Jared Bernstein has a brilliant post on what's wrong with economists. To avoid plagiary, I mainly copy subject headings. Read his post.

why members of my profession are competing with weathermen for accuracy kudos. So let me count the ways: here’s a list of reasons I think economists often get it wrong.

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1.

Economists sometimes serve vested interests, and will change their views accordingly. The best example is also one of the best economists, Greg Mankiw. This textbook-writing Harvard prof was Bush’s chief economist for awhile, and during his confirmation hearing and subsequent tenure at the White House, he constantly defended Bushonomics, including supply-side beliefs that he once argued were the musings of “cranks and charlatans."

[snip]
2.

Economists are reductionists. For all the alleged complexities, much of economics is too simplistic to capture the myriad dynamics that drive economic outcomes. [snip]
3.

And one reason for that is, as the NYT oped argues, we misunderstand incentives. To be specific, we exaggerate them. [snip]
4.

Old ideas die hard. [snip]
5.

Though we like to think otherwise, economics is not free of values, and that distorts our predictions. [snip]

In practice, these problems interact with each other to compound the damage. Powerful vested interests, thinking incorrectly about incentives, predict that Health Savings Accounts (“consumer-driven” health care coverage) will be roundly embraced and cut costs. Anti-union ideologues bound to simplistic market models assume that injecting market competition into public schools will yield great results.

But in both of those cases, the predictions have been wrong.

[snip]

There are other things economists do well. Our empirical methods, in the right hands, can be highly informative and useful. But, like Yogi said, prediction is hard, especially when it comes to the future. When you’re carrying all this baggage along with you, it’s even harder.

I wish I had written that.

I think that problems 2-5 are really the same problem -- economists assume that the first model with optimizing agents which addressed a phenomenon must be a good first order approximation to reality. The bad pun at the heart of bad economics.

Roughly, the first modern economic models indicated costs of meddling with markets. Later theoretical work showed that each and every apparent policy implication was the result of an assumption made for tractability (that is an assumption which is known to be false). Thus modern economic theory has no implications whatsoever "Isn't there some existence theorem that there is a second best argument for everything" -- Robert Barro. Economists can decide the whole excercise was a waste of time, or decide that old models are useful approximations to reality. It is very tempting to do the second. Hence, economic theory as presented to economists is even more simplistic than economic theory in the academic literature. Hence old ideas die hard. The response of quantities to prices was the main focus of the first neoclassical models. If one wishes to claim that these models address the most important economic issues, one must claim that such effects are large. Hence the exaggeration of incentive effects.

As Bernstein notes, simple neoclassical theory has strongly pro market policy implications to the limited extent that it had any (he should have added that indifference to income distribution is a later add on). These implications follow from assumptions which are obviously false and which were needed for tractability. Pro-market people are attracted to economics. The profession's claim to have a valuable unique perspective is attached to the pro market implications of the simple old models, and to the importance of the effects of prices on quantities which must be large for economist. Economists become pro market ideologues.

Hmm Well I have proven (again) that Bernstein writes much better than I do (probably because he thinks clearly).

I should note that Greg Mankiw argues that he was intellectually honest. After reading two defenses of Bernstein's brief accusation, I think that Mankiw has a point. He didn't endorse nonsensical claims made by the Bush administration (he did deny, under oath, that they had made such claims but, I mean, that is how you say you disagree with your Boss in official Washington. It is important that this doesn't help the reputation of the economics profession. The fact that he didn't denounce Bush means that people think that there is a debate among economists about whether cutting taxes causes reduced revenue. There isn't, but the silence of official economists makes non-economists think that there is.


Bernstein uses "reductionist" as a synonym for "simplistic." Now "riduttivo" is an Italian translation of simplistic, but reductionism is something else entirely. It is an intellectual approach which is widely used in the natural sciences and is, roughly, the only approach to thought which has generated successful predictions. It implies an effort to explain a whole by understanding its parts and how they interact. Natural scientists have repeatedly been astounded to find that reductionism so extreme that it seemed insane turns out to correspond exactly to reality.