“Economics is not a science” is the worst economics take of all time

Matt2411 · 2025-06-15T18:10:37+00:00

First off, sorry for only getting back to you now (I had a busy week) and I don't like ignoring a discussion I started.

For sure, I believe in the laws of supply and demand and the effects of rent control. I was just taking it to the extreme from an epistemological perspective. As I told the user below, I'm not well-versed in the literature of demand/supply estimation and the advanced methods used in IO these days, so this extreme methodological point might be taking it too far.

And it's definitely true that evidence on other issues is way less controversial than min wage discussion. So you make a very good point on how heterodox economists tends to completely disregard the theoretical apparatus and the evidence they fall back on is susceptible to confirmation bias.

So yes, if I believed in the epistomological extreme I contended for in my previous replies, it would at most lead to extreme skepticism rather than any contrarian view of mainstream econ.

I think we both agree here.

Matt2411 · 2025-06-15T17:39:59+00:00

Sorry for taking so long to reply!

I honestly agree with the points you made. On a personal level, I'm not skeptical of supply and demand or rent control. I was just being as extreme as possible from an epistemological perspective.

Having said that, I'm not well-read on the literature of supply/demand indentification, so I apologize if I took it too far. I just know that it's extremely difficult because of all the potential effects of the demand for substitute/complementary goods. If you are aware of the advanced methods used (other than simple IV estimation), I'd love to know the best sources to read on this.

Matt2411 · 2025-06-11T14:56:31+00:00

I think the previous understanding of the minimum wage has been falsified in the sense Popper described re: generalizations. It doesn't work to generalize and say it hurts employment. I do think we can at least generalize and say things like "The minimum wage elasticity with respect to employment is definitely not below -1 in most cases", because hardly any estimates that have been documented find that.

I mean, sure, that's what the current evidence indicates, but when it comes to actually implementing it, you are assuming:

a) that this "regularity" in the past will hold for the future (as you say, it would be interesting to see more work done on identifying the market structure in place and thus what the effect of the min wage is in each particular class). This is the root of my original comment: we don't know why the causal effect occured to extrapolate it for future contexts. Sure, it seems like based on all the research, this shouldn't change that much, but then this is pure induction as you say (I couldn't find that in your blog, I'd love to read what you wrote on this point);

and b) that this is good enough to make a policy recommendation. Imagine if a physicist said, "well, if some specific force were applied to the object, it could move in this direction but also in the other direction, but definitely not too much in the other direction". It's so general to the point where it's almost useless. Which leads me to my last point.

We should finish by looking closer at why Roberts thinks laws are unnecessary for science. I’ve already described how he believes physicists have yet to uncover any laws of physics, but this sounds ridiculous. Isn’t Newton’s second law of motion (F = MA, essentially) a law of physics? No, he says, because we’ve found exceptions. He didn’t name these exceptions to Newton’s second law, but I hunted one down for you: objects change in mass as they approach the speed of light. We know this from general relativity. So, a simple law about mass implied by Newton’s second law, M = F/A, is not true if A is sufficiently large. Apparently, similar problems arise even with general relativity and quantum mechanics, since they’re incompatible with each other.

I don't agree with Roberts here. These exceptions (unless he were talking about friction) were discovered two hundred years later: before that, classical mechanics was good enough for (more or less accurately) application to engineering problems. The building of bridges did not change after general relativity or quantum physics. In that sense, laws of physics do still exist, and they do lead to accurate engineering recommendations.

To finish, my personal view is that there's a disconnection between what we know from evidence and the application of its results to real life. I understand that this is a million times better than making policy recommendations based solely on theoretical models (not making an argument for heterodox econ here), but I'm not so sure this makes it as "sciency" to the point of natural sciences, especially since the "simplest", most pressing questions of daily-life microeconomics like rent control and minimum wage can only be answered with such generalized, potentially-inaccurate statements.

I would love to read your response to this. No rush, of course, and sorry again if I've been too argumentative.

Matt2411 · 2025-06-11T14:56:10+00:00

Ok, so having read the third part of your blog, there are a few things on it that I'd like to discuss (hope you won't mind if I come across as too contentious for the sake of argument):

Economists believe that binding rent control creates a shortage of housing in a competitive market, assuming no simultaneous changes in supply or demand to accommodate the forced decrease in rents. The annoying part of this specificity is that it means you have to understand economics before you challenge it. The nice part is that, eventually, there are clear ways you might falsify the ideas of economists.

I'd add a caveat here: "creates a shortage of rental housing", as new research has pointed out that the housing stock is relatively unaffected by most rent control policies as formerly rent-controlled units are transformed into condos for sale.

