Saturday, June 18, 2011

Should parenting and drugs affect economic theory?

Would economic theory be different if economists were parents when initially taught it? Freakonomics-blogger Justin Wolfer says yes, because that´s what the experience of becoming a father has told him. Overcoming Bias-blogger Robin Hanson says no, and says becoming a father is like having a mystical experience on drugs: It doesn´t inform us about the real structure of the world.

I´m wondering if the difference between these two may reduce to one thing: How “religiously” they´ve believed in the “ultimate truth” of the economic model of rational decision making. If we take Wolfer at his own word, he always saw it as
the basic idea informing economics—that people are purposeful, analytic decision makers. And this idea just seemed entirely natural to me. I had always believed in the analytic self; I was rational, calculating, and tried to make smart decisions. Of course real people don’t use math, but I figured that we’re still weighing costs and benefits just as our models say. Or at least that was my understanding of the world.
In other words, he sounds like the kind of guy who believed all behavior could be explained by economic theory as optimal, even if some of it would require complex choice models that assume people take subtle feedback effects, strategic “he knows that I know that he knows that I know X” issues and complicated delayed consequences of present actions into account in an optimal “rational” manner. After having a kid, this no longer seems to describe his own experience of himself:
My feelings toward my daughter Matilda aren’t easily expressed in analytic terms. I struggle to express it, just as I struggle to understand it.

There’s something new and strange about all this. Today, I feel the powerful force of biology. It’s visceral; it’s real; it’s hormonal, and it’s not in our economic models. I’m helpless in the face of feelings that overwhelm me. Yes, I know that a twenty-something reader will cleverly point out that I just need to count kids as a good which yields utility, or perhaps we need to add a state variable to the utility function as in rational addiction models. But that’s not the point. I’m surprised by how little of this I’ve consciously chosen. While the economic framework accurately describes how I choose an apple over an orange, it has had surprisingly little to say about what has been the most important choice in my life.
Hanson, in contrast, seems to see economic models as attempts to capture some of the regularities in human behavior:
First, econ makes sense of a complex social world by leaving important things out, on purpose – that is the point of models, to be simple enough to understand. More important, econ models almost never say anything about consciousness or emotional mood – they don’t at all assume people choose via a cold calculating mindset, or even that they choose consciously. As long as choices (approximately) fit certain consistency axioms, then some utility function captures them. So how could discovering emotional and unconscious choices possibly challenge such models.
Given Hanson´s view of economic theory, there is no need to redefine everything after having a kid. People will still tend to buy less as the price rises, avoid risk, and so on. It surprises me somewhat, though, that Hanson doesn´t see that there are a number of economists with a more fundamentalist belief in the neoclassical model. I´ve met several, and I bet I´ve met fewer economists in general than Hanson. I´ll admit this is pure speculation, but I´ve wondered if some economists feel threatened by behavior that deviates from the “rational choice” model they hold. They don´t say "Well, this is a simplified model, sure there´ll be deviations, but we`re capturing some regularities and that´s what we´re aiming for. Explaining something is better than not explaining anything and we´ll never be able to explain everything.” Instead, they try to twist their brains into coming up with ad-hoc assumptions that would reveal these deviations to be full, sophisticated optimization. At times, this means that increasingly stupid and shortsighted behavior is explained as increasingly subtle and complex optimization. Maybe it´s a fear of letting non-rational explanations get a foot in the door, maybe it´s because the "welfare effects" often tacked on at the end of choice models would no longer be "valid" (not that they are valid today, but if you truly believe all choices always maximize the ultimate good of importance to the acting agents, then I guess they might seem valid to you).

Hanson concludes that
Having an emotional parenting experience is as irrelevant to the value of neoclassical econ as having a mystical drug experience is to the validity of basic physics. Your subconscious might claim otherwise, but really, you don’t have to believe it.
 I´m not sure. If a person sees economic theory as Hanson describes it, then I agree with him. But if a person thinks his way of seeing the world is the only one that is valid and possible (in the sense of consistent with past experiences), then having a child or a high dose of psilocybin in a controlled setting may both be ways of learning otherwise?

