Should We Trust Economists?

They're fractious, frequently wrong, and have lost much of the public's faith. But their insights are still valuable -- as long as you don't expect them to predict the future.
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(Reuters)

Imagine you are the Royal Physician in England some time during the 14th century. The prince is sick, and you've been summoned to help. You call in two experts for advice. The first says: "Use leeches to suck out the evil humors." The second says "No, you must bleed him to get the evil humors out." They start to argue, insulting each other in nasty epistles. "Leech guy is secretly working for the French!" alleges Bleeding Guy. "Bleeding Guy just wants the prince to die because the prince wanted higher taxes on the nobles!" Leech Guy fires back.

What's the right move? Well, in an ideal world, you would go and get 999 patients who have illnesses similar to the prince's and give them all a variety of household substances, such as bread mold. Then you would take careful note of who died and use statistical analysis to figure out which household substances cured disease. Thus, you would discover penicillin and invent modern medicine.

Sadly, this is not what you do, because a) if you proposed it, you would be led off to the dungeons and beheaded b) it's the 14th century and you have no concept of the scientific method and c) you don't really have the right tools for that experiment, anyway. Instead, it's bleeding or leeches. So you take your best guess and you pray you're right.

The economic situation we find ourselves in today is a little bit like the example above. Everyone knows that it's a bad thing when factories sit gathering dust and potential workers sit idle on their couches. But the best "experts" that we have -- academic economists -- are in generally ill repute. Surveys have shown that the public has very little confidence in their predictions. They argue bitterly on op-ed pages and can't seem to agree on the most basic issues. And of course, the recent high-profile debunking of the "90 percent debt-to-GDP danger zone" -- a talking point created by the famous economist duo of Carmen Reinhart and Kenneth Rogoff, and used by many Republican supporters of austerity -- did nothing to help economists' reputations.

So are we making a mistake putting our faith in economics? Are economists themselves just charlatans, to be scorned as medieval cranks? Or for all their flaws, are they really the best experts we have? I don't have a definitive answer, just like there is no good answer to the problem of the Royal Physician. But having gone through an economics PhD, I do know a few things that I think the public should realize about the field.

To start, we need to talk briefly about what it is economic theorists do. Essentially, they make models, which are mathematical tools that are supposed to describe how the economy functions. 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.

Theory isn't the only problem. Economists don't really have good enough data to understand how the economy works, either. With chemistry or biology, you can put things in a lab and test them out with controlled experiments. With microeconomics -- the study of specific markets -- you can do something similar; for example, the auctions that Google uses to sell online ads were developed by microeconomists. But with macroeconomics -- the study of the economy as a whole -- you can't put countries and entire economies in a lab; all you can do is sit there and watch history go by, and try to deduce some patterns. But often enough, those patterns vanish just as soon as you think you've found one.

Just as it doesn't have their caliber of data, macroeconomics also lacks the kind of scientific culture enjoyed by biology and chemistry. In the hard sciences, models are built to explain data; that's their only purpose. But in econ, models are often used simply as storytelling devices to explain an idea about how the world might work.

Presented by

Noah Smith is an assistant professor of finance at Stony Brook University. He writes regularly at Noahpinion.

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