Raj Chetty has written an op ed in the New York Times designed to counter the abuse the Sveriges Riksbank (Sweden's central bank) rightly received for its latest embarrassment. Economics does not have a true Nobel Prize, so a central bank decided to create a near-beer variant. The central bankers have frequently made a hash of it, often awarding economists who got it disastrously wrong and inflicted policies that caused immense suffering. This year, not for the first time, the central bankers decided to hedge their bets -- awarding their prize to economists who contradict each other (Eugene Fama and Robert Shiller). The hedge strategy might be thought to ensure that the central bank's prize winners were right at least half the time (which would be an improvement over the central bankers' batting average in their awards), but that is a logical error. It is perfectly possible for both of the prize winners to be wrong. I'll explain why I think that is the case in a future article.
In this article I respond to Chetty's effort to defend economists from the ridicule that the most recent Riksbank award prompted. Chetty is professionally embarrassed by that ridicule.
The first words of his article are: "CAMBRIDGE, Mass. -- THERE'S an old lament about my profession: if you ask three economists a question, you'll get three different answers." Chetty's "old lament" is accurate, but incomplete. The "economist's lament" has many verses.
- If you ask three economists a question, you'll get three different answers
- The three answers will be opinions driven by the economists' ideologies
- The answers will ignore the relevant multidisciplinary literature
- The answers will ignore the relevant economics literature that challenges the answers
- The answers will arise from studies that fail basic requisites of the scientific method, e.g., they will implicitly assume that alternative causes do not exist
- The empirical methodology used to support the answers will often be so biased that it seems to support answers that are the opposite of reality
- The economists frequently water board their data until they seem to confess the answer that comports with the economist's dogmas
- All three answers are wrong, horribly wrong
- The policies that the economists recommend on the basis of their ideologies and tortured data are often destructive and they breed complacency by assuming away critical risks
- The policies that the economists recommend often produce unanticipated consequences that prove even more destructive
- The economists are blind to conflicts of interest and eagerly seek out such conflicts to enrich themselves
- The economists are blind to ethics, even disdainful of it
- The economists will rarely admit that they were wrong and reconsider their dogmas
Chetty's effort to defend economists was less than robust. He did not defend the answers economists reach as being the product of science. Instead, he argued that economists should not be mocked by real sciences because economists would really, really like to be scientists.
"But the headline-grabbing differences between the findings of these Nobel laureates are less significant than the profound agreement in their scientific approach to economic questions, which is characterized by formulating and testing precise hypotheses. I'm troubled by the sense among skeptics that disagreements about the answers to certain questions suggest that economics is a confused discipline, a fake science whose findings cannot be a useful basis for making policy decisions."
Chetty thinks critics who point out that economists don't achieve science even though they purport to aspire to it are "unfair and uninformed."
"That view is unfair and uninformed. It makes demands on economics that are not made of other empirical disciplines, like medicine, and it ignores an emerging body of work, building on the scientific approach of last week's winners, that is transforming economics into a field firmly grounded in fact."
Again, Chetty's idea of a defense reads more like a petulant confession of failure. We are supposed to be impressed that, in late 2013, economics is seeking to "transform" itself "into a field firmly grounded in fact." A science does not have "transform" into a science. Economists could have modeled the scientific method for well over a century. A large minority of economists continue to urge us to inflict austerity in response to a Great Recession -- the equivalent of pre-scientific "medicine" bleeding sick patients.
Chetty then tells us what he believes is the core problem with economics and why economists are finally "transforming" economics into a reality-based field.
"As is the case with epidemiologists, the fundamental challenge faced by economists -- and a root cause of many disagreements in the field -- is our limited ability to run experiments.
(Surely we don't want to create more financial crises just to understand how they work.)
Nonetheless, economists have recently begun to overcome these challenges by developing tools that approximate scientific experiments to obtain compelling answers to specific policy questions."
Chetty's parenthetical says it all, for economists have "create[d] more financial crises" precisely because they do not "understand how they work" yet they dogmatically insist on policies that prove ever more criminogenic. Economists would understand how they work if they actually followed the scientific method.
Chetty's statement that economics is "transforming" into a "science" based on "facts" because economists have "begun" to study "natural experiments" is as bizarre as it is inaccurate. I was taught over 40 years ago by my economics and statistics professors to study natural experiments and none of my teachers suggested that the methodology was novel. I was taught the same thing in criminology 20 years ago. As regulators we successfully used natural experiments for "testing precise hypotheses." In analyzing the causes of the current crisis I have repeatedly emphasized the usefulness of the natural experiment provided by "liar's" loans for "testing precise hypotheses." As I explain below, neo-classical economists studied natural experiments 30 years ago during the S&L debacle. The difference is that the economists' dogmas caused them to implicitly constrain the range of alternative hypotheses to exclude accounting control fraud as a candidate explanatory variable. As regulators, we did not arbitrarily constrain potential explanatory variables by excluding fraud. The result is that we got it right and the economists got it as wrong as it is possible to get something wrong.