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November 02, 2008

Dismal Scientists for a Dismal Science

By: Bernard Chazelle

Economists are notoriously unable to predict anything but the past. Why? Yale Professor Robert Shiller, an exception to this rule, explains:

Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? [..] It seems that concerns about professional stature may blind [them] to the possibility that we are witnessing a market bubble. People compete for stature, and the ideas often just tag along.

Translation: "They'll sell their mother to be on CNN."

— Bernard Chazelle

Posted at November 2, 2008 05:00 PM
"They'll sell their mother to be on CNN."

In Dean Baker's case, once he gets there, he needs to be dressed properly. Either wear a tie right, or take the damn thing off altogether. Shit, a nice power tie can be had for $25.

Whenever I see him on CNN, it looks like he just got done changing someone's tire. That's noble in itself of course, but we don't need these nattily dressed dunderheads dismissing his message. The tee-vee is a visual media after all.

Posted by: Labiche at November 2, 2008 06:54 PM

Perhaps we should outsource economist jobs overseas. Let’s see how they like it.

Posted by: Rob Payne at November 2, 2008 08:34 PM

Let's call it a corollary to The Iron Law Of Institutions--the people who control institutions care first and foremost about their power within the institution rather than the veracity of the institution itself.

Posted by: Don Bacon at November 2, 2008 08:39 PM

Outsourcing 'Economist' jobs will not solve the problem, I think. Punditry on CNN will still remain. Till we have the Best and the Brightest like Prof Roubini and Mr Baker working for the govt, "Challenging the Crowd in Whispers, Not Shouts" will continue. I watched Prof Roubini give his testimony at a congressional hearing the other day and he spoke his mind and told the committee what they needed to hear and not what they wanted to hear. And at one point, he very firmly told them how long the recession was going to last and in addition to short term projcts for stimulating the economy, long term projects had to be started immediately when a republican memeber tried to dismiss his suggestions and a prof from MIT had different proposals.

Posted by: Rupa Shah at November 2, 2008 09:15 PM

You can't dismiss economic interest. I think the reason most academics and reporters miss bubbles is because they're wrapped up in them. They were long stocks in the '90s. They were long real estate in the '00s. They will be long meteor insurance or whatever in the '10s.

They are in the exact target demographic of asset bubbles: people with money to invest but without experience investing, people with the pseudo-fancy-pants information of Charles Schwab or the Economist but without the truly fancy-pants information of a Reuters or Bloomberg terminal.

So they are wrapped up in the bubble and don't even notice it's happening. Worse, the institutions themselves have the same economic interest as their employees. Who paid for new chairs (in academia) and ads (for the press) in the 90s? Stock bubble companies. Who paid for ads and what financed university expansions in the 00s? Real estate. Certainly in the 10s, there will be an endowed chair in meteor insurance studies at Harvard, counseling all her colleagues on just which kind of meteor insurance policies they should buy in order to resell them at a profit in a year.

Posted by: hedgehog at November 2, 2008 09:23 PM

Surely, there are few professionals more deserving of criticism than the stuffed-shirt economist who uses numbers to obsfucate as much as enlighten (e.g., Mr. Greenspan). But, figuratively speaking, the criticism is more intelligent, witty and effective when it is applied precisely with a scalpel rather than indiscriminately with a twelve pound maul.

Granted, many in the field, particularly business economists, have incentives to ignore the seemingly obvious. Many others, including the majority of academic economists, are followers who are content to remain well within the bounds of orthodoxy (as is the case in any profession). Nevertheless, several economists did correctly observe and point out the underpinnings of the current clusterfuck before the fact. Dean Baker, Nouriel Rubini, Paul Krugman, and to a lesser extent Edward Leamer are four that pop immediately to mind. Others undoubtedly reached similiar conclusions but lacked the means to amplify their message.

Meanwhile, your creative (and sloppy) editing of Shiller's words is telling. You make it sound as though Shiller is saying concern for stature is the root cause of the profession's shortcomings. He clearly cites the lack of a proper toolkit as being a more important factor. Analyzing human behavior with mathematics is like quarrying granite with a scratch awl. You write, "Economists are notoriously unable to predict anything but the past." Of course economists are at a disadvantage compared to practitioners of the hard sciences. The systems they're studying are infinitely more complex. How clean would math be if numbers had free will? Is the fact that existing economic models frequently lack robust predictive power sufficient reason to not make the effort at all?

It seems you are expressing more than a little sour grapes here. I'm guessing it has something to do with the fact that, on average, economists are paid more money and receive more attention than mathematicians. (For the record, I'm a cabinetmaker, not an economist.)

Posted by: jm at November 2, 2008 09:49 PM

I think jm has a point. There is a continuum of purity within academia with Physics on one end and bullshit Lit-Crit on the other. Problem is peeps thinking Econimics is much closer to the Physics end than it really is.

Posted by: Cloud at November 2, 2008 10:51 PM

And Economics in particular (and to a lesser extent Medicine), I think, have been corrupted by 'the system'. Society bubbled-up and drugged-up because these disciplines serve the $$$ more than mathematics.

Posted by: Cloud at November 2, 2008 10:59 PM

Cloud: I wouldn't use physics as the rigorous end of the spectrum. The latest controversies about loop quantum gravity and string theory are positively Derridaesque if you ask me.

The problem with classical economics is different. Has nothing to do with math. Has to do with religion. It'd be better for everyone if Econ depts merged with Divinity Schools.

Posted by: Bernard Chazelle at November 2, 2008 11:59 PM

Austrian Economics anyone?

Posted by: Sam at November 3, 2008 08:30 AM

The problem with economics is because it's considered a 'soft' science, people feel more latitude in picking and choosing an outcome they like. The Austrian stepchild of economics isn't widely followed because people don't want to accept what it means. A society where each person is guided by self interest? The horror! The selfishness!

So instead we choose the laughably pie-in-the sky Keynsian philosophy and wonder at our luck when it turns out so bad. I mean, those central bankers were supposed to lookout for everybody. Gosh, what happened?

Keynsians please accept your system's place in the dustbin of history. (Right next to Socialism, thank you).

Posted by: tim at November 3, 2008 03:16 PM

Perhaps Physic's problem is that it has always been too rigid in its thinking.

For example, Newton never understood what 'gravity' meant. On day one, a computer scientist would have made gravity a variable, and worked out what different values of that variable would mean. Newton however, built a system around G=1 and left it at that. Everything from Einstein on, is dealing with the brittleness of that system.

Do physicists really think God couldn't change the value of e if he felt like it?

Posted by: tim at November 3, 2008 03:26 PM

Perhaps political economics, as a field, is not trying to explain, but to justify.

Posted by: Joel at November 4, 2008 01:09 PM