As a physicist, the models that I encountered in economic theory always left me quite disappointed. The main reason for this was that -like the article says- most of the models used in Economics are based on abstract reasoning about "ideal" markets and actors (or more recently on game-theoretic ideas) instead of experimental data. One reason for this is of course that when many of those models were developed (in the 50s or earlier) there simply was no reliable (micro-)data available that one could develop a theory against. Another big problem that kept Economics from taking a more experimental stance towards model generation is of course that until recently it was very hard or outright impossible to conduct large-scale experiments, which are the main instrument to validate (or better, not falsify) a given theory in other disciplines such as Physics or Biology.
That said, the recent computerization of all aspects of business and the creation of virtual economies -like Eve Online, World of Warcraft- and "transparent" markets -like Bitcoin- should provide ample data to develop "real" models of economic behavior against, and I think that many researchers actually already make use of this data.
The theories that will result from this will probably be more like those developed in statistical mechanics though -i.e. making statements about the aggregate behavior of the system- rather than those developed e.g. in electrodynamics, where we usually can predict the behavior of even a single particle. Would love -and be at bit scared- to be proved wrong about this of course :)
Essentially it's like pre-Enlightenment Natural Philiosophy, in that it's a discipline that claims to explain the way the world works, but actually explains who has the most sway in getting their ideas accepted.
> ...should provide ample data to develop "real" models of economic behavior against, and I think that many researchers actually already make use of this data.
I suspect reality will get about as much traction against idealogues of e.g. the Chicago School as actual climate science does agains useful idiots like Bjørn Lomborg. It's about providing views that happen to be useful to moneyed interests, not reality.
This is an odd criticism. I could see it applied to Chicago's cousin, the Austrian school, which clearly relies more on ideas (viz. the work of Hayek and Mises, both of whom considered themselves political philosophers as much as economists).
But Chicago is just the opposite. It's been criticized for being too tied up in the mathematics of it all. Chicagoans love numbers.
Larry Summers said of RBC models
1. RBC models use parameter values that are almost certainly wrong,
2. RBC models make predictions about prices that are completely, utterly wrong, and
3. The "technology shocks" that RBC models assume drive the business cycle have never been found.
(They assume that during recessions we just forget how to be efficient.)
That's a fair criticism, as far as it goes: it's been said (of Austrians, anyway) that they've predicted 8 of the last 3 recessions.
The thing is, qualitatively, we can say that "old school Keynesian-style aggregate models" are just as bad. The difference is that, rather than modeling based on coldly-rational actors, they're modeling based on (and I quote) "animal spirits". And those models told us that the end of WWII and curtailing war spending was going to usher in a new depression worse than the Great Depression; and that the Sequester and "fiscal cliff" were going to plunge us back into the depths of 2008.
The fact is that both approaches like to pretend that they understand what's happening, but neither really do. Anybody claiming they have an accurate model of macroeconomics is trying to sell you something.
HOWEVER, this is all talk about Macro.
If you take a look at the Micro world, you'll see that Chicago really are the winners. Microeconomics is a solved problem, at least to a first approximation. And the progenitor of that was pretty much Gary Becker - from University of Chicago.
So it's not fair to criticize Chicago when (a) in the micro world, they really have been triumphant; and (b) in the macro world, they're just a different kind of wrong than Keynesianism.
Thank you. Simple and true.
It would be more accurate to say that the framework within which microeconomic phenomena is pretty well understood. While there's still plenty of room for research to fill out all the details, there's very broad consensus about how the answers tend to look. Concepts like price elasticity are well understood and non-controversial.
That stands in sharp contrast to macroeconomics, where even when talking about the same stuff, say, ZIRP, there's fundamental disagreement about what factors we should be researching. (and when I say "we", I mean people that aren't me, 'cause I'm not an economist)
Empiricism often uses numbers and math, to be sure, but love of numbers and math is not love of empiricism: you can use math to tease out implications of your abstract, first-principles, non-empirical model as well as you can use apply it to real world observation in an attempt to confirm or refute an empirical model.
A criticism I've seen of the Chicago school has certainly been that it is more concerned with the mathematical implications of idealized assumptions and less concerned with how well those implications reflect real-world results.
It's possible to love numbers and still not be interested in empirical data. One thing you may notice about much raw economic data is that it was selected because (a) it was easy to collect, or (b) it gives "reasonable results" according to the accepted theory.
See also How To Lie With Statistics.
As a layperson with a bit of an interest in economics I don't really see how, as the article says "econ is now a rogue branch of applied math". More like economics uses applied maths, or something like that. It's a 'social science', we can't reveal the laws (let's call them 'habits') of economics like we do The Laws of Nature, because circumstances change -both globally and locally (macro / micro)- and new economic phenomenon emerge.
It'd be interesting to see what future historians have to say about present day economics.
Funny - you could say the same about physics. For example, knowing that the coming car may kill a person causes the human behaviour to change, namely the driver will stop the car. Does that invalidate Newton's laws?
Yes we probably cannot predict universe totally. But we can do scenarios (of complex emergent systems of interacting agents with bounded rationality), just like in physics. In fact the whole point of doing that analysis is to change behaviour of people, one way or another.
The difference is that whether a person will try to move out of the way of an oncoming car is not considered within the domain of physics (so them using their knowledge of physics to predict that a car is a danger may change their behavior, but not the accuracy of what physics predicts within its domain), but whether or not a person will try to move their money out of the path of a predicted stock market collapse is within the domain of economics.
This doesn't actually make empiricism any less applicable to economics, but it does compound problems in the empirical study of economics.
1. Car continues and hits the person / investor won't move money out before stock market crashes
2. Car is stopped / investor will move the money out
In both cases, the physics or economics is no less applicable whatever the circumstances of the actual decision. And just like physics cannot tell you whether the car stops, economics cannot tell you whether investors will actually move the money out. But what economics can tell you, under certain assumptions, say, investors want to make money with this and this horizon, whether or not are they likely to move out.
Let me give another example. Water flows downhill due to gravity. Yet, people can decide to build water pump and aqueduct to get water uphill. In doing so, they didn't break any physical laws. But if you ignore the pump, it may seem that the water flow downhill anymore and so the laws are incorrect. What happened is that now our model of the situation should include the pump, and within the expanded model, physical laws are again preserved.
Similarly for instance, if the society decides to regulate markets, the behaviour of the people can be changed, but they don't necessarily have to break some universal economic law. The new behaviour can have a perfect economic explanation, it's just that the frame of the model changed.
It seems that this "infinite regress" confusion (also called Lucas critique, if I am not mistaken) is caused by ignoring the fact that every model of reality only includes a portion of it and is never a perfect description (for example we ignore the physics of human brain when we model the car hitting the pedestrian).
Also, you should note there are situations where knowing more doesn't actually change the behaviour (under assumption of certain rationality) - for example, getting to know the exact odds of casino wins won't entice me to play.
So what I'm saying is that a theory that cannot be falsified experimentally is not very useful.
The real danger here is that these theories -most of which are supported by no or very slim experimental evidence- are used by governments to formulate economic policies, which in turn affect the life of millions or billions of people. For me, this is a bit like developing an "idealized" theory of nuclear physics and then trying to build a nuclear power-plant based on it. I, personally, would not want to live near one of these ;)
Suppose governments did not formulate economic policies with these imperfect models. What would they do instead?
Edit: this isn't a comment about economics but how economics is used in a political context.