Tuesday, June 14, 2011

Tim Harford´s "Adapt" - a book review

Tim Harford´s new book “Adapt” is a wonderful read but difficult to pigeonhole. There´s interesting stuff about the Iraq war, the finance crisis, development aid, randomized experiments, skunk works, the design of safety systems, whistleblowers, overconfidence and groupthink phenomena, not to mention a truly wonderful explanation of how a carbon tax would work and why environmentalists should embrace it. Even when he covers topics that have been ably covered by others elsewhere, he does so in a light and enjoyable way and manages to dig up new, cool anecdotes. It´s partly a popularization of science, partly a business book, at times it almost moves into self-help territory, and at times it seems to present new and interesting perspectives on big topics (such as financial regulation). Still - though it may sound sprawling, I didn´t really find it so when reading it. At one level it reads like a series of interesting pieces of journalism on different topics, but on another, there´s an underlying thread of ideas that gradually emerges.

The way I read it, the main point of the book is that the problems we face are too complex for us to understand and figure out the solutions to from behind a desk. Evidence from the failed predictions of experts to the extinction records of firms and the failure of high-level military strategies support this. There´s a number of reasons why this is so, ranging from the difficulty of capturing and aggregating information at a sufficiently finely grained level to psychological tendencies to trust in our (frequently false) beliefs and suppress possible evidence that they´re wrong. Still - we do solve problems - but this happens through an evolutionary process: We make lots of bets - each one of which is small enough that failure is acceptable - and the winning bets identify “good enough for now” solutions that we replicate and grow. The best examples of this (as a method for human problem solving) are market economies and science. Lots of entrepreneurs who hope to strike it big, some of whom combine the factors of production in a way that better creates value than others - thus making a profit (to put the point in an Austrian way). Lots of scientists stating hypotheses, some of whom are able to better predict the outcomes of experimental and quasi-experimental data than others - thus having their hypotheses strengthened (on a related note - I recently made the argument together with a colleague that this process is broken in economics - see more on that here).

Harford also discusses a host of implications that follow from this - the need to “decouple” systems so that failure in a single component (such as a bank in the financial system) doesn´t bring down the entire system, the need to finance both “highly certain” research ideas as well as “long shot” ideas, avoiding groupthink by including people likely to disagree (thus creating room for disagreement in the group) and demanding disagreement, and using prizes to elicit experiments. He also discusses how such evolutionary processes can be exploited better in policy- which is where he gets to his beautiful explanation of how a carbon tax works by tilting the playing field (there are two chapters here that should be reworked into a pamphlet and handed out in schools and parliaments).

That´s my brief take on the underlying “storyline” - but it doesn´t do justice to the book, which reads like a string of intellectual firecrackers. The wide-ranging topics, however, also means that they are necessarily touched on lightly - it´s an appetizer for a lot of ideas more than a fully satisfying meal. For instance, if success in the market (and elsewhere) consists of being the “lucky” winner who made a bet that - ahead of time - had no stronger claim to being right than others, how does this factor into our views on entitlements and redistributive taxation? If prizes (such as the prize for a space-going flight) actually elicit large-scale, expensive experiments that we only need to pay for when they succeed - does this mean that they exploit some irrational overconfidence in the competitors? If people were sensible and unbiased in their estimate of success, would they spend more than their expected reward? And if not - wouldn´t that mean the prize money would have to be sufficient to finance all the experiments - in which case it doesn`t save us any money? To what extent does the desire for control play into the desire for top down planning and control? (Imagine you were the prime minister - would you feel comfortable if loads of schools were allowed to try out whatever they felt like, risking the chance that some of them would beat kids or indoctrinate them in some way that blew up in the media?) In an online interview by Cory Doctorow, Harford states that

I also looked at the banking crisis and big industrial accidents such as Deepwater Horizon, and found that there were almost always people who could have blown the whistle — and sometimes did — but the message didn’t get through. So those communication lines need to be opened up and kept open.

Yes - but no…. After all, if there´s a host of signals coming up, most of them wrong, it might well be rational to have some filtering mechanism in place that also weeds out many of the correct signals in order to avoid being swamped and misguided by wrong ones.

While we´re on the topic of whistleblowers - I also wish he´d said a word or two about some of the biggest transparency cases of recent years. On the one hand, the whistleblower-friendly candidate Obama who changed his tune once he got in office. This could have served as a way of discussing how hard it is to actually have people looking over your shoulder and criticizing you, even when you think (or at least see the arguments for) allowing them to do so. Also, I would have been interested in Tim Harford´s views on Wikileaks, which in some ways is the biggest attempt to increase transparency in modern times - as well as his views on the conflicts it generated (a book championing the cause of whistle-blowers should also at least mention the awful treatment of claimed whistleblower Bradley Manning). Given the many stories from the Iraq war and the US military about the dangers of a strictly enforced official partyline/strategy/story, the potential value in Wikileaks shining a light on what is actually going on seems pretty clear. Or at least worthy of discussion.

