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The Role of Economics in an Imperfect World

Originally published in The New York Times

May 10, 2011
Edward Glaeser (Glimp Professor of Economics, Harvard University)

All good things must come to an end, and after more than two and a half years of producing an Economix post every week, it is time for me to move on. I have greatly enjoyed writing these posts, and I am grateful for the opportunity.

Economix began during a period of great popular interest in economics, spurred on, in part, by the tremendous success of Freakonomics, by Steven Levitt and Stephen Dubner. Initially, many of us thought the blog would be quirky and fun and would focus on the application of economics to the issues of everyday life.

But with the recession, the blog, like the economics profession as a whole, had to focus more on the basics, like unemployment and housing prices and the stimulus plan. While interest in economics remains high, the popular view of economists now seems to be shaped more by "Inside Job" than by the sparkling brilliance of Professor Levitt, and I think that makes the value of Economix greater than ever.

Economics has plenty to contribute to the war of ideas, and I’m grateful that The Times has allowed me and other economists to share the insights of our discipline. John Neville Keynes, the father of John Maynard Keynes, promulgated the distinction between positive and normative economics. Milton Friedman later made that division canonical.

Positive economics attempts to understand the world as it is; normative economics describes how the world should be. Most economists spend most of their time doing positive economics, but most economics columns advocate particular policies, which is implicitly normative economics.

One reason that I’ve enjoyed writing and reading Economix is its emphasis on the positive economics that is the real heart of the discipline, rather than the policy prescriptions that are the more usual fare of the blogosphere and the media.

Positive economics, as usually practiced today, combines formal, mathematical models and lots of quantitative, statistical work. That’s not what economists did before World War II; Keynes’s General Theory is short on both formal models and statistics. But formal theory and statistics have triumphed, and that’s a good thing.

In the wake of the recent crash and recession, it has become fashionable to deride the quants, whether on Wall Street or in the academy. After all, few of them saw it coming. The critics may be right to criticize excessive overconfidence, but they are wrong to suggest that the fault lies in either formal models or statistical work.

Hubris has been part of the human condition, with or without math, long before the Black-Scholes asset-pricing formula. Mathematical models create discipline. They ensure that we specify our assumption and that our conclusions then follow from our assumptions. Statistics then provide us with indispensable tests of our theories.

But we need to always remember that data and statistical tests never prove a theory. Typically, many different theories can explain almost any observed phenomenon. Data allows us only to reject a theory. The theories that survive are those that haven’t been rejected yet, and that’s a good reason for humility.

Normative economics also has a distinctive approach that deserves to be part of the electronic agora. At its best, normative economics draws heavily on positive economics: scores of studies have shown the ways in which rent control can screw up a housing market, with too little supply and misallocation of housing units, and that helps formulate policy prescriptions.

Yet the economic approach to public policy is distinguished by attributes beyond an attention to evidence.

There is a strong predisposition within economics to emphasize individual freedom. Our theories start with the assumption that giving individuals more choices is a good thing — and that assumption leads to the view that people benefit from having more money or lower prices for the goods that they buy.

That assumption doesn’t mean that all regulation is bad or even that, in some cases, people are better off facing fewer soups on a supermarket shelf. Even though people value more choices, they also value information, and an overload of choices can make it hard to figure out which soup is really best. But our assumptions do put freedom first, and that’s an important perspective.

Economics marries a predilection for personal freedom with a longstanding tendency to view the interests of the government as being distinct from the welfare of the people. Adam Smith’s “Wealth of Nations,” modern economics’ founding document, emphasized that point.

In the 18th century, it seemed clear that what was good for King George III was not necessarily good for Britain and certainly was not necessarily good for his American subjects.

Democratic revolutions muddied the waters and made it possible for some to think that the government was a faultless servant of the people’s will, but a healthy skepticism about the benevolence (and competence) of the state continued within economics.

Both markets and governments are quite imperfect, and it is important to weigh their failures against each other.

The world isn’t and shouldn’t be run by economists — many perspectives need to be at the table. But economists have plenty to add: formal models, statistical evidence, a focus on freedom and a sophisticated centuries-old approach to public policy. I am grateful to have been part of The New York Times’s effort to provide a stream of economic commentary.

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