An article in the Atlantic today asks the title question: Should We Trust Economists?
I like Noah Smith’s question as stated, but I think it can be improved. I suggest: What Kind of Economics Should We Trust?
The interesting part of Smith’s article touches on the relationship between formal models and empirical reality. Economists are wonderful at formulating models and finding faults in each other’s models but less wonderful at checking those models against the messy and contingent world of human behavior. Much to Noah Smith’s credit, he is quite open about the limitations of economics as it is practiced today:
The problem is that economists haven’t really built a model of the whole economy that works. A lot of smart people have spent a lot of time creating tools with names like “dynamic stochastic general equilibrium.” But as of this moment, those models can’t really forecast the economy like our meteorologists can forecast the weather. Furthermore, they contain a lot of obviously wrong assumptions. To give just one example, many of the models stipulate that companies are only allowed to change their prices at random times! Crazy, right? Economists include things like that to make the models easier to use, and they hope that those zany assumptions are actually decent approximations to the way the world really works. But even with these kludges in place, none of the existing models can do much to predict the economy.
The participants in Fair Money’s initial study are great examples of the limits of formal modeling. Little of what they reported to us could have been predicted by standard models of consumer behavior, in large part because the conditions they face would not be predicted by those models.
While I admire Smith’s openness about the limitations of economics, I have to take issue with his implicit assumption that economists are forever doomed to work in a world dominated by formal (but empty) models derived from mathematically informed premises, which bear an uncertain relation to reality.
For inspiration, Smith needs to look no further than the example of Harold Innis. Innis’ most famous book The Fur Trade in Canada: An Introduction to Canadian Economic History, which spawned the once well known “staples thesis,” was informed by several months of fieldwork on trade routes in the Canadian wilderness. Innis quite literally took a canoe trip along the traditional fur trading routes, taking notes and interviewing people as he went. As a result, Innis’ work has empirical teeth too often lacking in economic work and remains one of the better arguments against neo-liberal economic policy.
In the spirit of Harold Innis, Fair Money welcomes any economist to our project willing to loosen the tie and pick up a notebook. No paddling required.