With the 2016 election less than a year away, presidential candidates have been bombarding us with seemingly diametrically opposed policies— all claiming to boost the economy. How can we sort through these apparently contradictory claims? Economist Paul Romer (the son of former Colorado governor Roy Romer) recently authored a paper in the American Economic Review titled, “Mathiness in the Theory of Economic Growth.” Romer argues that the polarized political climate in the U.S. is seeping into the economics profession, where “mathiness lets academic politics masquerade as science.”
Mathiness is Romer’s term for economists’ use of fancy, and sometimes sloppy, mathematics to promote their preferred theories—a smokescreen of equations that disguises an ideological agenda where politics trumps science. Romer contends that while science leads to a broadly-shared consensus, politics does not. However, since politics must yield decisions, whether or not a consensus exists, people have incentives to exaggerate disagreements between factions and to use mathiness and ambiguous words that can “better serve the factional interests than words that are analytical and precise.” In clarifying remarks to economists, Romer asserted that it is “not okay for macroeconomists to hole up in separate camps. … As scientists, we have to hold ourselves to a standard that requires us to reach a consensus about which model is right. … The alternative to science is academic politics, where persistent disagreement is encouraged as a way to create distinctive sub-group identities.”
While there are undoubtedly many possible explanations for this failure to reach consensus, behavioral economics offers at least one plausible theory. In his book, The Upside of Irrationality, Duke University professor of psychology and behavioral economics Dan Ariely explores the “Not-Invented-Here” bias, which he describes as the human inclination to feel that if we create something, “we tend to feel rather certain that it’s more useful and important than similar ideas that other people come up with.” He maintains that this bias is widespread among scientists and is also known as the Toothbrush Theory. “Everyone wants a toothbrush, everyone needs one, everyone has one, but no one wants to use anyone else’s.”
Given the entrenched political positions many people hold, particularly in macroeconomics, it appears that progress toward consensus requires both a reliance on logic and evidence, as well as a willingness to shed bias by admitting when ideas are wrong. As Romer asserts, “Science is the most important human accomplishment. … It would be tragic if economists did not … protect our shared norms of science from infection by the norms of politics.” If mathiness is a problem, then how should investors account for it? At J.V. Bruni and Company we recognize the mathiness issue, which unsurprisingly extends to the dodgy use of statistics in economics and politics, and we make every effort to account for biases and achieve a balanced understanding of economic conditions and their investment implications.