While looking into the history of economics textbooks, I came across an excellent essay by eminent macroeconomist Robert Solow, “How Did Economics Get That Way and What Way Did It Get?” (Daedalus, 1997). The essay argues that outside observers have misunderstood the trend of economics from the 1940s to 1990s. Economics has not become more formal, Solow argues, but rather more technical, and especially more concerned with models:

Many observers in the other social sciences and in the wide, wide world perceive that economics has become formalistic, abstract, negligent of the real world. The truth is, I think, that economics has become technical, which is quite different. … Far from being unworldly, modern model-builders are obsessed with data. (47)

Ignoring, for a moment, whether the “design-based approach” of folks like David Card represents a counter to this trend, Solow presents several interesting consequences of this reliance on models rather than formalism of axiomatic variety (like geometry). First, as mentioned in the quote, economists encounter the real world frequently through their obsession with data (and, I would add, through “stylized facts”). Solow argues that data cry out to be modeled – the proliferation of quantitative data at the national and individual level in the Depression and post-War eras led to a proliferation of potential facts to be modeled.

Second, Solow argues that this focus on models also makes it difficult for economists to make use of the work of economic sociologists (and, perhaps retrospectively, of institutional economics who were not so model-obsessed). Some economists want to escape the straight-jacket of rationality qua constrained maximization, but they have trouble taking the insights of scholars like Jon Elster and Mark Granovetter and producing from them simplified models. In regard to this point, I wonder if the move towards the design-based approach mentioned above might bring economists and economic sociologists closer together. If economists, to some extent, abandon explicit models then they might learn to see the implicit models in the work of economic sociologists more clearly, and in turn to appreciate that work. Conversely, economic sociologists have (in some sense) more and less to fear from the design-based studies. The findings of these papers, much like the pioneering work in econ soc, contradict all sorts of simplistic notions of all-knowing, selfish, asocial, income/wealth/somethingsomething maximizing rational actors swimming in perfect markets – score one for econ soc! On the other hand, if economists recognize these problems and abandon some of the most intractable root assumptions in the practical work, what’s left of the economic sociology critique? A similar discussion occurred in the econ soc workshop here at Michigan around the emergence and acceptance of behavioral economics. Behavioral econ, though influenced more by cognitive science and psychology than sociology, is much harder to critique with the 1980s econ soc toolkit. So, lots of opportunities for econ soc to make positive contributions that get picked up by a broader intellectual community, but also risks of being swept into obscurity and irrelevance (or, even more obscurity and irrelevance!).

Anyway, back to Solow. Solow ends his essay with a discussion of physics envy in economics and two dangers thereof, which leads to our quote of the day:

“To the extent that economists have the ambition to behave like physicists, they face two dangerous pitfalls. The first is the temptation to believe that the laws of economics are like the laws of physics: exactly the same everywhere on earth and at every moment since Hector was a pup. That is certainly true about the behavior of heat and light. But the part of economics that is independent of history and social context is not only small but dull.” (56, emphasis added)

I really like that quote. I think it captures so much of what’s wrong with envying physics – physics, in some sense, is much easier than economics because the relationships you are interested in today are likely not going to change tomorrow, and presumably held for the last hundreds of years (if not billions!). This has all sorts of implications for the ability to generalize from economic experiments, and more broadly, for a need for some humility in attempting to apply economic insights across very diverse times and places. Which, in turn, contrasts with Solow’s second pitfall from physics envy: the “tendency to undervalue keen observation and shrewd generalization.”

A fun essay by a keen observer and shrewd generalizer; highly recommended.

PS I couldn’t help but reprint this quote as well, which may need to serve as an epigraph in the diss somewhere: “There is a tendency for theory to outrun data. … Theory is cheap, and data are expensive.”