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Rigorously Modest
From the May 14, 2012, issue of NR.

Economist N. Gregory Mankiw

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Imagine that a U.S. president is considering his options vis-à-vis a rapidly developing Iranian nuclear-weapons program. First, a science adviser comes into the room and predicts that if the Iranians take the following quantity of fissile material and compress it into a sphere of the following size under the following conditions, then it will cause an explosion large enough to destroy a major city. Next, a historian comes into the room and predicts that if external attempts are made to thwart Iranian nuclear ambitions, then a popular uprising will sooner or later ensue and force changes in government until Iran has achieved nuclear capability.

The president would be unwise to begin debating the findings of nuclear physics with his science adviser. Conversely, the president would be unwise not to begin a debate with the historian. This would likely include having several historians present different perspectives, querying them on their logic and evidence, consulting with non-historians who might have useful perspectives, engaging in introspection about human motivations, considering prior life experience, and so on.

Next, an economist walks into the room. She predicts that if the CIA were to successfully execute an Iranian currency-counterfeiting scheme designed to create additional inflation in Iran for the next five years, then the change in Iranian employment would be approximately X. Is this more like the historian’s prediction or the physicist’s prediction?

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Superficially, she might sound more like the physicist. She would use lots of empirical data, equations, and technical language. But many issues would remain outside the grasp of this analysis. How would consumer psychology in Iran be altered by the scheme, and how would this translate into overall demand changes? Would the economy respond to this problem over time by shifting resources to new sectors, and if so, what innovations would this create? How would inflation in Iran affect its foreign policy and in turn the policies of other nations, and how would these changes affect the Iranian economy? And so on, ad infinitum.

How would the economist respond if challenged like this? As far as I can see, she would respond with three kinds of evidence: (i) a priori beliefs about human nature, and conclusions that are believed to be derivable from them, (ii) analysis of historical data, and (iii) a review of the track record of prior predictions made using the predictive rule in question.

The physicist’s answer to challenges to the reliability of his prediction is simple: “Please view the following film footage of various huge explosions that resulted when independent evaluators combined the materials I described in the manner I described.” The reason the physicist need only concentrate on controlled experiments is that these are accepted as the gold-standard method for testing theories. Note that the first president faced with this kind of a briefing actually had an enormously expensive experiment conducted to test a nuclear bomb at Trinity Site, N.M.

The problem with the economist’s (iii) is that, in practice, so many things change in a macroeconomic event that it is not realistic to isolate the causal impact of any one factor. The economist’s findings are really observational data, and to call some of these macro events “natural experiments” is almost always to dress up rhetoric in analytical language.

Economists can use controlled experiments for certain narrow and important purposes, but they are not possible in macroeconomics, unless we order some randomly selected countries to, for example, print more currency, and others not. Therefore, while the economist might refer to prior periods in which some countries experienced inflationary episodes, she can’t test and validate a predictive rule in the way that the physicist can.

In the end, hard sciences produce a body of knowledge that lets us make practical predictions with tolerable reliability: An airplane of this design will fly; this vaccine will prevent smallpox; a mixture of these chemicals will explode when exposed to flame; and so on. On the important questions about which we seek predictive guidance from economics — “If we proceed on roughly our current path of projected deficits, will we do severe damage to the economy? If we spend a trillion dollars on stimulus in the face of the current economic slowdown, will we improve economic performance and raise employment significantly? If we cut the minimum wage, would employment go up?” etc. — it is possible to find highly credentialed economists who answer one way with great certainty, but it is just as easy to find equally credentialed economists who answer the opposite way with equal certainty.



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