Wednesday, 16 June 2010

The nature of economic truth

Re-reading an old David Beckworth post, I was reminded of that ancient question: is economics a science?

On the content of the post, I have no idea if the United States is an optimal currency area. Or the eurozone.

But a deeper question is: why ask the question?

If this kind of speculation was taking place in a discipline like physics, it would be ignored - if there is no way to test it, there's no point talking about it.

But "the US is an OCA" is not a testable proposition. Therefore, is there no value in proposing it? Well, economists don't seem to think so - these things are discussed endlessly, and some of them even get peer reviewed and published.

Economic "truth" (or economic arguments), even when not meeting the standard of science, can achieve two things.

The first is their value as engineering. Sometimes, with the physics proved to scientific standard, the task is to apply it in a practical design. Nobody can prove that this design is the best, but - if it works - it's still useful to create it. Much of day-to-day economics is like this - designing systems or incentives to the best of our ability, given an agreed background of theory.

The second is more subtle. Economic debates like that one between Beckworth, Krugman and Sumner give us meta-knowledge about the state of knowledge. Certain opinions - the economy needs more money - are common between all three. Knowing the disagreements can increase our confidence in the agreements.

3 comments:

Min said...

"The first is their value as engineering. Sometimes, with the physics proved to scientific standard, the task is to apply it in a practical design. Nobody can prove that this design is the best, but - if it works - it's still useful to create it. Much of day-to-day economics is like this - designing systems or incentives to the best of our ability, given an agreed background of theory."

Engineering preceded modern science, because it is empirical. Buildings collapse, ship masts break, Roman aqueducts and roads last, and so on. As an outsider, I cannot tell much relation between modern economics and engineering. Sorry.

Example: financial regulation. Whatever its strengths or weaknesses, financial regulation in the U. S. worked for 50 years. Then deregulation of the S&Ls was followed by the S&L crisis. Wouldn't an engineer go back to the drawing board? Or at least hold steady until we got more data? But no. Deregulation continued apace. We got a return to the regime of the 19th century, with recurrent panics. (Even today, Jamie Dimon likens them to natural phenomena, like locust infestations.) The attempt of Brooksley Born to regulate derivatives was squelched by, among others, the "maestro" economist who believed that financial markets are self-regulating. Finally the last of the Great Depression regulations was repealed. Almost a decade later we get the Not-So-Great-Depression.

Pardon me, but is that science?

PunditusMaximus said...

Economics is a battleground between engineers and the followers of the libertarian religion.

Min said...

@Punditus Maximus

Engineers build better barricades. ;)