Russ Roberts and William Byers

Russ Roberts has one of the best Econtalks I've listened to in a while up. He's talking to mathematician William Byers about uncertainty and imperfections in science, although the discussion is wide ranging.

They make a lot of points I make here on a regular basis which can be summed up as an opposition to a justificationist or foundationalist attitude towards science.

I find Russ's position on all this practically inscrutable. On the one hand he recognizes what scientific modeling and empirical work actually is - it's not a foundationalist attempt at some deeper truth, it's just an imperfect replication of what we see in the world to try to understand it better. Russ knows this. He talks about it in this video! So why is he so critical of modeling and empirical for not living up to a standard that they were never meant to meet? Why not accept it for what it is and what it can do? I have no idea. Russ has always deeply confused me on these points, but the discussion is still good.

Some work that I think would go well with this talk:

- Kuhn's The Structure of Scientific Revolutions
- Dewey's The Reflex Arc Concept in Psychology
- Keynes's Newton, the Man

"Scientism" accusations need meat on them - math helps us understand the social and natural world

One of the things that frustrates me to no end about accusations of "scientism" and "physics envy" is that they are always hopelessly vague and wishy washy. What precisely do you have concerns about? It's rarely made explicit because in my opinion the critique is rarely carefully considered by those making it. Constrained optimization is occassionally cited specifically for censure. It's a convenient case because Samuelson explicitly mentioned thermodynamics in his early work on constrained optimization, which painted a bulls-eye on him for people who were more interested in painting him as a physics-envier than they were in good economic science.

Outside of that, few specific critiques of why a technique is appropriate or not are offered.

I thought of that this morning when I was looking at this new NBER working paper titled "Quantile Regression with Censoring and Endogeneity". This is precisely the sort of thing a lot of the "scientism/physics envy" people would talk about: fancy math for fancy math's sake according to them. That's really unfortunate. Here's a summary of what this paper does:

"In this paper, we develop a new censored quantile instrumental variable (CQIV) estimator and describe its properties and computation. The CQIV estimator combines Powell (1986) censored quantile regression (CQR) to deal semiparametrically with censoring, with a control variable approach to incorporate endogenous regressors. The CQIV estimator is obtained in two stages that are nonadditive in the unobservables. The first stage estimates a nonadditive model with infinite dimensional parameters for the control variable, such as a quantile or distribution regression model. The second stage estimates a nonadditive censored quantile regression model for the response variable of interest, including the estimated control variable to deal with endogeneity. For computation, we extend the algorithm for CQR developed by Chernozhukov and Hong (2002) to incorporate the estimation of the control variable. We give generic regularity conditions for asymptotic normality of the CQIV estimator and for the validity of resampling methods to approximate its asymptotic distribution. We verify these conditions for quantile and distribution regression estimation of the control variable. We illustrate the computation and applicability of the CQIV estimator with numerical examples and an empirical application on estimation of Engel curves for alcohol."

I wish they came out with this five years ago, because this actually sounds like a very useful technique. We could have made good use of this in an evaluation of child welfare reform that I helped perform for the Department of Health and Human Services a couple years back (the evaluation itself is still working its way through the DHHS bureaucracy, but background is available online and we've presented preliminary results). We used quantile regressions for the analysis, but one thing we didn't have was an IV version of a quantile regression. This would have helped tremendously because we were investigating a series of highly endogenous child welfare outcomes - but we did have a quasi-random treatment which would have worked with the CQIV presented here. Some of our variables were also censored because of institutional time constraints within the child welfare system. A quantile regression approach that deals with both censoring and endogeneity in such a clean way is great stuff.

The trouble is, if you open up that working paper you see a lot of math. I would have had to spend a fair amount of time sitting down and reading it very closely to understand the gist of it. Then I'd probably have to take the time of walking down the hall to Doug Wissoker's office - a senior econometrician here, whose door I knock on often - and humbly profess my remaining ignorance and ask him to help me. And then he'd have to sit and look at for a while to figure out what they were getting that. And then we'd also share what we eventually did with it in meticulous detail to our technical working group and then they'd make sure we were doing something reasonable. It would have been quite a process - but it would have considerably improved our understanding of how abused and neglected children fare in the child welfare system in this country. And that is a very good thing.

These are the sorts of papers, though, that often just get dismissed as "scientism" with no details on exactly what is wrong with investing the time to learn and use it. That bothers me a great deal.

More Economic Science/Natural Science Analogizing: Two Thoughts

IS-LM as Ptolemaic Economics?!?!

Here, Mark Thoma paraphrases Larry Summers as saying "Larry Summers just said DSGE models played no role at all in WH policy response to crisis. It was all IS-LM augmented by liquidity trap... Summers says Ptolomy model outperformed Copernicun model for 50 years after discovered. Same for IS-LM vs. DSGE" at the INET Bretton Woods meeting that's going on right now.

Does this really make sense? I don't think so, although it's a turn of phrase that a lot of people are going to love to latch on to and repeat. So what does he mean that the Ptolemaic system worked better than Copernicus at first? Well, Copernicus had some bugs to work out at first - both empirical and theoretical. Empirically, the Copernican system implied that the other planets should have phases, which nobody had observed - leaving many in the Ptolemaic camp. Later, as telescopes were developed that did observe these phases, more people sided with Copernicus. Copernican predictions also weren't even as accurate until Kepler introduced elliptical orbits, and even Kepler's orbits had no solid justification until Newton! But is IS-LM Keynesianism really Ptolemaic relative to DSGE New Keynesianism? I'd say it's more accurate to say that IS-LM plays Copernicus to DSGE's Kepler or Newton. DSGE has a New Keynesian IS curve, after all, and the Taylor Rule and various other monetary policy rules do the same work that the LM curve does as well. IS-LM is still in New Keynesianism, it has just been filled out and modernized. Ptolemy was fundamentally different from Copernicus. Newton didn't throw out Copernicus - he developed him. IS-LM hasn't been thrown out either - the old IS-LM is just a first step toward more complicated models. I personally think in terms of IS-LM because even though I've had graduate macroeconomics and DSGE type models, I haven't had enough of it to really soak in yet. But there's not the fundamental break that Summers implies. I do think Keynes represented a paradigm shift, and I think Classical economics is more analgous to Ptolemy. Nobody except politicians and a few hold-out economists use Classical economics anymore. Even that's probably too harsh, though. Even Classical economics isn't as radically different from IS-LM and AD/AS economics as Ptolemy was from Copernicus. Still, I think there's a good case that Keynes marked a paradigm shift.

In What Way is Economics "Right"?

Here, Phil Plait discusses that kid that has some new ideas about Einstein and likes to do integration by parts on his window. He writes:

"Barnett may very well be a genius, and may very well rewrite a lot of physics… as, no doubt, future generations of genius scientists will. But one thing they won’t do is prove relativity wrong.

Bold statement? Not really. We know relativity is right. It may be incomplete, but it’s not wrong.

What I mean by this isn’t too hard to understand. In science (ideally, if you’ll pardon the pun), an idea becomes a hypothesis, a testable statement. If it passes the test, it can be expanded upon, broadened, tested and retested. Eventually, as it grows and becomes more solid, it becomes a theory — I know, in the general jargon that word means "guess", but to a scientist a theory is an explanation of phenomena so profoundly certain that a layperson would call it a law.

Relativity is just such a theory. It has passed essentially every single test to which it has been put for the past century. It is literally tested millions of times a day in particle accelerators, for example.

So I don’t think anyone, young Jacob Barnett or otherwise, will ever prove relativity to be wrong. What they might do, what I think and hope someone eventually will do, is show how it’s incomplete."