Given the number of topics covered in the book there are obviously quibbles you may have with certain facts that are wrong or the way some of them are treated, but that´s to be expected. More importantly, there were parts of the argument that I felt were missing - especially concerning how difficult it is to learn from experience. As documented in for instance Robyn Dawes´ excellent “House of cards” (in the context of psychology and the misguided beliefs of treatment professionals), there are clear cases where statistical decision rules consistently outperform human judgments, without this being enough to convince the experts who could gain from them. Or consider this post on the backfire effect from the you are not so smart blog, which discusses experiments suggesting that people can react to evidence that they were wrong by being even more convinced in their wrongness. The way politicians respond to arguments about the surprisingly weak effect of drug decriminalization on usage levels is another example. In terms of Harford´s argument - adaption and evolution not only requires us to test things and find out what works - it also requires us to accept what works and implement it more broadly. Taking into account the number of things covered, he probably covered this too - but if he wants his ideas to be taken up in policy circles I think (that is, my gut-feeling is) that this would be perhaps the hardest part.

Finally, the book could also have been tempered by applying its thesis to the thesis itself: Has “planned evolution” been attempted, and did it actually work? As the book argues, the devil is often in the details and seemingly good ideas based on solid case stories may turn out to work quite differently in practice from what we expected.

Monday, June 13, 2011

Economics, math and science - Krugman 1996 vs. Krugman 2008

Recently came across a slate essay by Krugman from 1996 where he basically asserts that economics is a hard-core sciencey discipline because it uses mathematical models, and that those who dislike modern economics do so because they would prefer literary criticism style blah-blah. He starts his piece by discussing criticism of him (which I haven´t read) from Bob Kuttner. Krugman states that the disagreement has nothing to do with politics:
We are both, after all, liberals.  (...) What we are really fighting about is a matter of epistemology, of how one perceives and understands the world.
A strong desire to make economics less like a science and more like literary criticism is a surprisingly common attribute of anti-academic writers on the subject.
More than 40 years ago, the scientist-turned-novelist C.P. Snow wrote his famous essay about the war between the "two cultures," between the essentially literary sensibility that we expect of a card-carrying intellectual and the scientific/mathematical outlook that is arguably the true glory of our civilization. That war goes on; and economics is on the front line. Or to be more precise, it is territory that the literati definitively lost to the nerds only about 30 years ago--and
they want it back. That is what explains the lit-crit style so oddly favored by the leftist
critics of mainstream economics. Kuttner and Galbraith know that the quantitative, algebraic reasoning that lies behind modern economics is very difficult to challenge on its own ground. To oppose it they must invoke alternative standards of intellectual authority and legitimacy.
In effect, they are saying, "You have Paul Samuelson on your team? Well, we've got Jacques Derrida on ours."
The literati truly cannot be satisfied unless they get economics back from the nerds. But they can't have it, because we nerds have the better claim.
I find this interesting for two reasons. For one thing, economics is about the real world, yet Krugman doesn`t mention empirical evidence with a single word. Based on this piece, the discussion seems to be a theological debate between Pythagorean mystics who believe in the revelatory power of math and the medieval scholastics who want to focus on conceptual distinctions and dialectical reasoning. With both of them seeing themselves as the more scientific.
The second thing is that this belief in divine revelation through algebra is exactly what Krugman later attacked when he had had enough of the absurdities of highly regarded, peer-reviewed work in top journals spouting poorly justified empirical claims. After the financial crisis, he wrote,
the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten. What happened to the economics profession? And where does it go from here?
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.
the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets
will solve all problems.
My point with this is not that it`s wrong to use mathematics (Krugman made sure to clarify this as well). My point is that it`s wrong to think that you can reason your way to empirical truth without getting involved with the messy reality around us. Claims about reality need evidence from reality. The claims about reality that you start out with could derive from a formal model or a verbal argument or even a diagram - but to analyze empirical evidence requires quantification of phenomena and statistics, so this is not an argument against either numbers, mathematical methods or hard-to-understand algebra. It`s an argument against theology in science and the belief that you can dispense with empirical evidence provided you`ve thought "logically" enough from a priori "truths" using some method or other - whether based on mathematics, literary criticism-style discussion, or symbology.