This is what the real science is. Observation and only observation. Reasoning is secondary and unimportant.
"Observation and only observation" is how you build an inchoate collection of useless factoids, it's not how you do science.
Observations are a very important part of the scientific method and you have to be either rooted or anchored in it, but it's only one part of science, and it's by no means the most important product of it. Observations are seeds (from which patterns are recognised and hypotheses formed) and filters (data gathered to test the predictive power of hypotheses).
We call it phenomenology. The very base of any proper science. The rest is just a mechanical work of eliminating the noise from this data.
Science should never produce any knowledge which is not found in the original data (either passive observations or controlled experiments - does not really matter). The scientific method is all about techniques of extracting the most compact representation (i.e., the information) hidden inside this massive data sets. It turns out that the axiomatic theories are very common and compact representations for many areas of science, but not necessarily the universal representation.
What you disregard as 'just a mechanical work' is nothing of the sort. It has required all the ingenuity of the greatest genius in history to get modern science out of the data, and any future advances will require even greater insights.
If anything, the data gathering is the 'mechanical work' part of science.
But yet, this process does not produce any new knowledge on its own. All the knowledge is there, in the data. Waiting to be extracted.
Then, some decades later someone finds the practical application, and the data that matches the model.
Mere observations give no interesting and no useful results. Basically, you'll end up with an ever-growing list of facts.
Science, essentially, is nothing but a process of extracting information (as in the algorithmic information theory, not in Shannon sense) from the data. Reasoning is just a tool, one of the ways of representing this information.
Traditionally, economists have put the facts in a subordinate role and theory in the driver’s seat. Plausible-sounding theories are believed to be true unless proven false, while empirical facts are often dismissed
The error is the assumption that facts are, well, facts. In real life, it's not nearly so black-and-white. Remember back in high school physics, when we did experiments with Newtonian physics, but our answers never quite worked with the theory - not just because of Einstein, but mostly because of (a) measurement error and (b) we were (knowingly or not) assuming point-masses on frictionless planes, etc.
As long as we were willing to write off our errors against those two sources, we could never discover that Newton's theories were incomplete, and we needed relativity to explain differences. We only got to that conclusion via models.
The way that you choose to measure fundamentally drives what your measurements are. And you can only decide what and how to measure if you start off with some model of the world.
So, the corrected wording for that paragraph should be the following:
Plausible-sounding theories are believed to be true as long as their numeric predictions conform to all of the experimental facts within this theory supposed range, up to this theory supposed precision.
And a theory falsified by a new set of facts does not become immediately "false". It just get its range cut down to that range of facts where it is still giving an acceptable prediction precision.
Back to physics analogy, the phlogiston theory is still correct and true, as long as it is applied within the range of the phenomenological thermodynamics. But this does not happen in the classic economics - all those crazy theories are coming from the depths of an insane mind, not from any particular set of facts. They never had any specific range where they were known to be applicable. Therefore, phlogiston is science, and economic theory is not.
I mean, it is possible to measure the effect. But you need to first design the experiment in order to make the measurement. It was necessary for Einstein to sit and think for a long time, to come up with the idea, which others were able to design experiments around.
You can't just say that somebody would have noticed the discrepancy sooner or later. Really, doing experimentation that way is a statistical error, of the sort that's really plaguing the sciences these days.
General relativity is an application of a well known extrapolation heuristics - the simplest possible generalisation of a model. The other possible generalisations were much more complex, and the nature for some reason tend to favour simplicity, so it was reasonable to go that way (as well as it is very reasonable now to go out and test all the possible extensions of the Standard Model, starting with the simplest ones).
Observation is useful to develop a theory (induction, or "educated guessing"). However, having a theory guides us towards newer, often subtler observations as we attempt to falsify it. Karl Popper called this the theory-ladeness of observation 
Of course. But it's merely some heuristics helping to cut down the search space, not an inherent, fundamental property of the universe.
In order to test a model, it is useful to collect new data.
The mistake is in thinking it should or could be a hard science like physics.
For example, the financial markets are the most measured markets out there, with the most microscopic details recorded. One interesting thing that happens after financial
crashes are crises of theory. For example prior to 1987 American options didn't show [volatility smiles](https://en.wikipedia.org/wiki/Volatility_smile). After the crash the smiles appeared, making the markets a very different place. The same happened after Subprime and the LIBOR scandal, when the notion of a "risk-free rate" suddenly disappeared: governments now had to compensate for their default risk and market quotes were unreliable. Academics still struggle with the whole notion, although it seems that the current practice is settling around OIS discounting and CVA/DVA.
The point is, rules change. Hence in economics you can't just empirically deduce a rule and let it be, you constantly have to recalibrate it.
The fact that some people use astrology to play the markets, and seem to get results that are as good as those of economic theory, says a lot about both.
Economics is entirely a faith-based pseudo-science, which plays the same role in modern culture as the nonsensical theistic "explanations" of the world put out by the Church played in medieval times.
It's a form of political/rhetorical persuasion and social control, with an implied morality that's never seriously questioned. Even if you accept that it's politically descriptive and not politically predictive, it still fails.
It's not a science in any useful way - it simply pretends to be one, because that makes it appear more authoritative.
The real scandal for me is the fact that skeptics and debunkers like the amazing Randi have spent so much time and energy on trivial topics like the paranormal, while leaving the epic intellectual fraud and imposture behind mainstream economic theory unchallenged.
First of all, not a lot of people actually use academic economic theories to "play the markets". Ask a trader how often does (s)he use the General Theory or monetarism in their daily decision making. There are macro-strategies, used mostly by fund managers, but it's not such a big portion of the market.
Secondly, anyone found to use astrology in their market activities would be fired in nanoseconds. Whichever institution. You can do it privately though.
The fact that one can get good results speculating while using astrology as a decision generator (or in fact any other random mechanism, like a monkey throwing darts) is actually known and used in the financial theory. It is called "the random walk hypothesis" and is the foundation of a lot of assumptions. A good introduction to it would be "A Random Walk Down Wall Street" by Burton Malkiel.
So I urge you to actually build an informed opinion before succumbing to an Alex Jones brand of reasoning.
So are the markets.
>First of all, not a lot of people actually use academic economic theories
Maybe not, it you don't consider Black-Scholes and it's endless brood of offspring to be serious academic theories.
Not many people use nation-state Keynesian or other big macro policy theories to play the markets - which is a different point.
But it's a relevant different point, because it highlights the political reality of using macro as a hand-wavey excuse for policy which benefits market operators and the owners of the money behind them at the expense of the rest of the population.
>It is called "the random walk hypothesis" and is the foundation of a lot of assumptions.
Quite. Does it not worry you that this is true, or that even with this insight manic-depressive boom-bust behaviour is apparently still considered a feature, not a bug?
>So I urge you to actually build an informed opinion
I suspect my opinion is at least adequately informed. Perhaps you're mistaking being heterodox for being wrong?
So meteorology isn't a real science either, I assume? Having a perfect model doesn't mean you can predict the behaviour of a system; conversely, not being able to predict the behaviour doesn't mean the model is flawed, or non-scientific.
That said, I do agree that economics is taken way too seriously for its incipient state.
I think this is the most spot on statement on economics I've read.
FYI - I met Randi personally about eleven years ago. He was a wildly charismatic person to talk to. It doesn't show as much when he's on stage or on an interview speaking to an audience.
