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All Of The Models Are Going To Be Flawed

“Economists essentially have a sophisticated lack of understanding of economics, especially macroeconomics.”

There is a beauty to the models in and of themselves. You assume, for example, that people are rational. I don’t think any really good economist thinks that people are perfectly rational, but, on the other hand, if you want to model people as not rational, all of a sudden it’s not clear what choice you should make. There are a million and one ways to be non-rational; there’s only one way to be rational within the confines of a model. Rationality means one thing: you’re maximizing your welfare subject to constraints. Now, if you say people don’t always maximize, and they’re beset by this and that, then all of a sudden you can have a million models. And that’s a little bit unsatisfactory too.

So all of the models are going to be flawed, and hopefully policy is going to be the best that you can do given current knowledge. The problem is that as “scientists” we often don’t have much to say. I don’t think we are scientists. I think we’re more like doctors in the sense that we do research, but in the end there’s a patient, and you have to say, given one’s knowledge, what’s the best way to treat the patient? You can’t just say, well, we just don’t know, at least not in the policy-making arena. We do have to treat the patient though it is important to state how much of our advice is based on evidence and how much is just our own personal inclination.

“So, yes, it’s true that the average guy on the street doesn’t understand economics, and it’s also true that we don’t understand economics. We just have a more sophisticated lack of understanding than the guy on the street.”

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