In a column yesterday, Tim Harford asks “are universities worth it?“. Surely a topic worth discussing. Yet there is an asymmetry in Harford’s summary of the debate. While Harford explicitly considers not just money but also time and intellectual resources as opportunity costs of running higher education, his taxonomy of the benefits is restricted to the financial.
From the New York Times:
Isn’t this just a marvelous observation:
What sex is to the biology classroom, stocks and investment riskiness is to the sophomore economics lecture hall. That chapter on personal finance, put there to keep hard-boiled MIT electrical engineers awake, helped make introductory economics the largest elective course at hundreds of colleges.
That’s from Paul Samuelson’s article (pdf) discussing the 50th anniversary of the publication of his economics textbook. What a perfect quotation it is: students enroll in economics courses to learn about the stock market, despite it being, really, secondary to the discipline, and by indulging them we made economics courses wildly, unimaginably popular. Even Samuelson saw it!
Then again, Samuelson seemed to see a lot of things more clearly than most. Justin Wolfers at the Freakonomics blog discusses the textbook, and says this:
And while modern textbooks typically begin with a list of the dozen or so key lessons of economics, Samuelson begins with a single claim: “The first lesson in economics is: things are often not what they seem.”
This is the enduring brilliance of Samuelson’s book. He would never have had the audacity to write down a list of “principles” in some misguided attempt to simplify or to circumvent argument or to hook a bored student; he discussed, sensibly, correctly, reasonably, lucidly. Even after he delivers his “first lesson” in the first chapter of the book, Samuelson gives a few examples then says:
…each of the above seeming paradoxes will be resolved. Once explained, each is so obvious that you will wonder how anyone could ever have failed to notice it. This again is typical of economics.
That’s how it feels to study economics. Things might not at first be what they seem, but soon they are revealed to be exactly what they seem, and my goodness how did it ever seem otherwise.
That first chapter is rightly championed by Wolfers. It shows precisely why it’s such a tragedy that Samuelson’s textbook doesn’t still dominate, why it’s a tragedy that we now have textbooks that put the cart before the horse and show questionable “principles” up-front rather than discussing what’s about to happen, then developing them patiently. Can this be beaten:
It is the first task of modern economic science to describe, to analyze, to explain, to correlate these fluctuations of national income. Both boom and slump, price inflation and deflation, are our concern. This is a difficult and complicated task. Because of the complexity of human and social behavior, we cannot hope to attain the precision of a few of the physical sciences. We cannot perform the controlled experiments of the chemist or biologist. Like the astronomer we must be content largely to “observe.” But economic events and statistical data observed are unfortunately not so well behaved and orderly as the paths of the heavenly planets. Fortunately, however, our answers need not be accurate to several decimal places; on the contrary, if only the right general direction of cause and effect can be determined, we shall have made a tremendous step forward.
There you have a perfect, simple explanation of the problem of measurement. Here’s more, this time on positivism and its limits:
At every point of our analysis we shall be seeking to shed light on these policy problems. But to succeed in this, the student of economics must first cultivate an objective and detached ability to see things as they are, regardless of his likes or dislikes… there is only one valid reality in a given economic situation, however hard it may be to recognize and isolate it. There is not one theory of economics for Republicans and one for Democrats; not one for workers and one for employers…
This does not mean that economists always agree in the policy field… Ethical questions each citizen must decide for himself, and an expert is entitled to only one vote along with everyone else.
Reading that collection of reminisces (same pdf as earlier) on the 50th anniversary of the book, I’m humbled again by how groundbreaking Samuelson’s textbook must have been. We must fight, fight and fight over again to make sure that the foundations of his book – the true principles of economics – live on and on.
“Nearly all Italians drink bottled water rather than the piped stuff. The industry is worth an estimated 3.2bn euros (£2.38bn) a year to the Italian economy.”
It would be very refreshing if they’d just say “GDP”, since that’s what they mean. That wouldn’t make it any less understandable either, because “economy” is equally vacuous. Let’s play the show and tell game again: what does the quotation mean?
It can’t mean that “if no bottled water was sold, people would spend 3.2bn euros less” – I’m sure they’d find another way to spend it. It can’t mean “worth 3.2bn euros a year to the Italian resource allocation”, because that’s not a sentence. It can’t mean that “Italian workers/producers would get 3.2bn less in wages/payments a year”, because I’m sure that they could do something else besides produce bottled water.
My best guess is “the Italian bottled water industry makes sales worth 3.2bn every year”. Why, oh why, can’t the reporter simply say that? It’s not remotely the same thing as any of the other suggestions I just made, yet I guess they’re all technically possibilities if we read “economy” as “system of production and consumption” or something like that. If I want to be really obnoxious I could ask whether the reporter has measured every consequence of the hypothetical disappearance of the Italian bottled water industry to come up with his figure.
More to the point, let’s forget about the absurdity of the quotation in itself and ask why the “worth” of any effect on the “economy” measured in money? This screams a confusion of metric and quality, a cardinal sin of positive science; even if I could get an accurate figure for the effect of something on “Gross Domestic Product”, I still think “worth” is too loaded a term.
A big chunk of the gulf between theoretical economics and empirical testing of real-world relationships is the metrics we use. Our abstractions work (or can, or should work) in a world where we measure outcomes agnostically: if you care about this. Theoretical economists can play in imaginary worlds all day, exploring the “relationships” between fundamentally unmeasurable things under their assumptions. On the other hand, some imaginary concept like “utility” is singularly useless if we want to actually talk about the real world. Empirical economists must deal with this problem somehow: if you want to talk about the effect of this measurable thing on that measurable thing you must explicitly ignore the intangible (like, perhaps, satisfaction).
Then what conclusions can we draw? This affects that, but not how “good” it is. This is, again, the reason why economics can never be a technocratic prescription of what “should” be done; we simply have no real-world metric to answer the question, and our theoretical metrics are unobservable. It’s the power and beauty of the science – we don’t have the answers. Is someone pretending to? Just for fun, I Googled “what’s wrong with GDP”. When our metrics are the sole determinant of policy, of course the metric – and, by extension, economics – comes under intense attack.
Now that’s all well and good until we get to economics teaching, practice and discussion which ignores this important conclusion. I don’t deny the challenge of constant vigilance to make sure student, reader, researcher know that we’re dealing with only what we can measure, but nothing short of a commitment to acknowledge the limitations of measurement at every turn will be enough to dispel the notion that the science of economics can tell us what to do.