Nobel Prize Report Card: Economics

The Nobel Prizes awarded each year resemble a kind of report card where each prize-worthy discipline (Physics, Chemistry, etc.) gets a grade that depends on the prize-winning research. If the prize-winning research is useful and surprising, the grade is high. If not the grade is low. More generally, at least to me, the intellectual history of the prize winners sheds light on the whole profession. Perhaps some biologists were unaware of the behavior of Eric Kandel described in Explorers of the Black Box when he was awarded the biology prize. Kandel, I hasten to add, is an unusual case.

Thomas Sargent is one of the winners of this year’s Economics prize. In 2007, he gave a graduation speech at Berkeley to economics majors (via Marginal Revolution). In the speech, Sargent called economics “organized common sense”. He went on to list 12 common-sense ideas, such as “Individuals and communities face trade-offs” and “governments and voters respond to incentives” that economists believe. The reasons for their belief weren’t stated.

When I started as a professor (at Berkeley) I did many experiments with rats and, to my annoyance, discovered an inconvenient truth: I understood rats less well than I thought. Even in a heavily-controlled heavily-studied situation (Skinner box), my rats often did not do what I expected. My common sense was often wrong, in other words. This experience made me considerably more skeptical of other people’s “common sense”.

To me, and I think to most scientists, science begins with common sense. Experimental psychology certainly does. I used common sense to design my experiments. Had I not done those experiments, I would not have learned that my common sense was wrong. So relying on common sense was helpful — as a place to start. As a way to begin to understand. You begin with common-sense ideas and you test them. That common sense is often wrong is a theme of Freakonomics, in agreement with my experience. Yet Sargent seemed content (he called economics “our beautiful subject”) to end with common sense, perhaps tidied up.

This is really unfortunate because economics, beautiful or not, is so important. If you ignore data, the answer to every hard question is the same: the most powerful people are right. That way lies stagnation (problems build up unsolved because powerful people prefer the status quo) and collapse (when the problems become overwhelming). Alan Greenspan’s faith-based belief in free markets and the 2008 financial crisis — after Sargent’s speech — is an example. In 2009, Sargent’s speech might have been less well-received.


16 Replies to “Nobel Prize Report Card: Economics”

  1. I would only disagree in calling out Alan Greenspan. Though he doesn’t get away scot-free, it is more the corrupting influences of government intervention in the housing market and the elimination of moral hazards by that same government that created the financial crisis of 2008 more so than free markets. I place more blame on Barney Frank than I do Alan Greenspan though Greenspan doesn’t come away unscathed. Your observations regarding Sargent and his commencement speech are sad. It is why I disdain consensus science.

    1. Tom, you ask “Is there a difference between common sense and confirmation bias?” Yes. Common sense is a set of beliefs that we have great faith in and that are widely shared. Confirmation bias is a scientific strategy that tends to set up tests so that they confirm the beliefs we start with. I think you’re right that there’s a connection: confirmation bias leads us to be overconfident about our common sense. (Whether that is why we are overconfident in our common sense I don’t know but it is plausible.)

  2. Wow. You learned all you needed to know in order to judge an entire discipline from a graduation speech?!

    If you had bothered to read Sargent’s work before judging it you would have seen that he won the Nobel for research showing that what people used to think was common sense (particular fiscal and monetary policy) is actually wrong.

    Your post (cf. para 3) rests on the unstated assumption that common sense = naive expectations. Sargent’s work (on “rational expectations”), on the other hand, specifically argues that this assumption isn’t true, so it seems sort of silly to criticize him for making it.

    1. George, I’m not “judging Sargent’s work” I’m commenting on a graduation speech. As for Sargent’s serious work, here is one paper:

      Supposedly important. It was linked to in a Washington Post article about why Sargent won the Nobel Prize. Perhaps this paper illustrates what you mean by “showing” that common sense is wrong. Please note the absence of data. In particular, the absence of data and comparison with prediction. To me this instance of Sargent’s work “shows” nothing except theoretical overconfidence. What if, ten years from now, someone tests predictions from Sargent’s theory and it turns out that those predictions are wrong? Then you might be less sure than you are now about what Sargent has “shown”.