Sunday, June 12, 2011

Bitcoin - the newest e-money, internet threat and speculative bubble - all in one?

The idea of untraceable, privately controlled electronic currency is not new. Remember Kevin Kelley made a big deal about it in "Out of control" (chapter 12), his breathlessly enthusiastic book on the accelerating digital age published back in 1995:
The nature of e-money -- invisible, lightning quick, cheap, globally
penetrating -- is likely to produce indelible underground economies, a
worry way beyond mere laundering of drug money. In the net-world, where
a global economy is rooted in distributed knowledge and decentralized
control, e-money is not an option but a necessity. Para-currencies will
flourish as the network culture flourishes. An electronic matrix is
destined to be an outback of hardy underwire economies. The Net is so
amicable to electronic cash that once established interstitially in the
Net's links, e-money is probably ineradicable.
Kelley didn`t discuss Bitcoin, as even a futurist would be hard pressed to discuss by name something that would be developed 13 years later. But it`s the same thing: Untraceable, outside government control, loved by libertarians and kind of geeky. A good description is here, a recent "oh-my-god-they-sell-drugs-with-this" article from wired here, and a very bullish "this-is-where-i´m-gonna-place-all-my-savings" post on the appreciation trend of the bitcoin here.
Off the cuff, my guess would be that a simple, safe on-line currency that was as easy to use as cash would be quite useful. If you`re buying some one-off good or service online, buying a piece of software directly from the vendor, want to leave something in a blogger´s tip jar, etc. - rather than using a number of different services (visa, paypal, google checkout, tipjar etc) a simple e-cash would be nice. Based on my very cursory look, bitcoin is not quite there. Most importantly, it seems like a chore to get money into and out of bitcoins (partly because paypal, mastercard and visa don`t want to help). If they fix this problem, there would also seem to be a user interface issue: They need to make this integrated into browsers or some ubiquitous tool (facebook? google account?) so that it truly became as easy as pulling a bill out of your pocket. As it stands, my guess would be that it might keep appreciating for a while as gold-standard devotees and Ayn Rand fans discover it, there may be a slight influx of blackmarket funds, and the resulting appreciation may attract people who see it as an investment vehicle. Unless "currency exchange" becomes easier (so you can get the money into and out of the real world) and usability improves, I don´t quite see why this would become big. And if you can´t get your money out without a lot of bother (it might even get worse if governments see the money laundering issue as a problem) - then the investment aspect of it is going to suffer as well.

Tuesday, June 7, 2011

The “flaw” in modern economics – and how to fix it?

Why do economists produce such sophisticated, intelligent work and yet end up supporting claims about the real world that seem – at times – insane, absurd and clearly unsupported by evidence? (We realize you might disagree that this is ever a problem, but (as the quotes below will show) we are not alone in making this observation.)

A colleague and I have tried to understand why this happens in a recently published paper. An essay presenting the same ideas in a shorter, simpler, and more readable form is here, and for those who prefer to get “the gist of it” through a video, you can do so here. An even shorter version follows in this blogpost… ;-)

The puzzle that we try to explain is this frequent disconnect between high-quality, sophisticated work in some dimensions, and almost incompetently argued claims about the real world on the other. DeLong recently blogged about this as the “Walrasian” mindset (as opposed to the more pragmatic and empirically oriented Marshallian) he feels characterizes some macroeconomists:

The microfoundation-based theoretical framework is not to be tested, but simply applied. It is not an "engine for the discovery of concrete truth" but rather a body of truth itself. Once a Walrasian has pointed out some not-wholly-implausible microfoundation-based mechanisms, his work here is done.

The implied claim is that some economists are seduced-by-theoretical-beauty and talk about the real world even though their gaze is fixed almost exclusively on the Platonic ideal of their equations and models. This is similar to Olivier Blanchard`s recent statement that

Before the crisis, we had converged on a beautiful construction" to explain how markets could protect themselves from harm […] But beauty is not synonymous with truth.

This, again, was similar to Krugman’s claim in the 2009  essay “How did economists get it so wrong?”:

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.

