Is Economics Worthless?

There have been a lot of interesting pieces by or about economics and economists that have come out or come to my attention in the last few days. Let me start with the book Freakonomics by Steven Levitt and Stephen Dubner, which apparently has had quite a media blitz. Levitt has been on The Daily Show and has been interviewed for Weekend Edition on NPR. You can listen to the latter after the fact via streaming media (Real or Windows Media Player). Yesterday I listened to the interview. I couldn't believe that Scott Simon seeminly just read from the dust jacket for the book (really, from the Web site). His softball questions allowed Levitt to simply review parts of the book for the audience. It certainly wasn't a hard news interview. The question is why. Is NPR incapable of asking critical questions of an economist like Levitt? Or are they afraid that won't appeal to their audience? I don't know. Nevertheless, that is not a criticism of Levitt or the book, which is clearly a good read and quite engaging. (I got fairly excited yesterday reading excerpts and tracking down some ideas, including what is being written on the blog for Freakonomics about Michael Lewis' book, Moneyball.) I will come back to Levitt in a bit.

Today Nicholas Kristof had an Op-Ed piece called "The Greediest Generation" about Baby Boomers. (I'm one of them.) Thank you Mr. Kristof. This piece was the perfect tonic to Krugman's piece that I lambasted a couple of days ago. Kristof cites Larry Kotlikoff and a book he wrote with Scott Burns called the The Coming Generational Storm. Kotlikoff should be thought of as a modern day Paul Revere. He has been warning us for some time about the over consumption of senior citizens and that our economy is ready to implode. This is probably the most important issue our society faces, more important than terrorism. Yet Kotlikoff is no folk hero, unlike Levitt. Indeed, Kotlikoff and his correct advice are being ignored by the Bush administration, so reports Kristof.

This is a painful problem. It really is too painful. Leaders don't want to deal with the responsible, belt tightening approach. So they ignore the problem and thereby exacerbate it. This is one sense by which I think economics is worthless. It analyzes situations correctly, but it has no oomph to actually get anyone to do something about it. After all it is the dismal science. Acting responsibly is a political loser.

There is another sense, however, that may be more important where economics is worthless. Rather than look at macroeconomic issues, let's focus on the inidividual and how decisions are made. Consider the business executive who has an MBA. How does that person make decisions. According to Warren Bennis and James O'Toole in an article in the Harvard Business Review, the B-schools have lost their way because they teach what their faculty research (aka economics) and this has no practical relevance to the real world realm of decision making. The economic model is based on decision making under uncertainty where the model is well defined and a good Bayesian decision maker (somebody well versed in the theory of statistics and decision making) has a subjective probability distribution on which to base the choice calculation. But in reality the situation itself is ambigous and ill formed. It is not clear what model to apply. And there is little or no data to base the decision on. There is only anecdote.

Levitt, who insists on the line "let the data speak for itself" has really cast economics into a tool for historical analysis. Moreover, there may be many situations, even historical ones, where there is no numerical data to analyze. Of course Levitt's historical analyses are interesting and that is why he is on center stage now. But when I was in graduate school the first course in microeconomics taught us that there was "positive economics" meaning an explanation of what went on, the type of economics that Levitt does, and "normative economics" meaning a recommendation for a course of action. Normative economics at the individual level is dead. Good decision making is all seat of the pants.