Economists have this outdated notion that economics advances through a progression of ever-better theories, with empirical testing serving to reject wrong models and confirm valid ones. In reality, we are really bad at formulating general models as social reality is malleable and contextual. Our theories — such as the theory of value or the theory of comparative advantage — are just scaffoldings, which need a lot of context-specific detail to become usable. Too often economists debate a policy question as if one or the other theory has to be universally correct. Is the Keynesian or the Classical model right? In fact, which model works better depends on setting and context. Only empirical diagnostics can help us know which works better at any given time — and that is more of a craft than a science, certainly when it is done in real time. If we economists understood this, it would make us more humble, less dogmatic, and more syncretic.
Deirdre McCloskey argued a long time ago that because economic models could be constructed to “show” just about anything the modeler wanted. Economics was better thought of as a kind of rhetoric rather than a standard science. What do economists need to do to make sure that their theory is better than simple rhetoric?
There are certainly plenty of rhetorical elements in economic modeling, but models are much more than rhetoric. Models ensure our arguments are coherent, and even more important, they lay bare the critical assumptions on which our conclusions rest. This may seem trivial, but I have dabbled plenty in the rhetoric of other social sciences, and I can assure you that they too could use some of both of that.
You disagree with scholars like Marion Fourcade and her co-authors, who suggest that economics is driven by power relations and prestige games. Yet you also suggest that the rise of the “rational expectations” approach had more to do with the prestige of its techniques than its understanding of empirical reality. Why did macroeconomics become so politicized, and is this an anomaly within the broader field of economics?
Those seem like separate issues to me. Power plays a role in economics, but to say that the discipline is driven by power relations seems extreme to me. As for rational expectations, its success had nothing to do with the “politicization” of the discipline, and everything with the appeal of the idea. It is just a formalization of the notion that “you cannot consistently fool people.”
It is true that rational expectations, coupled with a bunch of other critical assumptions (market-clearing, flexible wage-prices, complete markets, absence of borrowing constraints …) leads to skepticism about counter-cyclical policy — but the real work in drawing that conclusion is done by the other auxiliary assumptions, not rational expectations, per se.
It is true that macroeconomics is a bit of an anomaly in economics. Trade economists, say, or development economists tend to be much more aware that there are multiple models and that it is impossible to render unconditional judgments about one or the other policy. Well, maybe scratch that one about trade economists!
Unlike some of economics’ critics, you think that the basic tools of economics — clear models and good statistics — are appropriate. While you’d like economists to be more diverse, you want greater diversity of ideas but not of methodologies. Are economists becoming better at building this kind of diversity after the shock of the financial crisis?
I think economics has been surprisingly little affected by the financial crisis. Part of the reason is that most of what we needed to know to understand the crisis (bank runs, systemic externalities, agency problems in banks and other large firms, incentive distortions in financial markets) was already there — it didn’t have to be invented.
The broader trend in economics, which predates the financial crisis, and which is what really makes me an optimist, is the clear movement in the discipline in the direction of empirical work. As I say in the book, when I did may PhD in the first half of the 1980s, you couldn’t get a good academic job if you were doing empirical work; today you can’t get one without it. The difference this makes is that it is much harder to be dogmatic if you are an empirical economist.