That depends which theory; under most that can be taken as even semi-plausibly as models of the real world, no, unless you assert some simplifying assumptions (which then make them no longer semi-plausible models of the real world).
The simplifying assumptions are common in intro-level Econ classes, for the same reason that, e.g., assuming the absence of friction is common in many parts of intro-level Physics classes.
The thing is that we don't have as many people in the public media trying to sell policy using explanations of physics that leverage the fact that most people that know anything about the subject do so through hazily-remembered intro-level classes as we do for economics...
Finance != Economics
Economists hardly ever try to use the results of economics to predict the stock market...in fact economics is the field that has theories that no strategy exists that can beat the market reliably.
And there is a proper, scientific approach in the economics: behavioural economics. Instead of hand waving about some "ideal", non-existant agents acting fully rationally upon a 100% correct and impossible information available, as the classic bullshit economics does, the proper, behavioural economics starts with studying the real individuals behaviour (which is very much doable, no matter what the others are saying), and only then drawing conclusions about the herd behaviour in a statistical scale.
In addition to what JupiterMoon says, I'd say that individual behaviour was never a real problem in economics. A lot of the theories are built on stupid assumptions about rational behaviour, but that's just it: you always can change the assumptions and see what happens. Behavioural economics is just that.
The real problem of economics is scale and inability to cleanly experiment on that scale. To imply any kind of large scale "herd" behaviour from individual behaviour would still require a tonne of a priori, non-falsifiable assumptions. Even if the assumptions can be shown to be valid now, it would be impossible to prove that they are stable and valid for a long period of time.
Pure theory has its place in science, as long as one is honest about its limitations.
General relativity is a different thing, it was a pure hypothesis, an extrapolation of the simplest possible generalisation of the special relativity . And it held this hypothesis status up until it was sufficiently confirmed by the incoming experimental data. Before that, a multitude of alternative hypotheses existed which had the same numerical predictions covering the available experimental data (e.g., https://en.wikipedia.org/wiki/Anatoly_Logunov#Relativistic_t...).
So, yes, it's important to distinguish theory from a hypothesis.
 this "simplest possible generalisation" method works most of the time, but not always, so it's mostly valid to do so in the hard sciences, and should never be used as a justification for hand waving in the social sciences.
That's not an inherent limitation for applying science. Signal theory has models that represent circuits with feedback loops, where the output ; similar models could be developed to study people who know are being studied.
Also, if you use data collections that were compiled for other purposes, you can study the behavior of people who don't know are participating un such study. Big data is essentially that.
> As you say this all derives from the biggest problem with all the social sciences people are not rational actors and any mathematical model has to encapsulate real human behaviour.
There are theories that don't assume perfect rational agents, and can still predict behavior by studying the common human bias. See the work of behavioral economist Dan Ariely for an academic approach.
That's fair, so far as academic research goes, as there are plenty of academics doing respectable work in in non-scientific fields such as music and poetry.
But it's another matter to decide if and how to ethically apply the results of soft-science research (likewise music and poetry) in ways that affect society.
Competition (or lack of it) is absolutely the number one area where the simplistic models break down, with psychological phenomena being a close second. Even where there is demonstrated and measured irrationality in individual decisions though, in aggregate the distortion effects tend to be minimized.
Outside of these known areas of completixity and modeling deficiency, there have been several major breakthroughs in modeling and understanding other seemingly puzzling factors. Matching problems, search frictions, moral repugnance, game theory, asymmetric information, and discrete choices. There have been huge advances since the 1950's, it just takes some time to catch up with it all.
In the meantime, we still have to do our best. People still want ways to predict the future which suffer less from human interference (which is ideally what a mathematical model will let you do). That's still better than just asking people what they think (in some ways).
A lot of simplifying assumptions have to be made to say anything useful about a system which includes billions of intelligent actors trading trillions of dollars. There's obviously room for improvement, and I think that'll happen once people are given the proper tools to make it happen.
Aside from the technical possibility of doing economic experiments, there is also the ethics of doing them. You are not only involving humans, but doing so on a grand scale. To prove a point, you would not only need to possibly send an economy into a recession, but you would have to do so dozens of times to get significant results. The people you are experimenting upon might get a little murdery.
I think another reason is that in business you need models you can reason about.
One example is from a bank that advises customers on investment. They have to algorithms doing machine learning on the market, a decision tree and a deep neural net. Over time they can see that the neural net outperforms the decision tree, yet they cannot use the results to advise customers because it is a black box.
Why should you buy this investment? "Because the computer said so" isn`t an answer that makes it sound like you know what you are talking about.
And sometimes that's how economics feels. Absolutely agree with your comment. Coincidentally, I was thinking about this yesterday as I watched one of many economists explain the market on TV. At some level I feel they grab onto one of N plausible ideas and go with it. They have to say something, right? After all, they are economists.
I haven't failed to notice that there are very few (not one?) massively wealthy economists. That has to say something. If you look at the people who have made fortunes they are all practitioners, not theorists. In other words, they "touch and feel" the economy every second of the day for years and understand how it moves, at least at the relevant micro level, to gain advantages.
This one thing has always bothered me about economics. Lots of economists publishing books and claiming all sorts of events and effects and none of them have significant financial success to show for their understanding of the economy. Fake Jedi's who talk about the force but can't use it.
I'd like to see an economist on TV who starts their opinion of the economy in a Trump-esque way with: "I am very rich. I understand the economy and because of that I make $400 million per year".
In terms of using models and simulations, well, we do a lot of FEA, mostly for thermal and fluid dynamics. I had a poster printed and hung in the lab. It reads: "The only person who believes the results of these simulations is the one who wrote the code". I stole that from my friends in aero who always talk about how careful you have to be with aero "codes", particularly at the extremes (low and high RN).
Of course, FEA has gotten better and better over the years, yet it is true that you have to be very careful with how you interpret results. That's why we verify expected results experimentally by building a prototype every N variants of a design based on various criteria. I remember thermal management design to cool over 1,000 Watts of high power LED's concentrated within a small surface area. It took eight months of FEA and dozens of prototypes to get it right. Some of the proto's didn't behave anything like the simulation. Some behaved better. It's an art.
And so my point is that we are likely to have a new crop of economists who will base their opinions on simulations without, perhaps, understanding just how imperfect they can be.
An example of an economist who is successful would be Jan Hatzius, Goldman Sach's head economist.
I always go back to when I read "The Big Short" and realized that ALL of these economists missed a herd of elephants in the room. If I remember correctly, the two or three people who called it (and were yelling and screaming about the impending doom) and ultimately shorted the market and made truck-loads of money were not economists but rather intense observers and practitioners. I think one of them had Aspergers (It's been a few years since I read the book).
As for pundits, there's a reason they're pundits... Is Sergey Brin or John Carmack going to host a tech segment on TV? That's silly, as silly as thinking TV economists would be as successful as people like Jan Hatzius (BTW, he did correctly anticipate the crisis of 2008, and GS bet against the market and made a killing during that time).
I recall my family's PhD. economist relating an anecdote about an colleague explaining that he's making the usual set of assumptions like, say, "people live forever", before doing some math for students. :)
Assume a spherical cow: https://en.wikipedia.org/wiki/Spherical_cow
I'm a fan of using physics models for predicting behavior of large groups of people, but economics .... they do occasionally come up with nice statistical tools. Sort of like psychological researchers; those fellows whose papers can only be reproduced around 1/3 of the time.
