Must-Read: Robert M. Solow (1985): Economic History and Economics

Must-Read: Because economic theory can be nothing but crystalized or distilled economic theory:

Robert M. Solow (1985): Economic History and Economics: “Economics is a social science… subject to Damon Runyon’s Law that nothing between human beings is more than three to one… http://www.jstor.org/stable/pdf/1805620.pdf?seq=1#page_scan_tab_contents

…Much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity. Moreover, all narrowly economic activity is embedded in a web of social institutions, customs, beliefs, and attitudes. Concrete outcomes are indubitably affected by these background factors…. As soon as time-series get long enough to offer hope of discriminating among complex hypotheses, the likelihood that they remain stationary dwindles away, and the noise level gets correspondingly high. Under these circumstances, a little cleverness and persistence can get you almost any result you want. I think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief. Indeed, some of Fortune’s favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices.

If I am anywhere near right about this, the interests of scientific economics would be better served by a more modest approach. There is enough for us to do without pretending to a degree of completeness and precision which we cannot deliver…. The true functions of analytical economics are… to organize our necessarily incomplete perceptions about the economy, to see connections that the untutored eye would miss, to tell plausible-sometimes even convincing-causal stories with the help of a few central principles, and to make rough quantitative judgments about the consequences of economic policy and other exogenous events.

In this scheme of things, the end product of economic analysis is likely to be a collection of models contingent on society’s circumstances-on the historical context, you might say-and not a single monolithic model for all seasons….

What economic history offers… is more interesting. If the proper choice of a model depends on the institutional context-and it should-then economic history performs the nice function of widening the range of observation available to the theorist. Economic theory can only gain from being taught something about the range of possibilities in human societies. Few things should be more interesting to a civilized economic theorist than the opportunity to observe the interplay between social institutions and economic behavior over time and place….

If the project of turning economics into a hard science could succeed, it would surely be worth doing. No doubt some of us should keep trying….

There are, however… reasons for pessimism…. Hard sciences dealing with complex systems… less complex than the U.S. economy… succeed because they can isolate, they can experiment, and they can make repeated observations under controlled conditions[;]… or because they can make long series of observations under natural but essentially stationary conditions…. Neither of these… is open to economists….

A clear and productive division of labor between the economist and the economic historian… economist… concerned with making and testing models of the economic world as… we think it is[;]… economic historian… whether this or that story rings true when applied in earlier times or other places, and, if not, why not…. Economic history can offer the economist a sense of the variety and flexibility of social arrangements and thus, in particular, a shot at understanding a little better the interaction of economic behavior and other social institutions…