Economics and freakonomics

Noah Smith has an interesting post on his excellent Noahpinion blog about people who dis economists.  In his view, most of the contumely directed against the profession belongs solely with macroeconomists, whose problem is that it's hard to get any "usable results" from their branch of the profession.  In contrast, thanks in part to the explosion in available data, microeconomists are doing all sorts of useful things.

I sort of buy this, but only sort of.  The problem macroeconomists face is that the "useful result" that most people are looking for is a forecast, which is by its nature impossible.  As I've noted here before, the late John Kenneth Galbraith used to say that economists didn't forecast because they thought they knew the future, but because people asked them to.

Macroeconomic models can give you a good idea of how the economy or the financial system works, and can help you identify possible problems and imbalances, but they can't tell you when those problems might hit a tipping point.  There were a lot of economists, both in academe and in dealing rooms, who knew that things were going badly awry in the middle of the last decade, but they couldn't predict exactly when or how it would all kick off.  I suppose there's an analogy with Heisenberg's uncertainty principle here -- the more clearly you can see the problem, the harder it is to tell when the crisis will hit.  But of course, a warning of doom without a timetable is not much use to policymakers.

On the micro side, it's certainly true that there's lots of new stuff being done.  One interesting example back in the UK was the role microeconomists played in designing the auction processes used for the privatization of state-owned assets.  Some of these auctions secured far more money for the Treasury than the politicians had dared to hope, though the fact that in some cases, the buyers quickly ran into problems suggests that the auctions may have been too clever by half.

I'm a bit dismayed by the fact that so much of the public's perception of economics is derived from the Freakonomics books, which are entirely microeconomics -- if, that is, they're economics at all.  They're good knockabout fun, but basically they're just common sense with a bit of statistics thrown in.  I'd like to think there's more to the subject than that.

So pace Noah Smith, but I'm still more drawn to macro than micro.  The fact that the problems are difficult doesn't mean they shouldn't be attempted, though there's no doubt that you need to develop a carapace.  When new acquaintances ask me what I used to do for a living, I can never decide whether "ex economist" or "ex investment banker" is the safer response.

As a final thought, there are plenty of folks out there who will tell you that the reason macroeconomics has developed a bad rap is that we're doing it wrong. For example, check out the Marx-based take on things at David Ruccio's blog, Occasional Links and Commentary.  Just be warned, if you sign up for updates, that Ruccio's definition of "occasional" may be different from yours!

*  *  *  *  *

I will be heading south in search of some warmth in the next few days.  Posting will get back to normal around Groundhog Day.