Economics as science

Much as I enjoyed Unlearning Economics' riposte to Chris Auld, I fear such meta-critiques of mainstream economics miss a trick - the extent to which good "normal science" in economics can be the ally of challenges to neoclassical economics.

Let's take one recent example. Experimental work by Matteo Ploner shows how people's investment choices are shaped by peer pressure. Now, the standard criticism of experiments in economics is that they lack external validity. But this mightn't be the case here. Ploner's work corroborates detailed empirical work by Per Ostberg and Hans Hvide which has found that workers' share buying is influenced by their co-workers.

This strengthens the challenge to the rational markets hypothesis. Sure, Robert Shiller showed years ago that shares are more volatile (pdf) than the "fundamentals". But this, in itself, doesn't establish that markets are irrational. As Davidf Meenagh has shown (pdf), small and reasonable (but mistaken) changes in the probabilities attached to booms and busts can also generate what looks like excess volatility. What these papers do, though, is challenge Meenagh's reply. They give us a strong reason to believe that excess volatility is a sign of irrational markets. Bubbles can happen if some peoples' buying leads other to buy, and Hvide and Ploner have shown that such behaviour is widespread.

Sure, their work doesn't suffice to show that irrational bubbles can happen. To do this, we need to show that the "smart money" does not short-sell aggressively when (aggregate) stock markets seem over-priced. And Bernard Dumas and colleagues have done just this, by using the sort of general equilibrium modelling favoured by the mainstream.

What we have here, then, is an example of how a challenge to neoclassical economics is buttressed by good empirical work; Ploner and Hvide provide microfoundations for the idea that markets can be irrational. They do so not by big-think theorizing about the nature of rationality, but by ordinary empiricism - looking at the data and running experiments. And their work is, I think, reasonably typical of what many economists actually do.

In this sense - and I think I could produce other examples - leftist critics of neoclassical economics are under-estimating the extent to which economic science can support their case. There's nothing so radical as empiricism.

Comments

[Chad_Sexington]

For anybody interested, Mark Harrison's response to UE hits the nail on the head IMO: http://www.pieria.co.uk/articles/unlearning_the_history_of_communism

[Luis Enrique]

I am not sure how you are using the term neoclassical, but it's not just empiricism, there are plenty of mainstream theorists who depart from the neoclassical

just on rat ex we have Sargent, model uncertainty, Sims rational inattention, Xavier Gabaix bounded rationality, Itzhak Gilboa case-based decision making ...

[on some definitions of the term neoclassical, mainstream macro with search and matching, limited commitment, incomplete markets etc. isn't neoclassical. How much of micro is neoclassical - game theory, principal-agent, mechanism design?]

[UnlearningEcon]

Eh, I suppose I should be glad that I've bothered somebody enough for them to link to a completely irrelevant debate - in which I was apparently skewered - just because my name was mentioned. However, I think chad_sexington should reread Harrison's post, my comment, as well as my original post on the matter. Such a reading would reveal that all Harrison really did was restate the history of existing communism with incredulity and in more detail, as well as make some questionable but in any care largely peripheral points. At no point did Harrison discuss the history of capitalism, or mention by survivorship bias argument.

Anyway, sorry for the OT rant. Maybe chad should instead just investigate which debate he has actually stumbled into.

[Ottywell]

Does nobody these days read the likes of Boulding's Economics as a Science (McGraw-Hill,1970)? He ruminates on economics as a social, an ecological, a behavioural, a political, a mathematical, and a moral science, with a final chapter on Economics and the Future of Man.

[chris]

@ Luis - your question is one reason why I don't like bigthink. For my purposes in this piece, I need only consider as "neoclassical" the clain that bubbles are v.rare. A more precise definition - which as you say is tricky - is not needed.

[Tom Hickey]

Traders know that markets are "rationally irrational" in the sense that momentum rules. Traders trade momentum and they know that reversal of the trend is inevitable. They don't care a fig about fundamentals, which don't count other than maybe in the long term. Over that time innumerable profit opportunities will have gone by. Prices are marginal in financial and commodity markets, unlike goods markets were they tend to be fixed. So it is the traders that set the price. Due to momentum-chasing, the marginal price is rationally irrational, almost always "too much" or "too little" relative to the next trade, which is not based on information other than market action, other information already being discounted. Bubbles are possible based on the greater fool theory and the musical chairs theory (Chuck Prince).

[Tom Hickey]

Ottywell asks, "Does nobody these days read the likes of Boulding?"

Yes. Boulding, Lerner, Lowe, Theobald, Maslow....

[Tom Hickey]

"In this sense - and I think I could produce other examples - leftist critics of neoclassical economics are under-estimating the extent to which economic science can support their case. There's nothing so radical as empiricism."

Yes and... Heterodox economists have criticized some of those "empirical" experiments based on assumptions and methodology. MMT economists criticized Reinhart and Rogoff right off the bat (R&R would not provide the data at the time) based on the assumption that currency regime did not count. Similarly, a recent study supposedly showing that currency regime doesn't matter has been attacked on the basis of its design.

As Ronald Coase famously said, "If you torture the data enough, nature will always confess," "also cited as "If you torture the data long enough, it will confess." (Tullock)

Indeed, it seems that whenever an article of faith is criticized seriously, some big-name economist of the usual suspects comes out with a study to refute it, or at least the media report the results so.

[Deviation From the mean]

Economics is tainted by ideological interest more than the physical sciences. Economics as science is almost impossible in class ridden society, we will have to await socialism to get economic science.

On a previous thread I mentioned peer review as a fundamental part of the scientific method, this is next to impossible in economics. The whole subject is tainted.

Marxism should lead by example and have rigorous peer reviewing. But it simply can't escape the class struggle.

See this , Yanis Varoufakis "Confessions of an Erratic Marxist" for an insight into the science of economics, or the lack of it!

http://www.youtube.com/watch?v=A3uNIgDmqwI

[Metatone]

Empiricism is useful, but experience shows it is rarely enough to shift the Overton window. And thats the real problem in economics, there's a strong pattern of what counts as an acceptable result - unacceptable results can count as an academic publication, but don't count in reforming the view of even the average economist, let alone those who have the social standing to pontificate on policy.

[Andrew]

I think the response of of Luis is fairly typical of defenders of economics.

They pretend that neoclassical economics:

1. Is just one tiny and historical strand in a hugely plural field (as if having twenty seven competing schools of thought on the fundamentals is the sign of anything resembling a cohesive body of theory, i.e. an established science.)

2. Doesn't actually exist, since you can't produce a definition that satisfies them.

I don't think either response is convincing to an interested lay audience.

[Andrew]

I don't actually think that empirical work is useful when criticising conceptions like economic rationality.

The problem that fascinates many critics is the sheer internal incoherence of this mess.

There is no definition of economic rationality I've seen that isn't theoretically contentless or trivially false. The idea of it meaning optimisation in the sense of *any* function describing a set of preferences (as criticised by John Quiggin on the blog "Out of the Crooked timber") is an example.)

Just wonderful!

Empirical studies are useful for understanding mechanisms (something Chris if fond of - it just means building more models with more moving parts of course). They are not needed for criticising the internally inconsistent.