Brexit is a denial of economics as knowledge

A well known Brexiters said it was almost worth doing Brexit because of the anger I feel about it. He is right about the anger. The prospect of Brexit has filled me with the same horror as austerity did. The connection between the two is obvious. Both involve subjecting the whole country to a policy that basic economic ideas tell you will do nearly everyone harm.

We have seen nothing like this in my lifetime. The only person to try austerity (by which I mean fiscal consolidation in a recession) was Thatcher, and the policy was reversed (not stopped, but the consolidation was undone) within two years. Every government, and especially Thatchers, has pursued regulatory harmonisation and tariff reductions to increase trade. Now in just one decade we have seen both austerity for seven years and an attempt to dramatically increase trade barriers.

Imagine you were a doctor, and the government had appointed anti-vaxers to key positions who proceeded to reduce the vaccination programme. How would you feel as more children fell ill. Imagine you are a climate scientist and your government says it does not believe in man made climate change and encourages coal production. You don’t have to imagine of course, because exactly that is happening in the US and elsewhere. And you can ask the doctors and the climate scientists how they feel about it.

What we have seen since 2010 in the UK is the equivalent for economics. I would argue that this is no accident, but comes from the same source as climate change denial and anti-vaxers. Some people may not accept that comparison, and argue that economics is not a real science or some-such. And I agree that with austerity they had ammunition from within economics itself. There are still some macro economists around, nowhere near a majority but because they say things right wing politicians like they are ‘prominent in the public debate', who deny the validity of what Keynes wrote after the Great Depression. But we see the proof that Keynes was right today: a Great Recession followed by a limp recovery as the government squeezed demand. A minority of academic economists supporting austerity was no reason to largely exclude the views of the majority of academic economists, and all the evidence is that their views were almost completely excluded from the broadcast media. 

There is no such ambiguity with trade. We know trade between two people benefits those people because otherwise the trade would not happen. The very basis of the economy is trade. Every day we go to work we trade our labour for goods that go to someone else. Our work represents specialisation that allows everyone to benefit. If we had to produce everything we consume ourselves we would be much poorer.

This is why governments try to encourage trade agreements between countries to make trade between them easier. Greater trade is like technical progress, because it allows countries to focus on producing things they are good at producing. Now it is possible that such agreements, although they make the country better off, may not make everyone in the country better off. But every academic trade economist agrees that getting rid of the EU Customs Union and Single Market will make almost everyone in the UK a lot poorer. (Patrick Minford, whose analysis has an uncanny habit of always supporting hard right policies, is not a trade economist.)

Brexiters know this, which is why they came up with the idea of global Britain. It is a farce, which can be refuted in at least two ways. First, every analysis based on academic research I have seen suggests the gains from trade deals with other countries outside the EU come nowhere near the loss due to less trade with the EU. Nowhere near. Second, if you want good trade deals with other countries, the best way to achieve them is to get the EU to negotiate them on your behalf, because the EU is more experienced and has much more clout in any negotiations than the UK. That is why the EU has so many trade agreements with other countries. 

All this knowledge about the impact of trade on productivity and incomes was dismissed by Brexiters with two words: Project Fear. All the knowledge that Keynesians have accumulated for 80 years was dismissed with a few more: the government has maxed out its credit card. Others have dismissed the knowledge of doctors and climate scientists with similar home-spun homilies.

Yet many, including many in the media, still refuse to think of economics as knowledge. People who wouldn’t think twice about saying a fall in the supply of coffee will raise its price say all economics is just dressed up political opinion. People who would not dream of ignoring doctors just because they cannot predict when you get a cold say all economics forecasts are worthless. Of course there are some things, like whether the Euro was a good idea in economic terms, where there are pros and cons and therefore economists’ views may differ or change. But the evidence that making trade substantially more difficult with our immediate neighbours will be harmful is so overwhelming that only 1 in 22 UK economists disagree. I have yet to meet an economist who specialises in trade who disagrees. 

So when a woman on Question Time said we just do not know what will happen after Brexit, she was repeating an idea pushed repeatedly by the Brexit press and implicitly supported by most broadcasters. The BBC accepts that climate change is happening (most of the time) because that knowledge comes from ‘proper scientists’. The BBC does not accept that Brexit will make the UK worse off in economic terms because it is knowledge predicted by economists, and they think economics is not knowledge.

The right in the UK and US are now set on a course where they are prepared to defy science itself for their own interests. But this can only succeed when some of those who think of themselves as in the centre let them. In this case it has been allowed to happen in part because political journalists and those above them at the BBC decided economics where the overwhelming majority of economists agree was not knowledge but just another opinion. As I have spent my working life examining how economics can improve policy choices it is hardly surprising I find that simple ignorance outrageous.

How should academic economics cope with ideological bias

This question was prompted by this study by Mohsen Javdani and Ha-Joon Chang, which tries to show two things: mainstream economists are biased against heterodox economists, and also tend to favour statements by those close to their own political viewpoint, particularly on the right. I don’t want to talk here about the first bias, or about the merits or otherwise of this particular study. Instead I will take it as given that ideological bias exists within mainstream academic economists (and hereafter when I just say ‘academic economics’ I’m only talking about the mainstream), as it does with many social sciences. I take this as given simply because of my own experience as an economist.

