Making sense of economics

from Lars Syll

Robert Lucas, one of the most creative model-builders, tells a story about his undergraduate encounter with Gregor Mendel’s model of genetic inheritance. He liked the Mendelian model—“you could work out predictions that would surprise you”—though not the lab work breeding fruit flies to test it. (Economists are not big on mucking around in the real world.) Over the weekend, he enjoyed writing a paper comparing the model’s predictions with the class’s experimental results. When a friend returned from a weekend away without having written the required paper, Lucas agreed to let the friend borrow from his. The friend remarked that Lucas had forgotten to discuss how “crossing-over” could explain the substantial discrepancies between the model and experimental results. “Crossing-over is b—s—,” Lucas told his friend, a “label for our ignorance.” He kept his paper’s focus on the unadorned Mendelian model, and added a section arguing that experimental errors could explain the discrepancies. His friend instead appended a section on crossing-over. His friend got an A. Lucas got a C-minus, with a comment: “This is a good report, but you forgot about crossing-over.” Crossing-over is actually a fact; it occurs when a portion of one parent gene is incorporated in the other parent gene. But Lucas’s anecdote brilliantly illustrates the powerful temptation to model-builders—across the ideological spectrum—of ignoring inconvenient facts that don’t fit their models.

Economics may be an informative tool for research. But if its practitioners do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fulfil its task. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics will continue to consider its ultimate arguments as a mixture of rather unhelpful metaphors and metaphysics.

The marginal return on its ever higher technical sophistication in no way makes up for the lack of serious under-labouring of its deeper philosophical and methodological foundations.

A rigorous application of economic methods really presupposes that the phenomena of our real-world economies are ruled by stable causal relations. Unfortunately, real-world social systems are usually not governed by stable causal relations and mechanisms. The kinds of ‘laws’ and relations that economics has established, are laws and relations about entities in models that usually presuppose causal mechanisms being invariant, atomistic and additive. But — when causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it as a rule only because we engineered them for that purpose. Outside man-made ‘nomological machines’ they are rare, or even non-existent.