So how does economics stack up? What can we say, like this? Clearly we are different from relativity, but it's not like we're just making things up either. Later on in the post he lists evolution as being with relativity as one of those theories that we know to be "right", and that will never be proven wrong. I think laws in economics are "proven" in much the same way that evolution is (which shouldn't be surprising, since economics is a very, very specialized form of the biology of highly evolved primates). Relativity is "right" insofar as we know precise relations and formulas hold up consistently. Economics isn't "right" in that way. We don't have a supply curve that is the "right" supply curve. It sounds strange even to talk about it in those terms.

What we have, like evolutionary biology, is a mechanism that we know functions in the way we think it functions, broadly speaking. We know without a doubt that organisms evolved by natural selection, just as we know without a doubt that the price mechanism optimizes resource allocation (with "optimize" having a specific definition in this case, just as "selection" has a very specific definition in biology). We know the process is incontrovertibly true, but the way that process plays itself out is very contextual and historically contingent. When did humans evolve certain features or move to certain regions or emerge as a distinct species? These are natural history sorts of questions that are informed by the theory of evolution. These specific questions are analagous to questions like "how elastic was labor demand a decade ago?" or "what drove the inflation rate in the 1970s". The scientific law of supply and demand and market efficiency informs how we answer these questions both theoretically and empirically, but there is a lot more natural history to it than there is with relativity. Astrophysics has its own natural history, of course. People that try to answer questions about the origin of the moon or the asteroid belt set themselves to answer questions that are just as messy as the ones that biologists or economists deal with on a more regular basis.

Scientific theories are "right" in a lot of different ways, and people that are down on economics as a science should put aside their physics envy and just recognize we aren't "right" like relativity is "right". We're more "right" in the way that evolution is "right". We know that we have an accurate understanding of a broad mechanism or process that is central to answering the questions of economics, just like evolution is a broad mechanism or process that is central to answering all sorts of questions in biology.

Neil deGrasse Tyson on "The Measure of a Scientist" and a mentee of mine

One of the regular things I've taken part in at the Urban Institute is the Urban Institute Summer Academy. A couple years ago the Ford Foundation supported us in an eight week program where we have ten undergraduates come for the summer and work on a research project with a mentor from the Urban Institute staff. I've mentored two summer academy students (and hope to one final time this summer), and I've continued to work with my mentee from the summer of 2010 as she's turned her summer project into a senior thesis this year at Dartmouth.

This mentee took on an especially tough project... testing the impact of a policy measure. In most cases these students do the sort of thing students do for their papers in intro statistics or econometrics classes: they look at the relationship between some broad social or economic variables and pontificate on what that means for society, policy, etc. etc. This mentee had a very specific program that she wanted to get a treatment effect for. It was great to have her interested in that, but as anyone who does this sort of thing knows - it's a tough slog. Her results (both in the summer and in the expanded analysis she finished this spring) were abysmally insignificant. It's a fact of life. It happens. You have to stay agnostic when that happens - often you have to stay agnostic on a conclusion you really would have liked to have found. She was disappointed at first, but ended up taking it in stride after about the tenth time I insisted to her that failing to reject the null is an important scientific finding.

I recently stumbled across this discussion by Neil deGrasse Tyson about the measure of a scientist - you really tell a scientist by the way they react to what a more naive observer would characterize as "failure" (but really isn't).

Grumpy Kuhn

Lot's of people (here, here, here and here) are picking up on this story about Thomas Kuhn throwing an ashtray at Errol Morris. Morris shares:

"The conversation took a turn for the ugly. Were my problems with him, or were they with his philosophy?

I asked him, “If paradigms are really incommensurable, how is history of science possible? Wouldn’t we be merely interpreting the past in the light of the present? Wouldn’t the past be inaccessible to us? Wouldn’t it be ‘incommensurable?’ ”

He started moaning. He put his head in his hands and was muttering, “He’s trying to kill me. He’s trying to kill me.”

And then I added, “…except for someone who imagines himself to be God.”

It was at this point that Kuhn threw the ashtray at me.

And missed."

Wow! So I have a few thoughts on this. The first one being the obvious one that everyone is pointing out - "holy cow, Thomas Kuhn had a temper!". This sounded like an agitated and easily agitatable guy (which was very interesting to find out, because he seemed very calm and methodical in his book). Morris also discusses his six-or-seven pack a day smoking habit and his growing fame. You very clearly get a picture of a guy that could lash out.

That, I think obscures the second thought I had for a lot of people, namely that Errol Morris really doesn't seem to understand Kuhn at all and he seems deliberately provocative as well. That doesn't justify ash-tray hurling, of course. It's simply to say that these two personalities seemed destined to clash. What's particularly surprising to me is that this student of Kuhn doesn't seem to grasp what Kuhn was saying about incommensurability at all. I thought his apparent misunderstanding might just be an impression I got from a short blog post, but he goes on in part two (of five) to talk more about incommensurability (and the second edition of Structures of Scientific Revolution, which takes even more pains to point this out than the first edition) in completely the opposite way that Kuhn talked about it.

Morris writes: "In a Gestalt-flip, we never lose our ability to see the rabbit or the duck, even if we can’t see them at the same time. We see the rabbit, then the duck. Or the duck, then the rabbit. Rabbit, duck. Duck, rabbit. (I’m sure Elmer Fudd figures in here, somewhere.) But then Kuhn went on to say, “What were ducks in the scientist’s world before the revolution are rabbits afterwards.”, but Kuhn said about the Gestalt-flip metaphor exactly what Morris accused him of failing to note - that we could see incommensurable paradigms in both ways, but simply that we could not see them in the same way simultaneously or compare them simultaneously. This was the whole point of Kuhn's book, after all! To see and talk about prior paradigms on their own, incommensurable terms! Kuhn obviously believed you could see both the rabbit and the duck because his whole project was to engage and talk about Newton on his own terms, Einstein on his own terms, etc. etc.. The whole point of the book is that we never lose our ability to see the rabbit or the duck, but that two paradigms are still as incommensurable as the rabbit and the duck - you can't accept both at the same time, although you can see each on its own terms.

It would be one thing for Morris to dispute a minor point or phraseology of Kuhn, but in his first post (on the ashtray) and in this second post even more so he seems to have no concept of what Kuhn was saying, instead simply taking Kuhn's critics at their word. Throwing ashtrays is poor etiquette to say the least, but I can completely understand why Kuhn would be so frustrated with Morris.

My third thought is that this mirrors a lot of the critics of pragmatism who unthinkingly equate pragmatism with relativism, nihilism, post-modernism, etc. (and I think some people are probably similarly unfair to post-modernism although I don't know it very well). People think in terms of everything being nailed down or nothing being nailed down, but they have trouble with views that say "lots of things or even all things may be nailed down, but our perceptions can't always get to that and there's always going to be a fundamental uncertainty". Non-relativists see that and think relativism, when it's really not.

Anyway, we're forty percent through these blog posts from Morris, and while he strikes me as being a little obtuse, he's definitely intelligent and interesting - I look forward to the others.

If Biology Had Schools of Thought Like Economics Does

In this post I discuss how silly arguing from the perspective of "schools of thought" is in economics. Let me clarify, I don't think all economists do this. It's most problematic among macroeconomists, and particularly among macroeconomists that can't distinguish between their politics and their economics. This isn't an issue at all among microeconomists. Microeconomists differ over specific findings, but there are no great over-arching "schools of thought".

Anyway, by means of illustration I wanted to sketch out how silly it would be for evolutionary biologists to do what macroeconomists do. Imagine these schools of thought:

The Foodians: The Foodians strongly maintain that evolution is primarily driven by access to food sources. When climate changes, the kinds of food growing in an area changes and organisms who are best suited to survive eating the new collection of food available are the ones that survive and propagate successfully. Food drives evolution.