I also, from my own experience, want to suggest that in their formal discourse (seminars, refereeing etc) academic economists normally pretend that this ideological bias does not exist. I cannot recall anyone in any seminar saying something like ‘you only assume that because of your ideology/politics’. This has one huge advantage. It means that academic analysis is judged (on the surface at least) on its merits, and not on the basis of the ideology of those involved.

The danger of doing the opposite should be obvious. Your view on the theoretical and empirical validity of an academic paper or study may become dependent on the ideology or politics of the author or the political implications of the results rather than its scientific merits. Having said that, there are many people who argue that economics is just a form of politics and economists should stop pretending otherwise. I disagree. Economics can only be called a science because it embraces the scientific method. The moment evidence is routinely ignored by academics because it does not help some political project economics stops being the science it undoubtedly is.

Take, for example, the idea - almost an article of faith in the Republican party - that we are on the part of the Laffer curve where tax cuts raise revenue. The overwhelming majority, perhaps all, of academic economic studies find this to be false. If economics was merely politics in disguise, this would not be the case. This is also what distinguishes academic economics and some of the economics undertaken by certain think tanks, where results always seem to match the political or ideological orientation of the think tank.

There is a danger, however, in pretense going too far. This can be particularly true in subjects where empirical criticism of assumptions or parameterisation is weak. I think this was the basis of Paul Romer’s criticism of growth theory and microfoundations macro for what he calls mathiness, and by Paul Pfleiderer for what he calls ‘chameleon models’ in finance and economics. If authors choose assumptions simply to derive a particular politically convenient result, or stick to simplifications simply because it produces results that conform to some ideological viewpoint, it seems absurd to ignore this.

Romer’s discussion suggests that it is at least possible for ideological bias to send a branch of economics off in the wrong direction for some time. I would argue, for example, that Real Business Cycle theory in business cycle macro, which was briefly dominant around 40 years ago, was in part influenced by a desire among those who championed it to look for models where policy had little role. In addition, it showed up economists tendency to ignore other social sciences, or even common sense, at its worse. [1] It didn’t last because explaining cycles is so much easier when you assume sticky prices, as most macroeconomists now do, but it may be possible that other aspects of mainstream economics may be ideologically driven and persist for a much longer time (Pareto optimality?), and mainstream economists should always be aware of that possibility. One of my first posts was about the influence of ideology on the reaction of some economists to Keynesian fiscal stimulus.

The basic problem arises in part because empirical results are never clear cut and conclusive. For example the debate about whether increases in the minimum wage reduce employment continues, despite plenty of empirical work that suggests it does not, because there is some evidence that points the other way. This opens the way for ideology to have an influence. But the political implications of academic economics will always mean that ideology plays a role, whatever the evidence. Even when evidence is clear, as it is for the continuing importance of gravity (how close two countries are to each other) for trade for example, it is possible for an academic economist to claim gravity no longer matters and gain a huge amount of publicity for their work that assumes this. This is an implication of academic freedom, although in the case of economics, I still think there is a role for an organisation like (in the UK) the Royal Economic Society to point out what the academic consensus is.

Does this mean economics is not a true science? No, because ideological influence does not trump data when the data is very clear, as in the case of the Laffer curve or gravity equations, although ideology and academic freedom may allow the occasional maverick to go against the consensus. That in turn means that it is important for any user of economics to be aware of possible ideological bias, and always establish what the consensus is, if it exists, on an issue. Could ideology influence the direction particular areas of economics take for some time? The evidence cited above suggests yes. So while I have no quarrel with the pretense that ideology is absent from academic economics in formal discourse, academics should always be aware of its existence. In this respect, some of the points that the authors of this study mention in the discussion section of their paper are relevant. 

[1] This reflected the introduction of a microfoundations methodology which soon began to dominate the discipline, and which I have talked about elsewhere (e.g. here and here).

Views on the minimum wage show economics to be an inexact science

.The hallmark of a science is not just having refutable hypotheses, but also changing its view when data shows the theory is wrong. Economics is often accused of not being a science. A good test case to see if that is true is the minimum wage. Basic economic theory suggests if you fix wages at above their level in the market, employment will fall as less workers are employed. However a number of empirical studies, the most well known of which was written by Card and Krueger in 1994, have suggested that employment shows no noticeable decline when a minimum wage is imposed or modestly increased. My reading is that the most convincing studies do show this result, but not all do, so the picture is not completely clear.

This illustrates a problem for economics (and all social sciences) that outsides often fail to appreciate. Measurements and econometric studies are often not conclusive, and even in the case of austerity you can find one or two empirical studies which says something different to all the rest. As a result, it is more difficult to use data to show a hypothesis is conclusively wrong in the way the natural sciences can. My own view is that the balance of studies clearly shows a modest minimum wage has no noticeable impact on employment, but others would disagree.

Here is a question from the IGM survey.of around 50 top US economists on the minimum wage

Academic economists appear evenly divided, and few hold a strong opinion on the issue. A similar survey of UK economists, asked about the 2016 increase in the minimum wage, was also divided but lent more towards no effect. In contrast, most German economists appear to have been opposed to the recent introduction of a minimum wage.

If you were cynical you might say that all this shows is that the views of economists just reflect their political opinions, and I would indeed expect there would be a clear correlation to support that with the minimum wage. However when either theory or evidence are pretty clear, economists do not divide by political opinion. The same survey in 2012 and 2014 showed economists largely agreeing that the Obama stimulus reduced unemployment and was beneficial, even though the political right was strongly opposed to it. The reason is that economic theory and nearly all evidence shows that fiscal expansion when interest rates are stuck at their lower bound is expansionary.

