Dani Rodrik’s Economics Rules offers a much-needed reflection on the strengths and weaknesses of modern economics as a discipline. Rodrik himself is a highly distinguished economist who has significantly advanced our understanding of development economics and trade policy, and he is therefore able to offer important perspectives from the inside. While his book is wide-ranging and informative throughout, I found the central (if implicit) message of the book to be by far the most meaningful: namely, economics is misrepresented both by leftist critics as well as by economists themselves, and this caricature undermines the unique explanatory power of economic models.
Rodrik argues that development in the social sciences should be viewed differently from development in the natural sciences. I have written about this before (see here and here), but Rodrik’s formulation of the differences is particularly poignant and clear. Perhaps his most important insight regarding theory development is that social science develops horizontally, not vertically. In other words, there is no unified theory of economics (despite what die-hard Marxists or Neoliberals would have you believe). Instead, economics research focuses on expanding our library of contingent, specific theories that help us understand and predict economic behavior given certain underlying conditions. Most of the core Econ 101 models do make relatively simplistic generalizations – firms are price takers and profit maximizers, people are rational, and every change happens ceteris paribus. Obviously, these assumptions do not apply to every scenario. But they apply to a large number of situations, and thus theories grounded in these assumptions are still powerful tools for understanding the workings of the economy. But economics also has theories grounded in different assumptions. For example, monopolistic industries behave differently than perfectly competitive ones, and economists, therefore, use different models to explain how monopolistic firms behave. Instead of blindly supporting ever freer markets – a critique frequently leveled by the extreme left – economics has a diverse and wide-ranging collection of models and theories from which to draw. As Rodrik, in fact, points out, almost all of the best research in economics seeks to develop new models for understanding scenarios of market failure. Advancement in the field comes from poking holes in overly simplistic and dogmatic assumptions, not blindly supporting them.
So why does economics seem so monolithic and ideological? The problem is the way economics is deployed to support partisan talking points. Most economic commentators and politicians lack the requisite training to talk about economics intelligently. They probably took a few introductory courses, but they never learned the more advanced, graduate level models. Thus, they use their simplistic supply and demand curves to argue ridiculous positions like immigrants steal jobs or all instances of government intervention in the market are detrimental. This wouldn’t be such a problem if economists themselves bothered to correct these oversimplifications. But frequently they don’t. Rodrik doesn’t provide any concrete answers for why academic economists fail so badly at explaining the limitations and contingency inherent in every model, but he offers two possible theories. First, economists (and, indeed, all social sciences) tend to concentrate on a few theories important to their subfield. But this process of specialization has the unfortunate side-effect of causing academics to become overly enamored of a few particular models relevant to their subfield. Thus, they confuse a model with the model and forget that the strength of economics lies in its diverse and ever-expanding collection of theories and models. Second, economists are fond of the market because it is a core feature of their discipline and is somewhat unique to economics. Therefore, economists always seek to emphasize the power and flexibility of the market because of their belief that markets are underappreciated both by other fields and by the general public. The problem is that this can turn into proselytizing, and it leads people to conflate ideas that often make sense with those that always make sense.
It’s not surprising that people seek to derive universal truths from social scientific models. And it’s even less surprising that partisan hacks attempt to intentionally misrepresent economic theories to further their political agendas. But universality is something that simply doesn’t exist in the social sciences. Humans have agency, and the world in which humans interact is chaotic and complex. At best, models can provide a simplified approximation of human activity given certain underlying assumptions. Although these models are always imperfect, they are often enough to meaningfully improve our understanding of human social activity. But in order for these models to be effective at all, they need to be deployed correctly. Unfortunately, in the short-sighted and hyper-partisan world of today, they rarely are.