Friday, October 25, 2013

Raj Chetty Needs Your Help

I have argued before that whether or not economics is a science is an uninteresting question. Rather, one should be concerned with the quality of arguments economists put forth, how they engage one another, and how they respond to empirical evidence. As regard to the quality of arguments, Raj Chetty's performance contradicts his thesis. (I realize I am talking about an article meant for the general public, not a journal article meant for other members of his profession). Chetty writes:

"...At first blush, Mr. Shiller's thinking about the role of 'irrational exuberance' in stock markets and housing markets appears to contradict Mr. Fama's work showing that such markets efficiently incorporate news into prices.

What kind of science, people wondered, bestows its most distinguished honor on scholars with opposing ideas? 'They should make these politically balanced awards in physics, chemistry and medicine, too,' the Duke sociologist Kieran Healy wrote sardonically on Twitter.

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.

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.

It is true that the answers to many 'big picture' macroeconomic questions — like the causes of recessions or the determinants of growth — remain elusive. But in this respect, the challenges faced by economists are no different from those encountered in medicine and public health. Health researchers have worked for more than a century to understand the 'big picture' questions of how diet and lifestyle affect health and aging, yet they still do not have a full scientific understanding of these connections. Some studies tell us to consume more coffee, wine and chocolate; others recommend the opposite. But few people would argue that medicine should not be approached as a science or that doctors should not make decisions based on the best available evidence..." -- Raj Chetty, Yes, Economics Is a Science, New York Times, 21 October 2013: p. A21.

Chetty's argument is chalk and cheese, apples and oranges. Chetty brings up the existence of open questions in medicine. (I find it easy to decide which studies about health to believe; I pick the ones that tell me to do what I want to do anyways.) But the complaint about this year's Nobel is not about the existence of open questions in economics. It is rather wonder at the simultaneous award of the top prize to two, namely Eugene Fama and Robert Shiller, for apparently making opposite statements about how markets work. (I am ignoring Lars Peter Hansen in this post.) As I understand it, you do not usually get a Nobel in Physics, Chemistry, or Medicine without empirical evidence for your claims. Later empirical findings might overturn Nobel work, but, if so, the prize would not be shared in the same year for both establishing and overturning a theory. So Chetty's argument is a blatant non-sequitur.

What is needed is an argument why the specific work of the researchers sharing the award is complementary, not contradictory. You can find some such arguments on the Internet, but Chetty skates right by this need at too high a level of abstraction to be useful. (Readers should feel free to offer other links in the comments for such arguments.) I do not think this analogy works in the details, but imagine a prize at the relevant time simultaneously honoring Tycho Brahe and Johannes Kepler. Tycho had a mistaken halfway, sort of heliocentric model of solar system, and Kepler had a correct, geocentric model with the planets having elliptic orbits. But Tycho would not be being honored for his mistaken model. Rather, as I understand it, he collected more useful and precise observations of the planets than had been done by anybody before him. And Kepler used these observations to develop and verify his theory. If Tycho's work was not available, Kepler would not have succeeded.

(Note that work by economists with Randomized Control Trials (RCTs), natural experiments, and Instrumental Variables (IVs) is irrelevant to any points I have made above.)

Off topic aside: I want to note this post from Unlearning Economics, the Post-Crash Economics Society at the University of Manchester, an article about this society in The Guardian, and an organization called Rethinking Economics.

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