Equally standard microeconomic theory is just as clear that the minimum wage will reduce employment, and I suspect that had this survey been done in the early 1990s most academics would have agreed with this, whatever their political persuasion. What has changed is the evidence. This example clearly shows a good number of academics responding to empirical results that conflict with standard theory.

Furthermore some economists have done what good scientists should do and produced new theories which can explain the empirical results that the minimum wage does not reduce employment. In that sense economists have been behaving as a science should. But because there are some contrary studies, that allows two things that distinguish economics from physical sciences. The first thing is a temptation to hold on to basic theory even though the balance of evidence is against it, something that is not totally absent in the physical science either (Kuhn, Lakatos etc). The second is to allow ideological influences to help decide what should be a scientific judgement. These are the senses in which economics is an inexact science.

For those interested in economic methodology, and excellent place to start is here, the title of which I am abusing in this post. However it is also worth reading this for sources on the new 'empirical turn' in economics. On the impact of ideology on economics a great place to start is this thread from Beatrice Cherrier. On the introduction and history of the minimum wage in the UK, including initial political resistance to it, see here.

Why was economics so insular?

Noah Smith has a good piece on what seems like the never ending stream of popular articles in the UK slagging off economics (or economists). Here I outlined three potential reasons for this epidemic: people do not understand unconditional macro forecasts, politicians from the right do not like economists spoiling their pet schemes (e.g. Brexit), and many heterodox economists from the left wage endless war against the mainstream. All these complaints get airtime when the economy is bad.

The UK economy, right now, is perhaps in a worse state than at any time in the last eighty years. As John Lewis shows in this Bank blog, productivity growth has perhaps never been as bad as it is now: we have to go back to before 1800 to find anything comparable.

The natural reaction when the economy is bad is to criticise economists. That was what happened after the Global Financial Crisis, with some justification. But what is happening in the UK right now is mainly a result of first austerity and then Brexit. As I explained in detail in my earlier post, if we had followed the advice of mainstream economics austerity and Brexit would not have happened. [1] I have as yet not read a single critique of economics that has pointed that fact out, which if you think about it is extraordinary.

There is a little more to say about why economics is an easy target. Historically it has been very insular, and in this respect quite unlike other social sciences. I have already discussed the paper by Haldane and Turrell in the OXREP Rebuilding Macroeconomic Theory volume on Agent Based Models, but I did not have space to show an interesting chart from the introduction to that paper.

It tracks citations in papers to those in other disciplines. Until around 2000, there was no doubt which was the most insular discipline: economics. This is no surprise to me and I suspect most social scientists.

The paper does not explore the reasons why economics is so self-referential: their aim is simply to suggest that it needs to look to other disciplines to see what methods they use. Here I want to sketch why I think mainstream economics (and here the qualification mainstream is required) is so insular.

I once gave a lecture course on the methodology of economics, and in one lecture I used a large blackboard to describe how nearly all economics can be derived from the basic axioms of rational choice. For example the modern macroeconomics of consumption is just the choice between buying apples or pears transformed to the choice between consumption at different times. In that sense economic theory is like an immense tree, where every branch deductively builds on this core. Sometimes large branches grow by adding new elements, like asymmetric information, which then becomes part of the tree and can be used by other branches. This deductive tree of economic theory did not grow all by itself: its growth was and is influenced by the real world problems it wanted to address.

In using the idea of explaining decisions by optimising welfare under constraints economists have created a whole series of widely applicable tools. Economists naturally think about opportunity costs, adverse selection, moral hazard, incentives etc. There is something distinctive about thinking like an economist. To say, as Tom Clark does here, that sometimes this is just formalising common knowledge may be true (see also Cahal Moran here), but in many cases it is not. Try persuading someone who has invested in what is now a sub-optimal project about sunk costs.

This body of theory includes the neoclassical economics that heterodox economists and others love to hate, but it also includes game theory that has applications well beyond economics, and more. In my first year of studying economics I was told in some lectures that this whole endeavour was a huge ideologically driven misstep, but I began to see it differently after reading this famous 1963 paper by Arrow. It shows why (asymmetric) uncertainty in the health service means that the standard competitive model just cannot work for medical care. That may be obvious to us in the UK but it appears otherwise to many in the US. To be fair Clark also acknowledges that this economic theory has produced positive successes: he mentions auction theory but there are many more.

As to ideology, if you want an effective critique of neoliberalism you have to use economics (see, for example Colin Crouch’s book on neoliberalism or this by Dani Rodrik). So many critiques of economics use a kind of bastardised version that insists that workers are always paid their marginal products that the political right also employs. But monopoly and monopsony power are also part of the deductive tree. A paper I like to refer to in this context is by Piketty, Saez and Stantcheva (discussed here) which uses a simple bargaining model to show how cutting the top rate of tax can increase pre-tax CEO pay.

There is nothing like this deductive tree in other social sciences, and I think it at least partly explains why economics used to be so insular. As non-economists academics seemed to add little to building on this theory, there seemed little point in collaborating or even citing them. But, from the point of view of other disciplines, it was worse than that. Economics could also be imperialistic. Its methods, both theoretical and empirical, could be applied to other fields (with varying degrees of success): here is David Hendry applying his econometric methods to climate change, for example. So not only did economists not talk much to other social sciences, they trod on toes as well.

