Responding to the Fed Economist Who Slammed Bloggers

by: Econophile

From The Daily Capitalist

Richmond Fed economist Kartik Athreya recently penned a criticism of economics bloggers that has exploded over the blogosphere. Basically he says that professional, PhD-educated economists can be trusted because of their rigorous methodology. Bloggers (most), he says, aren't to be trusted. I have responded to his critique:

Dear Dr. Athreya:

I am an economics blogger and I very much enjoyed your think piece on economics and blogging (“Economics is Hard. Don’t Let Bloggers Tell You Otherwise”). I was prepared to hate it because I believe you are talking about me. But on cooler reflection I think you make some good points. They just aren’t the ones you intended to make.

The premise of your article is that PhD trained economists have a system of thinking, analysis, and critique that assures readers that their pronouncements aren’t plainly wrong within the framework of contemporary economics, that they have some merit, and are subject to rigorous review by their peers. This methodology yields greater economic truths.

You argue that statements made by many bloggers, right and left, are uninformed and incorrect, and do not go through the same rigorous vetting process as do the statements of professional economists. Thus, blog reader, you say, “Caveat emptor.”

In the spirit of full disclosure, I am not an academically trained PhD economist. Mea culpa. I studied Paul Samuelson’s book in my college econ coursework and I have been trying to unlearn it ever since.

It’s important for anyone to evaluate the statements you made about bloggers to first understand your economic philosophy. Everyone has a certain perspective on the study of economics through which we base our opinions.

While I don’t know exactly what your economics philosophy is, you told me it was “Garden variety economics as taught in most schools, ‘neoclassical’ I suppose.” I think I can make certain assumptions based on your education (University of Iowa) and by the fact that the Fed hired you to toil in its vineyard.

Would it be fair to say that you are an empirically based neoclassical econometrician?

I don’t mean to sound disrespectful when I say that such statements, especially to the consumers of economic opinions, sound arrogant. While your respect of the fallibility of economics reveals a more humility than arrogance, it is your conclusion that this professional methodology is the key to economic truth. And that is subject to discussion.

I will argue that the “scientific” methodology you describe is flawed and, more often than not, especially when used to make policy decisions, has been mostly wrong. Recent economic events have borne out my assertion.

As you know we have fallen into the subject of epistemology, or the science of how we know what we know.

Before I get to that topic, I would say that I agree with your conclusion that many bloggers are plainly wrong, and their analysis of economic phenomenon is mostly irrelevant, not to mention less rigorous. But I think their faults lie mainly with bad theory rather than sloppy, unvetted analysis.

I also will argue that many professional economists are plainly wrong because of bad theory despite the rigorous scientific process you propose as being the proper methodology. I will go further and argue that econometrics is a faulty path to economic truth.

Getting back to epistemology, I am impressed with your high confidence in your belief structure. So I ask this question: how do you know your approach to economic truth is correct? If you will answer that it is based on empirical research, then I would ask you two questions:

Question 1: How do you know which data to measure?

As you point out in your article, the economy is a huge stage with millions of actors making multiples of millions of economic decisions every day. And you are correct to point out that “one has to think hard about many, many things.”

So, how do you even know if you are selecting the right data? How do you know if your data set is big enough? How do you know if your statistical conclusions are based on the right data set? How do you know if you are ignoring factors that aren’t easily measurable? And, more importantly, how do you know if your conclusions are not merely empirically tautological?

I would suggest that, other than painting with a very broad brush, econometric empirical research is a false science. And I would point you to the recent statement of a famous economist [emphasis mine]:

[I’d] like to offer a few thoughts today about the inherent unpredictability of our individual lives and how one might go about dealing with that reality. As an economist and policymaker, I have plenty of experience in trying to foretell the future, because policy decisions inevitably involve projections of how alternative policy choices will influence the future course of the economy.

The Federal Reserve, therefore, devotes substantial resources to economic forecasting. Likewise, individual investors and businesses have strong financial incentives to try to anticipate how the economy will evolve. With so much at stake, you will not be surprised to know that, over the years, many very smart people have applied the most sophisticated statistical and modeling tools available to try to better divine the economic future. But the results, unfortunately, have more often than not been underwhelming.

Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make. To be sure, historical relationships and regularities can help economists, as well as weather forecasters, gain some insight into the future, but these must be used with considerable caution and healthy skepticism.

You might not recognize these words coming from Ben Bernanke. It is almost if he was channeling the great Austrian economist, Friedrich von Hayek. I don’t know if you have read Hayek, but he was known for his work in epistemology in economics.

This excerpt is from Hayek’s Nobel award lecture:

This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

The title of his lecture is “The Pretense of Knowledge.” He referred to this false scientific approach to social sciences as “scientism,” a pretention of science that was rather more of a superstition. I urge you to inquire further and read his entire speech.

I would propose that the methodology you and your fellow Fed economists use is “scientistic” and false.

Question 2: What was the basis of your original query?

In other words, where do you come up with your ideas for a research project? Do they just pop into your head or do you have a theory about how the economic world works and proceed from there? I suspect it is the latter.

If it is based on a theory, then how do you know if it is a correct theory? You can’t say that it’s based on empirical research because that results in a circular argument. Which comes first? It is obviously the idea or theory.

If you start out with a bad theory and “prove” it with data which you don’t know is accurate or not, then what good is the theory or the result?

The only way to prove a theory is by logic, specifically (synthetic) a priori inquiry. This is the great discovery of the Austrian theory scholars, especially Ludwig von Mises. Mises developed an entire methodology of human behavior based on this form of reasoning.

It’s not that Austrians don’t believe in mathematics or empirical research, it’s just that empirical research is a very limited tool for proving or disproving economic truth. And a priori reasoning is the better method of understanding human behavior.

In my opinion the best thinking comes from the Austrians. But it’s tough to grasp and study. As you say, such thinking is hard, very hard. In fact I challenge you to read Ludwig von Mises’s magnum opus, Human Action, and then come back and tell us if you feel the same way about your faith in professional methodology. I think that’s only fair. Since I have studied your methodology you ought to take a stab at mine. Otherwise I could say that your viewpoint is more naïve than arrogant. If you need a copy, I would be delighted to provide you with one, gratis.

To use your argument, I would say that the general public is being had by the bulk of professional economist because they offer nothing very useful or accurate by which to make economic decisions, and their policy suggestions have been proven drastically wrong by recent events. If you wish examples, I can direct you to articles from my blog, The Daily Capitalist.

Your article validates my assertion that you and most econometricians are woefully ignorant of epistemology, theory, and economic methodology. Anyone with a complete education in economics would understand the limitations of the methodology used by mainstream economists. Such an educated person certainly wouldn’t flatly pronounce that they have a corner on economic truth without understanding the full implications of that statement. And with all due respect, I don’t think you do, which makes your belief in your methodology more of a religion than a science. Thus you do not have the proper foundation to criticize other economists or bloggers, professional or not.

I found your piece to be a bit of sour grapes. You are criticizing bloggers rather than yourself engaging in that arena. If, as you believe, sloppy and incorrect data abounds in the blogosphere, then your response should be to correct it by presenting articles that meet your standards rather than just complain about it. You would have to compete for an audience based on subjects that are relevant to most economics blog readers such as economic policy and trends, finance, and investing. I know you’re busy but so are most bloggers.

It’s not an easy forum in which to get noticed. It’s also a no-holds-barred arena where your critics aren’t polite professional economists. On the other hand it gets you read if you succeed. My posts get up to 12,000 reads each which, I would guess is more readers than you presently attract.

Dr. Athreya, I think you fail to appreciate what blogging is. I can’t speak for most bloggers, but for myself and the bloggers that I follow, I believe they are well founded in theory, are thoughtful, and often have insights missed by the pros.

With the world moving so fast, how else would you suggest consumers of economic news make sense of what is happening? Since “professional” research takes months and months to produce, it isn’t feasible to comment on quick moving events and meet those standards, as flawed as they may be.

I think we bloggers are providing a valuable service to consumers of economic news. And, if we are wrong too often, then we disappear from the scene.

Do you care to join us?


Dr. Jeffrey Harding

Disclosure: No positions