The Scarlet Letter for economists

An econometrics paper that can make you laugh? Yes, Ed Leamer, famously the author of a 1983 paper, Let’s Take the Con Out of Econometrics (pdf), has a superb 2010 article in the Journal of Economic Perspectives, Tantalus on the Road to Asymptopia – it’s free access,  only moderately technical, and brilliant.

Leamer’s theme is the same in the more recent paper as in the earlier one, the need for a profound culture change in empirical economics:

“Can we economists agree that it is extremely hard work to squeeze truths from our data sets and what we genuinely understand will remain uncomfortably limited? We need words in our methodological vocabulary to express the limits. We need sensitivity analyses to make those limits transparent. Those who think otherwise should be required to wear a scarlet-letter O around their necks, for “overconfidence.””

The point is that the available economic data will always support a range of different theories, and Leamer advocates sensitivity analyses that illustrate the spectrum of parameter values and theories consistent with observed data. Economists need to go back to 1921, he argues, and read Keynes’s 

and Frank Knight’s
. Both books point out that decisions are subject to three-valued logic (yes, no, don’t know) whereas economic theory assumes away the large territory of don’t know.

I strongly agree with Leamer’s conclusions:

“Ignorance is a formidable foe, and to have hope of even modest victories, we economists need to use every resource and every weapon we can muster, including thought experiments (theory), and the analysis of data from nonexperiments, accidental experiments, and designed experiments. We should be celebrating the small genuine victories of the economists who use their tools most effectively, and we should dial back our adoration of those who can carry the biggest and brightest and least-understood weapons. We would benefit from some serious humility, and from burning our “Mission Accomplished” banners. It’s never gonna happen.”

He, like me, is profoundly sceptical about macroeconomics: “Our understanding of causal effects in macroeconomics is virtually nil, and will remain so.”

I must go away and read Leamer’s 2009 book,

.

[amazon_image id=”364207975X” link=”true” target=”_blank” size=”medium” ]Macroeconomic Patterns and Stories[/amazon_image]

 

 

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