But although there may still be important branches to be added [2], the limitations of what you can do with a few axioms about rational choice have led in recent years to economics becoming much more empirical, and much less tied to this deductive theory. (See the article by Noah Smith which began this post. Unfortunately in my view an exception to this trend so far is macroeconomics.). We can see this in the citations data above, and the most obvious manifestation is behavioural economics. But a more immediate example of a data rather than theory based idea is the gravity model in international trade, which lies at the heart of why Brexit is such a bad idea. It is irony indeed that just at the point at which we have all these articles attacking economics, a large number of people who believe the UK is committing a large act of self harm are seeing the virtue of just one small part of what economists do.

Having said all this, I think there is an unfortunate hangover from this insularity. As a discipline economics shows little interest in communicating its core knowledge to others [3]. This can be true both within academia and with the outside world. Within academia publishing in top economics journals still has far higher status than top journals in other disciplines. When it comes to policy and the public, there is a belief among many that when either requires our wisdom, they will seek out the best of us for advice. In part this epidemic of articles about the failings of economics reflects this communication failure. More importantly, both Brexit and Trump should be a wake up call that economists as a collective has to get better at communicating the core insights of economics.

[1] There are of course more underlying problems behind the UK productivity crisis beyond the negative shocks of austerity and Brexit. But economists overwhelmingly argue for more R&D spending and more public investment. In short if you want someone to blame for why the UK economy is currently in such a dire state, blame those who have ignored the advice of economists.

[2] Most of the good criticisms that I see of economics amount to requests to add to the tree. But economics is so rich that most things are possible. In part (but only in part) what is done follows the money: you will find it relatively easy to get money for work on free trade compared to work on rent seeking. To blame economists for that is just bad economics. As economists found out after the financial crisis, they had many tools to understand what had happened, but had just not applied them before the crisis.   

[3] I say as a discipline because I mean economists as a collective, not as individuals. There is no equivalent institutional infrastructure in economics to that built by the hard sciences. Of course many individual economists do their best, but there are also others who ignore the consensus to plug their own personal ideas or to further some political or ideological cause.

Brexit: it’s the economics, stupid.

The Global Future report published about a week ago, and particularly the polls it contained, received some attention, but in my view not nearly as much as they deserved. Respondents were shown four possible Brexit scenarios, together with an estimate of what each would do to the amount of money available to spend on public services. One of these options was the government’s preferred bespoke deal. All the options were overwhelming rejected, by Leave voters.

The Jack of Kent blog had a take on something similar that could also be applied to this poll result, after a well known children’s book: ‘That’s not my Brexit!’. It is very apt for this poll because it makes clear that none of the four types of Brexit offered are remotely like the Brexit people voted for. What is wrong with EEA, FTA, WTO or Bespoke in the mind of these voters? They all imply substantially less money for public services. The Brexit people voted for involved more money for public services.

This fits with the finding that most Leave voters continue to believe that they will be better off in economic terms as a result of Brexit. Many voted for Brexit because they were told more money would go to the NHS. The Remain side said that would not happen because of adverse macroeconomic consequences, but many voters believed the Leave side when they said these claims were just Project Fear. They were told that the EU would not decrease the ability of UK firms to trade with the EU because it was not in the EU's interests to do so. 

This is why polls that ask “In hindsight, do you think Britain was right or wrong to vote to leave the European Union?” only show a narrow majority for staying in the EU. In answering that question most Leave voters still believe they will be better off after Brexit. When presented with specific options that show we will not be (i.e. when presented with likely reality), you get quite different answers.

Forget those who say that the Brexit vote was all about sovereignty and not about economics. Economics matters, and the poll shows that in this case it matters a lot more than sovereignty or immigration. What Project Fear achieved, with considerable help from the media, was to take the economic factors that mattered off the table, or even replace them with mythical economic gains. [1] Voters went for what they saw as certain: £350 million a week, plus less immigration reducing pressure on public services. Both were lies, but Leave voters did not know that. Which is why most Leave voters continue to believe they will be better off, and why none of the four options they were presented with in the Global Future poll was the Brexit they voted for.

In short, half of the voting public bought snake-oil believing the claims made for it. Most continue to believe the claims, and put down the fact that the government appears not to be delivering what they were promised to something other than that they were sold a pig in a poke. If you think that is implausibly foolish, your main source of news is probably not a pro-Brexit newspaper or even the BBC.

The implications of this are huge. The Global Future poll shows that most Leave voters, and certainly most voters, do not want any Brexit deal that is actually possible. They only want the impossible deal they were promised by Brexiters. That means that any referendum on the final deal that included the government’s own realistic assessment of its economic consequences would result in a massive majority to Remain in the EU.

This is why Brexiter claims that everyone (and for the maths to work it has to be almost everyone) who voted Leave knew that meant leaving the Customs Union are beside the point, as well as being as economical with the truth as most Brexiter claims. Most Leave voters probably had only a hazy idea of what the Customs Union and Single Market were, but most clearly wanted a Brexit that delivered more money for public services. As it is now quite clear that the Brexiters cannot deliver that, then there is no mandate for Brexit. That is what these polls show.

