I recently posted a detailed article in response to Raj Chetty's lament that scientists make fun of economics' pretense to science.
The thrust of my article was that the problem was not that economics was inherently incapable of becoming more scientific. The problem was that so many economists wear ideological blinders that recurrently cause them to perform a parody of the scientific method.
Chetty claimed that economists who are "testing precise hypotheses" in quantitative studies that exploit natural experiments are (finally, in 2013) "transforming economics into a field firmly grounded in fact." Chetty's metaphor is that economics is like epidemiology. (One assumes that his column is posted in the CDC's common areas for the general amusement of epidemiologists.)
"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.- Advertisement -
(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."
My column pointed out that there was nothing new about economists studying natural experiments and that the methodology produced a field "firmly grounded in [fiction]" rather than "fact." I went through a series of "scientific" economic studies during a financial crisis that led to policy recommendations by economists conducting the studies that were exceptionally criminogenic. The economists consistently praised the worst frauds and damned our reregulation of the industry, which proved successful in stopping the S&L fraud epidemic. I showed that the field's top economists specializing in finance consistently got things as wrong as it is possible to get it wrong because they did not understand fraud or fraud mechanisms and relied on "data" that were the product of accounting control fraud. In virtually every case, the economists who purported to study natural experiments by "testing precise hypotheses" implicitly excluded control fraud as a possible explanatory variable. I explained the primitive tribal taboo that economists have that prevents them from using the "f" word and noted that economists do not study fraud or fraud schemes. Economists implicitly exclude control fraud, in contravention of the scientific method, for ideological reasons that they frequently do not even consciously recognize. Economists that study finance wear blinders that are invisible to them.
Every day provides multiple examples of the blinders imposed by economists' dogmas reducing their purportedly scientific studies about finance to exercises in self-parody. John Taylor provide a classic example in his October 28, 2013 op ed in the Wall Street Journal.
Taylor begins with a strong claim as to the causality of the financial crisis.
"The crisis did not reflect some inherent defect of the market system that needed to be corrected, as many Americans have been led to believe. Rather it grew out of faulty government policies."
Taylor is one of the most famous hard-right neo-classical economists, so his twin claims about the market system and government provide a concrete example by an economist from the highest echelon of the field that allows us to test Chetty's claim that top economists embrace the scientific method regardless of their ideologies.
Chetty rightly reminds us that science must be grounded in facts, so the key question is: did Taylor use the scientific method to prove his twin claims of causality? The answer is "no." We know that he could not do so because the kind of study he relies on for proof of causality is inherently incapable of determining causality. I guarantee the reader that Taylor has made that point to students hundreds of times during his career. Here is one example in which Taylor was discussing the causes of the financial crisis and warning against the "confusion of correlation with causation."
It is a point we all make, frequently, in teaching economics. Taylor has violated the most basic of empirical rules -- conflating correlation with causation.
Taylor's assertion of causation fails the most minimal adherence to the scientific method.
"[E]xtremely low interest rates led individual and institutional investors to search for yield and to engage in excessive risk taking, as Geert Bekaert of Columbia University and his colleagues showed in a study published by the European Central Bank in July."