Economics Is Fortunate In Its Critics: A Crucial Falsehood Believed By Freshwater, Saltwater, and Heterodox Alike

Here are three economists, all making the exact same claim. It happens to be totally (and obviously) false:

Here's economist #1:

All empirical sciences use simplifying or unrealistic assumptions in their modeling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

Here's economist #2:

As the joke goes, physics studies massless elephants on frictionless sandpaper. All sciences and engineering make simplifying assumptions appropriate to the problem at hand.

Economist #3 doesn't put it concisely in one place but the following are from here, here, and here (at page 41)

It’s a model – a simplification of reality designed to provide useful insight into particular questions.
[A]ny model involves untrue assumptions; how unrealistic are you allowed to be? That’s always a judgment call.
The point is not that these models are accurate or complete, or that they should be the only models used. Clearly they are incomplete, quite inadequate to examine some questions.... But they are easy to use, particularly on real-world policy questions, and often seem to give more or less the right answer.

So first, is this true of scientific models? The answer is no. Basically, economists have turned an anecdote from the history of physics into a bedrock principle of their social science. It starts with Galileo who, in 1608, came up with some equations to figure out how fast a mass will slide down an inclined plane. He had experimented with dropping things off tall buildings and extrapolated his thinking to the situation where an inclined plane causes something to fall at an angle. The equations are wrong. You have to take account of friction between the mass and the inclined plane. Apparently, engineers sometimes use similarly wrong equations because they are more simple. So why can't economists do the same thing?

Here's the thing: physicists don't make assumptions about friction, they know about friction!!! So engineers know exactly what they are leaving out of their equations too. Before they make a habit of using the simple equations, they compare the results with the better, more complex and more accurate way of solving the problem. This gives them an absolutely essential piece of information: they know exactly how wrong the simple equations are! There is thus a scientific line of reasoning that tells engineers exactly when it is ok to use their simple equations.

Economist number 3 above explicitly tells you that economists do not possess this crucial piece of information:

how unrealistic are you allowed to be? That’s always a judgment call.

I'm sorry, but you can't replace knowing with a judgment call and say both things count as good empirical work. You just can't. But there's an even bigger problem: economists assume that the problem solving methodology of physics and applied physics (engineering) are common to "all empirical sciences" and therefore economics must make "simplifying assumptions" to be good science. "La, la, la, were just like every science there is. La, la, la."

This is just totally fucking wrong!!! Other sciences absolutely, positively, do not make "simplifying assumptions" in their modeling activities. 

Economic methodology is based on a claim that is total and obvious bullshit!

Once you realize that there's more to science than physics, you find the following kinds of scientific models, none of which involve "simplifying assumptions":

  • The double helix model of DNA.
  • The fruit fly model of genetics.
  • The mouse model of human biology.
  • Computational forecasting models of complex systems used meteorology, ecology and geology.

I don't assume that DNA looks like that, I know that DNA looks like that, crumpled up into a small space. I don't assume that fruit flies have genes that express themselves just like other animals' genes, I know that's how it works. I know that humans have hearts that can be affected by drugs and that mice have similar hearts that also react to drugs. I don't assume it's exactly the same, that's why human trials come after the mice experiments. Nobody is assuming anything! This is science, after all.

The modeling of complex systems does "leave things out", but in a way that is self-conscious and under constant scientific scrutiny. The methodology of complexity research requires the scientist to study the consequences of leaving things out and to investigate the best ways to correct for this known problem. These scientists construct multiple models of the same system and compare the--sometimes quite different--results. They also go out into the world to observe reality and look for causal relationships that will improve the models. Economists, on the other hand, don't consider "debates about methodology" to be part of the actual practice of economics. Going out into the field to observe causation? That is simply outside the realm of discussion.

The thing that just makes you want to jump up and down on the face of these people is that, intuitively, we all know that starting with physics is just plain crazy. There are no "laws" of human behavior. Even when aggregated into an economy, the idea that our collective actions would amount to something mechanical like gravity or magnetism is just... bizarre. And yet that's what every single god damn economist believes.

So who are the three economists who all have exactly the same (incorrect) view of how scientists are supposed to use models? Number 1 is Lars P. Syll, a heterodox economist whose blog has a recurring "Chicago Follies" bit that mocks Freshwater economists. But he also criticizes Saltwater folks, routinely picking fights with Paul Krugman. Number 2 is John Cochrane, the consummate Freshwater economist who hates Paul Krugman, and Number 3 is of course Paul Krugman himself, the most visible Saltwater economist in the world, a man who has attacked both Syll and Cochrane in very harsh terms. You seriously couldn't imagine three men who disagree more about economics, and yet they are all wrong in exactly the same way. No wonder there is no progress.