I do not normally disagree with Martin Wolf, but I do when he says another referendum would tear the country apart. Instead, it would be the opportunity for most of those that voted Leave to realise that what they voted for is not on the table because it is not possible, and for them to gracefully retreat by changing their minds in the privacy of the voting booth. On the other hand to continue with Brexit would do far more harm to the UK’s body politic. We would have allowed politicians to put forward a fantasy and get away with it, which means every election from now on will involve claims more and more divorced from reality. The government, desperate to avoid the disappointed expectations of Leave voters, will resort to ever more populist tactics. The lurch towards an anti-pluralist democracy that we have seen since the referendum result could become entrenched in the UK.

Governments have been elected making impossible claims before, but when it turns out that they cannot deliver they can get voted out after 5 or less years. We have to think of the referendum in the same terms. We will have had two years to see if the government can produce the Brexit people voted for, and what these polls show is that they have failed to do so. That may be no surprise to many, but it is news for Leave voters. These polls show that Leave voters do not want the Brexit that is likely to be delivered. To deny people the chance of recognising that the Brexit they voted for is not possible in a referendum on the final deal is deeply undemocratic.

[1] I argue Trump did something very similar.

Academic knowledge about economic policy is not just another opinion

Does the financial crisis reveal that economists are at the leeches and mercury stage of their subject, and as a result policy makers and the public have every right to ignore what they say? Does the fact that economists working in finance failed to recognise the prospect of a systemic crisis, and that macroeconomists both took finance for granted and as a result failed to investigate financial-real links, mean that we should ignore what economists say when it comes to Brexit?

Speaking for my own subject, I think the financial crisis does raise serious questions about the methodology macroeconomists rely on, as I have explained at length elsewhere. But does it mean that everything macroeconomists have learnt in the last 80 years is virtually worthless, or at least no better than the opinion of the average politician? Why don’t we look at what has happened since the financial crisis.

Macroeconomists, having learnt the lessons of the 1930s, immediately recommended that policy makers do three things after the crisis: cut interest rates sharply, embark on fiscal stimulus and bailout banks. Policy makers took that advice in 2009, and as a result we avoided another Great Depression. Many said that rising government debt was sure to send interest rates on that debt rising: academic economists using basic ideas from Keynes said they would not and they were proved right. Many others said that Quantitative Easing (central banks creating money to buy government debt) would cause hyperinflation, but again academic economists looking at more modern New Keynesian models said that was nonsense and again they were right.

You might claim that in all this economists were just advocating what was obvious. The acid test came in and after 2010, when fiscal stimulus turned to austerity. What evidence we have suggests this move was opposed by a majority of academic economists, a majority that grew over time. There was a minority that supported austerity, at least for a time, and they gained a lot of publicity because politicians latched on to what they had to say. But the majority followed both textbook and state of art economics, and this majority was right. The recovery would have been stronger and faster if politicians had gone with this majority.

If we look back before the financial crisis at UK macro policy, we can again look at the record of economics compared to politicians. The obvious place to start is with the 364 economists, who despite all attempts by politicians and think tanks to suggest otherwise were right: tight fiscal policy in the 1981 budget delayed a proper recovery by over a year. We can look at the following recession in the early 1990s. A key driver behind that was the UK joining the ERM at far too strong an exchange rate. Here it gets personal. With colleagues at the National Institute I undertook what was acknowledged at the time to be the most comprehensive analysis of the appropriate entry exchange rate, and we argued that our entering at the then current rate was folly. We were ignored, and as a result the UK was the first to be kicked out of the ERM in 1992.

The next time the UK had to decide to join in this case the ultimate fixed exchange rate regime, the Euro in 2003, it was the economics that persuaded the Labour government not to join. In this case macroeconomic analysis played a critical role in making the right decision.

All this suggests to me that macroeconomics, if we compare it with medicine, is well beyond the bloodletting stage. It would be very surprising if we were not, given 80+ years of study and the huge amounts of data now available. Of course that does not mean academic macroeconomics will not make mistakes, and of course unconditional forecasters of the kind you read about endlessly in the papers will always get things wrong: our own models tell us they will. But when it comes to macroeconomic policy, experience suggests you are much more likely to get economic policy right if you ask an academic macroeconomist than if you ask anybody else. [1]

The other key thing to say is that the discussion above has virtually nothing to do with the long term impact of Brexit, which depends on international trade. The key bit of analysis that means trade with the EU cannot be simply replaced with trade elsewhere are gravity equations. Gravity equations do not come from theory but from the data: countries are much more likely, even today, to trade with near neighbours than far away countries after allowing for other factors. So when Rees-Mogg suggests that the Treasury must have fiddled the numbers, when the government’s analysis confirms those of other studies that Brexit will be costly for all of us, we know he is slandering civil servants for his own political gain. That he is also the favorite to replace May as leader of the Conservative party tells you all you need to know about the current mess the UK is in and why it is in this mess.

Of course we do not condemn engineering science when a new bridge wobbles or an oil rig fails, and we do not say that all medical science is nonsense when medics get things wrong, as they frequently do. But with economics, there are too many people who either want to replace the mainstream with their own school, or who like Rees-Mogg want to discredit economics because they suggest his preferred policy is harmful. As a result, whenever economics does make mistakes, as it will, there will be plenty of people around who want to bury the whole discipline. But when you look at all the evidence and not just one observation, as economists are trained to do, you find that you are better off following the advice of academic economists when it comes to economic policy than anyone else.

