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The intuition is the real economics

Noah Smith is encountering the frustration that most graduate students in economics experience when their professors put them through a math wringer that the students correctly suspect is largely useless. (In the more than 20 years I have worked on economic policy, as a consultant in several countries, in the U.S. Congress, and at the U.S. Treasury, I do not recall having used anything beyond basic algebra and some elementary statistics that you can run in Excel, such as a regression line in a scatterplot diagram. Only a few people I know who work on economic policy use more math than that.) Bryan Caplan at EconLog maintains that "economath fails the cost-benefit test."

I made a few comments on models in a post months ago. Now I add that what graduate school professors call, often disparagingly, "intuition" is in fact the real economics. When mathematicians say they are giving an intuitive explanation, they mean they are skipping important steps for the sake of making the presentation more understandable, or in some cases, they mean they suspect they know the answer but are missing some steps to prove it. When economists say they are giving an intuitive explanation, they mean they are explaining how people think and act. But people's thoughts and actions are the building blocks of economics!  Any satisfactory account of economic phenomena has to be able to show how they arise from those building blocks. The building blocks are also what we use to navigate our way through the human world. The main reason that graduate school economath is so useless later in most careers is that it leaves out the thinking, acting people who make the economy hum. Instead of stories about people, it offers much less satisfying stories having to do with aggregates, propensities, and the like.

"Intuition" is not the right word for the explanations in terms of thoughts and actions that good economics offers. A more precise term is fortunately at hand: Verstehen, the German for "understanding." As many Austrian economists and German-language or German-influenced writers in other social sciences have used it, it means our understanding of other people's intentions and actions. More English-speaking need to become familiar with it.

  • Benjamin Cole

    Well, I agree with this post…but.

    Suppose it is "intuitive" that people will save more, induced by higher interest rates.

    But then, suppose people actually save not because of interest rates, but for retirement, college, housing, possible medical bills, to start a business and economic security. They may actually save more when real interest rates are lower, and the economy is a bit scary.

    So one could get a global glut of saving at zero interest rates.

    Now, models probably won't help here…but intuition may not either.

    I find most economists revert to their inner agendas, whenever using intuition or models (models can be gamed easily).

    So, who has the biggest megaphone?

    • Kurt Schuler

      For isolating pure cases, economists use the assumption that other things are equal (ceteris paribus). Empirically, other things are rarely equal, so if you want to move beyond the blackboard, you have to ask "how much?" In the case you pose, empirically there are some savers who are not sensitive to changes in interest rates and others (particularly corporations) who are. Whether a global glut of saving can occur at zero interest rates is therefore not a question of economic theory (under certain assumptions, it can), but of empirical economics.

  • Bill Stepp

    Anne T. Positivist gave the lie to econometrics in the 1980s.

    Prove the fallacy of econometrics.

    by Anne T. Positivist

    1.) Econometrics is mathematical history.
    2.) Mathematics is a priori knowledge.
    .:. 3.) Econometrics is a priori history.
    4.) A priori history is a fallacy.
    .:. 5.) Econometrics is a fallacy.

    Don't mess with Tex, er Anne T. Positivist.

  • Michael Miller

    Kurt, are you suggesting a significant distinction between Verstehen and understanding?

    • Kurt Schuler

      "Understanding" is a broad term that applies to both human and nonhuman things. One can say, for instance, "I have a poor understanding of the geology of Hawaii." Verstehen as social science term borrowed from German has the narrower sense of our understanding of the thoughts and actions of other human beings.

  • Michael Miller

    Interesting. I'm familiar with the ordinary verb "verstehen," which is as general as "to understand," and the corresponding (also general) noun "Verstehen," but not the technical narrower social science meaning. Do German writers in the social sciences use "Verstehen" as a technical term with that narrowed meaning, or have English-speaking social scientists borrowed "Verstehen" and given it the narrowed meaning?

    • Michael Miller

      Never mind, Kurt. I just re-read your original post and see that German social scientists developed the narrowed meaning.

      • Kurt Schuler

        In particular, among those I've read, Wilhelm Dilthey (1833-1911) and Max Weber dwell on it. The Wikipedia article on Verstehen is okay for a quick overview.

  • Michael Miller

    Actually, I read the Wikipedia article shortly after I left my last comment. You're right, it's "okay" for a "quick overview."

    When I first read your post and saw "our understanding of other people's intentions and actions," I misunderstood and thought that's just one example of understanding or a subset of understanding. But now I understand that Verstehen is really used as a method of understanding, especially as opposed to the project of positivism in the social sciences. I don't see how anyone can think that one can understand beings who think and act, merely by "external" observation and description, without trying to understand them through their own subjectivity, i.e., through understanding their thoughts, intentions, motivations, feelings, meanings, etc. That's the reason I left the academic social sciences, having started college as a political science major.

  • NES

    I believe
    that economic intuition is essential for producing valuable economic research,
    for it is a compass that provides us with a proper research direction, while
    math is merely a tool for providing an economic intuition.

    An
    economist, though equipped with powerful economic and mathematical tools, is
    not able to conduct meaningful research without intuition to guide him. Basically,
    any science cycles through two phases in its progress: a slow development of
    existing methods and an instant breakthrough to a new type of method. The
    development phase mostly demands technical skills of a researcher, while the
    breakthrough phase requires a huge deal of intuition to realize a promising
    direction of research. Usually both phases are important for scientific
    progress, but economics has two peculiarities that set it apart from other
    sciences. Firstly, as a quite new and rapidly developing science, economics
    cycles through the phases very quickly. Big breakthrough papers appear comparatively
    often, thus constantly changing researchers’ views on economics. And only intuition
    can guide a researcher to that kind of study or at least help him to adapt to a
    new point of view. Secondly, in economics, breakthrough studies are rarely based
    on non trivial development of some existing model. Usually they explore
    something completely different, thus making the preceding slow development phase
    even less valuable. Overall, these two features of economics make economic
    intuition way more valuable to a researcher than technical mathematical skills.

    Mathematics
    provides good tools to work with economics models. But without intuition, the application
    of those tools results only in a random development of complex models. Many sciences
    use mathematical methods to describe ideas. Usually the more advanced science
    is the more complicated it becomes and thus, the more mathematics it requires. However,
    economics still cannot describe reality very well; nevertheless, many
    researchers try to use bizarrely complex math in their studies, despite the
    fact that application of such complicated methods is meaningless for now. Moreover,
    breakthrough studies tend to use rather simple math but carry a great deal of
    intuition, which makes them breakthrough. Thus, math is a great language for
    describing ideas, but it could never be a substitution for intuition.

    To sum up, economics
    researchers require great intuition to provide them with a promising research
    direction. Mathematical skills are important too, but merely to prove that
    intuition. In time, as economics matures, intuition will probably pass on some
    of its importance to mathematical skills. But for now, it remains essential.

    SEN