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How to Make an Economist Mad

By Chris | January 18, 2009

Say that economics isn’t a real science. Someone told me that over Christmas, and I have to admit that it rubbed me the wrong way. I don’t want to delve into what “science” really entails. I’d be the first to concede that economists don’t study the physical world. What bothers me is the all too common disdain for the profession. And, more often than not, it comes from professionals in other fields. For example, while I enjoyed Nassim Taleb’s book, Fooled by Randomness, I was put off by his incessant criticism of economists. He ridiculed the profession for insisting for far too long that humans were perfectly rational beings. Others complain that economists spend too much time trying to outdo each other with complicated mathematical models that have no practical applications. Both criticisms have merit, but are too often overblown.

The general masses are less critical of economists, but too often have unrealistic expectations. When I tell people that I study economics I get a pretty standard response. “Ughh (wincing), I hated that class. But, I guess we need some good economists in times like these, what should we do to get out of this mess?” I don’t know.  No one does.  There isn’t a magical solution. One of the first lessons learned by economists was that decentralized markets with flexible prices allocate resources much more efficiently than centralized planners. Of course that is based on the assumption that people behave rationally. What about when they don’t? What happens when Americans spend more than they earn and finance their expenditures with equity from their overpriced homes? Prices will eventually fall. That hurts, and there isn’t anything economists can do to ease the pain of the irrationally exuberant.

But, critics of economics might argue, if economists were worth anything they would have prevented the crisis before it started. There are two problems with that: 1) It is impossible to tell when markets are being irrational and when they are responding to changing expectations of the future 2) You can’t keep people from acting irrationally without seriously infringing upon their freedom.

And yet, economics is far from irrelevant. It provides us with all sorts of guidance on how to improve human welfare. Free trade is usually good, taxes can be used to correct externalities, we should minimize the extent to which we distort people’s incentives, moral hazard is a big problem, inflation should be restrained etc. Simple models provide great insights into how rational people will behave in all sorts of situations.  Of course, the real world is much more complicated and agents are far from perfect. When things go south it is far too easy to criticize those who study markets.  But, we should remember, economists didn’t create this recession, people did.

Topics: Behavioral Economics, Economics | 12 Comments »

12 Responses to “How to Make an Economist Mad”

  1. Frankie Stix Says:
    January 19th, 2009 at 9:11 pm

    “Science (from the Latin scientia, meaning “knowledge” or “knowing”) is the effort to discover, and increase human understanding of how the physical world works. “- Wikipedia

    It seems to me like economics studies how us humans allocate our limited resources. A study of how chimps allocate a limited number of bananas would definitely be considered behavioral science. I see no reason why a more complex model involving humans would fail to be considered science.

    We should not put down economists as scientists just because their predicitions about the future could probably be replicated by a group of chimp throwing darts at a board with different outcomes on it.

  2. Pete Murphy Says:
    January 20th, 2009 at 8:23 am

    I agree that economics is “far from irrelevant.” In fact, it may be the most relevant of the sciences right now.

    My beef with economists is that they remain adamantly opposed to considering the most dominant parameter of economy today – population growth. If they would just get over the whole Malthus thing, they might come to see the relationship between population density and per capita consumption, and what happens when nations grossly disparate in population density attempt to trade freely with each other.

    Pete Murphy
    Author, “Five Short Blasts”

  3. Ru... Says:
    January 24th, 2009 at 5:45 pm

    If someone considers economics is not a science then:
    1) he is totally ignorant of the economics science
    2) if he works in another science then he is totally ignorant of economics science and believes that because he knows little about his science he can disqualify other sciences, that is called stupidity.

    besides, who cares if someone says economics is not a science? they are just poor little creatures trying to inflate themselves minimizing other people´s work.

    the best way to get rid of this nano-brains is rationalizing their behaviour (why are they saying that) and stating (as a conclusion) the stupidity implicit in saying that “economics is not a science”

    we are as bad as any other scientist when it comes to forecasting (adjusted by complexity).

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