Thursday, September 03, 2015

Sounds about right...

Economics Has a Math Problem - Bloomberg View

Noah Smith writes:

Personally, I think that what’s odd about econ isn’t that it uses lots of math -- it’s the way
it uses math. In most applied math disciplines -- computational biology, fluid dynamics, quantitative finance -- mathematical theories are always tied to the evidence. If a theory hasn’t been tested, it’s treated as pure conjecture.

Not so in econ. Traditionally, economists have put the facts in a subordinate role and theory in the driver’s seat. Plausible-sounding theories are believed to be true unless proven false, while empirical facts are often dismissed if they don’t make sense in the context of leading theories. This isn’t a problem with math -- it was just as true back when economics theories were written out in long literary volumes. Econ developed as a form of philosophy and then added math later, becoming basically a form of mathematical philosophy.
I also recently mentioned this problem in economics - there is always "something else going on":
 Basically, Athey and Imbens look at the problem of how to identify treatment effects. A treatment effect is the difference between what would happen if you administer some “treatment” -- say, raising the minimum wage -- and what would happen without the treatment. This can be very complicated, because there are lots of other factors that affect the outcome, besides just the treatment. It is also complicated by the fact that the treatment may work differently on different people at different times and places. A final problem is that the data economists have to answer the question is usually very limited -- a big impediment for traditional econometrics, which generally assumes that the amount of data is comfortably large. Athey and Imbens deal with these issues by importing a method from data science, called a regression tree. Statistically literate readers can peruse their slides here
 So my previous guess, that it's the "there's always something else going on" aspect that lets the ideologically motivated economist get away with never having to revise their prescriptions, even when they haven't worked*, seems about right.

* See Laffer and Kansas;  as well as Noah Smith's other recent column Growth Fantasy of Tax Cuts and Small Government.

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