In defense of Economics

Last week I ran into an article that really caught my attention. Students from the Economics faculty of the Universidad Autónoma de Madrid were submitting a petition to change the way that Economics is currently being taught to them. What was bothering them? How the teaching of Economics is pretty much centered around the views of the“New Classical” school, how these models are of little use in today’s policy-making, as proven by their inability to predict and manage the financial crises of the past decade, how Economists like to forget sometimes that we are, in fact, a social science, and not an exact science, and how a broader view of Economics, comprising the teachings of authors such as Marx, Keynes, Smith, and other classical and contemporary authors should be included in the curriculum. Fair Enough.

Of course, as a former Econ undergrad, their claims resonated with innumerable classroom debates and discussions I had back in the day. In fact, I remember how in my very last Economics class, when we were having our “wrap up” discussion, I commented at how impressed I was at the fact that there is so much energy wasted in Economics in the incessant questioning of the raison d’être of the discipline. I mean, the claims in this protest were not exactly a novelty, and there is, in fact, a dense body of literature from top-notch economists that is dedicated to the critique of the way Economics is taught: Are we teaching university students the right models? Is this really useful for policy-making? Are the Neoclassical models the way to go? Why did we even have to go from a Keynesian world view, to an RBC world view? Why is it that NONE of these models can actually predict why crises have to happen? Can we even model crises? Are we making the right assumptions? Is it really our fault that the world is going to pieces? Etc etc etc…

Having done my major in the Liberal Arts faculty, I obviously could not identify myself perfectly with the concerns of these students signing the petition. Thinking back about my program, I find that there was a lot of flexibility in the subjects you could choose (although I am aware that many other of my former classmates would probably not feel the same way), and the only subjects that were really “compulsory” were intermediate micro, intermediate macro, and statistics. In fact, you could  get your Economics major without even taking a single class of Econometrics (although I chose to take it, because I’m a geek of course). Point is, the North American Liberal Arts Economics program probably does not feel as claustrophobic as its European and Latin American counterparts. Talking to my fellow Economics student friends from the DR, I see how my program requirements seem very “wishy-washy” next to their math-cantered-mostly-compulsory-classes one. But hey, at least we got to read a lot, and write papers, and work our “analytical mind” muscles (‘cause that’s what Liberal Arts is about, right?).

Anyways, my intention here is not to undergo a comparison exercise between both systems (I mean, how could we even design a counterfactual to test under which one did we actually end better off?), but rather to revisit some of the reasons why Economics, as a “science” gets so much trash from inside and outside of the field. First off,  I have heard many times the complaint of why Economists can’t just be humble.  You know, like Anthropologists, or Historians, or Philosophers… who are well aware of the limits of the precision of their findings, and do not claim that highly-stylized models that are built with the cement of unrealistic assumptions could hold the truths to the Universe.

Well, unfortunately you do not see protesters on the streets complaining about how a biased retelling of their country’s history made them lose their jobs, or how, because of the state of their nation’s philosophic thinking there is no food on the supermarket shelves and their children are starving. Because, you see, the “mistakes” of other social sciences don’t usually make the front pages of the newspapers, and they probably do not have such a tangible impact on people’s lives. This is precisely what puts Economics in such a tricky place: It’s not that we’re posers wanting to hop on the “exact sciences” bandwagon, but the scope of the task that has been entrusted to us, and the high expectations that we will, indeed, succeed as finding the answers, is even ridiculous, if you think about it.

I mean, bottom line, we have to figure out how individuals and governments make decisions, and how those decisions can snowball into either economic prosperity or economic crises. Do you see the problem there yet? We’re dealing with the choices of human beings…. How on Earth can you make an accurate mathematical model based on the behaviour of human beings? Do you think we all just act in the same way, and that you can accurately predict the extent to our reactions to certain events? Of course not. And yet, we just carry on by assuming that we’re all rational, forward-looking and optimizing individuals who will make maximizing economic choices.

