Hubris haunts the dismal science

Ignorance of the ways lack of humility, self-interested behaviour and the wrong analytical tools are hindering economic advice has a deleterious effect on society.

Six million people in the US have been unemployed for more than fifteen weeks. Since January 2008, almost five million people in the eurozone have been added to the ranks of the long-term unemployed.

For economists, it’s easy to brush off the role of economists in the crisis of the last five years. Our arguments are “we provide advice that politicians fail to implement”, or “we didn’t just not predict the crisis, we predicted that it was impossible to predict”.

These are boring and weasely excuses. They fail to acknowledge the influence economists have, and how economics sways decision-making. “What were all the economists doing?” is a more valid question.

I propose three big problems in economics as done by economists: a lack of humility about the limits of the discipline; mercenary economics; and Microsoft Excel.

Humility

Unlike actuaries, accountants, or lawyers, economists are an unnecessary cost-centre for most of their employers. They provide value – and derive employment – by reducing uncertainty. The more brilliantly an economist can reduce (perceived) uncertainty, the greater their (perceived) value. It’s almost that simple.

This is not the best incentive structure for any profession. It rewards economists who are able to convey certainty, and punishes those who do not. What incentive is there for an economist employed to reduce uncertainty to admit that something is fundamentally unknowable?

To reduce uncertainty, economists build simple models of complex systems. This allows them to ‘quantify their uncertainty’ under the assumption that the model is a true representation of the world. Unfortunately, much economic analysis is presented and reported on in a way that suggests the model is a good representation of the world.

Peter Diamond, a Nobel prize-winning economist, expressed this dilemma well: “Taking a model literally is not taking the model seriously”.

For hire: economists

Economists have known for some time that government officials behave quite predictably in their own interests, rather than society’s. There has been far less discussion about economists doing the same.

Equipped with an apparently sophisticated toolkit for analysing policy and the future, economists are often sought-after consultants. A rigorous looking cost-benefits analysis or modelling report (these may contain buzzwords “computable general equilibrium modelling” or “wider economic benefits”) can help a terrible policy or project get across the line.

When economists assist in this process, they are not improving human welfare.

To be fair, there is general disdain from within economics about the role of certain consultancies and government reports besmirching the good name of economics in search of profits or political favour. Low-rent economics pays, but not within economics.

The wrong tools

Most working economists outside academia are tied to one particular tool: Microsoft Excel. Excel is a brilliant product for its intended purposes; it makes doing simple analyses exceptionally easy for someone with next-to-no training. But rigorous economic analysis requires mathematical and statistical tools not available in Excel.

For instance, when I build models, I often need to test the sensitivity of the outputs by varying multiple assumptions at once. This is fundamental to ethical modelling, and is essentially impossible in Excel.

It’s a funny equilibrium. If economists used the tools available with greater functionality, their analysis could be better. They could better quantify uncertainty, and be more forthcoming about the limitations of their analysis. Instead, those commissioning economists ask for the work to be done in a format the client can understand. They want it done in Excel.

The alternative

The alternative, however, is not ‘fewer economists’, or ‘ignore the economists’. Knowing less about the world’s problems is not going to help us get over them. 

The real alternative is that those who seek the advice of economists—the press, politicians, business leaders—need to demand that economists are open about their uncertainty. Then we can make properly informed decisions.

James Savage is a researcher at the Grattan Institute. He is debating Henry Thornton on Tuesday at Thought Broker’s economist’s debate: ‘Whether economics is the cause of our problems’.