Bob Cropf

DeLong and the Nature of Economics

In 1 on February 21, 2009 at 8:49 AM

I thought DeLong’s observations about the nature of economics especially vis-a-vis the current crisis is worth sharing:

Justin Fox Is Still Perplexed

He wonders:

Brad DeLong tutors me on fiscal stimulus :: The Curious Capitalist – I guess what continues to perplex me at least a little is how lacking in the customary rigor of modern academic economics the arguments for stimulus are. It’s basically just, We ran gigantic budget deficits during World War II and the economy got better. That’s the kind of argument I would make, not the kind of argument I’d expect from the chair of the Political Economy of Industrial Societies major at the University of California Berkeley. It’s just all so seat-of-the-pants. But it’s better to be approximately right than precisely wrong, I guess…

“Lacking in the customary rigor…” Justin could mean either of two things:

1. Rigorous economics should produce tightly-estimated conclusions based on statistical sieving of mountains of data, like: when Safeway cuts grocery prices by 1%, its sales rise by 1.456%.
2. Rigorous economics should involve lots of theoretical equations with sigmas and rhos and betas in them.

With respect to the first possibility, Justin’s expectations are just too high. We cannot build models up from precisely-known microfoundations–we are not chemists who can calculate how molecules should behave because we know how the electrons and the nucleons that make them up do behave. We don’t have that many past examples of large-scale fiscal stimulus programs, and so we do the best that we can–and to be up-front about the partial and uncertain state of our knowledge is part of doing the best that we can.

With respect to the second possibility–well yes, I could make a bunch of arguments with lots of theoretical equations with sigmas and rhos and betas in them, but once again these theoretical equations would not rest on any solid microfoundations. Chemistry theory is built on top of physics theory. But economic theory–it is just a bunch of people looking at historical episodes and saying: “it looks like this is what happened a bunch of times in the past; let’s build a model of it.” Economic theory is crystalized history. But when the historical episodes out of which theory is being crystalized are as rare and as scarce as they are in the case of large-scale fiscal stimulus programs, why crystalize? Why not just take the history raw?

– KC

  1. This is precisely the point Heilbronner makes about economics. It is partly the economists’ fault too. They promise more they can humanly fulfill in too many cases. Theirs is far from an exact science. In terms of their predictions, they even make meteorologists look good with the five-day predictions.

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