Monday, 8 January 2007

Methinks Krugman doth protest too much

I have just been reading an interesting article by Paul Krugman. Partly it is a discussion of The Theory of Comparative Advantage (yes, I had to look it up, embarrassingly: try this if you do too) and how poorly understood it is; but partly it is an (understandable) cri de coeur about the failure of supposed intellectuals to take simple economic models seriously. Perhaps it struck a chord because I saw a similar complaint earlier, at Overcoming Bias:

Consider how differently the public treats physics and economics. Physicists can say that this week they think the universe has eleven dimensions, three of which are purple, and two of which are twisted clockwise, and reporters will quote them unskeptically, saying "Isn't that cool!" But if economists say, as they have for centuries, that a minimum wage raises unemployment, reporters treat them skeptically and feel they need to find a contrary quote to "balance" their story.

In short we, the ungrateful general populace, do not take economic models and their outputs seriously. Well, following that sage of economics Homer Simpson, Duh. Yes people don't have the same respect for economic predictions as for ones from the physical sciences. Some reasons could include
  • Physics has a long and glorious history of successful predictions about the world. Economics has, I suggest, explained rather less about its corner of reality and some of its recent predictions have turned out to be wrong.
  • In Physics if experiment repeatedly and consistently fails to confirm a theory, then the theory is reworked to fit the facts. In Economics if a theory is repeatedly falsified, there seems to be rather more effort spent on explaining why those facts aren't relevant than on figuring out what's wrong. Moreover Economics has a relatively small 'experimental' community devoted to testing theories given the number of theorists.
  • Physics embraces complexity. It acknowledged the existence of chaotic dynamics early, for instance, and it has tried to find appropriate models of these systems. Similarly, philosophically problematic though quantum mechanics is, physicists are engaging with it. Economists seem to shun complexity and cling to principles like the rational self interested agent that seem to have little predictive power (vide Behavioural Finance) and whose day could well be past.
Uncomfortable though this may be to Economists, until they have something like the success of Physics to tuck under their belts, they aren't going to get something like the same amount of respect.

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