What's the right move? Well, in an ideal world, you would go and get 999 patients who have illnesses similar to the prince's and give them all a variety of household substances, such as bread mold. Then you would take careful note of who died and use statistical analysis to figure out which household substances cured disease. Thus, you would discover penicillin and invent modern medicine.
Sadly, this is not what you do, because a) if you proposed it, you would be led off to the dungeons and beheaded b) it's the 14th century and you have no concept of the scientific method and c) you don't really have the right tools for that experiment, anyway. Instead, it's bleeding or leeches. So you take your best guess and you pray you're right.
The economic situation we find ourselves in today is a little bit like the example above. Everyone knows that it's a bad thing when factories sit gathering dust and potential workers sit idle on their couches. But the best "experts" that we have -- academic economists -- are in generally ill repute. Surveys have shown that the public has very little confidence in their predictions. They argue bitterly on op-ed pages and can't seem to agree on the most basic issues. And of course, the recent high-profile debunking of the "90 percent debt-to-GDP danger zone" -- a talking point created by the famous economist duo of Carmen Reinhart and Kenneth Rogoff, and used by many Republican supporters of austerity -- did nothing to help economists' reputations.
So are we making a mistake putting our faith in economics? Are economists themselves just charlatans, to be scorned as medieval cranks? Or for all their flaws, are they really the best experts we have? I don't have a definitive answer, just like there is no good answer to the problem of the Royal Physician. But having gone through an economics PhD, I do know a few things that I think the public should realize about the field.
To start, we need to talk briefly about what it is economic theorists do. Essentially, they make models, which are mathematical tools that are supposed to describe how the economy functions. The problem is that economists haven't really built a model of the whole economy that works. A lot of smart people have spent a lot of time creating tools with names like "dynamic stochastic general equilibrium." But as of this moment, those models can't really forecast the economy like our meteorologists can forecast the weather. Furthermore, they contain a lot of obviously wrong assumptions. To give just one example, many of the models stipulate that companies are only allowed to change their prices at random times! Crazy, right? Economists include things like that to make the models easier to use, and they hope that those zany assumptions are actually decent approximations to the way the world really works. But even with these kludges in place, none of the existing models can do much to predict the economy.
Theory isn't the only problem. Economists don't really have good enough data to understand how the economy works, either. With chemistry or biology, you can put things in a lab and test them out with controlled experiments. With microeconomics -- the study of specific markets -- you can do something similar; for example, the auctions that Google uses to sell online ads were developed by microeconomists. But with macroeconomics -- the study of the economy as a whole -- you can't put countries and entire economies in a lab; all you can do is sit there and watch history go by, and try to deduce some patterns. But often enough, those patterns vanish just as soon as you think you've found one.
Just as it doesn't have their caliber of data, macroeconomics also lacks the kind of scientific culture enjoyed by biology and chemistry. In the hard sciences, models are built to explain data; that's their only purpose. But in econ, models are often used simply as storytelling devices to explain an idea about how the world might work.
The best economists are well aware of their ignorance. During his recent graduation speech at Princeton, Federal Reserve Chairman Ben Bernanke half-joked to the crowd that "Economics is a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong. About the future, not so much." Greg Mankiw, one of the world's most famous macroeconomists (and my PhD advisor's PhD advisor) put the sentiment this way in a 2011 New York Times column:
"After more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don't know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention -- the ups and downs of the business cycle -- is where I find myself most often confronting important questions without obvious answers..."What all this means is that when an economist tells you something that is based on a theory or a model, you should be very, very skeptical. And the more complicated the theory or model is, the more you should be suspicious. For example, in a recent Wall Street Journal column, Stanford economist John Taylor called for fiscal austerity, and justified his recommendation by saying it came from a "modern macroeconomic model." I looked through that model and found a lot of assumptions that a lot of other economists would disagree with. But the average Wall Street Journal reader would have no way of knowing that. So beware of economists bearing fancy models.
If economists ever do succeed in developing formal models that work better, then we'll be able to go to them with questions (like "Should the Fed print more money?") and simply trust their expert advice. But until that day, all economists can really give us is intuition, suggestions, and ideas. Like the Royal Physician, each of us then has to decide for him/herself what we think is the best medicine.
So when you listen to economists, the key is to try to understand why they think what they think. For example, Paul Krugman thinks that monetary policy doesn't work well in a depression, because nominal interest rates can't go below zero, and because the Fed is not always good at convincing people that it will allow inflation in the future. Robert Barro thinks that fiscal policy doesn't work, because people anticipate the future taxes needed to pay for today's stimulus, and reduce their consumption today in order to save up to pay those future taxes. Most people can understand these basic ideas, and decide for themselves which they think are plausible, and which they think are unrealistic.
Economists have another virtue, in that they're very good at pointing out each other's logical errors. On the whole, economists are very smart, perceptive people. Like everyone else, they are liable to overstate their confidence and rely too much on their own unproven theories (not everyone is as skeptical and self-questioning as Greg Mankiw). But when they do this, other economists usually catch them! So in order to avoid believing too much in the confident-sounding pontifications of one economist, you should listen to economists on the other side of the issue.
Finally, though mainstream economists may not have it all figured out, they are far better than most of the groups who lurk outside the mainstream. For example, spend an afternoon reading the ideas of so-called "Austrian" economists, who believe that we only need logic to understand how the economy works, and that data and evidence are useless. Absurd. But that's the kind of alternative that's out there, and some people really believe that stuff.
No matter how much we might wish they were, economists are not go-to experts who know just how the world works or how to fine tune it. They are not car mechanics. And if they act like they are car mechanics, you should instantly be suspicious. But they do have a lot of interesting things to say. They might help you clarify or re-evaluate your own beliefs about how the economy functions. They can also help you spot the flaws in each other's arguments.
And in the end, you're the Royal Physician. You may not know everything, but the prince is dying, and you pick from among the "experts" you've got.
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