In his latest column David Brooks takes on economics in a number of ways but I want to highlight two particular statements
The liberal technicians have an impressive certainty about them. They have amputated those things that can’t be contained in models, like emotional contagions, cultural particularities and webs of relationships. As a result, everything is explainable and predictable. They can stand on the platform of science and dismiss the poor souls down below.
One, this presents a dichotomy that doesn’t exist. Are liberals – by which I assume Brooks means left-of-center – economists more technical? I think the correlation is low but if anything left-of-center economists are more questioning of the most mechanical models.
Two, you guys must really understand that the fact that there is no variable named cultural particularities, for example, does not mean its not in the model. An economist would generally refer to them under the heading "country specific fixed-effects.” That is, all the things that make America, America and for which I have no way to directly measure. Such effects are taken seriously.
Indeed, Steven Levitt owes his fame largely to an ability to measure these amorphous effects by carefully placing unnamed tags on each possible source and then tracking the behavior of the source rather than relying on direct measures of the phenomenon he’s interested in.
Emotional contagions and relationship webs are likewise modeled as network and peer effects. This stuff is taken seriously.
Second, Brooks says
It all makes one doubt the wizardry of the economic surgeons and appreciate the old wisdom of common sense: simple regulations, low debt, high savings, hard work, few distortions. You don’t have to be a genius to come up with an economic policy like that.
Brooks describes the old wisdom. Yet, the part of it that is old is not wise and the part of it that is wise is not old.
Capitalism is sometimes described as the Art of Going into Debt. Usury laws once prevented the loaning of money for interest. This implied that all investment had to be financed with high personal savings. The breakdown of these laws and, with it the taking on of enormous debts, was instrumental in the formation of our entire economic system.
Similarly, no one doubts the hard work of the Amish. I think few would want their economy. Again, capital – and the ability to borrow it and trade it – not labor is the key to capitalism.
However, most importantly the doctrine of simple regulations and few distortions is in no way common sense. Every social organization from smallest family to the United Nations constantly wants to enact Byzantine regulations in an effort to control what they see as wayward progeny.
The insight that these things do more harm than good is one of the overwhelming intellectual accomplishments of pointy-headed economics.