David Brooks and the "End" of Economics

David Brooks wrote a compelling piece today in the New York Times. Normally, I love everything that Brooks writes, but I had some hesitation really embracing his conclusion in this article. His column today contends that economics, as a "science," will die when economists start to factor in human nature into their analyses. I do not think it will do so, and I think Brooks (much as it pains me to say) may be wrong on this. Let me try to explain why.

I will begin by saying that David Brooks makes the most sense of any commentator/social scientist/talking head out there today -- period. He submits all his inquiries to his own thoughtful, thorough critique, and he writes persuasively and forcefully (as well as humorously). So I kind of surprise myself saying that I am disagreeing with him.

The subject of Brooks' article, economics, confounds me. I grow increasing irritated with economics as a discipline. In my own career as a law student, for example, I find myself confronted economic analysis of the law, and I cannot stand it. Society should not pursue a course of legal action based simply on the idea that the outcome is "efficient." It should pursue the moral outcome. In my mind, the law and economics movement misses this. Judge Posner is much smarter than I am, so I am sure he can rejoin this argument, but that is my critique. Secondly, in my job as an Articles Editor on the NC Law Review, I find many of the articles that I am reading crammed with regression analyses, data sets, and other mathematical chicanery that I have trouble understanding. The problem is not that these data exist; the problem is that the authors seek to base their argument oftentimes on empirical analysis and not moral analysis. When authors use as much empirical data and economic analysis as they do, I get the sense that they don't think arguments based on morality, common sense, or history quite cut it. So I began Brooks' article squarely in his camp.

People are not rational actors. Brooks notes this, and this has long been the Achilles heel of economics. In my mind, Marxism suffers from the same crippling logical flaw. Neither Marxism nor economics take into account human nature. Simply put: you cannot make behavioral predictions about a society when you so grossly misunderstand its people. Brooks notes that the discipline is moving in a "more humanist direction." Economists, presumably, are starting to respond to this age-old criticism that their theories suffer from the supposition that humans make choices rationally.

Brooks concludes that economics will still serve a function, so he does not completely throw out the baby with the bathwater. But I quibble with his complaint that the models did not see the financial crisis coming. Not every model is perfect, and not every discipline can predict things. In a broad sense, one may say that economists did predict this: this is a massive, massive market correction. People will adjust their behavior accordingly, as will markets. But Brooks obviously criticizes the failure to predict this specific crisis. First, I do not pretend to know enough about economic scholarship to know whether any forecasts were out there predicting a global financial meltdown. Secondly, plenty of people saw the risks associated with the behavior of lenders that was going on. And perhaps this fuels his criticism: when a discipline is supposedly the best-equipped to spot a problem fails to do so, but outsiders do, obviously, that discipline has failed.

But I think that Brooks should simply stick to criticizing economics as a discipline. It is simply unfair to an academic discipline to say that it failed to predict a certain outcome. Derivatives, credit default swaps, and many of the other financial instruments that contributed to the economic meltdown were all so new and intertwined in so many unforseen ways that the very real possibility exists that academia had simply not kept up with finance. (Obviously, neither had law. See this article on Brooksley Born, the former head of the Commodities Futures Trading Commission, and how she had more or less predicted this catastrophe.) It's an amazingly complex system. But I don't argue that a particular field of study should predict easy things and forgive economics because particular situation on these facts was simply just too hard to make. I argue that you cannot fault any discipline for failing to predict one specific event.

Academic disciplines are imperfect. Science is for sure imperfect. Any field of learning that relies on trial and error process to obtain information must, by definition, rely on assumptions that further study will later disprove. By testing hypotheses, you arrive at a clearer, more complete picture of whatever you are studying. Economics does the same thing. The financial crisis should simply continue to inform economics as an academic discipline: it should function as yet another set of data. Because we cannot predict the weather well a week out does not mean that we should scrap the discipline of meteorology. So I take issue with Brooks' fault of economics because it did not predict the financial crisis.

Yet Brooks does raise an interesting point. If a government agent like Brooksley Born (an extremely smart lawyer, but not an economist) can predict the economic crisis, why did economists not? No one really has an answer. I would wager that several people grew uneasy at the growth of the derivatives market and saw the lack of regulation as a serious problem. But with Brooks' thesis, that economics is a faulty discipline because it starts with a prima facie untenable premise, I completely agree. People are not rational all the time (indeed, many would argue that I am rarely rational). And it explains many things. Just not all. Science, indeed, cannot explain all. I would point to the apochryphal story of the evolution of the Harvard seal. Originally, one book of the three books was closed to show that man cannot know all. But now, that book is open: man can know all, the seal seems to proclaim. And that is the problem with modern scholarship. That is the problem with secular humanism: there is no humility, there is no recognition that man cannot grasp all there is to know about the world. Man's knowledge is definitively bounded. And scholarship must recognize that point.