Many economists and regulators suffer from a kind of physics envy. The hard sciences can quantify precisely and predict accurately via the experimental method. But even after Vernon Smith‘s innovations in experimental economics, the discipline still lacks the scientific precision that, say, an engineer enjoys.
Models, even complicated ones, are necessarily simplifications of unfathomably complicated economic phenomena. Models are also largely unable to account for fickle human elements. This structural limitation has foiled the plans and predictions of many economist-regulators.
Page 247 of the late Thomas McCraw’s superb Prophets of Regulation contains a gem of a quote from Alfred Kahn, the Cornell economist who understood this. It comes from his days advising New York State’s Public Service Commission, which set electricity rates:
[Kahn's] candor seemed appealing yet, given their training, the engineers naturally preferred precise solutions over rough approximations. To meet their objections, Kahn again and again asked them, “Do you want to be precisely wrong or approximately right?” Ultimately he won them over.
Kahn also played a major role in airline deregulation during the Carter years, though with typical Kahn wit, he immediately demanded a paternity test when someone once referred to him as the father of deregulation. Still, Kahn’s intellectual humility provides a positive example for regulators and economists of all stripes.