Economics isn’t science or literature

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In 1959, British physicist CP Snow gave a lecture called “The Two Cultures”, in which he lamented the cultural divide between literary intellectuals and scientists.

Having been a research assistant in a physics lab and a published novelist, he knew a thing or two about both.

The upshot of his argument was that literary types tend not to know anything about science or technology, while science types tend not to know anything about high culture, to the detriment of the nation as a whole.

Since 1959, Snow’s dichotomy has become common knowledge; at Stanford, we talked about “techies” and “fuzzies” as if never the twain shall meet.

As a physics major who wrote short stories for fun, I was a little bit like Snow.

But since I went to grad school in economics, I’ve discovered something Snow never even noticed – a third intellectual culture.

Economists use many of the same tools as scientists and engineers – matrix algebra, multiple regression, control theory.

But they don’t use them in the same way.

In economics, especially macroeconomics, the goal is often to persuade other people of your view. As Federal Reserve economist Kartik Athreya writes in his 2013 book, Big Ideas in Macroeconomics: “My view is that a part of what we do is ‘organised storytelling’, in which we use extremely systematic tools of data analysis and reasoning, sometimes along with more extra-economic means, to persuade others of the usefulness of our assumptions and, hence, of our conclusions… This is perhaps not how one might describe ‘hard sciences’.“

Basically, a lot of economists use the tools of science to accomplish literary, or lawyerly, goals.

That may sound like a silly exercise, or even a dishonest one, but the fact is that in many economic situations you don’t have good enough data to pin down what’s going on.

You can give up and go home, or let your political leanings give you an emotionally pleasing answer – and many people take those easy exits.

But if you want to do the best you can at describing reality in the face of poor data and uncertainty, you want to make sure your lawyerly arguments are as self-consistent and precise as possible.

Hence the maths.

Economics has plenty of critics, who slam it for being too deductive, axiomatic or chock-full of unrealistic assumptions.

Sometimes these critics come from the top ranks of the profession itself!

But economics isn’t just a cheaper, poorer version of science, or a more nerdy, uptight version of literature.

There are insights that you get from doing economics that you won’t get in a physics lab or from Shakespeare.

 

Random noise

The main insight, in my opinion, is that most things in the world have some randomness in them.

Economics deals with complex systems where controlled experiments are usually impossible.

If you want to isolate one phenomenon, you’re going to have to ignore a lot of interesting stuff.

But if you think about it, that describes most of the situations we face in our daily lives.

We have to make decisions based on the few things we (hopefully) understand, and treat the rest like random noise. We have a strong tendency to overfit the world – to think we can explain each and every little thing that we see.

Economists – the good ones, anyway – realise that this is just an illusion.

Finance, of course, is the ultimate case of betting on signal while trying to hedge against noise.

Dealing with randomness has made economics stronger in some ways than traditional science.

Physicists don’t have to be good at statistics – if the results of an experiment aren’t clear, run it 1 000 more times!

But economics has had to become adept at squeezing every bit of information out of empirical data.

Techniques such as instrumental variables, structural estimation and vector autoregressions have been developed to make the best of a difficult situation.

The other way that the economics culture differs from science or literature is in its purpose.

Literature describes human behaviour, while natural science ignores it.

But economists want to understand and control human behaviour, and that means the object of their study is as smart and free-willed as the economists themselves.

Predicting the actions of humans is a lot harder than predicting the actions of particles, and requires you to ask different questions, such as: “What would I do in this situation, if I were being smart?”

So to the list of intellectual cultures, add economics.

The disputes and food fights between economists and other intellectuals can be just as fierce as those between scientists and literary types.

But there is real value, and uniqueness, in the economics culture. – Bloomberg



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