Mariana Mazzucato, University of Sussex – How has the crisis in Greece (its cause and its effects) revealed failings of neoclassical economic theory at both the micro and the macro level?
Varoufakis: The uninitiated may be startled to hear that the macroeconomic models taught at the best universities feature no accumulated debt, no involuntary unemployment and, indeed, no money (with relative prices reflecting a form of barter). Save perhaps for a few random shocks that demand and supply are assumed to quickly iron out, the snazziest models taught to the brightest of students assume that savings automatically turn into productive investment, leaving no room for crises.
It makes it hard when these graduates come face-to-face with reality. They are at a loss, for example, when they see German savings that permanently outweigh German investment while Greek investment outweighs savings during the “good times” (before 2008) but collapses to zero during the crisis.
Moving to the micro level, the observation that, in the case of Greece, real wages fell by 40% but employment dropped precipitously, while exports remained flat, illustrates in Technicolor how useless a microeconomics approach bereft of macro foundations truly is.
I really don't know at what level of complexity someone must settle, in order to have a viable mathematical model to predict financial crisis... How many variables do you need? Then again a lot in economics depends on 'perception'. A FinMin will never discuss devaluation of his currency, the moment he does... The currency will drop. How can a mathematical model 'predict' such behaviours?
I have quite admired the way Yanis has handled his brief position in Greece. He's clearly an intelligent big picture thinker that was out to serve his peoples interests. This quote seems out of context to my expectations of his usually we'll considered statements. I wonder if there is some loss or context or other soundbite missing here.
Besides, Keen (and other postkeynesians) truly shows how the mathematical economics should be done, that is, by having a fully dynamic macro models with time and debt/money. I am afraid machine learning the article talks about is a similar distraction as econometrics. Unless mainstream economists will be willing to rework the theoretical foundations (give up on equilibrium, at least), and base it more on empiricism, mathematical approach, no matter how fancy, will always be a quandary.
But as other have said, the problem is that many economists are pretty much the prophets of the free market (or status quo in general). If you want to somehow claim a moral basis of society, then you can't have a model which allows multiple different solutions, and so you need to stick to equilibrium instead of allowing a dynamical solutions.
i can't find any coherent argument in your final paragraph. can you rephrase it in a way that has some meaning?
Depends what you mean. I would love to see a macroeconomic model, which is not just an assumption of equilibrium subjected to external shocks. I have only seen such models from postkeynesians. (Austrians do not count - they pretty much throw hands to the air and say "it does whatever it does, we cannot know anything, therefore it's OK".)
> can you rephrase it in a way that has some meaning
Well, assuming you want to show that some self-organizing system should be a moral guide, for instance, claiming that free markets lead to "efficient" (whatever that means) outcomes, then necessarily this self-organizing system has to have a stable unique outcome (which pretty much rules out chaotic behaviour that dynamical systems love to exhibit). If it had two different outcomes, then it couldn't be a unique source of morality (someone would have to come and decide which outcome is better).
For example, that's why economists, who believe in free market, cling so much to idea that there cannot be endogenous unemployment (and instead explain it as some sort of reaction to external "shock" which will eventually pass). If existing unemployment was endogenous, it would mean that at some point in the past there was a choice (bifurcation), which would set us to path of either unemployment or full employment, and the self-organizing system of free market "made" the morally wrong choice, or at least it was indifferent (meaning it is not a good moral guide).
To the best of my knowledge, it includes a small (I think fixed) amount of structural unemployment but anything else is assumed to be transient. We might have some unemployment now, but it's always assumed to right itself after a few years.
Note the contradiction: "no involuntary unemployment and, indeed, no money" followed by "real wages fell by 40% but employment dropped".
The latter statement only contradicts Keynesian economics, which don't have relative prices (Keynesian economics has only real and nominal dollars of GDP) and uses money combined with sticky prices to explain involuntary unemployment.
But although in one sentence he seems to think the Greek experience contradicts Keynesian economics, he turns around and appeals to Keynesian economics a few minutes later: "the 3.5% primary target for 2018 would depress growth today".
Second, "real wages fell by 40% but employment dropped," this is precisely what a Keynesian expects. The core insight of Keynesian economics is, that the employees are also the consumers, so that falling prices lead to falling demand.
The view, that too high wages cause unemployment, is a staple of supply side economics, the view that the economic process is driven by the supply side.
Krugman argues a lot about sticky wages recently, but not because this is a central tenet of Keneysian economics. Krugmann argues about sticky wages because it is a good argument against the troika's handling of the Greek crisis, since the internal adjustment in the Euro area would either mean inflation in Germany or deflation in Greece.
Supply side economics is not based on wage levels at all, but rather based on tax-based disincentives to employment and investment.
That contradiction quickly dissolves once you see that he first he talks about macroeconomics as taught in the university ("no involuntary unemployment and, indeed, no money") and then about microeconomics ("real wages fell by 40% but employment dropped").
Uh, no, it contradicts neoclassical economics. Keynesian economics views unemployment as a deficit of aggregate demand and most CERTAINLY does not pretend that it doesn't exist.
>But although in one sentence he seems to think the Greek experience contradicts Keynesian economics
A quick skim suggests he doesn't contradict Keynesian economists.
Probably he contradicts new keynesian economics somewhere, but then again, New Keynesian is an abortion that would have Keynes turning in his grave.
AGAIN, that's what neoclassical economists believe, NOT Keynesians.
>According to Varoufakis, "real wages fell by 40% but employment dropped" which is the exact opposite of Keynesian economics.
No, that's what Keynesian economics predicts which is the exact opposite of what Neoclassical economics predicts.
>Another phrase for "Keynesian economics" is "macroeconomic models taught at the best universities", which is what Varoufakis is criticizing.
Neoclassical seems more favored these days despite its atrocious predictive capabilities. This is what Varoufakis was criticizing.
If you think I'm wrong, please show how to use a Keynesian theory to predict "real wages fell by 40% but employment dropped". Good luck.
Pretty much any undergrad who's read their introduction to national accounts and Keynesian concept of aggregate demand and multipliers can devise a set of simultaneous equations which will yield both a real wage fall and an unemployment rise in a basic stylised macro model if you also slash G and raise T (especially if the assumption is - as with Greece - that the expected debt servicing will largely be repatriated to overseas bondholders)
I'm really not the one who is confused here :)
>If you think I'm wrong, please show how to use a Keynesian theory to predict "real wages fell by 40% but employment dropped". Good luck.
Simple. Reduce aggregate demand enough (e.g. by slashing government spending like Greece has done) and employment and real wages will both drop.
It's neoclassical economics with its idiotic presumption of 'full employment by default' that can't account for real wages and employment dropping at the same time. According to that theory, wages will just keep dropping until everybody is employed.
Step 2: ???
Step 3: employment and real wages will both drop.
How do you fill in step 2? Remember, I asked if you could show how Keynesian theory predicts this, not assert that it does.
1. Aggregate demand drops. This shifts the curve to the left. These leads to a drop in the price and quantity of goods exchanged in the economy.
2. If firms are producing less goods they need less workers to produce these goods.
3. If they need less workers, the demand for workers shifts to the left.
4. This means the price and quantity of workers drops(wage cuts and increased unemployment)
Price and wage stickiness is one tool that New Keynesian economists use to try to explain business cycles using microfoundations.
