Paul Romer explains what went wrong with economics

18 Feb, 2020 at 20:26 | Posted in Economics | 5 Comments

Economists cannot simply dismiss as “absurd” or “impossible” the possibility that our profession has imposed total costs that exceed total benefits. And no, building a model which shows that it is logically possible for economists to make a positive net contribution is not going to make questions about our actual effect go away. Why don’t we just stipulate that economists are now so clever at building models that they can use a model to show that almost anything is logically possible. Then we could move on to making estimates and doing the math.

washing-hands-23043In the 19th century, when it became clear that the net effect of having a doctor assist a woman in child-birth was to increase the probability that she would die, western society faced a choice:

– Get rid of doctors; or
– Insist that they wash their hands.

I do not want western society to get rid of economists. But to remain viable, our profession needs to be open to the possibility that in a few cases, a few of its members are doing enormous harm; then it must take on a collective responsibility for making sure that everyone keeps their hands clean.

Paul Romer

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This mathematical modelling activity is considered useful and essential. To understand and explain relations between different entities in the real economy the predominant strategy is to build mathematical models and make things happen in these ‘analogue-economy models’ rather than engineering things happening in real economies.

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science.  Let us not forget what Romer said  in his masterful attack on ‘post-real’ economics a couple of years ago:

Math cannot establish the truth value of a fact. Never has. Never will.

We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule, none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become the standard modelling assumption made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth. It would be far better if they instead made sure they keep their hands clean!


  1. Excellent! Paul Romer once called this type scientific mumbo jumbo “Mathiness” to label a specific misuse of mathematics in economic analyses. An author committed to the norms of science should use mathematical reasoning to clarify his analyses. By contrast, “mathiness” is not intended to clarify, but instead to mislead.
    According to Romer, some researchers use unrealistic assumptions and strained interpretations of their results in order to push an ideological agenda, and use a smokescreen of fancy mathematics to disguise their intentions.
    As Romer once wrote this type of methods are especially at use at the University of Chicago. Twenty eight of the 74 Laureates of Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel have been associated with the University of Chicago during their careers.

    • The most unrealistic, and also most basic, assumption economists do is that people are only interested in “more”. It is from that all their other assumptions flow.

  2. I admit I admired the verve with which Romer attacked “mathiness” and all that, but I am not so sure that Romer does not, in fact, typify the problem rather than the solution.
    I look at endogenous growth theory and I have to wonder whether there really is anything there but hand-waving. Romer is a good story teller, but should not the point be that we need method for operational modeling of institutional mechanisms, not facile story-telling?

    • Bruce : “Let every man be his own methodologist, let every man be his own theorist…My conception stands opposed to social science as a set of bureaucratic techniques which inhibit social inquiry by ‘methodolocigal’ pretentions, which congest such work by obscurantist conceptions, or which trivialize it by concern with minor problems unconnected with publicly relevant issues. Those in the grip of the methodological inhibition often refuse to say anything about modern society unless it has been through the fine little mill of The Statistical Ritual. It is usual to say that what they produce is true even if unimportant. I do not agree with this; more and more I wonder how true it is. I wonder how much exactitude, or even pseudo-precision, is here confused with ‘truth’; and how much abstracted empiricism is taken as the only ’empirical’ manner of work…Sometimes, by the way, you may find that a book does not really have any themes. It is just a string of topics, surrounded, of course, by methodological introductions to methodology, and theoretical introductions to theory. These are quite indispensable to the writing of books by men without ideas. And so is lack of intelligibility.”
      ― C. Wright Mills, The Sociological Imagination 🙂

  3. What went wrong with neoclassical economics, specifically, is that neoclassical economists eagerly exemplified their theory of human nature: people respond to incentives. As economists can make the most money and have the most eminent careers by chanting whatever lies are most convenient to the financial interests of the privileged, that is what neoclassical economists do. Even the very concept of privilege cannot exist in neoclassical economics; it is outside the realm of possible discourse. The result is a discipline (one cannot call it a science) that is marvelously efficient at providing plausible sounding rationalizations for privilege and justifications for injustice, but cannot make reliably accurate empirical predictions more complex than, “The recent trend will continue.”

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