The Climatists: The climatists regularly accuse the Foodians of ignoring underlying causes (despite regular references in Foodian articles to things like changing climates). Climatists argue that it's wrong to say that food supply drives evolution - ultimately changes in the climate cause evolution. Organisms that are more prepared to survive in colder weather, or wetter climates, or what have you are going to survive and propagate successfully. Climate drives evolution.

The Dispersionists: The Dispersionists, on the other hand, think that both the Foodians and the Climatists are barking up the wrong tree. Evolution depends on the availability of lots of genetic variation in a population and this is going to depend on how dispersed or concentrated, large or small the population of a species is. If there are just a bunch of small colonies of an organism scattered widely across the planet with little contact between each other, genetic variation is not going to be as wide as if a lot of organisms of the same species congregated together and could easily travel through the population and mate with each other. Population dispersion is what drives evolution. Moreover, the other schools have a fatal flaw: they consider population variation to be homogeneous! They aggregate too much! Despite the regular mention of variations in the preparedness of organisms to eat certain foods or deal with certain climates, the Dispersionists still accuse Foodians and Climatists of genetic aggregationism... no one quite understands why they accuse them of this. Presumably its because Dispersionists are smitten with the way they talk about genetic disaggregation and like to feel special.

The Asteroidists: The Asteroidists argue that the biggest episode that life has to deal with on a planet is surviving being hit by an asteroid or other incoming rock. Large rocks flying into Earth drive evolution because the impact is so violent and the resulting climatic changes are so all-encompassing that only organisms designed to deal with the extreme cold after the impact blocks out the sun, or those who can burrow deep underground, or even those who are simply lucky enough not to live directly in the impact zone can survive. Impact events drive evolution.

*****

Can you imagine how goofy that would be? The disagreements I outlined above are largely based on caricatures of the other positions. There's very little that is obviously mutually exclusive in any of this, and whatever is mutually exclusive can be explained by acknowledging "yes, X is a process that operates sometimes and excludes the prospect of Y process occuring, but at other times Y may occur without X occuring".

The reason why economists do this is probably mostly because of politics and ideology, but it's allowed to perpetuate itself because we also have a very weak commitment to the idea that (1.) we are scientists - primatologists, in fact, and (2.) we are studying a complex phenomenon that involves multiple simultaneously operating processes.

I think it would be legitimate to say "I study this particular extinction episode a lot, which was caused by an asteroid strike so I emphasize the role of asteroids in my own research but I recognize all the other forces". That's fine. It is also legitimate to have a preference for what explains a large portion of the subject at hand in general, without thinking of other forces as illegitimate or mutually exclusive. What's wrong is to pretend that what we're dealing with should be treated as warring schools of thought. This isn't to say there can never be warring schools of thought. I'm not sure what a good example in biology would be - punctuated equilibrium vs. gradualism? That seems like it might fit the bill. But they should not be as common as they are in economics.

Macroeconomics, Science, and Engineering

Robert Johnson and I have been discussing the extent to which economics is a science (or a "soft science") in the comment section of this post. The very term "soft science" is like nails on a chalk-board to me. I find it completely vacuous. I'll loudly proclaim that there are varying complexities of the systems that various scientists study and that this needs to be taken seriously - but this doesn't really speak to the scientific quality of that field of study. Social science is not the half-way point between the "sciences" and the "humanities". "Social science" is the name we give to certain sciences because our self-absorption and self-aggrandizement revolts against the idea of classifying economics as a sub-branch of primatology.

Anyway - I can't really comment much longer on that post, but at the end I was getting the sense that a lot of the difference between my views and Robert's views might be emerging from the fact that I separate questions of science, engineering, and forecasting. To me they are very different things. One is the pursuit of understanding through the scientific method. Another is the application of that understanding to problem solving. The third is the application of that understanding to piercing through the "dark forces of time and ignorance that envelope our future". All are noble pursuits. All are rightfully done by economists with varying degrees of success. All are quite distinct, though. I think we are quite good at economic science, and somewhat less good at economic engineering and forecasting (we are probably better at engineering and forecasting than meteorologists, worse at engineering but better at forecasting than geneticists, and worse at both engineering and forecasting than astronomers).

Anyway - all I intended to do here was to quickly point readers to an essay that Greg Mankiw wrote a while back on the macroeconomist as an engineer and the macroeconomist as a scientist. Here's a good selection from the beginning:

"To avoid any confusion, I should say at the outset that the story I tell is not one of good guys and bad guys. Neither scientists nor engineers have a claim to greater virtue. The story is also not one of deep thinkers and simple-minded plumbers. Science professors are typically no better at solving engineering problems than engineering professors are at solving scientific problems. In both fields, cutting-edge problems are hard problems, as well as intellectually challenging ones. Just as the world needs both scientists and engineers, it needs macroeconomists of both mindsets. But I believe that the discipline would advance more smoothly and fruitfully if macroeconomists always kept in mind that their field has a dual role."

Science as a Ratio

During lunch, I stumbled across an interesting discussion between Richard Dawkins and Lawrence Krauss that wanders in a couple different directions, but starts with an interesting way of thinking about how to compare the genius of a man like Darwin with the genius of a man like Einstein.

Dawkins says that we can think of a scientific theory as a ratio between what can be explained and what must be assumed. Dawkins argues that Darwin wins out over Einstein on this ratio, but also notes that this has implications for the underlying genius of Einstein. He jokes "any fool could be a Darwin". Krauss disagrees somewhat and gives Darwin more credit, and the discussion goes on from there.

But I think this ratio idea is a good way to think about science. It's appealing because in a lot of ways it is a productivity measure - informational output per unit of informational input. It really explodes the hard/soft science distinction as well. Yes, social sciences have complex, imperfect, imprecise informational inputs - but the phenomenon it is trying to explain is equally complex, imperfect, and imprecise. The "hardness" of a science doesn't make sense under this schema (or at least it doesn't seem important... all "hardness" really means is "complexity/precision") because we are normalizing outputs with the input.

This also presents a nice way of thinking about scientific advances. Copernicus revolutionized cosmology because he was able to produce the same output (the observed course of astronomical bodies) with substantially fewer inputs. One way of thinking about this is that Copernicus was "right" where others were "wrong"... but as science has advanced we've realized that that sort of hubris may be uncalled for. A better thing to say than that Copernicus was "right" was that he was "more efficient". His theory had higher scientific productivity.

Without having read any Kuhn, this sounds Kuhnian to me - but I think the expression of this ratio as the scientific productivity of a theory has other advantages. After all, with a productivity measure you can have a marginal productivity measure (or really an expected marginal productivity measure because science is a discovery process not really a production process). Once you have a marginal productivity measure you can make all kinds of claims about the behavior of scientists.

I see a few wrinkles that may present obstacles in making use of this sort of marginal productivity measure, but I have to chew on it for a little while. Thoughts or claims to the effect of "ya - so and so essentially already said that" would be appreciated - I'm not as well read as I'd like to be on philosophy/history of science.

The Practice of Macroeconomics - A Few Rules

There have been three good posts recently from Paul Krugman, Arnold Kling, and Steve Horwitz on how to do macroeconomics (or in Horwitz's case, Austrian economics in general). Krugman makes the point I often do that you can't assume that all macroeconomic episodes are created equal or that they should be responded to in the same way. It's a point that Jefferson and Keynes have both made emphatically, and one that Tom Woods and Bob Murphy would do well to digest. Arnold Kling makes several points on here about identification problems in macroeconomics. He also notes the relationship between model building and a person's macroeconomic priors. I think this is very important, and a good introduction to the way that empiricism can be used to pursue truth (and the ways in which it cannot). Steve Horwitz wrote a very thoughtful post with a lot of very thoughtful comments on what Austrian economics is - emphasizing for the most part the Peter Boettke's ten tenets of Austrian economics and Steve's own concerns about the tendancy to mesh positive and normative insights.

