Economics Rules Quotes

“The correct answer to almost any question in economics is: It depends.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“Many models are constructed to account for regularly observed phenomena. By design, their direct implications are consistent with reality. But others are built up from first principles, using the profession’s preferred building blocks. They may be mathematically elegant and match up well with the prevailing modeling conventions of the day. However, this does not make them necessarily more useful, especially when their conclusions have a tenuous relationship with reality. Macroeconomists have been particularly prone to this problem. In recent decades they have put considerable effort into developing macro models that require sophisticated mathematical tools, populated by fully rational, infinitely lived individuals solving complicated dynamic optimization problems under uncertainty. These are models that are “microfounded,” in the profession’s parlance: The macro-level implications are derived from the behavior of individuals, rather than simply postulated. This is a good thing, in principle. For example, aggregate saving behavior derives from the optimization problem in which a representative consumer maximizes his consumption while adhering to a lifetime (intertemporal) budget constraint.† Keynesian models, by contrast, take a shortcut, assuming a fixed relationship between saving and national income. However, these models shed limited light on the classical questions of macroeconomics: Why are there economic booms and recessions? What generates unemployment? What roles can fiscal and monetary policy play in stabilizing the economy? In trying to render their models tractable, economists neglected many important aspects of the real world. In particular, they assumed away imperfections and frictions in markets for labor, capital, and goods. The ups and downs of the economy were ascribed to exogenous and vague “shocks” to technology and consumer preferences. The unemployed weren’t looking for jobs they couldn’t find; they represented a worker’s optimal trade-off between leisure and labor. Perhaps unsurprisingly, these models were poor forecasters of major macroeconomic variables such as inflation and growth.8 As long as the economy hummed along at a steady clip and unemployment was low, these shortcomings were not particularly evident. But their failures become more apparent and costly in the aftermath of the financial crisis of 2008–9. These newfangled models simply could not explain the magnitude and duration of the recession that followed. They needed, at the very least, to incorporate more realism about financial-market imperfections. Traditional Keynesian models, despite their lack of microfoundations, could explain how economies can get stuck with high unemployment and seemed more relevant than ever. Yet the advocates of the new models were reluctant to give up on them—not because these models did a better job of tracking reality, but because they were what models were supposed to look like. Their modeling strategy trumped the realism of conclusions. Economists’ attachment to particular modeling conventions—rational, forward-looking individuals, well-functioning markets, and so on—often leads them to overlook obvious conflicts with the world around them.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“Once a model is stated in mathematical form, what it says or does is obvious to all who can read it. This clarity is of great value and is not adequately appreciated. We still have endless debates today about what Karl Marx, John Maynard Keynes, or Joseph Schumpeter really meant. Even though all three are giants of the economics profession, they formulated their models largely (but not exclusively) in verbal form. By contrast, no ink has ever been spilled over what Paul Samuelson, Joe Stiglitz, or Ken Arrow had in mind when they developed the theories that won them their Nobel.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“These problems are compounded by the fact that accepted practice does not require economists to think through the conditions under which their models are useful. Asked point-blank, they can state chapter and verse all the assumptions needed to generate a particular result; that is, after all, the point of modeling. But ask them whether the model is more relevant to Bolivia or to Thailand, or whether it resembles more the market for cable TV or the market for oranges, and they will have a hard time producing an articulate answer. The standards of the profession require that the modeler make only some general claims about how what he or she is doing is relevant to the real world. It is left to the reader or the user of the model to infer the specific circumstances in which the model can help us better understand reality.§ This fudge factor increases the chances of malpractice. Models lifted out of their original context can be used in settings for which they are inappropriate.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“Because economists go through a similar training and share a common method of analysis, they act very much like a guild. The models themselves may be the product of analysis, reflection, and observation, but practitioners’ views about the real world develop much more heuristically, as a by-product of informal conversations and socialization among themselves. This kind of echo chamber easily produces overconfidence—in the received wisdom or the model of the day. Meanwhile, the guild mentality renders the profession insular and immune to outside criticism. The models may have problems, but only card-carrying members of the profession are allowed to say so. The objections of outsiders are discounted because they do not understand the models. The profession values smarts over judgment, being interesting over being right—so its fads and fashions do not always self-correct.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“In sum, economists (and those who listened to them) became overconfident in their preferred models of the moment: markets are efficient, financial innovation improves the risk-return trade-off, self-regulation works best, and government intervention is ineffective and harmful. They forgot about the other models. There was too much Fama, too little Shiller. The economics of the profession may have been fine, but evidently there was trouble with its psychology and sociology.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“when a consensus forms around the universal applicability of a conclusion from a specific model, the critical assumptions of which are likely to be violated in many settings—as with perfect competition, say, or full consumer information—we have a problem.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“An economists’ consensus is perhaps more a rarity than a regularity. But when it happens, we need to pause and take stock.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“We have arrived at one of the central paradoxes of economics: uniformity amid diversity. Economists work with a plethora of models, pointing in all kinds of contradictory directions. Yet when it comes to the issues of the day, their views often converge in ways that cannot be justified by the strength of the available evidence.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“These results stand in sharp contrast to the hype that microfinance has attracted in development policy circles. They throw cold water on models that suggest lack of access to finance is among the most important constraints that poor households face.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“Field experiments to date have shown that microfinance—the provision of small loans, typically to women or groups of women—is not particularly effective in reducing poverty.14”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“In a famous hoax, physicist Alan Sokal submitted an article to a leading journal of cultural studies purporting to describe how quantum gravity could produce a “liberatory postmodern science.” The article, which parodied the convoluted style of argument in the fashionable academic world of cultural studies, was promptly published by the editors. Sokal announced that his intention was to test the intellectual standards of the discipline by checking whether the journal would publish a piece “liberally salted with nonsense.” Sokal, “A Physicist Experiments with Cultural Studies,” April 15, 1996,”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“The fracas was frequently portrayed in the media as two world-famous Harvard professors brought low by a graduate student from a lesser-known, unorthodox department. This is largely hyperbole. But the clash did illustrate an import aspect of economics—something that the profession shares with other sciences: Ultimately, what determines the standing of a piece of research is not the affiliation, status, or network of the author; it is how well it stacks up to the research criteria of the profession itself. The authority of the work derives from its internal properties—how well it is put together, how convincing the evidence is—not from the identity, connections, or ideology of the researcher. And because these standards are shared within the profession, anyone can point to shoddy work and say it is shoddy.¶¶ This may not seem particularly impressive, unless you consider how unusual it is compared to many other social sciences or much of the humanities.## It would be truly rare in those other fields for a graduate student to get much mileage challenging a senior scholar’s work, as happens with some frequency in economics. But because models enable the highlighting of error, in economics anyone can do it.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“policy discussion usually means pitting one model against another. Viewpoints and policy prescriptions that aren’t backed by a model typically don’t have standing.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science

“When economists get it right, the world gets better.”
― Dani Rodrik, Economics Rules: The Rights and Wrongs of the Dismal Science