Economics and Biology Again

A couple biology blogs picked up an old post by Russ Roberts on how economics is like biology (here, here, and especially here, by Mike). As I've said many times, I agree that the biology analogy is apt, but I think Russ largely butchers it for many of the reasons pointed out in the last link.

Russ writes: "But we would never ask of biologists what the public and media ask of economists. We do not expect a biologist to forecast how many squirrels will be alive in ten years if we increase the number of trees in the United States by 20%. A biologist would laugh at you. But that is what people ask of economists all the time."

Mike responds: "Erm, no. Actually, ecologists not only answer those types of questions for regulatory purposes all the time (e.g., forestry biologists, fisheries biologists, pest control, crop management), but they routinely answer much more difficult questions, such as how does a temperature increase combined with less rainfall affect pine populations due to a change in bark beetle populations. Biologists have been running simulations (which are different from models) for a very long time."

Mike is exactly right, and I made this point to Russ initially. A lot of people that are down on economics as a science don't really understand what they're talking about when they talk about the complexity of an economic system. Complexity doesn't mean that you aren't able to predict the behavior of something, it simply means that there are certain dynamics that can emerge unpredictably. You can think of it like the classic difference between risk and uncertainty in the economic system. Certain events can have probability distributions fitted to them, but you have to allow for fundamentally uncertain process, and ultimately that prevents you from projecting too far into the future. But you can simulate things and you can forecast. You just have to know what processes are subject to the fundamental complexity of the system and what aren't. Biologists can predict what will happen when an ecosystem that is understood experiences a shock. Biologists cannot predict what animals will have evolved 10,000 years from now. Economists can predict growth paths for the economy. Economists cannot predict what specific firms will still be successful in 100 years.

The post then gets into a discussion of natural selection and the role of natural history in biology. His point is simply that both disciplines deal with historical contingency and rely on theory to be both confirmed by history, but also to reconstruct historical narratives. This section is all good.

Finally, I have to take issue with a point that this post ends on. Mike writes: "But where Roberts goes off the rails is his statement that economists try to predict specifics and that's impossible to do. I personally wouldn't blame an economist who didn't get the timing exactly right on the collapse of Big Shitpile. But what was disturbing was that very few economists--or at least those that interacted with the public--were saying that the combination of rapidly rising housing prices, high personal debt and stagnating wages were a disaster waiting to happen."

I have two contradictory responses to this. You may choose one.

1. I think more people noted the housing bubble was a bubble than for some reason people generally admit. I heard it referred to as a "bubble" around the Urban Institute long before it popped. Everyone has their lists of their buddies who saw it coming. The housing bubble was not that much of a surprise to anyone, I don't think. What was a surprise was what it did to the rest of the economy, which was largely based on the what the finance industry had done with the mortgages. People were sounding the alarms about the debt build-up too - lots of mainstream people. But the debt loses some of its cogency when you don't know how liable everyone was to movements in sub-prime mortgages. That was the real surprise, but I don't think it says anything about economics as a science that we aren't privy to the portfolios of major banks.

2. And as Scott Sumner and others have pointed out - there's no good way to point out a bubble when you're in one. If there was, you probably wouldn't have bubbles. It's one thing to say "gee, house prices look overvalued". It's another thing to say what that overvaluation means, and it's yet another thing to say what implications it has for the economy.

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The question of science boils down to this - what method do economists use to chase after useful knowledge? Well, we have an iterative deductive/inductive process where theory is tested against data and the tests inform new theory construction. Replication of results is required to convince the community of economists of a claim. Good economists don't let their normative judgements influence their conclusions. We deal with complex systems and we deal with the interactions of a specific mammal, so it's not surprising we are similar in character to biology. If someone studied the same sort of thing in another species they would actually be called a biologist, after all.