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By Noah Smith
Bloomberg View
In 1959, British physicist C.P. Snow gave a lecture called "The Two Cultures," in which he lamented the cultural divide between literary intellectuals and scientists. Having been a research assistant in a physics lab and a published novelist, he knew a thing or two about both. The upshot of his argument was that literary types tend not to know anything about science or technology, while science types tend not to know anything about high culture, to the detriment of the nation as a whole. Since 1959, Snow's dichotomy has become common knowledge; at Stanford, we talked about "techies" and "fuzzies" as if never the twain shall meet.
As a physics major who wrote short stories for fun, I was a little bit like Snow. But since I went to grad school in economics, I've discovered something Snow never even noticed — a third intellectual culture.
Economists use many of the same tools as scientists and engineers — matrix algebra, multiple regression, control theory. But they don't use them in the same way. In economics — especially macroeconomics — the goal is often to persuade other people of your point of view.
Basically, a lot of economists use the tools of science to accomplish literary — or lawyerly — goals. That may sound to some people like a silly exercise, or even a dishonest one, but the fact is that in many economic situations you don't have good enough data to really pin down what's going on. You can give up and go home, or let your political leanings give you an emotionally pleasing answer — and many people take those easy exits. But if you want to do the best you can at describing reality in the face of poor data and uncertainty, you want to make sure your lawyerly arguments are as self-consistent and precise as possible. Hence the math.
The main insight, in my opinion, is that most things in the world have some randomness in them. Economics deals with hideously complex systems where controlled experiments are usually impossible. If you want to isolate one phenomenon, you're going to have to ignore an awful lot of interesting stuff.
But if you think about it, that describes most of the situations we face in our daily lives. We have to make decisions based on the few things we (hopefully) understand, and treat the rest like random noise. We have a strong tendency to overfit the world — to think we can explain each and every little thing that we see. Economists — the good ones, anyway — realize that this is just an illusion. Finance, of course, is the ultimate case of betting on signal while trying to hedge against noise.
Dealing with randomness has made econ stronger in some ways than traditional science. Physicists don't have to be good at statistics — if the results of an experiment aren't clear, run it 1,000 more times! But economics has had to become adept at squeezing every bit of information out of empirical data. Techniques such as instrumental variables, structural estimation and vector autoregressions have been developed to make the best of a difficult situation.
The other way that the economics culture differs from science or literature is in its purpose. Literature describes human behavior, while natural science ignores it. But economists want to understand and control human behavior, and that means the object of their study is as smart and free-willed as the economists themselves. Predicting the actions of humans is a lot harder than predicting the actions of particles, and requires you to ask different questions, such as "What would I do in this situation, if I were being smart?"
So to the list of intellectual cultures, add economics. The disputes and food fights between economists and other intellectuals can be just as fierce as those between scientists and literary types. But there is real value, and uniqueness, in the economics culture.
Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications.