Tuesday, December 05, 2006

Model Envy - A Post On Economists

I'm allowed to bash economists a little, given that I belong to that stuffy group myself. And boy do we deserve some bashing. Via Atrios, I read the following from Angry Bear:

Robin Hanson thinks we economists are poorly treated:

Consider how differently the public treats physics and economics. Physicists can say that this week they think the universe has eleven dimensions, three of which are purple, and two of which are twisted clockwise, and reporters will quote them unskeptically, saying "Isn't that cool!" But if economists say, as they have for centuries, that a minimum wage raises unemployment, reporters treat them skeptically and feel they need to find a contrary quote to "balance" their story. I see the same pattern with my students - they'll easily believe physics claims, but are very reluctant to entertain standard economics claims.

The obvious next step (which Hanson takes) is to deplore the low level of economic education among nonexperts. If only, we sigh, sipping our Scotch through a plastic straw, if only those unwashed masses would kneel in front of our erudite mathematical models as eagerly as the do in front of those physics models. If only, we sigh, and fade back into the world where a mathematical model is fitted more because it's the simplest one to solve than because it would be the right one to use.

It sounds a lot like religion to me. Also like penis envy, in the sense that physics is a hard science, a rigorous science and one in which researchers climax early. So enviable. Economics, on the other hand, is a social science, a soft science, and one in which Milton Friedman was still quoted right before his death at a very ripe old age. - Shall I tell you what we economists really want? We want you to find our simple models far too difficult mathematically to follow, so difficult, indeed, that you must just accept them without understanding them at all. And we want you to confuse reality with our models or perhaps even prefer our models to reality. A few temples to us would be nice, too.

I sound angry here, and I am, a little, because model envy or physics envy or whatever you want to call it takes a tool and makes it into the thing itself. It's reality we are trying to explain, after all, not some sterile and often stationary world with no uncertainty or informational asymmetries and with assumptions never fulfilled in many real world markets.

Models can be very useful, but they are models. Natural sciences can test the formulas and models in laboratory circumstances. Social sciences don't have that luxury, partly, because even if laboratories were used they would be artificial environments likely to affect the outcomes, not ways of holding external influences constant. This means that social sciences muddle through and actually study something more complicated than some of the physics models do, and it also means that we must view the social science models with a greater deal of scepticism.

And what about the claim in the quote above, the one which says:

But if economists say, as they have for centuries, that a minimum wage raises unemployment, reporters treat them skeptically and feel they need to find a contrary quote to "balance" their story.

As Atrios points out there are several models of labor markets and not all of them predict that unemployment would increase. It might also be useful to note that the standard model predicting a rise in unemployment with higher minimum wages is based on a model which assumes that all market participants know everything relevant in the market, including all wage offers and the productivity of every single worker, and that it is a partial model, not following through the chains of events caused by the wage changes in neighboring markets or the local area in general and then back to the market where the firms products are sold.

But even if every single model gave the same prediction of higher unemployment levels economics must take into account something over and above that, and this something is the actual evidence on what happens when minimum wages are raised. Just like physicists' models must be proven in laboratory tests. Funny, innit?