Book review: Economics Rules

Economics and economists come in for a fair amount of criticism from those outside the discipline. Not all of that criticism is for good reason, but at least some of it is. And there is also a fair amount of criticism of economics and economists from within the discipline. Dani Rodrik's new book, Economics Rules, fits into the latter category. However, it isn't all negative. As Rodrik notes in the introduction, "this book both celebrates and critiques economics".

At the heart of economics lie models. Rodrik spends much of the early chapters describing what economic models are, and what makes them useful. The usefulness of models is that they capture aspects of reality. The multiplicity of different models in economics exist because they capture different aspects, relying on different simplifying assumptions to do so. However, this also causes a problem because:

...very few of the models that economists work with have ever been rejected so decisively that the profession discarded them as clearly false.

Despite this problem, Rodrik is clearly in favour of having diversity of models, and clearly advocates for this, with the caveat that economists need to recognise that each model is a model, not the model. This is fair criticism - too often economists rely on shoehorning reality into their preferred model, rather than recognising that in different situations or contexts, different models will be called for. This is something more akin to the approach of Nobel Prize winner Jean Tirole.

When economists confuse a model for the model, Rodrik explains that this leads to errors of omission (where economists fail to see troubles looming ahead, such as the Global Financial Crisis), and errors of commission (where economists become complicit in policies whose failure might have been predicted in advance, such as the Washington Consensus). He goes on to note that:

Because economists go through a similar training and share a common method of analysis, they act very much like a guild. The models themselves may be the product of analysis, reflection, and observation, but practitioners' views about the real world develop much more heuristically, as a by-product of informal conversations and socialization among themselves. This kind of echo chamber easily produces overconfidence...

Rodrik sees this as leading to two weaknesses in modern economics:

...the lack of attention to model selection and the excessive focus at times on some models at the expense of others.

Alluding back to his earlier book, The Globalization Paradox (which I reviewed here), he argues that economists need to be 'Foxes' (holding many different views about the world, based on different models), rather than 'Hedgehogs' (who are captivated by a single big ides, such as 'markets work best'). 

Overall, this book is a good read for both economists and non-economists alike. Economists who read the book with an open mind may be persuaded to be a little more open to alternative models, or at least they might apply themselves more thoughtfully to the task of model selection. Non-economists who read the book may gain a better appreciation for what underlies the perceived arrogance of economists in defending their policy prescriptions based on particular models. Recommended!