Keynesians don't need it they use other routes to explain why aggregate demand exists(Pigou's wealth effect, Keynes interest rate effect, and the Mundell-Fleming exchange-rate effect). The downside to the Keynesian approach is the Lucas critique. That relationships based on historical data are vulnerable to change when monetary policy changes. This started the New Keynesian/NeoClassical/Keynesian dvision.
 - https://en.wikipedia.org/wiki/Lucas_critique
But you don't get involuntary unemployment - people employed at a price $P as well as people unemployed but willing to accept work at the same price. All your story gives us is that there is a new market clearing price for labor at a lower price level, e.g. $P2 < $P. Fewer people are willing to accept labor at $P2, so they voluntarily go without work.
This is pretty much just basic supply&demand. You don't even need to go as far as Keynesian theory to get this out. If this is Varoufakis' story, it's hardly clear why he is criticizing classical econ 101 at all.
The difference between schools is that even though Keynesians believe in an aggregate demand curve( a relationship between price level and output) the neoclassicals(i.e. Chicago school) do not.
Varoufakis is criticizing the neoclassicals because they don't believe in an aggregate demand curve. Instead all of their modelling is done on the supply side. And its very hard to tell a supply side story where both employment and wages fall.
Involuntary unemployment is an easy jump from falling wages and employment.
Also, Varoufakis is criticizing "macroeconomic models taught at the best universities". Keynesian economics has been taught at universities for nearly 100 years.
It seems to me there are two possibilities.
1. When Varoufakis talks about macroeconomic models taught at the best universities feature no accumulated debt, no involuntary unemployment and, indeed, no money (with relative prices reflecting a form of barter) he is talking about Keynesian.
Keynesian theory includes involuntary unemployment, accumulated debt, and money. So Varoufakis would have to have been mistaken. And he is shown to be especially confused when he later remarks
This means he believes Keynesians are especially focused on microfoundations and ignore macro foundations. When this is actually true of the Neoclassical school. Then there is the issue you brought up. Varoufakis critiques Keynesians at the beginning and then appeals to it at the end. This implies he does not understand the basics of Keynesian theory. This is very surprising because he thinks of Keynes as one of the economists that personally influenced him the most.
2. Varoufakis is actually talking about Neoclassical economics.
This makes a lot of sense. Many Neoclassical economic models lack money, don't have involuntary unemployment, and lack accumulated debt. In addition it is very hard to tell a story about large wage drops, and growth in unemployment from microfoundations(basically supply-side). This means he is being consistent when he later appeals to Keynesian economics.
Varoufakis is obviously a very intelligent man who has spent 28 years studying economics. I would be incredibly surprised if he was confused about the basics of the two most influential schools of thought in macroeconomics.
That still doesn't make the models he was actually describing any more Keynesian.
It it taught, although it has fallen out of favor somewhat. The preferred school for teaching these days is neoclassical, which is the school he was criticizing.
Keynesian != Neoclassical
Just in case you didn't get it the other 11 times, he wasn't talking about Keynesian economics.
* Austerity slashes public sector worker pay and pushes public sector workers into unemployment.
* Since public sector and private sector workers compete in the same job market, reducing the wages of one reduces the wages of the other through increased competition.
* Since the public sector is the largest single customer of the private sector, reducing its spending reduces the income of the private sector. This leads to lay offs and retrenchments in pay as well.
* Increasing unemployment also puts downward pressure on wages. The more desperate people are to have a job, the lower the wages they will accept.
* More downward pressure is put on wages by slashing social security, too (usually austerian target #1). The more unpleasant you make unemployment, the more desperate people will be to take a job. The more desperate people are to take a job, the lower the wages they accept will be.
You've just shown that classical economics explains the Greek situation perfectly, contradicting Varoufakis.
This is, indeed, exactly the type of mind numbing idiocy that Varoufakis was talking about.
The classical claim is that don't have involuntary unemployment - prevailing wage levels equal to $P (in some segment) and simultaneously people unable to find work at $P.
Your story agrees with this.
Economics is different; arguments that are very convenient to people who are wealthy under the status quo are very difficult to challenge, resulting in failed austerity programmes, "trickle down", and so on.
There is no lack of academic economists who can (and do) prove how austerity programs and trickle-down are wrong; in fact, they're the only ones really leading the charge on this matter in the political world at the moment.
The problem is that policy leaders not trained in advanced economic studies (most of them lawyers by trade, as you would expect in the business of writing laws) are awash in "pop economics", cheap literature peddled by suspect gurus sponsored by interested parties. This creates a hegemonic but distorted view of the field that is then very hard to shake.
Then there's the Rheinhart-Rogoff excel error: http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-...
The Excel error is also exemplary of what I referred to as "pop economics": a single argument was "divulged to death" and transformed into mainstream orthodoxy even though it was still being confuted in academic circles.
The thing is you can pretty much find an academic economist to back up whatever argument you want to make.
In the US it is all a shell game where the deceit of baseline budgeting allows Congress and the President to claim cuts when spending increases. The US could balance its budget in a manner of years if budgeting were honest and they actually reduce spending increases below inflation.
The problem is that politicians aren't interested in implementing the most ideal economic policies, they're interested in policies that give the effect they want - which is often at odds with the common good.
I was just reading the convention speech of the Democratic candidate for president in 1896, William Jennings Bryan. In his speech ( http://historymatters.gmu.edu/d/5354/ ) he says "There are two ideas of government. There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it." So some Democrats had to counter this trickle down nonsense even back then.
As an aside, in the speech he says "we shall fight them to the uttermost, having behind us the producing masses of the nation and the world". Can you imagine a Democratic presidental nominee saying that today, even if by some miracle it was Bernie Sanders? It's impossible - the heirs, and rentiers, and LPs and VCs and "job creators" and other parasites on those of us who work and create wealth have gained too much control of the system. And for the past two weeks signs are around that it could be entering one of its periodic crackups.
Assuming that were even possible. Whether it is or not is a pretty big open question. More to the point, can you do it without needing the hammer of government sanctioned violence (or threat of violence).
Unless, of course, you're a politician, in which case it is related to vote count.
This is an overly pessimistic view that ignores the philosophical aspects of economics. E.g. I lived on under $15k per year for a couple of years before I moved into software development, but during that time I still supported a very liberal approach to economics. This is because I hate violence (I can't even bring myself to crush spiders that wander into the house), and view redistributive economics as necessarily violent, as in a roundabout way it's forcing people to give goods/services/tokens of exchange to me that they may not want to give (since they're forced to give it via taxation lest they face imprisonment, I cannot assume it's voluntary). Other people may not care so much about this and take a more utilitarian approach, focusing on maximising some particular metrics (such as GDP or income equality), so they'll reach different conclusions.
Assuming people subscribe solely to the theories (economic or otherwise) that maximise the financial benefit to them is ironically a rather economics-style view of the world, and I'm fortunate enough to say that most of the people I'm close to don't fit this characterisation.
In terms of actual data, there's a correlation, but it's far from being the strongest factor: http://www.theatlantic.com/business/archive/2012/11/does-you...
How about we all try getting rich (or just keep our wealth out of violent neighboring hands) without violence or a government. Try to even significantly increase any meager income in that situation.
My point is that without taxes and the government they support, there is nothing but violence to support any type of venture. This has historical bearing with places that were lawless yet aplenty with resource for ventures (e.g. North American colonies, Wild West, etc...).
