Dossier Without theory, there is no empiricism

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    Without theory, there is no empiricism

    The Nobel prize in physics was awarded this year to three researchers (Weiss, Barish and Thorne) who empirically validated a century-old theory, originating from a sole equation that aims to explain the entire universe. Those among economists who aspire to make economics an exact science like physics probably felt some jealousy, and maybe a bit of dismay at seeing the Nobel for economics awarded to the academic Thaler, who deals also with psychology, even less easily attributable to one or two equations. But economics started as a social science and it is in this way that it has contributed enormously to our comprehension of the world in which we live, as Francesco Trebbi mentioned in these pages (Il Sole 24 Ore of October 17).
    The big advances of recent decades are due above all to extraordinary SEM empirical research, made possible also by the use of enormous quantities of “micro data” (individual and enterprise) and to the exponential growth in calculation capacity. These steps forward would however not have been possible without a theoretical structure that, in the necessary simplification of hypotheses, creates a robust conceptual framework, which is indispensable for the preparation of empirical research. In the training of economics students, above all of those that will not be professional economists, it is impossible to overlook general economic equilibrium, which is where to start from to teach how to reason on the efficient use of resources, on the informative and allocative role of prices, and on the optimum use of goods in limited quantity. The fact that human beings, as Thaler reminds us, often do not behave rationally does not mean that we should not teach how to think rationally and to understand how economic relations would be if everyone behaved as rational beings. It is therefore still from the basic elements of “traditional” economic theory that we need to start to train economists. But those elements are just a starting point.
    Wendy Carlin, the tireless director of the CORE project for the teaching of economics, states that “economics is capable of explaining many things, but university curricula are not”. These are two extreme theories but there is a lot that is true in both.
    Economics, along with medicine, has made major advances in the explanation of some big questions that interest students and all of humanity, but it has not yet managed to fully understand them. One need only think of the mechanisms of long term economic growth, of the causes of structural unemployment, of the origin and dynamics of economic crises, of the forces that determine creativity and innovation. It is however these questions, along with environmental questions, that interest the most intellectually lively young people.
    University economics teaching needs to equip itself more than it already does to help students to face these problems without claiming to give definitive responses when these simply do not exist. This involves therefore training first of all to formulate articulated and intelligent questions before providing responses. It then involves, and this is the most difficult part, teaching to use different techniques and methods for different questions, and above all, to use more than one to resolve a single problem. It involves making people understand, with exercises and concrete examples, that often by using theory, quantitative analysis and economic history together, results have been obtained that none of the disciplines could ever have obtained on their own.
    It is difficult for me, at this point, to not give the unpleasant impression of speaking pro domo mea. But it is also difficult for me to ignore the essential contribution that economic history can give to the analysis and solution of significant problems which capture the interest of students. I am thinking, for example, of the financial crises and of their spreading to the real economy, phenomena which economic theory has some difficulty in explaining. Ben Bernanke, the Chairman of the U.S. Federal Reserve at the time of the Great Recession, was the author of important works on the Great Depression of the 1930s and showed that he had learnt their lessons. Christina Romer, Chair of Obama's Council of Economic Advisers, is an economic historian at Berkeley: her contribution, far from the spotlight, was not of minor significance. The contribution of economic history is also indispensable to try to respond to the question: “Why do some countries develop and others do not?”
    And not just that: questions that regard our future such as the creation and destruction of work following technological revolutions refer back directly to how much it is possible to learn from past experiences. So that economic history can contribute to adapting economics teaching programmes, we however need professors and researchers that understand economic theory and quantitative methods and are interested in discussing the big problems that interest students, helping them to find the explanation first of all with the tools of the economist, educating them to reason as economists, making them appreciate a social science that, though imperfect and not always capable of providing satisfactory explanations to some big problems, is nevertheless capable of explaining many things, past and present.

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