I`d also note the recent reflections of blogger noahpinion on his graduate economics courses, where

the course [… in macroeconomics] didn't discuss how we knew if these theories were right or wrong. We did learn Bob Hall's test of the PIH. That was good. But when it came to all the other theories, empirics were only briefly mentioned, if at all, and never explained in detail. When we learned RBC, we were told that the measure of its success in explaining the data was - get this - that if you tweaked the parameters just right, you could get the theory to produce economic fluctuations of about the same size as the ones we see in real life. When I heard this, I thought "You have got to be kidding me!" Actually, what I thought was a bit

and (in part 2)

all of the mathematical formalism and kludgy numerical solutions of DSGE give you basically zero forecasting ability (and, in almost all cases, no better than an SVAR). All you get from using DSGE, it seems, is the opportunity to puff up your chest and say "Well, MY model is fully microfounded, and contains only 'deep structural' parameters like tastes and technology!"...Well, that, and a shot at publication in a top journal.

Though these observations seem related, they still don`t explain how this happens and why – and that makes it hard to find a good way to fix things.

Our explanation can be put in terms of the research process as an “evolutionary” process: Hunches and ideas are turned into models and arguments and papers, and these are “attacked” by colleagues who read drafts, attend seminars, perform anonymous peer-reviews or respond to published articles. Those claims that survive this process are seen as “solid” and “backed by research.” If the “challenges” facing some types of claims are systematically weaker than those facing other types of claims, the consequence would be exactly what we see: Some types of “accepted” claims would be of high standard (e.g., formal, theoretical models and certain types of statistical fitting) while other types of “accepted claims” would be of systematically lower quality (e.g., claims about how the real world actually works or what policies people would actually be better off under).

In our paper, we pursue this line of thought by identifying four types of claims that are commonly made – but that require very different types of evidence (just as the Pythagorean theorem and a claim about the permeability of shale rock would be supported in very different ways). We then apply this to the literature on rational addiction and argue that this literature has extended theory and that, to some extent, it is “as if” the market data was generated by these models. However, we also argue that there is (as good as) no evidence that these models capture the actual mechanism underlying an addiction or that they are credible, valid tools for predicting consumer welfare under addictions.  All the same – these claims have been made too – and we argue that such claims are allowed to piggy-back on the former claims provided these have been validly supported. We then discuss a survey mailed to all published rational addiction researchers which provides indicative support – or at least is consistent with – the claim that the “culture” of economics knows the relevant criteria for evaluating claims of pure theory and statistical fit better than it knows the relevant criteria for evaluating claims of causal or welfare “insight”. To see this, just compare the Bradford-Hill criteria for establishing causality in medicine/epidemiology with the evidence presented in modern macro or rational addiction theory or a game-theoretic model of the climate treaty negotiation process.

If this explanation holds up after further challenges and research and refinement, it would also provide a way of changing things – simply by demanding that researchers state claims more explicitly and with greater precision, and that we start discussing different claims separately and using the evidence relevant to each specific one. Unsupported claims about the real world should not be something you`re allowed to tag on at the end of a work as a treat for competently having done something quite unrelated.

Anyway, this is also an experiment in spreading research – and in addition to this blogpost you can pick from three different levels of interest: The full paper, the essay or the video.

Comments welcome :-)

A blind spot in economics? Unjustified claims about reality

Thursday, June 2, 2011

Bob Lucas – believe the vision, belie the evidence

Noahpinion has a nice “Marshallian” take on the recent talk by Robert “Rational-Expectations” Lucas, the Godfather of modern macro. He shows easily available empirical evidence that strikingly goes against each of the three main assertions Lucas made about the US macroeconomic woes.

In this recent lecture at the University of Washington, Lucas makes the following assertions:

1. The persistent gap in income levels among rich economies is due to the costs of European welfare states.

2. The length of the Great Depression was due in part to the emergence of strong unions.

3. The reason for our current ongoing weakness in employment and business investment is the recent expansion of the U.S. welfare/regulatory state.

All three of these assertions are baldly contradicted by history.

Head over to Noahpinion to read the smack-down (well worth reading). What I`d like to do here is just to add a relevant and telling anecdote from Lucas`s professional memoir that I came across in one of the comments on DeLong:

"'Crossing over' was a term introduced to us to describe a discrepancy between Mendelian theory and certain observations. No doubt there is some underlying biology behind it, but for us it was presented as just a fudge-factor, a label for our ignorance. I was entranced with Mendel’s clean logic, and did not want to see it cluttered up with seemingly arbitrary fudge-factors. “Crossing over is b—s—,” I told Mike.

