Russ Roberts has a lengthy post on the limits of macroeconomics. The post is well worth reading in its entirety. Below the fold I will provide a few tasty morsels. But first for the general principle of these two posts we turn to Hayek, the Nobel winning economist:
The curious task of economics is to illustrate to men how little they really know about what they imagine they can design.
This is the call to humility that is not often heeded. We go too far with our confidence in what we think we know. Worse still, in the hands of smart people with power, they act on them. The lesson for policy-makers and business managers alike is to remember that it is far better to seek to understand and change incentives than to seek to understand and change people.
Today’s But if Not is the story of how macroeconomics is not a science.
macroeconomics is deeply flawed and not a science . . .
scientism–the use of the tools of science to give a field such as economics the aura of science without it’s predictive or descriptive power . . .
the tools of physics–advanced dynamic equations that treat the economy as a planetary body or even a group of planets interacting, is not just wrong, but deeply misleading . . .
They also are unable to convince people in the other camps nor is it clear that any data or empirical test would lead to ideological or methodological conversions . . .
seventy years of macroeconomic theorizing has led to a better understanding of many macroeconomic phenomena. But it has not yielded a general theory that can explain the causes of macroeconomic problems . . .
the system is simply too complex to model with too many unobservable variables to allow systematic understanding. Thus we reach scientism–we are fooled into thinking that we are making progress when in fact we are misleading ourselves . . .
We do not expect a biologist to forecast how many squirrels will be alive in ten years if we increase the number of trees in the United States by 20% . . .
My claim is simply that we should recognize the limits of reason in analyzing complex systems with millions of decision-makers, numerous feedback loops, institutional features (synthetic CDOs, the repo market, the willingness of the Fed to bail out bondholders) that are difficult to model in tandem with the outcomes we care about . . .
So what is economics good for? It’s good for organizing your thinking. It helps you know where to look for causal elements even if we cannot measure their precise contribution or how to relative weights of factors that pull in opposite directions.