[1] The argument that academic economists should be modest or humble when giving their views should be seen in this light. They should certainly be honest about their own views compared to their colleagues, and they should also if they are given the opportunity express the uncertainties. But being modest and humble should never mean leaving politicians unchallenged when they proclaim economic nonsense. 

Why does economics get so much stick?

Because the advice of economists is so hopeless, you may say. Well think about the following thought experiment. After the financial crisis. suppose people had done the opposite of what the majority of economists said they should do. We do not need to imagine over Brexit, because most of the 52% who voted for Brexit chose to ignore, or more likely did not hear, the advice of 90+% of economists that Brexit would make them worse off. For those who work that belief was quickly shattered as their real wages fell as a direct result of Brexit.

Immediately after the financial crisis interest rates would not have been cut and austerity would have started in 2009, not 2010. Banks would have gone bust because economists said we needed to bail them out. In which case the Great Recession would have become the second Great Depression. Because the majority of economists did not support austerity you would have had continuing cuts in spending during this new depression.

So comparing this thought experiment with reality, we can see that economists have prevented a rerun of the 1930s depression, and if their majority advice had been taken we would have had a stronger recovery and the UK would not have left the EU. Sounds pretty good to me. But, as I’m sure you are now saying, what about the financial crisis the economists failed to warn of?

That was a mistake, but what are the consequences? Do you really think that if most economists had warned about how fragile the sector was anything would have happened? Banks would have continued to lend because they were making money and they had a guaranteed bail out from the state. Their campaign contributions would have weighed far more heavily in politicians’ minds than warnings from economists. So yes, not warning about the financial crisis was a mistake, but it would not have changed anything if the mistake had not happened. Economists are often told to stop being naive about politics, but the same needs to be said to their critics.

Despite such a strong record in macroeconomics since the crisis, why does economics get so much stick? I think there are three reasons. The first is simple: when the economy goes wrong, economists are easy to blame, particularly because of those forecasts that never predict downturns. In reality virtually no academic macroeconomists are involved in forecasting because they know that kind of unconditional forecasting is a mugs game [1], and furthermore most economists are not macroeconomists, but for some that kind of detail is irrelevant. (There are also plenty of highly successful pieces of microeconomics, but most critics act as if economics was just macroeconomics.)

The second reason is politics. Carlyle in 1849 called economics the dismal science because economists did not support his idea of reintroducing slavery. Ever since then economics has annoyed politicians and their supporters of various colours by pointing out the problems with various political programmes or schemes.

Politics is also at the heart of the third reason for criticism: politicians and ideologies of the right use the aspects of economics that suits their cause. Want to promote markets? Just take the idea from economics that an ideal market is an optimal way of exchanging goods, and ignore all the ways that real markets deviate from this ideal (ways which, incidentally, a great many economists spend a lot of their time studying). Some heterodox economists of the left, rather than use mainstream economics to point out how the right plays fast and loose with economic ideas, prefer to suggest that mainstream economics is much closer to the right wing caricature than it is in reality. It is why, as Noah Smith observes, so much of this criticism can be found in the pages of the Guardian.

This misrepresentation of mainstream economics is either deliberate or reflects ignorance. Ignorance about the fact that a lot of economics has become more empirical and therefore more eclectic in its use of theory over the last few decades, perhaps in part because of the influence of behavioural economics. Ignorance that even in macroeconomics, where ideological influences can be strong, there is more consensus around New Keynesian economics than some mainstream Keynesian economists imagine. (See my survey with André Moreira of post graduate teaching at the top schools here.) Nowadays you will find that in most areas of economics (alas not yet macro so much) there is nothing limiting the analysis to selfish individualistic behaviour. The idea that economics is like a religion is absurd.

But sometimes it is hard not to believe that popular criticisms of economics choose to ignore how far economics deviates from the neoliberal characterture. There is no excuse for ignoring that, for example, the best arguments against health care being left to the market can be found in a paper by Nobel prize winning economist Kenneth Arrow written decades ago. As the recent book by Colin Crouch suggests, the best critiques of neoliberalism come from within economics.

Another ridiculous charge against economics is that economics has a natural bias against state intervention. Indeed it is possible to argue the opposite. In my own field it is typical to assume the existence of a benevolent policy maker, who maximises social welfare. It is essentially just a useful analytical device, but you could argue if you wished to that this device biases those that use it to favour state intervention.

Judging by recent conversations I have had, many heterodox economists attack the mainstream because it uses the distinction between positive (value free) and normative economics. An example of positive economics would be me saying a temporary cut in government spending when interest rates are stuck at their lower bound reduces output. A normative statement would be that austerity is unfair. Heterodox economists like Sheila Dow seem to suggest that everything is value laden, and the positive/normative distinction allows economists to avoid being “morally implicated in the advice they give.”

I think this criticism is either trivial (yes, of course there may be normative reasons for choosing particular research topics) or dangerous. It is dangerous if it suggests that economists should be encouraged to base their analysis on assumptions that reflect their values. Economics, even though it is a social science, should conform to the scientific method: it should be as much like a science as medicine. Indeed I think it would greatly improve the public debate if both economists and their critics realised that economics, even though it is a unique and inexact science, is more like medicine than any of the hard sciences.