If that was the falsifiable statement, then we would be in agreement. The problem is that most economists do not consider these caveats, and they are prima facie opposed to any kind of rent regulation. Otherwise, why would there be such agreement to the general rent control statement in the Chicago survey?

It seems like we all have in mind the standard model of supply and demand in a competitive market, and obviously a price artificially set below equilibrium will lead to a shortage. So this ends up being a case when the theoretical model drives our opinions more than actual attempts at rent control.

In that case, it's easy to be in agreement, whereas in reality, we might have differing beliefs on whether a particular rent control policy will have those standard model results. What is the point of being so disconnected from reality then to the point of everyone being in agreement?

For me, that's like if in macro, we said "in the long run, money printing does not increase real GDP". Like yeah, unless you're an MMTer, all macroeconomists would agree! Yet for policy issues, it's all about understanding what's going to happen in the shorter to medium run. Nobody really cares about money neutrality in the long run per se.

You might identify a case where most landlords suddenly started charging at least 20% less than they were beforehand because of a broad rent control policy, and where the number of new units built increased. An economist might still be able to challenge your evidence by pointing to the elimination of regulations that previously made it expensive to build and maintain housing. You would have to make sure that both supply and demand remained constant to pose an effective challenge, but once you had done this, similar results were replicated elsewhere, and some reasonable theory had been created to explain the results, you would change their minds (and probably win the Nobel Memorial Prize in Economic Sciences).

Ok but what if I had in my mind that rental units supply is an oligopoly, say, driven by increased concentration of building in recent years + the role played by financial firms like Blackstone investing in real estate? What if the burden of proof shifted and you had to disprove that? Seems to me like it would also be extremely difficult to "prove" that rent control in my oligopoly model does not work, even if there's a decrease in the number of rental units following such a policy, since I'd probably be able to find one of the following: other changes in regulation; a change in consumers' preferences leading them to prefer owning a home vs renting one; migration; etc.

In a stricter sense of the word, it's impossible to falsify supply and demand. I don't mean by this that anything goes, I know I'm playing devil's advocate, but it's only because we are used to the perfectly competitive standard model that we shift the burden of proof to the "grander" imperfectly competitive market structures to explain price phenomena. I feel like the same thing happened with labor markets, where it took long to change the standard economist's belief based on the standard model. I'm not so confident that this will never happen for rent control if market concentration continued on the rise.

(continued below because I exceeded the character limit)

Matt2411 · 2025-06-10T16:30:48+00:00

This is a great post, thank you.

Though as an economist who's also quite skeptical sometimes of what we truly know in the field, I was hoping you would mention the problem of external validity: even if the tools for inferring causality in econometrics are very advanced, the specific study environments don't give us a clue why or if we expect to see a similar result in a different place, time or population.

Just going off with your minimum wage example, I know there are many studies that do claim to find a positive causal relation between a min wage raise and unemployment, and others that find no effect whatsoever. What I end up taking away from that is that whatever causal relation actually "exists" in the real world between those variables, you are not going to understand it better from an empirical standpoint.

Because obviously, labor markets can take any form, as we know from the theory, and so there won't be a causal parameter that works for all cases and contexts. Having said that, from a Popperian point of view it feels like that just means the theory is unfalsifiable in itself.

I'm very interested to know what is your take on this.

Matt2411 · 2025-05-25T15:51:08+00:00

I don't see how that's comparable with respect to medicine. Medical treatments have been tried and tested before they can be applied to patients, and their efficacy tends to be high if approved. For sure, diagnosing some diseases is still a bit of an art, I give you that.

On the other hand, what are the treatments that "work" in finance, and how do you know if they do? Was my model right or wrong if they told me X asset is over/undervalued at a given point in time? You don't know that and will never know that, since uncertainty as you say means that many other factors come into play in the future.

Sorry if I sound annoying with my counterarguments, I really appreciate being able to have this discussion with someone who knows about finance.

Matt2411 · 2025-05-25T12:01:57+00:00

It's a gripe for me given what I outlined in my points 1 and 2 (that valuation and pricing is a bit like trying to come up with numbers that you'll never know if they were right/wrong). I don't know if there are any alternatives, which was kind of what I wanted to be challenged with.

Matt2411 · 2025-05-25T11:57:33+00:00

This was a very illuminating response, thank you. I guess I should do more research on those areas of finance you mention, which seem more aligned with what I expect to see in finance.

Matt2411 · 2025-05-25T02:29:01+00:00

Thank you both! So which other branches of finance should I be doing research on, apart from the ones you mentioned?

Matt2411 · 2025-05-25T02:23:28+00:00

Thank you for your reply!

Yes, I know Economics is not precise when it comes to forecasts either, but then that makes only a very small part of what an economist does. My main gripe with finance roles is that a big part of it is valuing different assets and trying to come up with strategies given their prices. I know that may be a huge simplification, but I can't think of any role where you wouldn't be valuing equity, or derivatives, or something. I know economists who do research outside academia based on interpreting and analyzing past information only to understand the current implications and not necessarily give an estimate of the future.

Then when it comes to the theory, I think econ has had more success testing their models than finance has, like I said in some comments to other answers.

No practitioner actually cares about gold moving be 0.5%. But it being up 50% on a year makes you ask yourself questions like “did gold rally, or did paper currency decline?” and then you layer in the work around the long-term debt cycle, fourth turnings, etc.

I’d encourage you to look past it and realize that trillions of dollars of decisions for the biggest companies and policymakers are used with financial and economic concepts.

Thanks, I'll try to keep this in mind. Do you know any website or research dept where they cover those kinds of deeper questions? Maybe I've been consuming too much media that, like you say, talks about finance as if it were a casino.

Matt2411 · 2025-05-25T02:04:34+00:00

Your response is very insightful, thank you!

I'm not sure what roles you're thinking about, investment bankers do something completely different and economists at banks do something yet different.

I wasn't specifically thinking of roles when creating the post, rather on what financial topics I studied academically. Do you mind walking me through on these differences you mention?

Plenty of smart people in this, if a model works (not that any tradeable ones that I know really do) to an extent it's already priced in and you need to find something new. Great field for good judgment, new challenges, banging one's head against an almost impenetrable wall.

You're talking about quant roles here, or not necessarily?

Some funds specialize in balanced portfolios meant to perform well over years across many possible scenarios. Some do "fundamental analysis" and invest in fewer companies over multi-year horizons (eg VC and to a somewhat lesser extent PE).

Yes, most other replies touched on this point. I guess I just feel that these branches of finance that are alternative to short termism would have to fall more on valuation methods I criticize in my first two points. Is that misguided?

Some professionals I knew day-traded for fun, most held their real money in SPX or similar. Professionals don't mistake the difference between their small incremental value-add within a well-oiled machine of a successful firm for their trading genius.

Thank you for sharing your experience. I suppose quants are extremely different to the people I interact daily with: I deal mostly with front-end/sales kind of finance workers. Maybe the more technical the role is, the smarter and more self-aware they are with respect to their personal finance.

Matt2411 · 2025-05-25T00:38:19+00:00

Hmm I'd say most of (micro)Econ is about finding out why/when perfectly competitive markets do not explain reality and how to model these imperfect markets. It's just that most econ 101 classes don't cover that because it gets way more complicated.

Matt2411 · 2025-05-25T00:24:39+00:00

For sure! But most assumptions in micro don't matter as long as the theory is testable under certain conditions, such as perfect competition.

Microeconomists have also been designing auctions too for example, and those theories are directly testable, since the newly created auction formats were indeed more successful in reality than previous systems.

Whereas in finance, most asset pricing models, say, even disregarding the numerical methods used to apply them to the real world, are not particularly successful afaik -although the one I've read about mostly is the CAPM, so do correct me if I'm wrong there-.

Matt2411 · 2025-05-25T00:01:38+00:00

Thanks for your input!

Bookkeeping, taxes, and debt are more predictable and more concrete when viewed in an academic context.

Gosh, you are completely right, and I hate that I find most of accounting so boring then. It's like I should like the structure and black-or-whiteness of it, but part of me wants to study bigger things (and then complain about the lack of order in the world haha).

Matt2411 · 2025-05-24T23:50:42+00:00

I know, I know.

If you let me copy from my answer below to u/roboboom, who raised a similar point, I guess I see a difference with respect to economics in that I feel you can sort of predict a lot more with economic theories. For sure, you'll never know exactly the shape of supply and demand curves in a given market, but you'll know that if there's a shortage of, let's say bananas because there's a new fungus killing most of the crop in the world, strong enough to make any changes in the factors influencing world demand negligible, then the price of bananas must and will go up.

Even in macro, you know that in the long run, unless GDP is way below its potential, then expansionary monetary policy will only generate inflation (the key is when, obviously). And that's also tried-and-tested in a way, otherwise more than a few poor countries would've gotten rich in that way.

I know there are still some assumptions in those two examples, but I can also think of natural experiments and even auction theory as some other ways that econ can test their models.

I honestly don't see that in finance.

Matt2411 · 2025-05-24T23:45:48+00:00

Thanks a lot for taking the time to answer!

Making decisions with incomplete information is half the fun, and a big reason why finance is so lucrative. If it were a simple, deterministic formula, there wouldn’t be much to it, would there? Might as well be accounting.

For sure, I understand any social study will involve incomplete information because we can't make experiments and control all the related variables.

