Paul Romer on 'Skyhook' Economics
Tuesday October 13, 2009
A must read from Paul Romer. Here's a sample, but the entire thing needs to be read:
Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles. In fact, they almost always invoke a skyhook, some unexplained result without which the entire structure collapses. Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up, building a crane that can support the full range of economic behavior...I wish I had something clever to add to that. All I can say is:
Economists who have become addicted to skyhooks, who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today - how to improve the quality of bad rules that cause needless waste, harm, and suffering.
Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can't tell the difference between assuming and understanding.
- I agree with every word.
- A question I have asked before - if the vast majority of economic research is of little-to-no value (which I believe it is), how did that happen and how can we prevent it from happening in the future? What are the institutional factors that cause the outcomes we are seeing?
Comments
Meah… unproductive criticism. Next!
P.S. In econ theory, it’s all about jointly-constrained maximization, which doesn’t go well at all with “rules that humans follow”…
Compared to physics, economics does lack a solid foundation. This is unfortunate.
It is as much the result of a lack of ability to do controlled experimentation as it is a lack of defining economics from a perspective of fundamental physical objects and forces.
Just as well, in no other science, is rationality and free will held forth as a foundational concept. Even psychology (one of the underlying basis for economics) makes no assertion of either.
On the other hand, I sympathize with both the necessity of attempting to grasp economic forces and the difficulty in the attempt. No other field of study encompasses more complexity. Human being are perhaps the most complex objects in the universe. Economics attempts to explain these most complex object in their most complex interaction and with relation to the remainder of the environment.
And, unlike other sciences, it uses money as the fundamental unit of measure. Unlike energy, mass, or operational definitions in psychology, money is the most mutable of all possible quantities.
Whatever money represents changes based on the perception of two individuals during a single transaction. It’s value is relative to the total amount of money in the system and the total amount of money in the pocket books of both parties in the transaction.
And all the while, the economist is inextricably entrenched in the very nature of her subject, having formed subjective perceptions from early childhood.
Could anything else possibly be added to the mix to make the subject just a bit more difficult?
I agree with Gabriel and John 100%.
Although he is a highly accredited economist, Romer’s statements about economists and their work present little merit to me. I would like to know exactly what questionable work he is talking about and exactly which economists “can’t tell the difference between assuming and understanding.” The economists I was trained under definitely didn’t exhibit anything of the sort, and made sure that we understood economic theories and their implications, as well as what the theories did NOT imply. Although I think he is correct in his statements of the work and character about some mainstream economists, he clearly hasn’t dug any deeper into the work of lesser known economists.
Elinor Ostrom did do some nice work. There aren’t many political scientists out there that can do what she can. But trust me, if we as a society just ousted the study of economics because a lot of mislead people actually believe it causes more problems than it solves, then we are all screwed. And we would be even more screwed if the study of economics was entirely replaced by political science, as well as political scientists replacing economists altogether. With the exception of some political scientists (who is more of an economist than anything) like Elinor Ostrom and David Bueno De Mesquita, the rest of them get it so wrong its laughable. Why? Because they’re trained to look at issues in terms of politics, not costs and benefits. No other study presents a better understanding of social costs and benefits than economics, and no other individual from any discipline can perform cost-benefit analysis like a trained economist can.
A good discussion as it serves to challenge our understanding and application of assumptions and what we accept as means of evaluation.
Consider the concepts: “the institutional factors that cause the outcomes we are seeing?” the “rules that humans follow” and “politics, not costs and benefits.” At what point are the assumptions and framework of “fundamentals” themselves examined for the set of circumstances under which they are “valid”?
Here is one of my favorites: decisionmaking …”having perfect knowledge” (as an assumption). Knowedlge of what? Understanding of what? Perception of what? Ability and means to act on the knowledge, understanding and perception of …etc, etc? This particular assumption is never in isolation … it is always accompanied by such concepts as “time”. How is “perfect knowledge” changed, for example, if the decisionmaker believes the world will end in five years?
To what extent does the real world actually run on a set of assumptions that can be used to formalize “fundamentals”? Perhaps this is more philosophy than economics or political science . Still, the practioner or interventionist (political or institutional leader) is normally cognizant and sensitive to the “assumptions” (anything from “rules” to “opinions”) and the degrees of reliability and validity that may be present and influeneced in a given set of circumstances
(think marketeing campaign, political battle plan, media release, etc.).
Is it true that the more narrowly we define a concept it is more or less useful? To whom? Or .. is this even a fair question?
When someone says “the recession is over,” and it becomes a headline, is anyone concerned who understands the definition of “recession” and “growth” and how this may apply (other than perhaps as a means to influence spending patterns)? What does it mean when a leader says “We’ve won” or “Let’s finish” (other than a means of creating a perception of a sense of accomplishment and being associated with this perception)?
Is it fair to economists, as scientists, to really expect application without considering political science and psychology? Somehow, I get the impression that there is a desire to to take the complex and attempt to simplify, e.g., “social costs and benefits” separate and apart from the evolving perception, understanding and self-application of the same. That does not mean we should not do this … but, perhaps, if done, should we not try to understand the context and limitations these attempts, themselves, impose?
Far better, I think, to say “if we define (concept) as such and such, then it follows that…. Thus, we develop understanding of the breadth and limitation of constructs, parameters, circumstances and the degrees by which they are present or manifested (in anything from society, nation state, to “target” group) and the circumstances these “degrees” and confluences thereof are influenced and changed —- then perhaps, we can measure “skyhooks” appropriately.
In fairness, I have not yet read Romer, but I would think this is particularly worthwhile so long as there is an openess to examine the parameters and limitations of the theoretical structures themselves as they are applied to subsequent evaluation. Perhaps, with awareness of a need for such openess will come an understanding for such a need in other, related endeavors.
Otherwise, we may be just “muddling through.” I’m not sure, for now, that this is all that bad, as long as we recognize that this is what we are doing (as I believe John has succinctly pointed out) and the implications thereof.
All in all, the previous observations and comments were a most enjoyable read.