After a while, of course, we came into the realization that we humans were not–surprise, surprise- all that rational after all. In fact, we’re not even close to rational, so we even came up with a new branch of Economics to explain all the different ways in which we are irrational, causing our conventional economic explanations to be mistaken. Of course, it was probably not the wisest move to try to amend the highly-questioned field of Economics with the only other equally-contested “pseudo-science”: Psychology (for the record, this is not my view of Psychology, but I did want to highlight the fact that back in the day, Psychology also got a lot of trash from the other disciplines because it was pretending to be “something that it was not” i.e. an actual “exact” science). Still, most of this Behavioural Economics stuff is taught (if at all) at the periphery of what would constitute the main economic curriculum, which to some, may still suffer from delusions of grandeur from its own analytic precision Utopia.

And of course, we have the cliché of all the attacks to the field:  “Why do you even study Economics, when NONE of the Economic “models” of the time could even predict the last crisis?” Ahh, if I got a penny for every time I heard that before or during my undergrad (actually, make it a nickel, because, you know… inflation). Well, first of all, a model predicting a crisis would be, in fact, an oxymoron. Crises are by definition unpredictable (if we could predict them, we would just try to do something about it and see if we could play with destiny, wouldn’t we?), and models are, by definition, ideal. Deep down, I feel that economic models suffer from a salience issue in the collective mind. Like horoscopes. Think of it this way: those who believe in horoscopes do so because they give more weight to those times that the horoscope has been correct, forgetting about the many, many times that horoscopes made a completely inaccurate prediction. Well, same goes with Economic models: we are completely torn apart by the media and non-Economic professors in every faculty whenever we miss, but hey, nobody ever gives us credit for all the plain-vainilla stuff that our models can actually predict with impressive accuracy! Because nobody cares about plain-vainilla stuff, and because plain-vainilla stuff does not make the front of the newspapers or sends protesters to the streets in Greece. Again: Salience.

And of course, our models fail whenever there’s uncertainty in the way, and that uncertainty, most of the time has something to do about human behaviour. But to me, the problem is not in the models per se. (Economic) models are abstractions, they are not supposed to be an all-encompassing explanation of how, exactly, the world works. They make up for a toolbox of possible options, rather than a definite prescription. Because Economics is not about what works, but about what works when, and models cannot replace a discretionary approach based on context-specific information. Think about how our greatest Economic theories came about: Keynesianism pretty much surged initially as a response to the Great Depression in 1929, so naturally, its models were developed thinking about a world where Government Spending can save the day. A few decades later we would have a paradigm shift, as economists stood puzzled at why the increase in inflation was not bringing a decrease in unemployment, as the Keynesian models of the time predicted. So they went on, saying how these models were “an unreliable guide to policy-making” (sound familiar?) and how we needed to be more scientific about the way we carry Economics in order to avoid similar disasters in the future. So they came up with the Neoclassical models, which worked for some time, but of course, eventually, other macroeconomic events took place that made other economists question those models too, etc etc etc…

Point is, the story is always the same: something seems to work… until it doesn’t. Because economic models are context-specific and not universal, and there is no way we could learn all the possible policy-making scenarios and potential crises in the short span of an undergraduate career. So yes, maybe the complexity of economic phenomena limits the knowledge that we can ever attain, and maybe we should all learn to embrace the uncertainty that permeates economic events. Of course, it’s easier said than done, as this implies renegading the comfort of having an absolute truth on which we can sleep at night. But hey, it comes with the job, and it is about time that we start accepting the shortcomings as well as the virtues of the field, and stop with the whole “you-cannot-predict-crises” shaming.

Finally, I did not want to end without making the note that indeed, I am writing this while still in my “Look-at-me-I-graduated-from-Economics” phase, which means that I have yet to reach my “Sh*t-just-got-real-I-actually-work-as-an-Economist-now” phase. So obviously, there may be still some perspective missing from my story, which only time will be able to calibrate. Still, I do have faith in progress, and I do believe that we are continuously finding new explanations for human economic behaviour. And it’s fascinating, because, who knew that we were so complex, and unpredictable? I mean, our models don’t work sometimes because of us. We are the loose cannons in models that we, ourselves have built. Who knew that our greed could be so powerful? Or that our collective panics could escalate so aggressively to bring corporations down with it? Will we ever possibly be able to capture key human phenomena like this in an accurate economic model? Probably not. But we’ll keep tying.

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