Wednesday, June 5, 2013

Should We Trust Economists?

Noah Smith was a physics major in college who got interested enough in economics to earn a PhD last year from the University of Michigan.  He is like a lot of other smart people who were good at math and science but were attracted to economics because it seemed like science, and it was more interesting to them.  He is now teaching finance instead of economics.  He believes that finance has more practical value than much of the economics that he has studied.  He recently gave a talk at the Bank of England on the usefulness of DSGE models that are widely used by macro-economists.  He argued that they are not very good at forecasting the economy, and he explained why they are not very useful for making economic policy decisions.  The short explanation is that DSGE models make numerous assumptions, that are needed to make the mathematics tractable, but most of the assumptions are invalid.  The real economy is much more complex than the models that are in use.

In this article, written for a broader audience than economists at the Bank of England, he explains why we should be skeptical about economic advice provided by macro-economists. The problems are much more complex than the theories and models that are in use.  Moreover, they necessarily overlap with the political perspectives of the economist.  For example, the advice that one might get from conservative economists like Robert Barro from Harvard, and John Taylor from Stanford, will differ from that of economists like Paul Krugman from Princeton, and Brad DeLong from Berkeley.  Economists tend to be very smart people who are very good at finding faults in the ideas held by other economists, but none of them are as good as meteorologists who are only pretty good at forecasting the weather.

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