These all got me thinking more concretely about a few thoughts/rules of my own on the practice of economics and macroeconomics in particular that I've been thinking about for a while. I think they broadly relate to these three posts insofar as they emphasize how we have to approach macroeconomics pragmatically rather than dogmatically, and how to keep our approach objective despite the obvious judgement calls and normative concerns.

Rule # 1 - The economy is complex so you cannot successfully build it up deductively. This is not to say, of course, that deductive logic is useless. It is useful - but as a tool to be employed when necessary, and not as a totalizing method. The problem with building a macroeconomics out of strict deductionism is that there are simply too many factors to account for - we are faced with what is essentially a knowledge problem. Deduction can certainly illuminate specific processes that go on in the economy, but one cannot hope to get an adequate picture because of the very real risk that the necessary and true axioms identified are insufficient for determining the system. In other words, deductive logic should not lead you astray if you do it right and if it remains circumscribed (both of which are very big "ifs"), but it will lead you astray if you make the mistake of thinking you can rely on your deductions for a sufficient picture of the macroeconomy.

Rule # 2 - Start with theory, whether it is deduced, induced, or inherited. We need some way to conceptually organize what we empirically observe, and if we want an understanding of the macroeconomy we need some framework for understanding macroeconomic processes. So you need a story or an explanation - a theory. Where you get this theory isn't terribly important as long as you understand that what you have is a theory and not a statement of exhaustive truth. Deductive logic is very useful in theory construction, of course. But induction can be a useful approach as well. If we observe, for example, that cyclical unemployment is primarily determined by movements in hiring rates rather than separation rates, that observation can be used to think up a story about why that might be the case. It's also fine to acknowledge that you're relatively new to macroeconomics, but everything that some older, wiser scholar said has the ring of truth, and so you adopt that perspective as a theoretical starting point. The key is to understand that you are not claiming a truth - you are constructing a way of understanding the world. Pitfalls still exist for deduction (I describe these above), induction (the pitfalls of induction should be abundantly obvious), and inheritance ("arguing from authority" is never good, and hero-worship is always a risk). But these problems and fallacies are only really problems if we think of theory-building as truth-claiming. It's not. And I can't emphasize this enough. Epistemological insights are useful for science, but science is not the search for "truth". It is the search for useful approximate knowledge of the world. Theories are ways of organizing knowledge and information - they are not "truth".

Rule # 3 - History is simply past behavior of the human species and as such it is essential to the scientific study of the human species - once you have a theoretical framework your first task is to corroborate it with history. Verification of theory is extremely hard. We think it is only possible through deductive verification (which we established as futile in Rule # 1) or falsification, but falsification never provides definitive proof of truth (only definitive evidence of un-truth), and what falsification can provide us with is very hard to come by because true falsification tests are hard to arrange. However, corroboration (which is necessary, but not sufficient, for establishing truth) is comparatively easier, and therefore we should first exhaust our options for corroboration of theory with evidence. In other words, to establish the truth of a statement about the macroeconomy, we would like to uniquely map our theorization space onto our observational space (i.e. "what we theorize uniquely implies X", or "we would expect to see X given our theory") and uniquely map our observational space onto our theoretical space ("what we observe uniquely implies Y understanding of the economy"). The latter is very hard to do, but the former is somewhat easier. If you cannot corroborate your theory with what happens in the real world in every episode that comes up, you're in trouble, because you know your theoretical space cannot map onto your observational space. The fix may be relatively easy - you just recognize that you've identified one economic process among many. That's no reason to abandon your theory - that's a reason to expand your understanding of the economy. You may also have to modify the theory itself. This happened when people realized the Phillip's Curve needed to take expectations into account. This should illustrate why corroboration is very fruitful. At the very least it gives us a pragmatic theory that we can say seems to fit a lot of circumstances (and so should be a decent guide for future circumstances), but it also allows us to start the task of weeding out or fixing bad theories. It doesn't give us definitive proof, but it is a very important task. This is how I see the work I've done (and continue to do) with 1920-21. It's quite obvious how 2007-2010 or 1929-1933 corroborates the Keynesian story. 1920-21 is more of a head scratcher for some people, so it was worth some attention. It didn't take that long to realize that it actually doesn't provide an obstacle to Keynesianism at all. It's perfectly consistent with Keynesianism - a Keynesian would expect to see 1920-21 play out exactly how it did. So my theory maps uniquely onto my observation. The problem is, a couple other theories seem to be corroborated by the episode as well. ABCT and monetarism also map onto the observational space we are presented with in 1920-21. So the question is - of the theories which uniquely map onto the experience of 1920-21, which theory or combination of theories does 1920-21 uniquely map onto? That is a tougher question.

Rule # 4 - Theorization is the task of elaborating economic processes of which many could be true. From Rule #'s 1 and 2 another point starts to emerge - that our brains are inadequate to rule out additional theories deductively or inductively so any story-telling we do about the economy cannot be assumed to be exhaustive. What we are doing is theorizing economic processes and hoping to understand and integrate enough of the important ones to have a useful (not exhaustive or strictly "true") description of the way the economy works. I think this point is especially easy to grasp for someone coming from a New Keynesianish perspective. New Keynesianism as a theoretical project was largely the cobbling together of lots of different processes and market failures that could explain the idiosyncrasies of the observed economy. We had credit rationing, asymmetric information, wage rigidity, money illusion, efficiency wages, irrationality, bounded rationality, myopic discounting, frictions, etc. to explain all the funny stuff that could go on. It was an exercise in economic process identification, not economic truth proclamation.

Rule # 5 - Try to uniquely map observations onto theories, but don't hold your breath. You should always look for good opportunities to actually try to verify theories with data. This is very hard for macroeconomics because of how sparse data is. It is especially hard when we are interested in particularly rare phenomena (like depressions). Ideally we would want to have two cases that are exactly identical except one case implements the desired amount of fiscal or monetary stimulus and one doesn't. We could compare the two and get a legitimate test of various theories' implications about fiscal or monetary policy. The problem is, (1.) it's hard to establish that two historical circumstances are exactly the same, much less close enough for comparison, (2.) most of the time some intervention is tried (so there is no counter-factual), but often it's not of a magnitude that anyone is happy with, and (3.) it's hard to get sufficient statistical power even when we do have a case to look at. Macroeconomic theory testing is extremely hard for these reasons, as I mentioned recently in another post where I noted the fact that I came to macroeconomics via labor economics (which has been able to perform much more rigorous and plausible empirical analyses and has quite a high bar for satisfactory identification). I've essentially concluded that this sort of strict theory-testing empirical work is practically impossible in macroeconomics. There are a few good examples of it - like Barro's work on the multiplier. Those are always great to have. But for the most part you're grasping at straws. Empirical macroeconomics mostly has to stick to (1.) providing parameters to plug into theoretical models, and (2.) corroboration/checking for consistency with observation.

Where does this lead, in a nutshell?:

1. Less "schools of thought"
2. More openness to the operation of mutliple processes
3. More history in macroeconomics
4. Less fretting about microfoundations. They're nice and I'm not saying they're bad, but notice they don't feature very prominently in my schema.

"Thinking like an economist" on climate change

Bjorn Lomborg, a famous "climate change skeptic", is publishing a new book where he identifies climate change as one of the biggest problems facing the human race, which should be addressed by a carbon tax and billions invested in addressing the problem (HT - Tyler Cowen). All very shocking stuff, right? This pronouncement by Lomborg is going to electrify the environmentalist community and it will be presented as a major coup.

The problem is, as far as I can tell Lomborg isn't really saying anything new. He's always asserted that climate change is real and a problem, and he has always (like a huge portion of economists) identified a carbon tax as the solution.

