Tuesday, September 1, 2015

Crossing the Ravine from Economic Theory to Policy Advice

When describing the benefits of learning economics to often-skeptical listeners, I often quote Joan Robinson (in the 1978 book Contributions to Modern Economics, p. 75): "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."

After all, if you don't know any economics, you are likely at some point to find yourself in a discussion of policy or social issues where at some point the other person says: "Well, even a basic knowledge of economics will tell you that my view is correct." That person may be totally wrong; in my experience, that person is often totally wrong. But if you don't know any economics, you have no easy way to refute this claim about what "economics" implies.

David Colander makes a similar point more thoroughly in his "Economics with Attitude" column in the Fall 2015 issue of the Eastern Economic Journal, "Economic Theory Has Nothing to Say about Policy(and Principles Textbooks Should Tell Students That)" (41: pp. 461-465). He begins his way:
Let me start with a quiz: 
● Question 1: According to economic theory, whenever possible government should avoid tariffs.
● Question 2: According to economic theory, the minimum wage lowers the welfare of society.
● Question 3: According to economic theory, if there are no externalities, the market is the preferable way of allocating resources. 
The correct answer to each of these questions is false; economic theory, on its own, has nothing to say about policy.
Colander distinguishes between theorems and precepts, and discuses how the pedagogical emphasis has shifted between these over time. Theorems are results derived from models and assumptions. "Precepts are based on the insights coming from models, combined with educated judgments about all relevant aspects of the decisions that the model assumes away for tractability reasons. These include moral judgments, historical knowledge, and institutional understanding. Precepts are the realm of economic statesmen, not economic scientists." With this distinction in mind, Colander writes:
 All students coming out of a principles course should know that before one can make a meaningful judgment about policy, there is a lot of history, moral philosophy, and additional peripheral knowledge that is needed to move from theory to policy. Even if we don’t teach the nuance, we can teach the need for nuance in policy discussion. Every beginning economics student should know that economic theorems are not enough to arrive at policy conclusion.
Colander has been contributing short, lively essays at the start of each issue for the EEJ, and the essays are freely available at least for a time. Earlier essays in 2015 include his remembrances of Gordon Tullock. an argument that there is too much intellectual in-breeding (that is, cross-hiring) at Harvard and MIT, and a critique of the overly enthusiastic reaction to Thomas Piketty's Capital in the 21st Century.