Tuesday, April 5, 2011

Annals of Unscientific Economics: “....is consistent with....”

Sciences are distinctive in many ways, but they all have in common the drive to minimize Type I error. This, you will recall, is the risk of accepting a hypothesis when it is actually false, as against rejecting it when it is actually true—the Type II variety. Sciences are progressive, advancing over time, because they have systematic procedures for expunging falsehoods. Other fields of human achievement have much to offer, but they lack this particular trait. Biology in 2011 is “better” than biology fifty years ago in a way that music or politics isn’t.

If you are still wondering whether economics should be considered a science, think about all the articles you’ve read that claim to be testing theories, and where the key language is “is consistent with”. “The starred coefficients in Table 9 are consistent with the properties of equation 18", “The greater incidence of such episodes in countries in Panel A is consistent with the predictions in our model”, etc.

The long form of “is consistent with” is “we should be more willing to accept this theory because it could be explaining the data”. The short form of this long form is “rejecting this theory risks Type II error”. Remarkably, most economists think this approach is what makes economics scientific.

If you take Type I error seriously, you have to ask, does the evidence preclude any other explanation? Am I at risk of accepting a false explanation because there is another which is actually correct? In practical terms, this means two things: taking all plausible explanations into consideration and not just the one you want to support, and searching aggressively for all the elements in your data that might contradict your pet theory. This second admonition includes examining subsamples whenever feasible, for instance.

Because economics, as it is practiced, is more concerned about Type II than Type I error, it propagates and defends a vast array of dubious propositions, and there is little methodological resistance.


BruceMcF said...

This hits the nail square and true.

Audio Investigator said...

Great!!! But also add:

1. Obviously wrong assumptions and re-definitions of common words.
2. Special servile relationship with wealth and power for which typical economics serves as propaganda tool, delivering this underlying but usually covert message to everyone else: accept only the crumbs that fall from the great tables of the great system, since your taking more than that would destroy the greater good which includes you. The special relationship arises because people of wealth and power take great interest in the dogmas that advance their privileges, and have ways to fund them, thus letting alternative visions such as Marxism or Minskyism or even Keynesianism wither on the vine.
3. Physics envy.

(1) generally follows (2), and (3) is the magic glue that makes it all seem scientific and respectible. This is not a new idea, Keynes said essentially the same thing in General Theory.


AJSwtlk said...

Too, since science cannot be complete (and those who are insightful recognize this), it can spend the energy (the requirement is enormous) to focus on consistency. Science's problem for economics revolves around those things with which science cannot deal (as of yet). The current mode is to discard a whole bunch of stuff pushing it to the realm of pseudo-science.

Economics deals with humans, essentially, and with their lives (yes, those messy things alluded to above). Via all sorts of compactification, humans get closures that foster some notion, or illusion, of completeness.

The result? Consistency is less important. One might say that Emerson's little thought reigns in economics.

Actually, we need both of these approaches. Why can't we use science to define a 'sandbox' for economics in which the boys/girls can play to their hearts content yet at the same time bolster up that which may be stable so that we, the wee folk, are not always cleaning up the crap after a Minsky blowup?