In fact, though, there was a big discrepancy between the Mendelian prediction without crossing over and the proportions we observed in our classroom data, too big to pass over without comment.

My report included a long section on experimental error.... Mike...replaced my experimental error section with a discussion of crossing over. His report came back with an A. Mine got a C-, with the instructor’s comment: “This is a good report, but you forgot about crossing-over.”

I don’t think there is anyone who knows me or my work as a mature scientist who would not recognize me in this story. The construction of theoretical models is our way to bring order to the way we think about the world, but the process necessarily involves ignoring some evidence or alternative theories—setting them aside. That can be hard to do—facts are facts—and sometimes my unconscious mind carries out the abstraction for me: I simply fail to see some of the data or some alternative theory. This failing can be costly and embarrassing to me, but I don’t think it has any effect on the advance of knowledge. Others will see the blind spot, as Mike did with crossing-over, keep what is good and correct what is not."

From Robert Lucas, Professional Memoir, pp. 4-5

This may also be an appropriate time to call attention to the classic old Solow quote about Lucas that you can find here.

Wednesday, June 1, 2011

Friedman`s schizophrenic legacy in economic methodology

Brad DeLong had an unexpected take on Friedman`s methodological legacy in economics, highlighting his desire to stay close to data when theorizing rather than his defense of "as-if" theorizing. In DeLong`s words, Friedman was a (pragmatic) Marshallian rather than a (purist) Walrasian:

are the theoretical mechanisms we are studying things that we can see? Are their predictions consistent with the gross features of reality? Supply curves slope up: if we say that demand has changed and pushed us along a supply curve, is it in fact the case that both quantities and prices have risen (or fallen)? Demand curves slope down: if we say that supply has changed and pushed us along a demand curve, is it in fact the case that quantities have risen and prices have fallen (or fallen and risen)?

If the first-order predictions of our theories are not visible in the first-order movements of the data--quantities, prices, asset values, and expectations--then, Friedman (and Marshall) would say, our theory is broken and we need to fix it.

I`ve often been puzzled by examples Friedman`s  pragmatic, close-to-the-data, uncover-the-actual-mechanisms approach and its mismatch with the message economists took away from his essay on methodology. In a footnote in Hausman's book on "the inexact and separate science of economics" he mentions that Lee Hansen
recalls economists in the 1950s reacting to Friedman`s essay with a sense of liberation. They could now get on with the job of exploring and applying their models without bothering with objections to the realism of their assumptions.
More recently, Nathan Berg and Gerd Gigerenzer wrote a paper where they set up the "as if" methodology associated with Friedman as the great big flaw of behavioral as well as neoclassical economics:
For a research program that counts improved empirical realism among its primary goals, it is startling that behavioral economics appears, in many cases, indistinguishable
from neoclassical economics in its reliance on as-if arguments to justify ―psychological models that make no pretense of even attempting to describe the psychological processes that underlie human decision making.
This image of Friedman as the staunchest defend of absurdly speculative rational choice fiction always seemed at odds with other stories about the man`s research. As I understand it, he pored through meeting minutes from the Fed together with Anna Schwartz to understand why the Fed did what it did during the Great Depression, and he was sceptical of data-fitting and overly complex theoretical models. Also, when the Economic Journal had a 100 year anniversary issue (January 1991, vol 101 no 404) and asked a number of famous economists for their predictions about the "next 100 years" of our discipline, Friedman went back to the early issues to actually see what (if anything) had changed. As far as I remember, the other contributions I read were mainly
economists saying that in the future the discipline would finally move
towards what they themselves had been doing for a long time. Friedman concluded that the core subjects of the late 1800s would still be present, some new topics (e.g., property rights, crime, public choice) would probably be present, along with some new topics. The methods would be an updated but recognizable mix of pure theory, descriptive statistics and econometrics. And to conclude he quoted a conclusion Ashley had made after a similar exercise in 1907:
When one looks back on a century of economic teaching and writing, the chief lesson should, I feel, be one of caution and modesty, and especially when we approach the burning issues of our own day. We economists...have been so often in the wrong!