If in particular you meant a progressive tax policy that increases the percentage of taxation with your income level is what you're describing as violent then I can see your point a bit more clearly. Why punish the people who are being more productive, right?
Well the thing is that the owners of capital get the most extreme benefit from government. Never the other way around. It makes sense to me that the biggest recipients become the biggest supporters.
For a brief anecdote, poor people who earn wages get social programs to help sometimes, which are then largely obfuscated from public comprehension so you'll need a social worker just to get started. Rich people who own capital get business subsidies in the form of cash on the books. They are both paid from taxes and supported by the government. Who do you think benefits most from the government here? The business owner or the wage earner? Who is being stopped more readily from using violence with this support from government?
So taxes support all of this precarious balance in a capitalist society because the government is the only thing we have found to solve this problem of violence.
There's a pretty broad range of what you could call "government" in that discussion. The question of how to reign in would be aggressors isn't fully settled, but it certainly hasn't been proven that it takes the kind of government we have today. Especially given that the system we have today doesn't stop aggression, it just shuffles it around and renames it. See, for example, "civil forfeiture".
Please don't let your observation of present society confuse your ideas about a free society: The poor use the violence of the government to take money from others and give it to them via social programs. The business subsidies are a form of government privilege that is a corruption of free markets in which the rich use the violence of government against competitors.
Free market thinkers challenge the assumption that government should be granted a monopoly on force but rather there should be competition in all areas of society. As it stands, we see abuse of power in the courts, police, legislatures, and bureaucracy, all for the enrichment of those who have a legal monopoly on force.
This is true in pretty much the same sense that it is true that the primary relationship of a people to its government is the threat of violence by the former against the latter for failure to deliver on demands. (The extent to which either is actually truly the primary relationship in practice is pretty much precisely the extent to which the government has lost legitimacy.)
> Free market thinkers challenge the assumption that government should be granted a monopoly on force but rather there should be competition in all areas of society.
The government is simply whatever entity (including a collection of entities) in practice holds a monopoly on the legitimate use of force. You can question what the nature, scope, composition, and role of government should be, but questioning whether it should have a monopoly on the legitimate use of force is exactly like questioning the assumption that a triangle should be a three-sided polygon.
Yes, it's quite a pessimistic view of things, I agree. I speak mostly from personal, anecdotal experience. That may of course vary.
A medical scientist runs experiments on rats, to gain insight into what the effects of a certain phenomenon might be on humans. Rats aren't humans, of course, but we think they share important characteristics with humans. Of course, human trials would be better---butbecause there are ethical and practical difficulties in performing human experiments in controlled environments, we are happy to accept the insights that come from studying rats.
Theoretical economics studies the interactions of idealized 'rational' actors. These aren't humans, of course, but like rats, we think they might share important characteristics with humans. Like rational actors, humans have things they want, and do respond to incentives. Economics is largely the study of systems of incentives.
You can gain insight into the systems of rational actors---and insofar as you believe the analogy between rational actors and humans, into human economic systems---by writing equations and proving theorems.
I'm sick of this theme that theoretical economists are these dogmatic lunatics who write equations on the board that have nothing to do with reality. They are in the business of crafting powerful arguments about human nature by analogy, which yes, aren't always accessible to those of us who haven't steeped ourselves in the math, but I think that is no reason to dismiss their insights as nonsense and saying they have a 'math problem'.
You don't have a "math problem", you have a "data/science problem". And saly, at least at the micro-level, economists could have disabused themselves of the accuracy of rationality decades ago (e.g., Kahneman and Tversky's work in the 70's).
Much modern economics is like the elaborate math of epicycles, close enough, but still missing key insights. And this won't change until data is valued more.
What theoretical economists do is not 'nonsense' but can become nonsense when it naively forms the rationale for real-world policy.
If there is a convincing empirical economic study that widely contradicts a theoretical consensus---yes, that evidence should be preferred. But that is not often the case, and otherwise the theoretical argument is simply the best argument there is.
What drives me bonkers, though, is the people who dismiss the math and its conclusions as being 'meaningless', but then what they substitute is not superior empirical arguments of their own, but their own emotional sentiments and undisciplined intuitions (typically decorated by cherry-picked historical observations).
In that case, the "theoretical argument is simply the best argument" is wrong; we should study economic history and human behavior rigorously and let that inform our policy. Theory can serve as a useful model when it is validated by some sort of observation and data -- but even when we cannot perform controlled studies there is not a knock-down argument that "theory" must be our best guess.
I agree that a person's interpretation of economics is very likely to be influenced by their idea of how the world should work; but this is more a problem of our characteristic lack of critical self-reflection. And of course, we should have cogent arguments for our interpretation of economics, ideally rooted in objective evidence.
If you use economist math you see a benefit. If you use epidemeologist math you don't.
I entered stats through econometrics. I love econometrics. Econometrics is seriously hampered relative to other applied math fields by the inability to apply large scale casual experiments. For this reason parsimony is soooo important in modelling. Machine learning is the opposite of parsimony. Machine learning is wonderful for many applications, it lets us shrug off a first error of model selection, but it's not a panacea to the math problem and I think it actually might make it much worse.
A good example of what can be done (http://econprediction.eecs.umich.edu/)
On the other side, the claim "literary types who lack the talent or training to hack their way through systems of equations" is groundless and mostly fallacious. The "literary types" have grasped many politicized inconsistencies and dedicate their research by deductive reasoning. Most of them are not 9/11 truthers.
The easiest analogies for me to make are to electronics. Talking about cash/debt is like talking about instantaneous voltage. It's sort of interesting, but it isn't doing any actual work. In electronics it is the flow of that voltage, the current, that is more often more important and more interesting and more directly applicable to the "work" of a circuit...
I think you get a very different view of economics if you model it more like electronics circuits than just about any of the other economics models I see discussed. I've often wondered what would happen if someone actually bothered to attempt such a model and apply some deep scientific rigor to it.
Certainly, the models that we see in day to day political discussions and popular/lay culture have not seemingly progressed much beyond the macroeconomics courses I took in college, but again I'm willing to admit I certainly have my biases/blinders. Also, I'm sure that dynamic models exist, I was more curious if there are economists that have played with models more closely aligned with my physics analogies, specifically.
Thus far the one of most interesting things in economics right now, to myself at least, is I have done some reading on some of the work of theorists in Modern Monetary Theory (MMT) and I liked where it seemed to be heading (not to mention its ties to turn of the last century Social Credit theories/works). That certainly seems close to what I'd expect/like to see more of in economics, but correct me if I'm wrong, it still seems "fringe" in the current state of economics.
Therein lies the real reason for the panoply broken economics models. They are more often used for the purpose of lobbying rather than for impartial prediction.
Much of the profession (particularly the elites) only exists as an intellectual pretext for maintaining and perpetuating existing power structures. It's about as scientific as the departments of Marxist economics were in the former Soviet Union or the Vatican in 15th century Italy.
So, in a sense, if you assume ideal markets to have an "infinite number of participants", then yes, you can solve TSP in polynomial time but otherwise they will just evolve like bitcoin miners which as of yet still didn't solve the "find a decent hash" problem an order of magnitude faster even though there are many of them.
My beef with economists is that they themselves are not subject to markets so the bad ones and the good ones survive and you end up with lots of noise.
Because austerity is working out just brilliantly everywhere it's been tried?