I think the public's view of economists is driven by the weird way that economists think and interact (relative to everyone else at least). For example, economists are very good at compartmentalizing different parts of a problem, and they are also good at thinking speculatively. Thus, in Superfreakonomics, you have the authors speculating about the relationship between time preference and the mitigation of climate change. They set aside the question of whether we should do anything about the problem (let's say, for the sake of argument, that we should) and ask "what should we do?". It may be more efficient to wait until climate change is actually a problem and cheaply pump sulfur aerosols into the atmosphere to cool down the Earth, compared to the impoverishing impact of reducing our carbon consumption. Like it or not, this is a serious thing to consider: do we do painful remedies now when we are relatively technologically unadvanced, or do we do cheap remedies later when we'll have greater technical know-how anyway. Normal people don't think in terms of these time preferences and trade-offs... but economists are not normal people.

Lomborg is the same way - he's severely criticized Al Gore and other alarmists for hyping extreme scenarios and misleading the public about the reality of climate change. Normal people assume this means that Lomborg is somehow unconcerned about climate change. After all, Al Gore seems to have good intentions. Anyone criticizing Al Gore must not take climate change seriously. This is not the case at all.

Generally speaking, natural scientists approach natural science objectively and social issues subjectively and emotionally. The general public often approaches both natural and social science issues somewhat subjectively and emotionally. Economists tend to approach social questions quite objectively. You can't assume that because an economist opposes cap-and-trade he is unconcerned about climate change. You can't assume that because an economist opposes the minimum wage he is unconcerned about low-income families. You can't assume that because an economist supports large budget deficits they are unconcerned about fiscal responsibility. They may be unconcerned about those things, but not necessarily. They view these questions objectively, as scientific questions, whereas the general public sees them as moral questions. If you come out against any proposed climate change policy it is assumed that you don't care about climate change. If you come out against any policy purported by elected officials to help the poor or to bring responsibility to Washington, it is assumed that you don't care about those things.

Of course, part of "thinking like an economists" is laughing it off when people assume you're a monster... in retrospect this probably isn't very conducive to straightening things out.

Another important element of "thinking like an economists" is amicable arguing. Criticism among economists is famously vicious, but professional. This catches a lot of non-economists off guard, which is why I think Lomborg has been branded as an opponent of dealing with climate change (and actually - Lomborg is not an economist, although he is a social scientist and he does "think like an economist"). I've run into concern about this "amicable arguing" at Cafe Hayek a lot. People there have accused me of "disrespecting" Don Boudreaux and Russ Roberts. That's because most people argue with people they don't like and try to smooth out disagreements with people they like. Economists aren't like that, as anyone who has been to an academic workshop in economics can tell you. This is what I tried on several occasions to tell people commenting on Cafe Hayek - I'm just raising what I see as concerns with Don and Russ's argument. Patting them on the back for good points seems unnecessary and unproductive. Beyond a shadow of a doubt, Don and Russ both get the same kind of scrutiny in their own workshops at GMU (just take a look at the Youtube debate between Bryan Caplan and Peter Boettke - amicable argument is the norm within economics departments).

Normal people don't generally act like this. Vigorous disagreement and disputation are taken as signs of opposition. Normal people try to cushion criticisms of friends, and let themselves go in criticisms of enemies. I've never seen that tendancy in economists. You don't do your friends any favors by indulging inaccuracy, and as Keynes said "There is no harm in being sometimes wrong- especially if one is promptly found out".

When you add all these things together: an eagerness to speculate, an ability to compartmentalize, objectivity on questions of social import (we can also think of this as a well tuned ability to distinguish between "is" and "ought" or positive and normative points), and an argumentative nature (even with friends), what you get is a group of people who can easily be mistaken as supporting something they actually oppose or opposing something they actually support. But that's not because we're being unclear about it - it's because you normal people are.

Boettke on New Methods of Peer Review

I want to pass this post by Peter Boettke for reactions, although I don't have time to think in detail about it now. He mentions a New York Times article about a more open, blog-like "crowd-sourcing" of the peer review process. I didn't even get a chance to read the article in detail yet, but it sounds interesting.

I do have my doubts, though. I have very little experience with the peer review process, and the experience I have had doesn't entirely reaffirm the value of the status quo, but I worry that this is the wrong stage in the process for introducing a blog-like approach.

It seems to me peer-review is simply a way of ensuring quality and making sure important points in research were hit, right? I don't see how this blog-like approach helps with that. What blogging can offer is a way to formalize a much wider range of comments and critiques than the normal journal format for replies and comments. A good example of this is what Econ Journal Watch is doing to collect a series of critiques of the Buturovic and Klein article on economic ideology (which I participated in). We could have more of this sort of thing, and we could presumably have each of these critiques as blog posts with comment sections, methods of voting on the salience of different critiques, etc.

But is it really necessary as a gate-keeper? I don't think so.

This is not to say the current peer review process is perfect - it's not. But it seems to me the biggest problem with peer review are issues of (1.) elevating the most sexy, counter-intuitive findings and empirical tricks, regardless of whether they are the right findings, and (2.) having a bias against insignificant findings. I don't see how these would be solved with a blog-like approach.

I also imagine it would be a nightmare to respond to everybody in an equitable way. I had only two reviewers for my recent Review of Austrian Economics article, and on some issues they advocated exactly the opposite change! And this is RAE - presumably the reviewers of other journals are even less homogenous than the reviewers of this one.

So my initial reaction is to move forward with these possibilities and definitely experiment with them, but I'd hesitate to use them at the peer review stage.

Do others have thoughts?

Jeff Tucker on Intellectual Property and Research

Jeff Tucker has a really great post on intellectual property and a report in the New York Times about advances made in Alzheimer’s research from sharing data.

I agree, and I’m very intrigued by this economics of information/intellectual property literature which honestly I don’t know much about. Anyone who has ever done research knows the benefit of freely sharing ideas. This all makes intuitive sense.

The question, though, is why do we have intellectual property if information is so resistant to standard property rights logic? How did failing to share information and ideas come about in the first place?

Well, because it’s costly for one thing. Even if I were an a priorist economist I’d still have to feed myself – I would still need my labor effort provided for. Even these sorts of theoreticians need books to draw from. When you get into empirical research the costs increase even more with data collection and computing power that’s required. Any final version of an idea requires editing and review, and quite possibly the costs of publication. It costs the Urban Institute millions of dollars to do random assignment, experimental research on federal programs and we’re a non-profit – that’s just the cost of the inputs for developing the information.

Now, when the government pays us to provide them with information I suppose the idea is our costs are covered for the benefit they receive and then the information can be shared after that. But that still introduces something of a free rider problem. If you were a pharmaceutical company, for example, why would you even contract for data collection in the first place if you knew that it would be shared after your paid for the costs of the data? Why wouldn’t you just wait for someone else to pay for your data and then reap the benefits of sharing it? Tucker quotes Jefferson on this, which highlights what I consider to be the nub of the problem:

“If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property.”

Jefferson gets at the heart of the problem with freely shared information. He compares it to the air – in other words, there are externalities here. We have internalized costs of developing knowledge but the benefits are externalized because by their very nature they resist being penned in by property rights – just like air. Internalized costs and externalized benefits means too little will be produced (just like with air pollution internalized benefits and externalized costs means too much will be produced).

So – we have an excellent case for free information here, but a fundamental externality problem. Which of course sets us up for an insight that has been expounded upon countless times before: the state or some other institution not motivated by profit opportunities has an important role to play in promoting the development of knowledge. The market mechanism breaks down here – you cannot say that “well if nobody was studying it that must mean nobody really wants the knowledge”. That argument simply doesn’t hold water for anyone that knows anything about the market mechanism.