Dow writes “Getting policy-makers or the general public onside over a particular argument is therefore, critically, a matter of persuasion rather than demonstrable proof (since that proof is impossible).” But surely the best way of trying to persuade a policymaker not to impose austerity is to say that most models, including the consensus theoretical model, and nearly all the evidence suggests austerity will reduce output. In contrast it is far too easy to persuade a politician of things they want to hear. We do not want politicians to pick advice only if it is given by ‘one of us’ (by those who share their values), or as a result of the rhetorical skills of the academic.

The danger in encouraging plurality is that you make it much easier for politicians to select the advice they like, because there is almost certain to be a school of thought that gives the ‘right’ answers from the politicians point of view. The point is obvious once you make the comparison to medicine. Don’t like the idea of vaccination? Pick an expert from the anti-vaccination medical school. The lesson of the last seven years, in the UK in particular, is that we want mainstream economists to have more influence on politicians and the public, and not to dilute this influence through a plurality of schools of thought.

All this does not mean that economists are beyond criticism. As my last post pointed out, I have fundamental criticisms about current macroeconomic methodology. An important point to note about the microfoundations methodology is that it excludes economists who are not prepared to sign up to what is currently considered (by macroeconomists) acceptable microeconomics, or who do not think microfoundations is where you have to start in doing macro. But this critique has nothing to do with values. The mistake macroeconomics made in the 1980s was not in their desire to look for microfoundations, but in deciding that models that had internally consistent microfoundations were the only admissible models.

The big problem with most criticisms of economics you see in the media is not that economics is beyond criticism: as the paragraph above suggests it in many cases should be criticised, and there are plenty more interesting criticisms of economics available. The problem is that these more important criticisms are not those you find in the pages of the Guardian. The typical criticisms you see in the press are just not very good, and I fear reflect either ignorance or ideological antipathy.

[1] A lot of the criticisms of forecasters are themselves spurious. Someone who writes “economists should not need to pretend that we can predict things that do not really matter to several decimal places” are themselves pretending that there are any serious forecasters who do pretend this.

Economics is an inexact science

When I wrote about why the BBC should treat a clear consensus in economics the same way as it now treated climate science, I got a number of comments about why economics is not a science. A common theme was that economics couldn’t prove theories ‘beyond doubt’ the same way as the hard sciences could. A more sophisticated version of this complaint is that most economic theories cannot be disproved in the same way that Popper thought scientific theories could be disproved.

All this ignores a key feature of any social science, which is their inexact nature. Instead we have accumulations of evidence that confirm the applicability of some theories and reject the applicability of others. Economists’ views about what models are applicable change as this evidence accumulates.

A good example involves the minimum wage, as Noah Smith suggests. The basic economic model suggested even a modest minimum wage should significantly reduce employment, but economists discovered that the evidence did not show this. As this evidence accumulated, alternative theories and models (monopsony and search) were thought to be more relevant. It is this response to evidence that makes economics a science.

Jo Michell writes “The scientific method of forming a hypothesis and then testing that hypothesis against reality can never be the final arbiter of knowledge, as it can in the physical sciences.” He is right that no single experiment or regression can kill a theory, but wrong that the accumulation of evidence is not the final arbiter, because no other arbiter is available. He links to a post by Noah Smith which talks about the failures of forecasting. But as that post makes clear, this is not about data rejecting models, but the inability of models to predict the future. We would never dream of condemning medics because they cannot predict the exact time of our death, still less suggest that this failure indicates they are not doing science.

Of course economics involves cases where economists appear too reluctant to give up their favoured models. You can find similar stories in the hard sciences. There will be more such stories in economics because the inexact nature of economics makes it easier to discount any single piece of evidence. What I cannot understand is what leads someone like Russ Roberts to argue against the use of evidence, and instead that “economics is primarily a way of organizing one’s thinking”. Astrology is also a way of organising one’s thinking, but it fails because evidence does not back it up.

That comparison is slightly unfair, because while the theory behind astrology is obviously implausible, the basic principles of microeconomics are not. In a class on economic methodology I once drew a huge tree that showed how most of economics could be derived from principles of rational choice. But go beyond the basics, and add in complications involving information and transactions costs (to name but two) and you very quickly derive competing models. There is no single model that comes from thinking like an economist, so for that reason alone we need data to tell us which models are more applicable.

So thinking like an economist does not tell me at what point raising the minimum wage will reduce employment. But why would anyone want to keep their models from being proved relevant or otherwise by data? The only reason I can think of is that some models give answers that are ideologically convenient. Of course allowing data to establish the relevance of some models over others does not make economics ideology proof. For example people can always select the one study that suggests that fiscal policy does not influence output and ignore the hundreds that show otherwise. That is why the accumulation of evidence, which includes its replicability, is so important. If you think economics has problems in that respect, have a look at psychology.

This is why economists views about the long term impact of Brexit should be treated as knowledge rather than just an opinion. Here knowledge is shorthand for the accumulation of evidence consistent with plausible theory. Sometimes the theories are common sense, like making trade more difficult will reduce trade. Estimates of the size of trade reduction based on evidence are uncertain, but they are better than estimates based on wishful thinking. Empirical gravity equations consistently show that geography still matters a lot in determining how much is traded. Finally there is clear evidence that trade is positively associated with productivity growth. To say that all this has no more worth than some politicians opinion is ultimately to degrade evidence and the science which interprets it.

