This is so often mentioned in the context of economics that it is a cliche. However, I thought a list of confused quotes from economists trying to explain how reality is wrong might be both amusing and instructive to the state of the discipline. Most of them speak for themselves, although I’ll offer some comment on the more confused/ing ones.
(1) A commenter on Chris Auld’s blog, on hearing that demand isn’t a ‘law’ because it goes up when stock prices go up:
…simply observing price and quantity data can’t tell us much about the underlying structural relationship. This is a famous identification problem in economics. The law of demand is a statement about the structural relationship, not the observed correlation in the data.
(2) Preston McAfee and John McMillan, expressing incredulity when confronted with evidence from surveys that people behaved ‘irrationally':
Statements about the winner’s curse come close to asserting that bidders are repeatedly surprised by the outcomes of auctions, which would violate basic notions of rationality.
(3) Scott Sumner, defending the EMH:
I know of no explanation for the 1987 bubble. The collapse (comparable to 1929) occurred when the overall economy was doing fine. Some argue for “computer trading,” as if computers have free will. I am not saying they are wrong, but then the correct term would be “really stupid computer programmers.” If correct, this is a good argument against the EMH position. But even here, one must be careful not to push things too far. At the time EMH opponents probably assumed more than just a inexplicable price change—they probably assumed that the bubble’s peak represented irrational exuberance. Were stock prices too high before the 1987 crash? We had no way of knowing then, and we still don’t really know. There is enormous uncertainty about what the stock market should be trading at, based on “fundamentals.”
Reality doesn’t exist! We don’t know anything! Anyway, where was I? Oh yeah, the EMH is correct.
(4) Scott Sumner, on hearing that MMT actually *gasp* looks at the real world:
I wasn’t able to fully grasp how MMTers (“modern monetary theorists”) think about monetary economics (despite a good-faith attempt), but a few things I read shed a bit of light on the subject. My theory is that they focus too much on the visible, the concrete, the accounting, the institutions, and not enough on the core of monetary economics, which I see as the ‘hot potato phenomenon’.
(5) A commenter at Angry Bear, when presented with evidence that flat out contradicts the Laffer Curve:
Mike can not do a comparison with what the Laffer Curve is doing. Its Apples and Oranges. The Laffer Curve is a realtionship, thats why there is no numbers on it, and it can applied at any point in time.
(6) Ben Bernanke, discussing Irving Fisher’s ‘Debt-Deflation’ theory:
Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.
Of course, it’s not possible the banking system works completely differently to your theory.
(7) Eugene Fama, with the best defense of the EMH I have ever seen:
Fama: I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.
…what happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis.
John Cassidy: Surely the start of the credit crisis predated the recession?
Fama: I don’t think so. How could it? People don’t walk away from their homes unless they can’t make the payments. That’s an indication that we are in a recession.
The articles on both sides of the controversy [regarding marginalist analysis]…concentrate on the largely irrelevant question of whether businessmen do or do not in fact reach their decisions by consulting schedules, or curves, or multivariable functions showing marginal cost and marginal revenue.
How does neoclassical economics instill this level of cognitive dissonance in people? It’s probably the way things like information asymmetry and irrationality are presented as deviations from idealised conditions, rather than as being central to an understanding of the economy. This leads economists to see reality itself as a deviation from their perfect models, and hence dismiss results that conflict with their theories as anomalies.
So a question for defenders of economics: do people from other disciplines behave similarly? Would you be able to find a list of equally absurd statements from other sciences, social or otherwise? If the answer is no, surely it suggests that something is wrong with economics?