Jim Manzi replied to my defense of economics saying

What Smith is describing here is intelligent and data-driven theory-building. What’s missing is the part where the theory is tested, and proven to be reliable.

In other words: You say that you have the ability to predict the effect of stimulus. Prove it.

I don’t think think I am saying this. At least, not how I think Jim means it. I am saying I have reason to believe that the effects of stimulus will be X and I can make an argument for it.

If you want to hear that argument then I am more than willing to spell it out in great detail.

Moreover, this is all virtually anyone in any discipline has. I sometimes tell my students that scientists don’t prove, mathematicians and philosophers prove. Scientists accumulate evidence that seems to suggest.

This I think is true in all fields of science and is doubly true when that science is applied to actually engineering results in the real world. Not only have well relied upon theories in physics been upended upon careful examination but there is no one I know of who can design an airplane using a physics textbook. Nor, would many people  trust an airplane to fly without testing it first.

And, despite despite all of the testing that is done, airplanes can a do malfunction and crash. There simply isn’t a “proving it” when it comes to making predictions about the real world. What we hope to do is give an answer that’s better than random and better than folk wisdom.

Now perhaps Jim is not confident that we can achieve our goal of beating randomness and folk wisdom. There are two basic lines of reasoning I can offer.

One is evidence and logic. We can talk about why in this case stimulus makes sense, why the evidence looks like it points in the direction that it does and why it seems to be telling us something different than mere folk wisdom.

Throughout human history evidence and logic have shown themselves useful. They are by no means omnipotent. The smartest people make mistakes. The most carefully argued cases are sometimes wrong. Nonetheless, as a general guide evidence and logic are useful.

Thus you should “rely” on my predication because you follow my evidence and logic. And, if you don’t follow my evidence and logic then we should talk about it. I talk about this for a living and am more than willing to devote as much time to it as Jim or anyone else wants. I crave the opportunity to offer evidence and logic for these positions. This what I hope to do with this blog.

So, to be clear, I am not asking at all that you simply submit to my superior knowledge, modeling or intuition. I am offering that intuition and if you want to see behind the hood and understand why I say all of these things then I am offering that too.

The second line I offer is that of experience. That when economists had the helm we really were able to produce results. In the 1980s Central Banks were largely turned over to their economists who produced low inflation and low unemployment by manipulating the overnight lending rate.

Indeed, the two major failures in that period, Japan and the current recession, coincided with the overnight lending rate hitting zero and thus no longer being under the economist’s control. So our basic argument was that we can steady the economy so long as we have control over the overnight rate seems to be validated.

Moreover, its validated in the direction we predicted. We argued that if the overnight rate was lower than we wanted the result would be inflation. If the overnight rate was higher than we wanted the result would be recession and disinflation.

This is key, because lots of pronouncements were issued when the recession started. Monetary economists said “we are running into the Zero Lower Bound and thus there will be high unemployment and disinflation.” Particularly, on the disinflation point, many people disagreed. But, we were right, there was high unemployment and disinflation.

So we have one example were the economists themselves got to run the institutions and the macro results confirmed what we said and were widely regarded as good.

Now that that tool is not available. So we are talking about other tools, fiscal stimulus, quantitative easing, etc.

If you are arguing that I don’t know for sure that these tools will work then you are right. I don’t know. What I am suggesting is that the same logic and evidence that worked for controlling the overnight rate is telling me certain things now.

I don’t ask that you simply trust this. We can go through the models. We can go through the logic. We can look at all the evidence. However, at the end of the day we have to make a choice. Even the choice to do nothing is a choice, with consequences for which we will be responsible.

I think making our choice based on logic, evidence and the experience of the Great Moderation is the way to go.

About these ads