Saturday, July 17, 2010

How Economics is better than Nassim Taleb says it is

The Black Swan is a great book, and deserves the hype it has received. It also features lots of nasty comments about economics, most of which the profession deserves.

But economics training (or at least my Wisconsin economics training) teaches empirical skepticism (something Taleb advocates) all the time. We worry about mis-measurement of variables, omitted variables, selection, reverse causality, and distributions all the time. We think hard about things we don't observe--in my context, when I think about measuring house prices, I worry about the fact that we only observe houses that actually sell. We do non-parametric statistics, and we reject the assumption of normality on a regular basis.

As a result of all this, economics has actually helped us understand certain things better, at least within the realm of applied microeconomics. One a lighter note, let me state an untestable hypothesis--of all the "silent" music that has been written, none has been better than J.S. Bach's.


Maxine Udall (girl economist) said...

I don't think empirical skepticism is the problem (except perhaps for the tendency to assume a Gaussian distribution because it's tractable in situations where for a variety of reasons tails are likely to be fat...OK, there's also a discipline-specific tendency to be willing to swap precise, possibly minimally biased estimates for imprecise, theoretically unbiased estimates somewhat mindlessly...oh, and there's that pesky tendency to confuse statistical significance with practical importance, but all the social sciences do it so we probably shouldn't fault econ on it). I think the problem Taleb may be alluding to is some of the above combined with an absence of theoretical skepticism which is exacerbated by an absence of grounding in the history of economic thought. It causes well-trained economists to misunderstand metaphors like the invisible hand (which in turn produces a near religious faith among some in markets' abilities to discipline the immoral and amoral). It also causes some to ignore or minimize the likely impacts of moral sentiments on market transactions and economic policies, particularly as they relate to fairness. And it may be why a few have recently confused accounting identities with causal relationships.

Richard Green said...

Maxine, there is a reason why I said Taleb's harsh words are generally apt.

Nevertheless, I think he attributes the bad tendencies of some economists too all economists, and this is not fair. Many of my teachers (Goldberger, Manski, Baldwin, Brock) knew a great many things outside of the "tunnel," and Heckman has allowed us to thing better about the impacts of policy. We are better off for having Akerlof, Holmstrom, Myerson, around to teach us about asymmetric information and auction theory.

And FWIW, I have always tried to read fairly broadly (for examples, Dickens is very helpful when one wants to think about urban development), and it hasn't seemed to hurt my career, although perhaps that's because I have not landed in an economics department.

Maxine Udall (girl economist) said...

I can't argue with you, Richard, and didn't mean to sound like I was. Everyone you have named is someone whose work I admire (and they were not the economists I had in mind when I wrote my comment). I stand by my remarks regarding tendencies among some in the discipline to methodological narrowness. My main point, which was obscured by my introductory remarks, was simply that empirical skepticism may not be sufficient. We perhaps need to be skeptical of some of our theory and that may be why Taleb was critical of us. :-)

Richard Green said...

Fair points, Maxine.

Anonymous said...

All of us who study low-likelihood events have been where Taleb says we should be for years. But no, he paints all academics with the same brush, nobody knows anything but him, etc. I find it to b rather a self-indulgent book, and I have a low tolerance for that stuff; I hate it when authors make themselves the heros of their own writing--thinking back around erasing your humbuggery a la Orwell.

Any book that harps on a theme that says, basically, "whatever fears you have are right and whatever anybody else says is wrong" to the reader as much as Taleb does strikes me as being the intellectual equivalent of sugar water in pretty bottles. It's taking risk analysis to the extreme of radical individualization, and just because I can't tell you that your aunt is going to be killed in a car crash on Friday, August 13, 2010 at 5:37 pm doesn't mean that we don't collectively benefit from the statistically wise advice to not to drive over the speed limit.

And he picks out economists because he wants to be seen as playing with the big boys so his polemic gets more attention. And what better way to do that then make whipping boys out of people who are getting a lot of the blame for the economy?

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