Now, I’m sure Jeff Tucker and I will part ways on the role of the state in all this, but I would note that our differences would be derived from our political philosophy, not from our economics. I think he highlights some key points in his post. I also would probably part ways from him insofar as I’m not too critical of some minimal intellectual property rights – it's not exactly something that keeps me up at night, and if they're minimal I don't see how they could be too disruptive and they might alleviate some of the externality problem. But I would agree that they shouldn’t be as strict and they shouldn’t be regularly renewed like we often see. It's like property rights for pollution or any other externality - if you can get it to act like property to a certain extent you'll probably improve the outcome, but you shouldn't go too far with it because these sorts of externalities are very hard to conform to a property rights regime. One very easy step would be to make all government funded research entirely public (this may already be the case – I’m not sure).

Immortal, tentacled sea creatures

Hmmm... immortal, tentacled sea creatures.

I know the post is a year old, but I'm enjoying catching up on the Discovery blogs. Besides, not a single one of the 106 comments mentioned "Cthulu", and it had to be said.

"That is not dead which can eternal lie;
And with strange aeons even death may die."

Cosmology seems to make macroeconomics look decisive!

So I was watching the History channel last night, and they were showing an episode of The Universe called "Beyond the Big Bang", which covered cosmology, the Big Bang, and the formation of the universe immediately after the big bang. Neil deGrasse Tyson had a very interesting thing to say about cosmology:



"There were more theories running around than data"

Wow - that sounds familiar! It certainly doesn't seem to lead Tyson to call cosmology "fake science", as Russ Roberts likes to call macroeconomics.

Wikipedia confirms - check out the number of cosmological theories. You can even scroll down to the twentieth century, and it still puts macroeconomics to shame (Brad DeLong recently identified seven basic macroeconomic theories, compared to my count of twenty cosmological theories in the twentieth century alone).

I think another important point is that we fight over these macroeconomic theories, but ultimately that's kind of a weird thing to do. There's no good reason why most of them can't be integrated. Arnold Kling puts forward a mixed Minsky-Austrian story. I think Keynes, Minsky, and the Austrians all make sense and I'm perfectly comfortable with major tenets of monetary disequilibrium theory, and of course I believe real shocks can matter which means I don't think there's anything especially wrong with Real Business Cycle Theory. The problems come in when people point to a specific theory and say "this, and only this, is how macroeconomic fluctuations happen". Every recession is different, and presumably they're going to have a mix of causes. Macroeconomists have done a pretty decent job outlining these causes. What we need more of is understanding how these theories integrate together and what factors are important for what specific episodes. What we need less of is this attitude that there is one answer.

Are the twenty cosmologies as easily integrated and traded off? Well, they're explaining a single event and many of them contradict each other on the very nature of the universe, so probably not - but I'm sure to some extent they do.

I'm not trying to ridicule cosmology - as Tyson says, it's a matter of the data that's available - that's a limiting factor in science. But challenges don't make something non-scientific! Science is all about the method of gathering and testing knowledge.

Anyway, I just thought this was interesting. Phsyics is usually held up by the critics as some sort of gold standard. My response is "well, economics is really more like biology", but the fact is physics is struggling or has struggled with the same things that certain sub-disciplines of economics struggles with. That's life - science is hard.

Keynes on Newton

Keynes was one of many dignitaries selected to speak about Isaac Newton on the 300th anniversary of his birth, in 1942, I'm assuming because of his painstaking efforts to track down and reacquire Newton's papers and return them to Cambridge. Keynes read through and reflected on these papers, and in many cases he was the first to have read them since Newton himself. The war delayed the event, and by the time it was held in the summer of 1946, Keynes had passed away. However, he did leave the speech he was intending to deliver, entitled "Newton, the Man".

Yesterday's exchange on science reminded me of it because of one line in the piece that I was familiar with, that "Newton was not the first of the age of reason. He was the last of the magicians." So last night I read it - it's a very interesting read. Here are some good passages:

*****

"In the eighteenth century and since, Newton came to be thought of as the first and greatest of the modern age of scientists, a rationalist, one who taught us to think on the lines of cold and untinctured reason.

I do not see him in this light. I do not think that any one who has pored over the contents of that box which he packed up when he finally left Cambridge in 1696 and which, though partly dispersed, have come down to us, can see him like that. Newton was not the first of the age of reason. He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind which looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago. Isaac Newton, a posthumous child bom with no father on Christmas Day, 1642, was the last wonderchild to whom the Magi could do sincere and appropriate homage."

*****

"I believe that the clue to his mind is to be found in his unusual powers of continuous concentrated introspection. A case can be made out, as it also can with Descartes, for regarding him as an accomplished experimentalist. Nothing can be more charming than the tales of his mechanical contrivances when he was a boy. There are his telescopes and his optical experiments, These were essential accomplishments, part of his unequalled all-round technique, but not, I am sure, his peculiar gift, especially amongst his contemporaries. His peculiar gift was the power of holding continuously in his mind a purely mental problem until he had seen straight through it. I fancy his pre-eminence is due to his muscles of intuition being the strongest and most enduring with which a man has ever been gifted."

*****

"There is the story of how he informed Halley of one of his most fundamental discoveries of planetary motion. 'Yes,' replied Halley, 'but how do you know that? Have you proved it?' Newton was taken aback - 'Why, I've known it for years', he replied. 'If you'll give me a few days, I'll certainly find you a proof of it' - as in due course he did."

*****

"His experiments were always, I suspect, a means, not of discovery, but always of verifying what he knew already.

Why do I call him a magician? Because he looked on the whole universe and all that is in it as a riddle, as a secret which could be read by applying pure thought to certain evidence, certain mystic clues which God had laid about the world to allow a sort of philosopher's treasure hunt to the esoteric brotherhood. He believed that these clues were to be found partly in the evidence of the heavens and in the constitution of elements (and that is what gives the false suggestion of his being an experimental natural philosopher), but also partly in certain papers and traditions handed down by the brethren in an unbroken chain back to the original cryptic revelation in Babylonia. He regarded the universe as a cryptogram set by the Almighty - just as he himself wrapt the discovery of the calculus in a cryptogram when he communicated with Leibniz. By pure thought, by concentration of mind, the riddle, he believed, would be revealed to the initiate.
He did read the riddle of the heavens. And he believed that by the same powers of his introspective imagination he would read the riddle of the Godhead, the riddle of past and future events divinely fore-ordained, the riddle of the elements and their constitution from an original undifferentiated first matter, the riddle of health and of immortality. All would be revealed to him if only he could persevere to the end, uninterrupted, by himself, no one coming into the room, reading, copying, testing-all by himself, no interruption for God's sake, no disclosure, no discordant breakings in or criticism, with fear and shrinking as he assailed these half-ordained, half-forbidden things, creeping back into the bosom of the Godhead as into his mother's womb. 'Voyaging through strange seas of thought alone', not as Charles Lamb 'a fellow who believed nothing unless it was as clear as the three sides of a triangle'."

*****

"As one broods over these queer collections, it seems easier to understand - with an understanding which is not, I hope, distorted in the other direction - this strange spirit, who was tempted by the Devil to believe at the time when within these walls he was solving so much, that he could reach all the secrets of God and Nature by the pure power of mind Copernicus and Faustus in one."

*****

I suggest reading the piece in full. I think it's fairly common knowledge that Newton dabbled a lot in alchemy. Evan, you'll be interested in knowing that he also put a lot effort into thinking through theological points, eventually coming to a personal Arianism and other assorted heresies. He is a very interesting and conflicted guy, and it makes sense really. He lived in the seventeenth century, after all. What's truly remarkable is the coexistence of all these currents in Newton.

A Question

How do you define "science"?

One of the problems with the earlier exchange was that people were making claims without even establishing what "science" is. Eventually I came around to offering a rough definition. This was my critique of Razib Khan's article too - he was making critiques of social science with no clear explanation of what he was calling "science".

