Simon Wren-Lewis and commenters on Tim’s blog are complaining about ideologically-motivated attacks on conventional economics – one from the left and one from the right. I want to agree with both these complaints.

First, the question of the merits or demerits of economics should be independent of one’s political ideology. You can be well to the left politically whilst cleaving to orthodox economics: open borders and anti-managerialism, for example, don’t require heterodox economics. Or you can be well to the right without indulging in the quackery of which Simon complains: small-state Keynesianism is a tenable position – it was good enough for Keynes himself.

Secondly, the ideological attacks upon mainstream economics misunderstand how economics progresses.

Let’s take an example from financial economics. The dominant position used to be the efficient market hypothesis – the idea that share prices embody all available information and so you cannot beat the market unless you take extra risk*. However, we now know that this isn’t right. Both momentum stocks and defensive (pdf) ones (pdf) do better than they should. Granted, this might be a pay-off for taking on benchmark risk, but it’s strong evidence that some investors can indeed beat the market without taking a risk that troubles them.

There are, though, two key points about this successful challenge to the once-orthodox position.

First, it is based not in theory or hand-waving, but in the discovery of hard facts. By facts, I mean not anecdotes or even single (pdf) academic papers, but rather findings that are consistent across many different data sets. Thomas Gradgrind’s educational philosophy might have left a little to be desired, but critics of economics should heed his words**:

Now, what I want is, Facts. Teach these boys and girls nothing but Facts. Facts alone are wanted in life. Plant nothing else, and root out everything else. You can only form the minds of reasoning animals upon Facts: nothing else will ever be of any service to them.

Secondly, context matters. Although the EMH is wrong in the sense that we can beat the market without taking on extra risk, it is correct in other contexts. If you are asking the question “should I buy an actively managed fund?” you should behave as if the EMH were correct.

This point generalizes (to a degree!). As Simon says, channelling Dani Rodrik, “there are many valid models, and the goal is to know when they are applicable to the problem in hand.” For example, I’ll concede that there have been times – and there might well be in future – when expansionary fiscal austerity works. It’s just that those times and places are not here and not now.

Which brings me to my third gripe with the anti-economics brigade. Economics is – or at least should be – a practical discipline, aimed at helping individual people to make better decisions in specific contexts**. A (futile) hunt for big-T truth or grand theories can distract us from this job.

* I’m talking about the pricing of individual stocks here, not of the whole market. Paul Samuelson, for example used to believe markets were “ micro efficient but macro inefficient.” Even this isn’t wholly true though.

** In fact, economics is becoming more (pdf) Gradgrindian – and rightly so.

** Most of my day job consists in doing just this.