Economists Are Not Plumbers

Peter G. Klein. Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and W. W. Caruth Chair and Professor of Entrepreneurship at Baylor University's Hankamer School of Business.

"The American Economic Review has published Esther Duflo's Richart T. Ely Lecture, "The Economist as Plumber" (ungated version here, video version here). The essay summarizes Duflo's vision of economics. First, economics is primarily useful as a policy tool; i.e., the main role of the economist is to advise governments in designing laws and regulations. Second, economics is not a set of theoretical propositions about human action and interaction, useful for understanding history and policy, but a technique for building things, albeit imperfectly and experimentally. To do so, one must focus on the details, without worrying too much about the big picture. "Plumbers try to predict as well as possible what may work in the real world, mindful that tinkering and adjusting will be necessary since our models gives us very little theoretical guidance on what (and how) details will matter. This essay argues that economists should seriously engage with plumbing, in the interest of both society and our discipline."

I recognize Duflo's achievements (along with Alvin Roth, Abhijit Banerjee, John List, and many others) in pioneering the use of "randomized controlled trials" in economics. But I am not, in general, very sympathetic to this approach. To be sure, there is a role for applied policy analysis, particularly among private actors. Randomized controlled trials can be a useful tool for entrepreneurial forecasting, just like other forms of business analytics (1, 2). And of course, RCTs are supposed to be the gold standard for biomedical research (albeit imperfectly applied). But are they economics?

I have argued before that experiments, and RCTs in particular, are not substitutes for economic theory and more conventional forms of applied economics, because they deal with very small problems. By "small" I don't mean socially unimportant — Banerjee and Duflo became famous for their Poverty Action Lab, an attempt to alleviate poverty in the world's least developed areas — but rather, problems that don't involve much economics beyond something like, "incentives matter." RCTs have been used to study how to get students to study harder for tests, how to write fundraising letters to get more money, how to get people to eat healthier food (maybe), and other social issues. It's unclear that they can provide any insight into the core questions addressed by economic theory and policy, both Austrian and neoclassical. What is the basis of social cooperation? How does an economy grow? What causes business cycles? Should we adopt the gold standard? Does regulation protect private interests? There is nothing wrong with providing a little extra understanding, on the margins. But RCTs don't easily handle the big questions. 

Duflo recognizes this concern but thinks it's a feature, not a bug: 

[A]n economist who cares about the details of policy implementation will need to pay attention to many details and complications, some of which may appear to be far below their pay grade (e.g. the font size on posters) or far beyond their competence level (e.g. the intricacy of government budgeting in a federal system). It will sometimes appear that the extensive training they received is underused if . . . the theoretical complexities turn out to be second order. On the other hand, they will have a chance to apply their economist’s mind, since many of the details have implications for issues that are an economist’s bread and butter: incentives, information, imperfect rationality, etc. They will also need to be very observant, and keep a close eye on the impact of any change they recommend.

There is nothing wrong with being careful and observant in applying one's "economist's mind" to applied work in economic history or policy. (Mises would argue, in contrast to Duflo, that introspection and a deep understanding of the motives and beliefs of the relevant actors are more useful here than experimental methods.) But is that the best use of the profession's scarce talent? 

An additional problem, which I discussed before in the context of Alvin Roth's work, is that RCTs deal primarily with non-monetary exchange. In these models and settings, coordination takes place not through the price mechanism, but by administrative rules created by the "market designer." Again, this may be useful for entrepreneurs, managers, and technicians. But I fear for a world in which government bureaucrats see their role as making private markets "work better." As Hayek pointed out in The Counter-Revolution of Science, engineering is for, well, engineers, not for social scientists. Likewise, plumbing is fine and necessary, but an economist-plumber is acting mainly as a plumber, not as an economist. 

Update: Carmen Dorobăț offered a similar critique on an earlier version of Duflo's paper, emphasizing that economists are not entrepreneurs, economics is a vocation, and economists are not poets. I agree on all three points!"