First, economic theory, taken as a whole, is culpable. The core problem is that each theoretical departure, whether it is a knotty agency problem or a behavioral kink, is inserted into an otherwise pristine general equilibrium framework. The only way you can get an article published in a mainstream economics journal (and therefore reproduce the conditions of your existence as an academic economist) is to present your departure piecemeal, showing that it exerts its effects even in an otherwise pristine universe. According to the standards that rule the profession, a GE model with one twist is theory’s version of the controlled experiment. This is why the picture Eichengreen paints for us, in which multiple unorthodox insights come together and interact synergistically, is never seen in a peer-reviewed economics journal. As a result, even though every organ of 1960′s-era orthodoxy is mortally wounded, the entire body strides vigorously forward. That is a prime reason why, despite the labors of so many clever and right-thinking economic theorists, we are in this mess.

Second, the shift toward empiricism is not an unalloyed gain. Yes, much of this work is refreshingly open-minded, allowing the data to lead. An honest tally of the published literature, however, particularly in the top journals, will show that a majority of quantitative articles are concerned to calibrate existing theoretical models. Unless a model is so out of step or inflexible that it cannot be calibrated at all, it passes the empiricist’s “test”. Economics, as I have argued before here and elsewhere, has no culture of what in real sciences is known as a critical test, a confrontation with data that can be survived only if the hypothesis in question is highly likely to be correct. In other words, empirical work in economics, whatever sophisticated estimators it employs and stringent p-values it seeks, has little to do with the minimization of Type I error, properly understood. For this reason, bad theory (like the mind-numbing onslaught of DSGE models in macro) prosper even in the midst of the “empirical turn”. With enough tweaking, I can calibrate an equilibrium model of the US economy as of 2006, and again as of 2009. It won’t be exactly the same model, but it will use a standard set of baseline assumptions, so who cares?

Recession Forecast?
Friday, September 07, 2007 | 10:00 AM
in Economy | Psychology/Sentiment
Interesting WSJ Readers Poll: Will the U.S. economy enter a recession in the next six months?

Slightly more than half (51%) do not think we are heading to a recession. About half expect a recession, or say we are already in one (38+11%).
Note this WSJ reader’s Poll was taken yesterday (9/6/07), prior to today’s NFP data
Friday, September 07, 2007 | 10:00 AM | Permalink | Comments (59) | TrackBack (0)

We are still calling for a recession of a minimum of two years. We’ve lived the high life too long without a true day of reckoning. The time has come. We can blame $100 oil, federal deficits, or the moon. It doesn’t matter. The recession became an eventual fact two years ago- for details see our April 2007 post at http://jpetervanschaik.googlepages.com
We will remain bearish until the S&P 500 bottoms below 600.
Posted by: J. Peter Van Schaik | Jan 12, 2008 1:44:32 AM

I read the article and thought, “Yep, that’s about right” and then browsed the comments. Dan Duncan is very accurate here. It’s like the pot calling the kettle black.; Going after the whole profession is too broad, there should be more emphasis put on the actual people. Reaming 10 Economists would be more helpful but would require more concrete examples and a longer article.