Anonymous comments are fine if you don't have an account and that's an obstacle to posting. No interacting or critiquing necessary. I'm just curious how readers define "science".

Social Science as a Science

More debate has flaired up over whether social science is really a science. The source of it is this City Journal article by Jim Manzi. The article is actually quite good, and highlights a lot of the empirical limitations I talk about a lot on here. Some of the commentary is less persuasive in my mind.

Razib Khan and many of his commenters overstate their case against social science as a science in this post, with many of the commenters clearly ignorant of how social science does its work, and confusing political claims with the claims of social science.

Arnold Kling, not exactly a huge cheerleader for the "social science as science" crowd, at least focuses on the original Manzi article and some of the good points that it made.

One of the frustrating things about the people who don't think social science is a science is that they're so shifty as to why. It usually starts with a methodological point, criticizing our ability to establish counter-factuals (something that is very explicitly talked about among us - this isn't a huge secret or embarassment - it's a fact of life working with the data we work with), and our lack of experimentation. When you point out the plethora of other sciences that don't experiment it jumps to another of other justifications: (1.) predictive ability (the right response: we have better predictive ability than meteorologists, and why do you blame us for not predicting recessions exactly but you don't discount geology for not predicting earthquakes exactly), (2.) ideology (the right response: ummm... yes, ideological social science is not scientific - if you're going to claim all social science is ideologically determined I'd like to see some data to support that - since I'm a social scientists of course), (3.) multiple theories (the right response: sure, but again that's just a result of the complexity of the system under study and the lack of counter-factuals. Falsification is a lot harder. You see more theoretical positions arguing in paleontology than in the rest of biology, and you see more theoretical positions arguing in biology than in chemistry - it's a function of the data, not of the "scientificness" of what we're doing).

I think there are two primary reasons why people make the mistake of thinking that social science is not a science:

1. Sentimentality: People don't like to think of themselves as objects of study. The universe can obey laws, but humans can't. We're special. An evolutionary biologist won't come out and tell you that we're made in God's image, but the residual hubris of that cosmology remains for a lot of people. We're different and you just can't study us and our social system. You can scientifically study the social systems of lower organisms, but not humans.

2. Cargo Cultism: I'm going to turn Fenyman on his head here. A lot of natural scientists are huge practitioners of cargo-cultism. If you don't do science their way - if you don't reproduce the forms of their research, then you're not scientific. The best example of this is when people say that you need experimentation to be scientific - that's cargo cultism par excellance. They often don't think about how the nature of the subject determines the form of how you approach it. I've always said social science is most like biology - and probably the paleontology comparison is even better since for the most part we're looking at historical data. Physicists and chemists don't impose the forms of their science on paleontologists because it would be inappropriate - that would be cargo-cultism. Something goes out the window when humans are concerned. The Fenyman point was really unimpressive to begin with - I think people accepted what he said just because they respect his other work and it reinforced what they wanted to believe. What was his example? People who "sit at a typewriter" and make claims that "food grown with fertilizer that is organic is better for you than other food". What does this have to do with social science? This isn't even social science - it's an anatomical/medical example, and not even an example - it's something that Fenyman just made up off the top of his head. The idea that people would cite this as an authoritative point is more than a little disappointing. It was a poorly reasoned argument on Fenyman's part without any evidence and ultimatley it was probably symptomatic of the very cargo-cultism he thought he had identified in social science.

I have yet to see a good argument for why social science isn't a science. Everything I've ever read reduces to cargo cultism or sentimentality about human beings. None of it references the requirements for a science to be a science, and if it tries to it usually fails miserably.

Khan and Caplan on Savings

Razib Khan, at the Discover blog, has an interesting post up on a Jonah Lehrer post about early childhood investments, reviewing a recent Heckman paper on preschool. Khan brings in an older paper that looked at the cognitive and non-cognitive impact of early childhood education. The cognitive impact apparently wore off over time, but the non-cognitive impact persisted. Khan relates the non-cognitive effect to the adoption of "bourgeois values", including what he mentions as a lower time preference. He goes through an interesting discussion of the results: is the impact a result of actually changing the brain at a critical point (much like how young children can acquire languages easier than older children), or does it have to do with peer groups? He also links to an interesting former post of his discussing genes and saving behavior as well as culture and saving behavior (both are important).

It's not all that strange to think that time preference is culturally informed. That's the Weber thesis. It's also not all that strange to think of it as genetically determined - low time preference is a fantastic trait to evolve if you want to set up your ancestors for success (granted, first you have to evolve an ability to think abstractly about time in the first place).

All of this meshes very well with Keynes's assertion that savings behavior is as much about psychology as it is a response to economic incentives.

I would also highlight that although Khan only mentions time preference as it relates to savings - it will also relate to investment and the sorts of investments we make. A lot of very important public investments: space colonization, basic research, addressing climate change, etc. are hampered by a high discount rate and short time horizons.

***

Bryan Caplan also has a post on savings, specifically addressing the critique that expansionary monetary policy and tax cuts won't work because "people will save it". He accepts the liquidity preference justification for the increased savings, and then essentially says "well what's so wrong about satisfying that preference"? I have three thoughts:

1. He does raise a good point that eventually consumer demand could be augmented by satisfying consumer's liquidity preference, but

2. The real glitch isn't consumption - it's investment demand. Now, maybe once corporate liquidity preference is satisfied, they'll start investing because they feel safer. But they're not going to start investing in response to lower interest rates - that's the essential point of the liquidity trap. When cash and bonds become interchangeable because interest rates are so low, further expansion is not going to stimulate activity through lowering the interest rate. Could it stimulate activity through satiation of liquidity preference? Perhaps. But,

3. Wouldn't it be a whole lot quicker, and wouldn't it avoid the risk of substantial inflation after the recovery, if we just augmented demand with fiscal policy? This might not be as attractive if we didn't have a bunch of potential public investments, but... ummm... we do have a bunch of public investments.

I've been fairly agnostic about the monetary policy route - I don't think it holds a ton of promise right now, but I haven't put a lot of effort into shooting it down either. Caplan presents a plausible case for how it could work, but it just seems like it would take so damned long.

Assault of Thoughts, Scientific Progress Edition - 7/22/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- Scott Kuhagen provides an update on the Commonwealth of Virginia's travesty of an Attorney General and his witch hunt in Charlottesville. AG Cuccinelli is tossing the very notion of academic freedom aside and targeting scientific progress at the University of Virginia. It's a cliche, I know, but it fits the bill: Mr. Jefferson must be rolling in his grave over this. It would be bad enough with any university, but the ideals and the mission on which the University of Virginia was founded make this especially sad.

- Andrew Sullivan links to interesting research that suggests that the technological gap between Europe and sub-Saharan Africa explains the majority of the difference in per capita income between the two regions today. Very powerful stuff, and I would say not surprising. But then they write: "78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 AD – even BEFORE the slave trade and colonialism." This seems like bad reasoning to me. Presumably, the reason why the Atlantic slave trade took off, and the phenomenon of "white slavery" fizzled had a lot to do with the very technological differences this research has identified as important. So it doesn't really make sense to say (or really, simply to imply here) that "the difference in per capita income is due to technological differences, not slavery," because slavery itself is probably a very important mechanism through which technological differences made their impact. The two are very closely related. And not only that, but the damage to African society from the slave trade probably locked-in the technological discrepancy.

- Alex Tabarrok at Marginal Revolution has an interesting post on private space exploration. He reviews private contributions to space exploration in the early years, and notes a few different ways to think about the data. He concludes the obvious - that private space exploration is a very, very good thing. With shock only a person that believes or suspects Obama is a socialist could manage to muster, he also notes that it is "surprising" that President Obama has been pushing American space exploration in this direction too. I have a few issues with how Alex approaches this issue.