  3. I know Seth blogged about this already, but I’m reminded of “The Truth Wears Off”, an article that appeared in the New Yorker last December. Here’s an excerpt:

    In the late nineteen-nineties, John Crabbe, a neuroscientist at the Oregon Health and Science University, conducted an experiment that showed how unknowable chance events can skew tests of replicability. He performed a series of experiments on mouse behavior in three different science labs: in Albany, New York; Edmonton, Alberta; and Portland, Oregon. Before he conducted the experiments, he tried to standardize every variable he could think of. The same strains of mice were used in each lab, shipped on the same day from the same supplier. The animals were raised in the same kind of enclosure, with the same brand of sawdust bedding. They had been exposed to the same amount of incandescent light, were living with the same number of littermates, and were fed the exact same type of chow pellets. When the mice were handled, it was with the same kind of surgical glove, and when they were tested it was on the same equipment, at the same time in the morning.

    The premise of this test of replicability, of course, is that each of the labs should have generated the same pattern of results. “If any set of experiments should have passed the test, it should have been ours,” Crabbe says. “But that’s not the way it turned out.” In one experiment, Crabbe injected a particular strain of mouse with cocaine. In Portland the mice given the drug moved, on average, six hundred centimetres more than they normally did; in Albany they moved seven hundred and one additional centimetres. But in the Edmonton lab they moved more than five thousand additional centimetres. Similar deviations were observed in a test of anxiety. Furthermore, these inconsistencies didn’t follow any detectable pattern. In Portland one strain of mouse proved most anxious, while in Albany another strain won that distinction.

    The disturbing implication of the Crabbe study is that a lot of extraordinary scientific data are nothing but noise.

    Full text:

    1. Thanks, Alex. To me, that example supports my point. Crabbe believed that he was likely to have controlled all the important factors but he was wrong. His common sense was wrong. He tested it, which is good. I don’t agree with the author’s conclusion here (“a lot of extraordinary scientific data are nothing but noise”). I would say the Crabbe data suggests that a lot of data are less generalizable than we might think. But that data is an improvement on common sense — which is to say it is not “noise”. In essence my conclusion is exactly the opposite of the author’s (the author is Jonah Lehrer). The Crabbe example shows how important all data is and how we should never ignore it.

  4. 1) You really ought to acknowledge that the Economics “Nobel” is a rather a pretendy prize – it’s not in the old boy’s will: all part of the Economists’ Physics envy.

    2) “If the prize-winning research is useful and surprising…”: the science panels seem happily to give prizes for work that has yet to show any “benefit” as the will insists they should. Just another example, I suppose, of institutionalised science operating in bad faith.

    1. dearime, that the Nobel Prize is so often given for useless work, contrary to Nobel’s instructions, to me shows the power of the forces (especially the desire to project status) that Veblen wrote about in Theory of the Leisure Class. You project status by being useless. Powerful people can afford to be. When a rich person “wastes” their money I have no objection. When a scientist or whole discipline wastes their power to improve human life, it is a tragedy.

  5. No, you were quite clear. Yes, he was against government regulation of financial markets – in the 1960s and 70s. As chairman of the Fed, however, he was by definition, in body, mind, soul, to the bone, in every way imaginable, very much FOR government intervention of financial markets. His reputation as a free marketeer is simply wrong, wrong, wrong as well as being and insult to both pro and anti interventionists.
    But I doubt we’ll agree on that… Instead, let me finish by saying I really enjoy your work. Thanx!

  6. I wouldn’t go as far as Jan Madsen but finance is an industry with lots and lots of government regulations. Perhaps in his heart of hearts Greenspan opposed these. However, he made almost no effort to “deregulate” any aspect of the industry when he was Federal Reserve chairman–no speeches, no lobbying Congress, no Fed “studies.”

    He did oppose most new regulation but that is a different thing. He may have felt that finance was about as good an example of “mixed economy” “regulated markets” as you were likely to get.

    Of course, he was wrong. But we still don’t know exactly what changes will make things better how. Dodd-Frank, on balance, is probably doing more harm than good (I count as harm the increased business for lawyers and lobbyist; many in Congress may disagree).

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