A theory about theories

April 2, 2009

In May 2009, a representative of Georgetown University will hand me a piece of paper implying that I am a competent human being with some limited knowledge of the field of government. At least in theory, this document will enable me to assert my authority on topics relating to current events and to claim that this authority in some way stands on the firm foundations of social science.
But, to be honest, the idea that science gives us insight into today’s major policy issues—the most important, of course, being the financial crisis—hugely misrepresents what social science can tell us about the economic world.
No one policy prescription is any more scientific than another. That’s because in economics, prescriptions and hypotheses fuse together; each choice is not based on verified theory, but is a guess drawn from one possible way of looking at the world.
Think about it this way: in the physical sciences, we isolate experiments from practical implementation through, say, engineering. The scientist starts with a theory whose implications arm her with expectations about the world. She then tests these expectations against reality in a series of controlled experiments. If reality bears out her hypotheses, the theory is vindicated and the engineer can apply its lessons to constructive projects. Experimentation and engineering pull apart.
But in economics, the two converge. Economists only get as far as theorizing. Certainly, they can fit their theories to history by using their models to explain, for example, the Great Depression or the recessions of the 1970s. But only policy makers—the engineers in this analogy—can test the theories’ implications against the future. When they do so, they are both conducting an experiment and engaging in economic engineering. When we formulate economic policy, we aren’t working from theories that have already been confirmed; we are working to confirm theories.
Of course, we aren’t facing the world with fresh eyes each time we make policy decisions. In the past century, we’ve had ample opportunity to face down some serious economic problems armed with sophisticated models, and, in doing so, we have made profound progress. But it’s important to understand the nature of this progress.
In twentieth century economics, most theories have derived from one of two dominant paradigms, each of which has been (allegedly) disconfirmed time and again. Each is bolstered by rich theory and powerful econometric analyses of historical cases, but it is easy to see these projects as largely falling into the realm of normal science, where research is blind to deeper processes and new variables which may be extremely significant.
The first, developed by John Maynard Keynes, claims that the market is rough and wild and that the government should intervene to smooth out its more destructive fluctuations. Roosevelt’s New Deal and the European economic successes of the immediate post-war period stood on firm Keynesian footing, but this same stance produced only inflation and unemployment in the 1970s, opening space for an older paradigm to rise to prominence.
This alternative, developed first by Adam Smith and reworked by, among others, Milton Friedman, argues that the market is a self-correcting machine and that government intervention only leads to distortions that can wreak serious havoc. First disconfirmed by the Great Depression and then ushered back into the limelight thanks to the unemployment and inflation of the 1970s, this paradigm reigned supreme until the current economic crisis has, apparently, disconfirmed it again.
Now we are again asked to choose between the two, and the world is quickly falling into two camps. Obama’s policies have been largely Keynesian; it is precisely for this reason that Limbaugh said he wanted the stimulus to fail and why, just last week, Czech Prime Minister Mirek Topolanek described Obama’s policies as “a way to hell.”
Both camps claim to have truth on their side, but each theory has shown success and known failures; choosing between them ultimately cannot be much more rational an activity than flipping a coin. In the end, the winning side will not have been any more scientific than the other—just luckier.
I’m something of a Keynesian, myself; I want Obama’s program to succeed, partly because I would like to be able to feed myself over the next several years, but also largely because I like to see my theories vindicated.
If I ever argue with you about it, I’m sure we’ll both cite good evidence supporting our position and undermining our opponent’s. But in spite of my degree in government and yours in economics, philosophy, or art history, we can’t really have any deeper insight into the problem than a gut feeling that may or may not prove lucky.
And we certainly didn’t get that from a degree.

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