He starts out by quoting Matt Ridley, who says "Can you doubt that if NASA had not existed some rich man would by now have spent his fortune on a man-on-the-moon programme for the prestige alone?". This seems to me to miss the entire point about the nature of the public-private split in space exploration. First, there was nothing preventing private individuals from going for it on their own, which (since we haven't seen a man privately put on the moon) would suggest that there are substantial entry barriers. Second, private and public efforts at this sort of thing aren't really conflicting. Presumably the aerospace industry would benefit from scale economies, and there are almost certainly going to be knowledge spillovers; public and private space exploration are complements in this sense, rather than substitutes. So this whole implicit premise that "if only X" we could have had an even better private space exploration history seems (1.) wrong because there was nothing substantial preventing such private endeavors, and (2.) wrong philosophically because it inappropriately juxtaposes the public and the private as something we have to choose between.

OK, so I don't think this is an either/or situation - but what are the benefits of public exploration? The answer to that question is implicit in the record on private exploration that Alex shares. A lot of these exploratory initiatives where not motivated by profits at all. Of course we also have ample examples of advances in space exploration that are attributable to the profit motive, usually attributable to communications technology (in the future probably attributable to mining, etc.), but the point is exploration itself isn't necessarily going to be a profit-making endeavor. As a result, we shouldn't logically expect the price mechanism and the market to be able to zero in on an optimal level of space exploration. This is a mistake that you see in a lot of areas where externalities are important, like road building. Opponents of publicly provided infrastructure will point to examples of privately built roads as if that proves advocates of public infrastructure wrong. The externalities argument is never (or should never be) that there will be no private provision, because to say that important costs and benefits are externalized isn't to say that no costs and benefits are internalized. Obviously some are and there will be some private activity. But pointing out that banality does nothing to demonstrate that an optimal amount of private effort is being invested. That's my reaction here, too. It's fantastic and not surprising that there are privately funded observatories, satellites, etc. - it doesn't mean it's sufficient. Knowing how much of a good with fully internalized costs and benefits is "sufficient" is easy - the market will tell you. When the costs and benefits aren't internalized it's harder to say. John Stuart Mill, writing on colonies, made fundamentally this same externalities argument for public exploration and colonization:

"If it is desirable, as no one will deny it to be, that the planting of colonies should be conducted, not with an exclusive view to the private interests of the first founders, but with a deliberate regard to the permanent welfare of the nations afterwards to arise from these small beginnings; such regard can only be secured by placing the enterprise, from its commencement, under regulations constructed with the foresight and enlarged views of philosophical legislators; and the government alone has power either to frame such regulations, or to enforce their observance."

The point is, private exploration is important and good for the same reasons the market is always good, but it's not sufficient. We know most private activity has been charitable, indicating there is little profit in space exploration. This is likely due to the externalities involved, which opens the door to public space exploration. Public space exploration should be flexible, though. It should draw on the private sector's ingenuity, it should leverage private interest with a prize-fund, and it should give the private sector considerable say in the goals and destinations. And while some externalities are unavoidable (i.e. - the externalized benefits to future generations), we should shore up the ones that are avoidable by establishing clear property rights in space.

McKibbon and the No-Growth Economy

The Atlantic interviews Bill McKibbon about his book "Eaarth", which blames "the growth economy" for climate change, and advocates a radical reordering of human society. "Radical reordering" is always a dicey prospect, but I think whether McKibbon is right or wrong, he raises some interesting points here.

First, I think any responsible economist should recognize that market activity does introduce serious environmental risks precisely because optimization decisions in the market are agent-based. Yes, it's the externalities point again. But externalities run through everything in economics because of property rights. Sometimes they are negligible, and sometimes they are enormous. Rarely can we put a firm estimate on it either way. But they are necessarily part of the discussion. If a decision is made on the basis of its costs and benefits to party A and party B, any costs or benefits accruing to party C, D, E, F, G, etc. are not going to be optimized by a market that all agree is driven by the weighing of individual costs and benefits. We thus expect individual utility to be maximized by market behavior and efficiently allocated, but we don't expect the utility of society in general (as it is affected by some decision made by person A and B individually) to be optimized by market activity. Society benefits from markets insofar as lots of individuals are having their utility maximized. Society suffers from markets insofar as individual maximizing behavior imposes social costs. Which is greater is an empirical question. So the claim that "the growth economy is hurting society" in and of itself is not a crazy claim, but we should also not accepted it uncritically or unqualified.

McKibben makes a few interesting points that I think are worth highlighting:

1. Why growth? Assuming continued population growth, we have to have output growth to maintain a certain standard of living, but why do we feel we need consistent output per capita growth? What is wrong with stagnation? Well, the obvious answer is that a no-growth economy means that the quality of our lives isn't steadily improving - and what is there to praise in that? But if McKibbon is right that there are social, cultural, spiritual, etc. costs to improvements in material wellbeing, the growth calculus would be much different. I don't think McKibbon decisively makes his case, but it is legitimate to raise the question. We often come at economic questions assuming growth is good. Is this necessarily justified? A no-growth economy would obviously be impoverishing in many ways, but it could be beneficial in others.

2. Whether it's good or bad, no-growth and sustainable energy go hand in hand. McKibbon makes this point, but I'm not sure if it's really correct. I suppose it could be. The thorny issue is, it's precisely the growth economy that has opened us up to energy sources beyond muscle power and wood. If it were possible to have growth and sustainable energy, it's a fairly good bet that the growth economy will get us there. Perhaps... most energy-related discoveries have been driven by the profit-motive and the imperatives of the growth economy. But there is reason to question whether the sorts of energy McKibbon seeks would be, and it all gets back to the externalities question. Private companies have made major advances in chemistry, but not in astronomy. They've made major advances in genetics but not paleontology. It doesn't take A.C. Pigou to figure out why. It's very likely to be absurd to think that the market economy will develop the socially beneficial energy sources that McKibbon is talking about here. Just ask Nikola Tesla*. This isn't to say markets are bad, of course. An analogy I always like to make is something my dad taught me (and I'm sure many dads taught others through the years) when I was very young about tools. You use the right tool for the right job. The market is a tool of sorts. To me, some free-market cheerleaders can (at times) look like small children banging on screws with a hammer, and then telling me "you don't really appreciate hammers because you don't bang on screws with hammers".

3. Concentrated finance isn't going to be as necessary for unconcentrated economic activity. A lot of people are lobbing critiques at Wall Street these days, and a lot of it is just populism. This, I thought, was actually an interesting point by McKibbon. Modern finance developed to support huge, centralized, industrial projects. Modern finance probably isn't as necessary for the decentralized economic activity that McKibbon is proposing. And this is something that a lot of people could potentially appreciate the indirect benefits of - less concentrated finance probably means less opportunity for crony capitalism. Here, he also mentions the return on investment that people demand from Wall Street. I'll also emphasize that this is a private return on investment, which is necessarily going to be limited. Some people get incredulous about fiscal multiplier estimats of 1.5. That's a 50 percent return on investment. That's insane, they say. But they often forget - that's a 50 percent social return, not a fifty percent private return. They're confusing what's being measured when fiscal multipliers are estimated.

4. Distance matters and social cohesion works. A lot of environmentalists leave themselves open to easy critiques by economists when they advocate some sort of utopian vision that eschews high rises and pavement. McKibbon is careful not to do this. He makes the point that what he's talking about is actually easier, not harder, in crowded cities precisely because costs are incurred in rural areas where scale economies aren't possible, where division of labor is weaker, and where opportunities for exchange and interaction are less abundant.

*Nikola Tesla is an interesting guy that I'd love to learn more about. I'm not making any claim here about his discoveries with respect to energy because I can't verify that, obviously. But simply as symbols, the Tesla/Edison contrast lays out internalized/externalized benefits and costs issue quite nicely.