I was arguing with Stephen Williamson about the propriety of chest-pounding declarations about “economic science” in the macroeconomic context and I think a good way of perhaps persuading him to see things my way is to note that he enjoyed this interview with Robert Lucas. Lucas has one of the highest reputations among academic macroeconomists, and even if I think his ideas are a little bit ridiculous he’s clearly a very skilled practioner of what passes for science in the field.
Here’s what Lucas says about the evolution of his own thinking:
I drew from this the idea that all cycles are probably driven the same kind of shocks. Since I was convinced by Friedman and Schwartz that the 1929-33 down turn was induced by monetary factors (declined is money and velocity both) I concluded that a good starting point for theory would be the working hypothesis that all depressions are mainly monetary in origin.
Ed Prescott was skeptical about this strategy from the beginning and I remember he gave me an old framed photo of Mitchell (with a cracked glass!) saying that I should have it because I was an admirer of Mitchell and he was not. Ed wanted to start with Kuznets highly structured series rather than the hodgepodge of series Mitchell used. He also thought we needed to have some kind of benchmark theoretical model to give us a start and he liked the natural match ups between theoretical objects and Kuznets’ accounts. His great 1982 paper with Kydland ended by summarizing comovements just as Mitchell had done but unlike Mitchell they produced an internally consistent theoretical account of causes and effects at the same time.
As I have written elsewhere, I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008. Of course, this means I have to renounce the view that business cycles are all alike!
Changing one’s mind is a great sign of discipline and rigorous thinking. But as Noah Smith says, it’s telling and remarkable that a leading practioner in the field would twice flip-flop on the nature of the business cycle over the course of his career. First he thinks all business cycles have the same cause and the causes are monetary. Then he’s persuaded by Kydland & Prescott that actually all business cycles are driven by real factors. But then a whole new event occurs that he thinks can’t be explained in the Kydland/Prescott framework and that causes him to revise his longstanding view that all business cycles are the same. And that has the secondary consequence of causing him to return to his initial view that the Great Depression wasn’t caused by real factors either.
Being open to persuasion is good. But this kind of veering between wildly different theories is a telling sign that the whole discipline is operating with an amazing paucity of relevant empirical information. For all the mathematic skill that economists have, when you try to explain business cycles you end up with the same basic problem facing historians or anyone in the “softer” social sciences—there’s not a lot of data, not a lot of great ways to test theories, and therefore lots of different theories that fit the data. The economics profession recently had an election-related argument about whether the Obama recovery was unusually slow or not that featured as one of its key points of contention disagreement about which events count as financial crises. Obviously if you can’t agree about which things are and aren’t financial crises, you’re not in a position to engage in a very useful scientific study of financial crises.
Which isn’t to say that the people working on these problems are bad people. They’re just hard problems. But they could use some humility. Paul Krugman was wondering about the Italian productivity collapse earlier this week, but it turns out we can’t even be sure if this is a real thing or just bad data. It was about ten years ago that Lucas said that “the central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.” Making a mistake in the face of murky data is fine. But reasonable people ought to recognize that and restrain the definitiveness with which they issue these pronouncements.