What people tend to forget about government deficits and debt is that it is just one side of the economic coin. It's exactly the same thing as saying "the private sector saves too much".
Austerity in the last few decades would have avoided the crisis but once you have more debt than you can ever afford to repay neither spending nor saving will do the trick and the only possible way forward is default.
Since you refer to Greece in your other comment - I am more concerned about the politics than about the economics, given they don't default even though they have a clear democratic mandate.
No it wouldn't. The 2008 crisis and the European Crisis were both caused by an unsustainable build up of private debt. The levels of public debt had nothing to do with it
Even in Europe where there was multiple sovereign debt crises, the debts all started out in the private sector and were later shifted on to the public balance sheet. Same story in Spain, Ireland, Slovakia, etc. (even Greece to a large extent).
>once you have more debt than you can ever afford to repay
"Afford to pay" means something different to governments than it does to the rest of us. Governments that print their own currency cannot run out of it. The only decision they have to make regarding the deficit is "is the current level of inflation too much?"
Austerity in the UK and the US is thus kind of like saying "well, we must stop spending money because what if we run out of little green bits of paper". It would be funny how stupid it is if it weren't so devastating.
Similarly in the EU inflation is rock bottom and the ECB could kickstart every ailing economy easily. They just don't want to.
>Since you refer to Greece in your other comment - I am more concerned about the politics than about the economics, given they don't default even though they have a clear democratic mandate.
Greece has unfortunately handed over control of their payments system to the ECB and wresting back control is not something that can be done in under 9 months.
Thus it doesn't really matter what the Greek government says or what their electorate wants - if they don't follow Troika orders they flip a switch and the economy seizes up completely. Instant 3rd world status. No jobs, no money, no food, no life saving drugs.
This is why successive Greek governments have done the opposite of what they were elected to do. They have a gun against their heads and Schauble is just itching to pull the trigger if they don't fall in line.
Measured on what timescale?
So that's roughly four complete and total fuck ups in a row.
How much more time do you need?
There's always a chance, of course, that austerity is utterly destructive towards the Greek economy but very good for German financiers (with the ear of the ECB) who would like to pick up a port or state electric company on the cheap and who like the flood of cheap labor the austerity crisis has instigated.
The question is whether that savings goes into G or I - i.e., whether the money is spent on prisons or a new Tesla factory (to borrow two examples that contradict the standard mood affiliation).
Quite. This is what I was saying.
Public sector deficit 'too high' = Private sector saving 'too much' = Not a particularly concerning issue.
Deficits matter only insofar as they cause inflation.
>The question is whether that savings goes into G or I - i.e., whether the money is spent on prisons or a new Tesla factory (to borrow two examples that contradict the standard mood affiliation).
As far as pushing aggregate employment higher and escaping from the liquidity trap is concerned, you could do either. Just so long as it employs people.
The highest multiplier for any government spending was probably FDR's new deal public works program.
ROI is a different question and not one that can really be looked at in purely monetary terms. If the government paid people to write open source software they could end up creating staggering amounts of value but it wouldn't show up in any economics statistics.
Noah Smith is slightly misdirecting his complaints though. If we're looking at applied economics or policy, the amount of math is not intimidating to anyone who has taken a couple of years of non-introductory statistics. The most important econometrics papers of the past few years apply basic regressions with only a few additional valid statistical techniques.
newsflash: most economists are acutely aware of the imperfections in their models. sure, you can find the blinkered and dogmatic, but that is unsurprising in such a large and varied field. the subject encompasses a serious variety of subjects and methods you (the hn poster) simply know nothing about. for example, machine learning techniques are really nothing new. theorists have been aware of the kahneman/tversky result for decades. please bear this in mind before you lazily declare the intellectual bankruptcy of the entire field.
p.s so-called econophysics was a direct attempt to apply models from hard science to economics and it has been a complete failure, since it lacks an underlying model of human behaviour. turns out this is quite important...
For example, the dogma that markets tend toward efficiency.
This is true -- as long as certain axioms are not violated. But they seem to forget about the axioms on which their conclusions are built and march forward as if their conclusions are absolutely true and apply that assumption to problems where they simply do not hold because the axioms on which they are built are violated.
To continue with the 'markets tend toward efficiency' conclusion: it does not hold when there are negative expectations for a party for not making a transaction. And they invented a fudge factor to get around this a bit (that still doesn't work for all cases) which is to make sure the equations when taken in aggregate do not generally lead to negative expectations for not making a transaction. This holds in many more cases but still not all.
Where does it fail and why does it matter? Well, the axioms underlying the 'markets tend toward efficiency' work great in capital markets. They tend to completely fail when pain or death is potentially involved in a transaction (severe negative expectations) but they may look like they should work and you can find limited cases that do work. So, basically war or crime or relationships or corruption or or poverty or healthcare or any other of those human interactions pain or death tend to come into play. A huge swath of sectors where politicians and special interests and the economists that inform them try to craft policy to fit a misapplied theory. Yet, economists march on pretending the theory holds from the axioms to the conclusions and on to the further conclusions built on those hold because 'mathematics' -- who can argue with mathematics?
On the other hand a purely game theoretic model is not satisfactory either because a lot of people wont read about the model, and wont act optimally.
Maybe a two-tiered model, with "fish" and "sharks" could be a solution.
> Their overview stated that machine learning techniques emphasized causality less than traditional economic statistical techniques, or what's usually known as econometrics. In other words, machine learning is more about forecasting than about understanding the effects of policy.
And it's true. Economists care more about forecasting than 'understanding the effects of policy' because the money is to be made forecasting while working for a bank or a large corporation.
Economics can't be codified the way physics can because economics models human behaviour (which is constantly changing), not physical laws than can be tested and retested.
1) First of all, let's make clear that there are no "the economists" and there is no "economics" that could be identified with whatever peeve du jour of "the journalists". Economics as a field, understood as the study of exchange between decision-making agents in more or less large systems, is marked by an extreme diversity of approaches and opinions on even basic questions. From my superficial understanding of other fields, this seems to be a big difference between economics and the sciences, and on the other hand rather similar to the humanities. If you're going to criticize something, better make it specific and name names.
2) It is fashionable for "technical" people to scoff at the mathematics used in economic theory (basically, analysis, optimization, linear alg, and measure-theoretic prob), pretending that the problems arise because the tools are too primitive. First, perhaps they should remember that a lot of the foundations of mathematical economics were laid by people way above their paygrade. I'm talking about von Neumann, for example, or Fischer Black. Usually, when smart people do something that does not make sense to you, you take a step back and ask what you might be missing, and usually there is a nontrivial answer to that question. Paul Romer, sorry, is a good economist but he has a BS in math. I would say that's my definition of a "lightweight when it comes to equations". That's not to say he shouldn't criticize, he should! But let's not pretend that there was no reason to "go formal" in economic theorizing or that there were/are easy modeling choices.
3) In my experience, most of the criticism of economic models comes from ignorance of the goal and context of a model and a too literal reading of the math. For example, if you take Markowitz's portfolio optimization (mean vs variance of a linear combination of a multivariate normal), it is correct that individual returns have non-exponentially decaying "heavy" tails, the copula is not (unconditionally) Gaussian, and risk is therefore not captured in variance and correlations (not least because they may in fact be undefined). But that is completely beside the point of the model, which is simply to express the idea that the risk of a portfolio is not necessarily additive and that there is a tradeoff between risk and return. The point being, although it is expressed in mathematical language, it is actually a qualitative model. Once you realize this difference to more descriptive models in the sciences, economic theory starts to make a lot more sense.
