In 1997, economist Robert Solow published a reflective piece in the journal Daedalus (Vol 126, Issue 1) containing his thoughts on the nature of economics, how the field had changed over the course of his 5-decade career, and possibly where it was going. The whole issue was dedicated to taking stock of where various fields of social science stood in the mid-1990s, and Solow obviously drew the economics stick.
It is a fascinating read. One, Solow is an uncommonly good writer (for an economist). He is also shrewdly perceptive, obviously possesses a powerful intellect and his insights into the field of economics were piercing back then, but perhaps even moreso now. For some brief background, Solow won the Nobel Prize in 1987 and is most famous for his theory on economic growth published in the 1950s. He created a model that mapped the way capital, labor and technology interact over time to drive long-run economic growth.
He also figured out the rather intuitive notion that the value of capital diminishes over time; this is why developing countries can see really rapid economic growth as they increase their initial stock of capital. This can’t go on forever, though, because there is a limit on the amount of capital an economy can produce, so mature economies eventually have to spend resources just maintaining the existing stock of capital rather than creating new capital. This is why China in the 1990s could grow at 10% a year by building infrastructure and factories. But eventually you run up against diminishing returns because how many new roads and buildings can one country build? This simple idea explains why mature economies like the US only grow at 1-2% a year, and can’t really get passed that level, while Vietnam is chugging along at 7%.
In the article, titled “How did economics get that way and what way did it get?” Solow grapples with a general criticism of his field: “It is widely perceived that economics has become a largely formal and abstract discipline that is detached from the real world.” He didn’t know it at the time but this tension would only become more pronounced as time went on. By the 1990s a change that had been underway for some time was beginning to really take hold in the field of economics. Many older economists, like Mancur Olson and Douglass North, who were brought up when the intersection between politics, economics, philosophy and sociology was more fluid, were reaching the end of their careers. Economics was becoming increasingly data and model-driven, more technical and more mathy. People were wondering whether this was divorcing the study of economics from everyday life.
Solow sought to address these concerns. His basic argument was that economics was not becoming more formalistic or technical - it was becoming more model-driven, and that these models could now be informed by better data and better techniques. But, to him, the foundation of a good model did not depend on math or technical expertise; it depended on a deep, intuitive understanding of the particular problem you were trying to solve, and while this might involve some math is also involved understanding the social and historical and institutional context of whatever problem you were trying to model.
Or, as Solow put it: “I venture the estimate (safe because it is unverifiable) that there is little or no correlation in fact between the difficulty or mathematical depth of an economic model and its value as science.”
The piece is full of similarly great one-liners, now that we have the benefit of hindsight. I’ve collected some of the greatest hits below:
“There is a movement that does experimental economics, but I cannot guess how far it can go.” Turns out it went pretty far.
“This is not to say that mainstream economists think explicitly about method.” That may have been true in 1997, but methodological rigor has come to be the gatekeeper of mainstream economics in modern times. I wonder what Solow would think if he hopped on #econtwitter and saw some of the endless technical hair-splitting about difference-in-difference and causal inference which dominates the discourse in modern American economics.
In describing some of the (arguably unrealistic) assumptions that economists need to make: “It is a model of an economy populated by a single immortal family with perfect foresight.”
And, finally, on theory: “Theory is cheap, and data are expensive.”
The whole thing is pretty much endlessly quotable, and I recommend anyone interested look it up for themselves. What the piece reveals is a leading scholar who was acutely aware of where the discipline was in 1997, and I think had some inkling of where it might go if technique and data and methods were allowed to take over and crowd everything out.
First and foremost, though, the article is a defense of economic models. “A model is a deliberately simplified representation of a much more complicated situation,” Solow writes. “The idea is to focus on one or two causal or conditioning factors, exclude everything else, and hope to understand how just these aspects of reality work and interact.”
Solow was quick to acknowledge that history and society and institutions are important factors in both how a model is constructed, and how relevant that model is over time: “A good model embodies accurately a representation of the institutions, norms, and attitudes that govern economic behavior in a particular time and place. There is no reason to presuppose that a successful model of the supply of labor in the second half of the twentieth century will apply unchanged to the nineteenth century when institutions, norms, and attitudes were different.”
This is coming straight from one of history’s great economic model-builders, who understood that a simple but well-constructed model, one that somewhat accurately approximated the relationship between a few key variables, had immense explanatory power. He also understood that, in economics, the way these variables interacted with norms and institutions and attitudes would obviously change over time, and that models needed to be capable of adapting to those changes.
The field of economics has proven unequal to the task, however. For me, here is the kicker. Solow cautioned that economics was not comparable to a physical science, bound by immutable laws of nature: “The temptation is to believe that the laws of economics are like the laws of physics: exactly the same everywhere on earth and at every moment since Hector was a pup. That is certainly true about the behavior of heat and light. But the part of economics that is independent of history and social context is not only small but dull.”
That part of his insight, and it was an insight shared by many of the economists of his day, has to a large degree been lost in subsequent decades as economists have tried, through increasingly complex mathematical proofs and rigorous research designs, to bring their field ever closer to that of a hard or physical science. One bound by immutable laws and where the right theoretical model will never be overturned because they are as sound as the law of gravity. Such was the hubris that led macroeconomists, by the 2000s, to believe they had essentially solved financial crises in mature economies. Clearly, that confidence was misplaced.
Solow’s view on economics, and how good models rely on a keen understanding of social and structural context, is something I hope we see make a return to mainstream economics. Unfortunately, those who had the clout and the position to champion such ideas, like Bob Solow or Douglass North or Elinor Ostrom, are no longer able to do so, and so the field continues its drift into abstraction and mathiness, beholden to the false belief that economics, as a field of scientific inquiry, is no different from physics.