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Tuesday, September 13, 2011

What do you want it to be?

I am reading some high quality debates (and jokes) lately for my class in labor economics. This one is on economists, and the assumptions we make.
An official at Treasury asks three experts, “What’s 200 billion plus 200 billion?” The first expert, a mathematician, immediately responds, “Four hundred billion, of course.” The second, an economist, kind of grimaces and says, “Well, that depends . . .” But the third expert, an econometrician, doesn’t immediately answer. Instead, he gets up and quietly closes the office door. Once he’s sure no one is listening, he leans over and whispers in the official’s ear, “What do you want it to be?” 
I never thought this joke was very deep, but thinking about Leamer’s (1983) paper made me appreciate it more. Insightful jokes typically exaggerate to make a point, so let’s assume what is really being asked is a hard question like “How will consumer spending be affected by $200 vs. $400 billion in fifiscal stimulus?” The econometrician is well aware that by playing with assumptions—what control variables and instruments to use, what functional forms to pick—it’s possible to obtain pretty much any desired coefficient on government spending in the consumption function. 
What struck me for the first time upon rereading Leamer (1983) is that the economist is really the hero of this joke. He knows what the econometrician knows, but he’s willing to admit it. In Leamer’s words, “All knowledge is human belief; more accurately human opinion.” In contrast, it is the mathematician who is really misguided, by expressing a false degree of certainty. My view, like Leamer’s, or the economist in the joke, is that there is no way to escape the role of assumptions in statistical work, so our conclusions will always be contingent. Hence, we should be circumspect about our degree of knowledge. In the words of Maimonides: “Teach thy tongue to say ‘I do not know,’ and thou shalt progress.”
-- Keane 2010 on the Journal of Economic Perspectives

1 comments:

Bobing said...

If one follows Karl Popper, then science is the process of falsification of hypotheses. In the search for the truth, science is 100% certain of what is false (like the earth is flat) but never 100% about what is true. This is enshrined in statistics where we allow ourselves a 99, 95 or 90% level of confidence. There is a world of difference between economic theory and economic policy. Try reading Blaug "The Methodology of Economics".

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