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Russ Roberts on Economic Humility

Summary:
Russ Roberts has an excellent essay, What do economists know? on economic humility. (HT Marginal Revolution)A journalist once asked me how many jobs NAFTA had created or destroyed. I told him I had no reliable idea. ... The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I ...

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Russ Roberts has an excellent essay, What do economists know? on economic humility. (HT Marginal Revolution)
A journalist once asked me how many jobs NAFTA had created or destroyed. I told him I had no reliable idea. ... 
The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer. 
A lot of professional economists have a different attitude. They will tell you how many jobs will be lost because of an increase in the minimum wage or that an increase in the minimum wage will create jobs. They will tell you how many jobs have been lost because of increased trade with China and the amount that wages fell for workers with a particular level of education because of that trade. They will tell you that inequality lowers health or that trade with China reduces the marriage rate or encourages suicide among manufacturing workers. They will tell you whether smaller classrooms improve test scores and by how much. And they will tell you things that are much more complex — what caused the financial crisis and why its aftermath led to a lower level of employment and by how much.
And Russ continues, with great clarity, to explain just how uncertain all those estimates are.

So what do economists know? As Russ points out, much of these kind of estimates are not really produced by economics


...most of the people I am talking about are not economists. They are really applied statisticians. Economics is primarily a way of organizing one’s thinking in considering incentives and costs and the interactions between individuals that we call a market but is really emergent behavior with feedback loops.
This is not an argument against quantification. What economists do know are basic facts, 
It is useful to know that 40% of the American work force was in agriculture in 1900 and now the number is 2%. It is useful to understand that that transition (which was most faster in the first half of the 20th century than the last half) did not lead to mass unemployment and starvation.
This is a fact, as distinct from a causal analysis. 

Economics leads you to great sensitivity to the fact that  correlation is not causation. That many workers lost manufacturing jobs while China was expanding does not prove that China's expansion caused those job losses, or that they would not have occurred in a world otherwise the same but with powerful trade barriers. Rich people drive BMWs. Driving a BMW will not make you rich.  This is the main reason why so many "studies" remain controversial, well covered by Russ. 

Still, we haven't answered well enough just what economics is good for. Russ: 
Economists generally believe that incentives are very powerful
I'd rather he had said "Economists generally understand.." as "believe" is not a good word for any scientific enterprise. Much of the world makes sense if you recognize the power of incentives.

Yes. In just about every policy question an economist sees an incentive. Where most of our political analysis sees an income transfer. Raise gas taxes? An economist sees an incentive to drive less, move closer to work, carpool, ride a bike, buy a more efficient car. Most of our political system sees only a transfer of income, with current habits unchanged.

But I want to go further. Budget constraints and accounting identities. I think good economists quickly follow the money one more step than most analysts. If you subsidize x, then you must take money away from y. If foreigners are not able to sell things to us, then they cannot get dollars to buy things from us, or to buy assets, or to invest in the US. There is no such thing as "real" vs. "paper" investment -- each person making a "paper" investment is buying someone else's liability, which funds a "real" investment. You can't make American's wages go up, say by banning nurses from the Philippines, and also health care costs go down.

Unintended consequences. Our field is, perhaps, best described as a collection of funny stories about unintended consequences. (I became an economist one day very young, reading a newspaper story about a program to get rid of poisonous snakes. The government had offered a bounty on each dead snake. Guess what happened. Hint: It's easy to raise snakes.)  Unintended consequences usually come from forgetting about incentives and budget constraints. My daughter, age about 8, looked up from reading the paper one day and asked, "Dad, if the government makes everyone buy fuel efficient cars, won't they just move further from work and use the same amount of gas as before?"

Supply response, (or demand), and competition. In thinking about banking regulation, a good economist focuses on incentives for new banks to come in, rather than just how to manage the existing ones. In thinking about health care, we are all talking about how to pay for it, not about how to get new competitors to come in and offer better services. In thinking about labor regulation, we forget that the worker's ability to quit and easily get a new job, from a new hungry business trying to unseat the old one, is his or her best defense against a shoddy employer.

As you see, I think we're pretty good at identifying causal channels that most analysts ignore, even if we are not always great at quantifying their relative significance. But "not zero" is usually an eye opener in public policy.

In sum, I think economics provides an excellent set of bullshit detectors. This is my stock answer about my own professional expertise. I may not know what makes the economy grow, or how monetary policy works. But I now with great detail exactly why the ten stories in front of us are all wrong, and typically logically incoherent. That is useful knowledge.

Russ has a lovely closing paragraph, which you might miss:
But an economist when considering a policy of banning autonomous vehicles can think of a lot of other impacts besides the jobs saved and the continuing deaths from human driven cars if such a ban is put in place. One of the things we would think about is how such a ban will effect the incentives to discover future innovation that might also people out of work. We would think about how putting more power in Washington would encourage lobbying for protection. We would think about the children and grandchildren of today’s workers and how restricting technology and changing incentives would affect things. These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.
So let's call it Hayekian humility. This is the hardest one for so many economists to admit, as we all like to play central planner.

Economics and economic history also teach us humility: No economist in 1900 could have figured out what farmers, horse-shoers, ice deliverers, street-sweepers, and so forth would do when those jobs disappeared. The people involved did. Knowledge of our own ignorance is useful. Contemplating the railroad in 1830, no economist could have anticipated the whole new industries and patterns of economic activity that it would bring -- that cows would be shipped from Kansas to Chicago, and give rise to its fabled meat-packing industry. So, in a dynamic economy, all the horse-drivers, stagecoach manufacturers, canal boat drivers, canal diggers, and so forth put out of work by the railroad, and their children, were not, in the end, immiserized.

So, economics should be much better at being the lifeboat for simple lessons of economic history and experience. Alas our current professional training makes us pretty terrible at this.

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John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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