4) The real problem of economic theory may be the disconnect between how many people have a stake in it and how many people have the time and leisure and inclination and background to understand what the theorists are actually saying.
5) Side comment and half-reply to ThePhysicist's complaint: The reason to go with the "perfect gas"-type models in economic theory, I think, is that you are dealing with self-interested, utility-maximizing particles or "agents" -> acting particles. The thinking being that if you put in constraints of some form, say a short-sales constraint in a financial market model, you make the model very special. But in the messy real world agents would find a way around this particular constraint eventually. So the unconstrained general equilibrium models are trying to give you a big picture, "this is where the market tends to" type of result. There is so much more to be said on this point but I'm already way above my allocated time for this "duty call"...
6) Last but not least, let me state my opinion that there is nothing inherently noble about science. It is a method to gain knowledge, and it is contingent on the affordances of the field to which it is applied. In economic theory, your basic problem is lack of data. Now that may change in some subfields, and that's great. So the scientific method can be applied in those subfields eventually. But we need answers or opinions today for practical problems. I see economics as akin to philosophy how Russell  understood it. Let me quote him:
“Philosophy, as I shall understand the word, is something intermediate between theology and science. Like theology, it consists of speculations on matters as to which definite knowledge has, so far, been unascertainable; but like science, it appeals to human reason rather than to authority, whether that of tradition or that of revelation. All definite knowledge—so I should contend—belongs to science; all dogma as to what surpasses definite knowledge belongs to theology. But between theology and science there is a No Man’s Land, exposed to attack from both sides; this No Man’s Land is philosophy. Almost all the questions of most interest to speculative minds are such as science cannot answer, and the confident answers of theologians no longer seem so convincing as they did in former centuries.”
One should be aware of the limits of this approach but one should also not assume that there was a choice between science and this. If there was, it wouldn't even be a contest! The realm of science may get bigger over time, as more and more data is gathered, but again, we need answers today and in real time, not in 100 years, to decide on regulations, interest rates, portfolios or budgeting decisions. In almost all the big economic questions, your sample size is one and the possibility to experiment is nil. The world is arguably nonstationary on time-scales that matter, economic mechanisms change, and every statistical test and computational experiment is always a joint hypothesis test of your assumptions, about which I said in (1) above that there is and perhaps can be no consensus.
In short, it's not that people don't know there is a problem. It's that there has so far been no better solution.
 I'm just making this definition up on the fly but if someone has a better one, I'm all ears.
 B. Russell. A History of Western Philosophy. George Allen & Unwin, 1945.
One can hope that data-driven economics could improve predictions, but keeping the theory discussion alive is vital, if we are to ever understand our goals as something more than increasing production and consumption (quantitative).
Using the correct set of data, has long been the main issue with economic theory conflicts, and data-driven economics can only make a difference (and a huge one) if that changes.
A major instance of this problem comes from models used for trading, which often assume Gaussian distributions and Brownian-motion behaviors. According to those, extreme moves such as the ones occurring during economic crises such as the one of 2007 are several sigmas away from the mean -- making them supposed to happen perhaps once every 10^10 years. Yet they happen every 20 years.
Taleb's book "Black Swan" is an interesting resource on this topic, for those interested.
The other half of the article seems interesting. Does anyone have handy references (besides the Athey and Varian papers in the article) to how machine learning is being used to establish causation rather than focusing on prediction? I've heard several places that there have been big strides lately in this area, but I'm not sure where to look.
Instead of "this model fits the curve and sounds attractive and sciencey" it becomes "this model fits the curve and was done by computer!"
Not really the "empiricism coming to economics" that the author claims, but I guess it could support better outcomes. For a while.
Economics has a math problem only if you're not honest about your mathematical models reflecting an ideological position rather than "reality" (whatever that's meant to mean in the context of economics).
As much as I like picking on economists and watching them bicker, there's actually a method to the madness. (Except for the shills, I'm looking at you, Krugman). When done correctly, economics becomes kind of a cross between a courtroom and a bullshitting session. People present various theories and sets of measurements. Lots of discussion around instrumentation and epistemology takes place. At the end of the day, the discussion wraps up to be something like "Given that most of us agree that these kinds of initial conditions mostly lead to these kinds of results, do most of us think that these kinds of initial conditions currently exist?" (Note that the "most of us" can very well be different sets of folks)
Oddly enough, it turns out that this kind of discussion has lots of real-world value.
Machine learning and deep learning especially has a pretty cool new role here, but it will never take of this dynamic ongoing discssion.
So no, economics doesn't have a math problem. It doesn't work like that. Perhaps a better way of putting is this: people who expect the world to be deterministic have a problem with economics. That situation is unlikely to change.
 I pick on Krugman because his shtick is already knowing the answer, no matter what the question is. He also likes showing us his Nobel. Somebody said once that every Krugman column should begin with "Damn fools!" In this way, this isn't economics; as far as I can tell it's personal aggrandizement using economics as a prop. A huge ego is a terrible thing to waste. But damn, it sure is entertaining!
[Several edits for clarity]
The truth is that Economics is the study of choices in a world of limited resources, and that the process is exactly as you have said : observing initial conditions, material decisions and subsequent outcomes. It is, as laid out by Adam Smith, also dependent on certain initial inputs (theory of moral sentiments) which produce rational actors.
The amusing thing for me is that, despite repeated tests and outcomes, people continue to think that they can wander off the reservation and get better outcomes with the same humans by trying different things to try and control the flow of limited resources. The results are rarely pretty, but the siren song of being able to improve things and be hailed a hero draws people into thinking the rules do not apply.
Krugman wandered off the reservation a while back and hasn't been worth reading since at least 2008.
The point is, you don't have to agree on economic policies to agree that it's not a hard science and shouldn't be treated as such.
And you say Krugman has wandered off reservation? Rubbish. He's got to keep banging the same drum because nothing's getting fixed.
It is not a hard science, but out of all of the soft sciences, I think economists understand just how tenuous their situation is. This is probably because they are using very hard tools to get a handle on a very fuzzy situation.
ADD: One of the bad things over the past 10-15 years has been the use of economics as a political weapon. It was bad enough when professors got stuck in one system or another and you had to wait an entire generation for new ideas to take hold. Now you're seeing a lot of laymen using economics as a way of arguing politics. Doesn't matter to me one way or another what kind of politics people have, but at least if you're an academic you have some notion of the realities of this field of study. In political discourse it's all just throwing dog poop around and supporting your team. That's going to make the serious study of economics even more difficult in the years ahead.
> Machine learning and deep learning especially has a pretty cool new role here, but it will never take of this dynamic ongoing disucssion.
Your pagerank is strong.
I'm guessing you could run something like face recognition software but instead of faces it could recognise effects like the above and flash some politicians being paid off to turn a blind eye to high risk - give 'em a kick, warning or similar.
Unfortunately I don't know enough about economics to comment any more than that.
I'm looking for the economics equivalent of Feynman's lectures on physics.
I like it.
I sincerely hope someday you would read Blatt's book with an open mind. It has nothing to do with Keen, and on few pages with a bit of matrix math he obtains far better model than economists with their supply and demand curves can ever hope. (In fact, John von Neumann apparently had fingers in it too - shame he didn't live longer, we could have a proper economic theory today.)