“Good Economics.”

A few days ago I received an e-mail from a former student who’s gone on to major in economics. Hopefully said student won’t mind that I’ve published my response online. [Parts of the original message have been edited for privacy and dramatic effect.]

Good Evening…

Just this week I finally got into taking some real Econ Classes … (International Trade and Intermediate Microeconomics). While I find these classes to be very enjoyable […o]ver the years, through reading, studying, and discussing, I’ve noticed that Studying Economics isn’t as simple as taking Econ classes. I’ve quickly come to realize there are many schools of thoughts on subjects that I believed to be universally understood.

That shouldn’t be any surprise. Keep in mind that economics is not a “hard” science, not even close. Even the law of demand, which is as close to an ironclad rule as you’ll find in economics, may have exceptions (Veblen goods and Giffen goods).

For some perspective, I offer the following cartoon from xkcd.com:

Economists would be to the right of psychologists and far left of biologists.

That said, economists can reach broad (though not unanimous) consensus on occasion. There are some ideas, such as free trade and abolition of subsidies, that are widely accepted by economists.

I guess what I’m getting at is, how do I know that I’m learning “Good Economics”?

If what you learn in your econ classes enables you to make generalizations and predictions that match the ensuing empirical evidence, great. But that’ll always be tough to prove, because we can’t run well-controlled macroeconomic experiments that allow us to isolate factors and variables and precisely, definitively determine what caused what. If we had a handy alternate universe lying around, such experimentation would be more reliable.

Aside from that, I’d say that if you can intelligently discuss marginal analysis in micro, if you think in terms of opportunity costs and “the seen and the unseen,” if you can “speak Keynesian” despite disagreeing with Keynes, and if you can do statistics and econometrics despite your valid concerns about them, you’ve got a pretty good economic education.

Now, if you find yourself saying, “I think the labor theory of value is right,” “mercantilism works,” “communism just hasn’t been done right yet,” or, worst of all, “what I’ve learned is right and there’s no way I could be wrong,” then you are probably not learning “good economics.” You are, however, well on your way to supporting revolutions in underdeveloped countries, working at a coffee shop in some dinky little college town, or pursuing a career in academia.

I myself tend to favor the Austrian/Hayekian view on Economics. (Which I know tends to be looked down upon, but I believe many of the ideas hold merit) But I would not venture to call myself a Libertarian. I believe there are, at the very least, necessities for upholding moral law.

If you’re talking about political laws to uphold moral laws, that would likely upset Hayek but please Adam Smith.

However, I do not agree with the use of Monetary Policies to try and correct a market. And I also find the idea of predicting future markets through the crystal ball of Mathematics to be a highly presumptuous if not prideful idea. How can one possibly assume to know all inputs for a given scenario and come up with a fixed equation for every situation? I find myself quite incapable of predicting the actions of a single individual, much less a market of individuals. That being said, I do understand that every individual makes decisions with the goal of maximizing the satisfaction of desires. But because desire is not always money, how do I make assumptions concerning future outcomes?

Through careful observation and humility about what you know and what you can know. Given your concerns, it sounds like a good thing you’re a Hayek guy. He once wrote: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Maybe he’s right, and maybe your great task in life will be to fix or disprove all those formulas and equations you were complaining about.

Case in point: according to Keynes, the government spending multiplier must be greater than the taxation multiplier. According to actual evidence, that’s far from true. In fact, there’s enough evidence against it that my professors didn’t mind when I couldn’t remember the word “multiplier” during my senior thesis defense. And yet, that model is still being taught as gospel to high schoolers and undergrads, and is taken as gospel by congressional staffers and presidential advisors, regardless of party. Maybe somebody needs to work on getting it updated, or even weaned from the curriculum. Either way, you’ll still have to study it first.

Perhaps my disfavor with mathematics alone for Economics stems from the ambiguity of the science. We’ve always been told, “Numbers don’t lie”, but whoever said this was lying. The same set of numbers can be manipulated by an individual to tell two different stories. The danger is when we accept those numbers when they go against logic. If tomorrow a thousand different statistical studies came out revealing how the Minimum wage actually decreases unemployment, reason should be enough to refute every one of those reports. It doesn’t matter if you have your pretty charts and smooth regression lines, anything that doesn’t follow logic must be deemed illogical.

Careful—if the evidence doesn’t match the logic, the problem could be in the logic, the evidence, or both. If Congress hikes the minimum wage up to a hundred bucks an hour, and unemployment disappears forever, you’ve got to at least consider the possibility that over 90% of the real-life minimum wage research has been wrong.

Also, keep in mind that economic “science” is ambiguous, but not totally worthless. We can make some reliable predictions about large, multi-variable, chaotic, macro systems. We’ve learned enough that we can reasonably assume that high trade barriers will slow economic growth both inside and outside the protected areas, that well-defined and secure individual property rights lead to greater economic growth than the lack thereof would, that increased use of capital corresponds to greater real wages, etc.

Well, I guess I’m done with my little narrative. Basically I can sum things up as:
1. I love Economics
2. I want to Study Economics
2a. I want to study TRUTHFUL Economics
3. I don’t know if I’m heading in the right direction

If you know enough about your subject that you can express these concerns about it, you’re heading in a right direction. But let the poets and philosophers worry about “truth.” You’re an economist, you should worry about facts.

Maybe you should look for a course about the history of economics (if one is offered). That might give you a sense of how economics is an evolving discipline, and that might give you an idea about what path to pursue.

Also, have a look at these articles by Mankiw, from his “Advice to Students” sidebar:

Advice for Aspiring Economists

Why Aspiring Economists Need Math

I know I’m cribbing from Mankiw a lot in my response, but right now he’s one of the most renowned and esteemed professors of economics on Earth, and he expresses some of the same doubts about the subject as you do.

Hope the school year is going well and congratulations on your opportunity to lecture new teachers. I hope it proves beneficial for you, the teachers, and their future students.

Me too. It’s good to hear from you, and good luck.

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