Economists as medics

I got some stick on twitter the other day for my (longstanding) view that economics is in many respects like medicine. It is of course not exactly like medicine: as the man said, economics is an inexact and separate science. But think about what most doctors spend their time doing. They are in the business of problem solving in a highly uncertain environment in which they only have a limited number of clues to go on. They have solutions to a subset of problems that work with varying degrees of reliability.

If you read Dani Rodrik’s book Economics Rules (which if you have not you should, and can the person who borrowed my copy return it please!), you will see that economists have a large number of distinct models, and the problem that many economists spend their time solving is which model is most applicable to the problem they have been asked to solve. Where doctors have biology as the underlying science behind what they do, they also rely on historical correlations to see if the science is appropriate. Think about solving the problem of why there had been an increase in lung cancer in the middle of the last century.

The science for economists is microeconomic theory, now enriched by behavioural economics. Most of the models economists use are derived from this theory. But as Rodrik emphasises, the trick is to know which model is applicable to the problem you have been asked to solve. To help solve that problem, economists, like doctors, want data. Many have observed how journal articles are now more likely to be about investigating data than establishing theoretical results. Economists have recently started adopting the terminology of medicine in economic studies, talking about treatment effects for example. We both do controlled trials (for economists, mainly in development economics).

Sometimes the paths of the two disciplines cross (as they do all the time, of course, in health economics). One of the big empirical discoveries of recent years has been by Case and Deaton, looking at mortality rates of the US white population. Here is a key figure from their 2015 study.

Mortality has been falling steadily almost everywhere, except since just before 2000 among US whites. Focusing just on the US, the problem seems to be mainly for non-college educated whites (this graphic comes from here).

As with anything to do with race and class in the US, this work has been controversial, but some excellent analysis from Noah Smith shows that the problem suggested by the data is real enough.

Case and Deaton have a new study which tries to understand why this is happening. They describe it as evidence of ‘deaths of despair’. In each age cohort among this group, deaths from suicide, drug overdose or alcohol have been steadily rising. Some useful data is shown here. The interpretation the authors give for the despair is the decline in economic circumstances and status of the white working class in the US.

One of the factors that they describe as an ‘accelerant’ in this development has been the overprescription of opioids drugs that provide short term pain relief, but which have negative consequences in the longer term. US policy over the last 20 years has led to what some describe as the

“worst drug epidemic in U.S. history. Enough opioids are prescribed in the United States each year to keep every man, woman and child on them around the clock for one month.”

They go on

“It is hard to believe that medicine, which prides itself on empiricism, could have taken such a wrong turn.”

Of course individual doctors make mistakes all the time, but the profession as a whole can make major mistakes. It is of course subject to pressures from individuals and large organisations (drug companies). In this, again, it is like economics.

Consider this chart, taken from Alan M. Taylor, ‘The Great Leveraging’, NBER WP 18290.

The blue line shows the percentage of high income countries experiencing a financial crisis each year. Crises were endemic until after WWII, when it appeared for two decades or more that they were a thing of the past. In the 1980s they returned, but without any major impact on high income countries. Then there was Japan’s lost decade, and plenty of papers were written about how that was a particularly Japanese problem. The 2000s seemed quiet, and some called it the Great Moderation, until the global financial crisis arrived.

Looking at this chart, it is hard to believe that economics, that prides itself on its empiricism, could have made the mistake of believing that now things were different. But economics, like medicine, can make big as well as small mistakes. The point I want to make here is the different nature of the response to these mistakes from outside these disciplines. No one says that medicine has failed us, and we need to find fresh voices. No one will say that ‘mainstream medicine’ is in crisis, and we need to look at alternatives.

They do not say that because it would be stupid to do so. With the opioid epidemic something has gone very wrong and it needs to be corrected, and the same is true for economics and the financial crisis. So why the overreaction when it comes to academic economics? One reason is that doctors are not generally asked how long people will live, and even when they do their forecasts are not published almost every day in the press. Most economists are as honest as doctors would be about that kind of unconditional forecasting, but it suits the media to appear shocked and surprised when things go wrong. Another reason is that ordinary people can see doctors doing good things all the time to themselves, their friends and families, but the work of economists is felt less directly. It also seems intuitive that medics are in some sense better than economists, although how you could measure that I do not know. Both factors may explain why medicine is internally policed to a large degree (doctors can be stopped from practicing), whereas economics is not.

Another big difference involves politics. Economists bring unwelcome news to both left and right, so it suits both sides to occasionally bash the discipline that brings the message. We have seen a great deal of that from the right over Brexit. For the left more than the right there are also non-mainstream economists who have an interest in arguing that the mainstream has been corrupted by ideology. Quite why so many on the left choose to attack mainstream economics rather than use the mainstream to attack the right I do not know. All I do know is that they have been doing it for 40+ years, as I remember being told by many economists that the mainstream was fatally flawed back in Cambridge in the early 1970s, which was before Thatcher and Reagan.

But these differences should not obscure the similarities between economics and medicine. We both deal with people, and their mind and body can be pretty complicated whether as individuals, or as a society. In some areas we have developed quite detailed degrees of quantitative understanding that allow us to make successful interventions (more so than in other social sciences I suspect). In other areas we do things that work most of the time but sometimes fail, but there are many important areas where if we are honest we do not have any real idea of what is going on. So we make mistakes, which can sometimes be extremely costly for huge numbers of people, but we also learn from these mistakes.