Lucas, Jenner, Washington, Shaw
I am thinking about modern macroeconomic methodology again. I am also thinking about the fresh water school of thought. Also I am thinking about aspirin and smallpox.
I am going to attempt a nickle summary of the Lucas critique (really a half penny summary or a 5 Turkish Lira summary).
Lucas argued that it was unwise to base policy on models which fit the available data, because parameters can be estimated even if they do not describe causal relationships but rather depend on the policy regime. So long as one does not understand the mechanism which causes the pattern one sees, one should not use it to forecast the effect of policy.
I will admit that this is (more even than usually) unfair, but, I suspect I could get away with it if I didn’t admit that.
Now note, I did not include the word “economic” anywhere. Therefore straw Lucas would argue that the observed pattern that people exposed to Vaccinia don’t get small pox, should not be used to forecast the effect of a policy of mass vaccination unless and until the mechanism is understood. The mechanism of disease and of acquired immunity was not understood at all when Jenner wrote. It wasn’t understood a century later. Bernard Shaw dismissed it as crude empiricism in “Doctors’ Delusions” in which he also asserted that vaccination doesn’t work and that smallpox is, in fact, the exact same disease as large pox, that is syphilis.
However, the crude empiricism lead to excellent policy advice. The approach which was not based on any understanding of mechanisms of any micro foundations worked. Small pox no longer exists outside of Moscow and Frederick Maryland where some is frozen.
This post is 2 days late, because our founders made policy related to acquired immunity — George Washington banned it — he forbade soldiers from attempting to acquire immunity from small pox.
The alert reader will notice that the letters “vacc” do not appear in the paragraph above. The reason is that long before vaccination, people avoided small pox by innoculating themselves with the small pox virus. A little bit of fluid from a pock put on the skin almost always gave the person one pock then resistance forever (about 1% of the time it gave the person small pox — this is a point estimate from a doctor who kept records and the 1% is one person out of about 100). This was the procedure banned by Washington. He didn’t understand what was going on.
Washington’s policy was good policy too. The person who got one pock acquired resistance fast enough to avoid small pox, but he or she was contagious and tended to infect those around him or her. So the old policy of inoculation with small pox shows us the dangers of crude empiricism. The obvious effect was one pock then immunity for the patient. The non obvious effect was more small pox. This also shows the importance of externalities and the difficulty of learning from simple experiments when there are externalities.
The bottom line is that there is no bottom line. The world is complicated. Neither ignore patterns you haven’t explained nor look at the data which has been collected and ignore possibilities which haven’t been or can’t be evaluated is the answer. The answer is, if anything, that one should keep an open mind.
The problem is that it always comes down to either empiricism or making something up. Lucas doesn’t seem to have understood this. Suppose you want to know if higher demand leads to higher prices. We know that isn’t always true. Sometimes raising the price of something increases demand since higher prices are associated with luxury and exclusivity. (Artists produce numbered prints of their works for just this reason.) Then there’s the issue of whether it was the increased demand that forced the prices to rise or some other issue in the supply chain. (For example, increasing factory output is inexpensive until capacity is reached in which case one needs to buy a new factory. Is it the rising demand or the cost of a new factory that will require raising the price? How can one tell?)
Every field has this problem, even mathematics. You can restate just about any piece of mathematics by swapping theorems and axioms. What it comes down to is what is empirically observed as true. In mathematics, it’s whether you can perform the necessary proof. In other fields, it requires experimentation and measurement. Welcome to the philosophy of science.
Of course, it is possible that Lucas was arguing that his gut feelings were right, and so evidence should not be used against them.
In this area, that was Thomas Balogh’s description of the newly resurgent epidemic of neoclassical economics a la Lucas: “Smallpox”.
Welcome to Angry Bear. First time commenters go to moderation to weed out spam, advertising, and spammers.