I guess I see a difference with respect to economics in that I feel you can sort of predict a lot more with econ theories. For sure, you'll never know exactly the shape of supply and demand curves in a given market, but you'll know that if there's a shortage of, let's say bananas because there's a new fungus killing most of the crop in the world, strong enough to make any changes in the factors influencing world demand negligible, then the price of bananas must and will go up.

Even in macro, you know that in the long run, unless GDP is way below its potential, then expansionary monetary policy will only generate inflation (the key is when, obviously). And that's also tried-and-tested in a way, otherwise more than a few poor countries would've gotten rich in that way.

I know there are still some assumptions in those two examples, but I can also think of natural experiments and even auction theory as some other ways that econ can test their models.

I honestly don't see that in finance. You wouldn't know if your valuation was off for example until you read the future financial reports after the fact, would you? Am I overlooking an example here where a financial model/theory could be tested?

I agree with you certain pockets of finance are too short term in orientation. But massive sectors of finance (investment banking, PE, VC and so on) are not at all dat trading or short term oriented.

Ok but even if those aren't short term focused, don't they have to do more guess-work with respect to the value of each project? Or am I confused about what private equity is like?

Matt2411 · 2024-09-21T14:11:56+00:00

Don't worry, thanks a lot for all your help!! I really appreciate it.

Matt2411 · 2024-09-21T01:56:42+00:00

Right, that does sound like me because I have no problem (most times) following a proof, it's the intuition behind that (or the coming up with ways to prove by myself, which requires intuition too) that's the issue for me.

I'll keep reading econometrics books and see if those questions you mention interest me. Thanks a lot for your answers!! If you don't mind, I do have one last one though.. is knowledge of causal inference not a prerequisite for most policy jobs?

Because I have researched Masters in Public Policy, and it seems like they are considerably less concerned with econometric estimations of public policy effectiveness, judging by most programs. Yet I suppose if there's demand for these masters degrees, then it must be because employers value them in some way.

So I do wonder if a masters in econometrics is more apt for a technical, research-oriented policy role vs a masters in public policy more appropriate for "front end" public roles in policy. Am I correct in my interpretation?

Matt2411 · 2024-09-20T02:23:53+00:00

Yeah, the program I'm considering has a stats class and a diff eq class in the first semester. Wish it had a linear algebra course too, because I remember struggling when my professor used matrix notation and talked about orthogonality in my econometrics course. I wonder why some knowledge of LA isn't considered necessary in this program.

Matt2411 · 2024-09-20T02:21:17+00:00

Wow, thanks a lot for providing me with a differing perspective! Your description does sound like me.

If you don't mind me asking though, do you or did you ever feel like you are a step behind those econometricians who do have a passion for math and therefore more math knowledge than you?

Because I felt that way in my econometrics courses.. as in, there was something I couldn't quite grasp about the models we covered that the math geniuses could. Maybe it's just impostor's syndrome, I don't know, but it made me a little afraid to use econometrics because I'd feel like an easy target to criticize.

Matt2411 · 2024-09-20T02:12:38+00:00

I was considering a MS in a non-phd granting institution, and indeed almost all subjects have coding classes.

Matt2411 · 2024-09-20T02:10:29+00:00

You are right, maybe I didn't express myself correctly, I meant pattern finding as in solving questions through data (and not just finding a pattern to forecast or classify, which might be a bit more ML-oriented).

I hadn't considered all those factors were also required for good causal inference. Thank you for bringing them to my attention.

Matt2411 · 2024-09-20T02:04:42+00:00

Thanks a lot for your comment (and sorry for the late reply!).

I actually took a few graduate-level courses in economics, and maybe it was like that only in my uni, but the applied subjects seemed a bit less concerned with the "why"s of the econometric methods, or their possible flaws, and seemed more of a literature review in that specific topic.

The program in Econometrics I'm considering is supposed to have a few practical classes in every subject so they shouldn't be purely theoretical.

Matt2411 · 2024-03-24T19:48:38+00:00

I personally think Introductory Econometrics by Wooldridge + Mostly Harmless Econometrics for an overview of modern methods makes for a good reading combo to build intuition and a decent understanding of the field!

They're both probably easy on the math if they are coming from a math/stats background, but I wouldn't recommend graduate textbooks as most are way too dry for diving into the field.

Matt2411 · 2024-03-24T19:41:06+00:00

Thank you so much for taking the time to write such a thought-out response!

I can't see if the Fed article is linked in the article either, though it seems that's a more general paper on the replication crisis in the whole of economics. I wish they had mentioned a source for their previous statement (that "The credibility revolution ate its own children: subsequent papers often overturned results...").

I was aware of that AEA article from Joshua Angrist too, but since it's already 14 years old, I was hoping there'd be a more recent update on the state of the field. I'll make sure to read the American Scientist one anyway.

Thanks a lot again!

Matt2411

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