Theory vs data?

The battle over Economics 101 continues. A while ago, I suggested that introductory courses should feature a lot more empirical data analysis. Currently, they contain essentially none. Given the empirical revolution that is sweeping academic economics and challenging our most basic ideas about theory and policy, that needs to change.

Defenders of the status quo often assume that “theory versus data” is an either-or proposition. In fact, the opposite is true. Without theory, data is very hard to interpret; you may find that immigration has little impact on native-born wages, but without theory, you don’t know why, or even where to look for answers. Similarly, without data, theories can’t be verified, falsified or even effectively modified; only reality can help us choose from a wide variety of competing theories, or tell us that we need to go looking for new ones. We need both. By not teaching our introductory students even the most basic techniques for testing theories, we are asking them to take conventional wisdom - often, incorrect conventional wisdom - on faith. That can’t be good.

Unfortunately, the public battle is not about teaching empirics in 101. Far more attention has been focused on the sweeping reforms that have been proposed by a group of British economics students calling themselves the Post-Crash Economic Society. The group’s main thesis is that economics education currently teaches too narrow a range of theories. They claim that there are alternative schools of thought that are getting short shrift in the classroom.

The Post-Crash Economic Society and other would-be student reformers have gained the support of a few high-profile figures, including the Bank of England’s chief economist, Andrew Haldane. Unfortunately, reforming economics education by broadening the array of available theories is not a very good idea, for several reasons.

First, the central conceit of the Post-Crash Economic Society - that the financial crisis has prompted a broad rethink of basic economic principles - is only true in a few areas of economics. Most laypeople and students use the word “economics” to mean macroeconomics - the branch of the field that deals with business cycles, growth and other economy-wide phenomena. In fact, macro represents just a small piece of the profession. Most economists work in an assortment of other fields, collectively known as microeconomics. They study taxes and spending, labor policy, development, decision-making, auctions, environmental economics, business competition and a host of other topics.

These fields are changing as well, but the impetus for change was not the global financial crisis or the recession that followed. It was the flood of data and statistics software that accompanied the information technology revolution. By focusing on responding to the crisis of 2008, the student reformers are ignoring the much broader and deeper changes going on in non-macro fields.

Second, many of the alternative schools of thought championed by the Post-Crash Economic Society are - to be brutally honest - not worthy of being taught in college classrooms. Some, like Austrian and Marxist economics, are collections of ideas without methodologies to test them. Unlike mainstream economics, they aren’t quantitative in nature. Unlike sociology or anthropology, they don’t have established practices for fieldwork and the gathering of qualitative data. And unlike psychology, those ideas can’t be tested in laboratories. In fact, these alternative schools of thought are not really social sciences at all, but are more akin to the critical theory that is taught in literature departments.

Other schools of thought mentioned by the Post-Crash Economic Society are not really distinct from the mainstream. Institutional economics, for example, won a Nobel Memorial Prize in Economic Sciences for Elinor Ostrom in 2009. It is already taught at many universities.

Contrary to the assertions of the Post-Crash Economic Society and their fellow travelers, mainstream economics education is already extremely diverse. Diane Coyle, a professor of economics at Manchester, says the field has become much more varied in recent years, incorporating insights from psychology, history and political science. In fact, it is now so wide-ranging that any undergraduate economics education, no matter what it teaches, will inevitably only cover a small number of the available theories.

Instead of teaching an ever-broadening array of theories, undergraduate economics courses should be teaching something even better: how to choose between them. Methodological pluralism will only take you so far. If there’s no rigorous method for deciding which theory to use in a given situation, then politics and bias will inevitably play a role in how people choose which theories to espouse. Instead, we should be showing students how to rely on facts rather than opinions. That means empirics.

Fortunately, some influential voices are now calling for a move in this direction. Textbooks and courses are being developed that emphasize data work much more than the prevailing ones do - for example, seethe sequence of books by Acemoglu, Laibson and List. Hopefully these efforts will continue to gain traction, and soon every Econ 101 teacher will be showing kids how to compare theory with fact.

*The author is an assistant professor of finance at Stony Brook University.

by Noah Smith