Here’s an engaging read from this AMs NYT on why economics doesn’t qualify as a science, and, more fundamentally, asking what is it good for, anyway?
On the first point, you’d probably be hard pressed to find even many economists willing to defend our discipline as a science, or at least anything resembling a hard science. As the Times piece points out, “The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy.”
Right…there’s that. And this fundamental limitation grows from the fact that the theories, variables, concepts, even the most fundamental building blocks of economics are social, not physical constructs. You drop a stone, known forces determine its trajectory. You change a price, and economic theory can tell what might happen. It can even tell you—with mathematical precision—what should happen if that price change is met by fully rational actors with full information.
But it cannot tell you what will happen, nor will it ever be able to do so.
But that doesn’t mean economics is useless. The authors come up with some compelling ways in which it can and does help improve society which I’ll get to in a second. But first, at least for my money, they actually didn’t go nearly far enough in indicting the way the discipline is misused and abused in the real world.
Because economics both poses as a hard science and fails to generate reliable predictions, establishing economic facts is an elusive exercise. Battling statistical analyses come to opposite conclusions on the impact of fiscal stimulus, changes in tax rates, wage mandates, regulations, and so on. Into this void steps money and power, such that today we find ourselves with think tanks staffed by economists who provide their clients with the answers they seek. And since those with the deepest pockets can buy the results that best serve their goals, it is increasingly difficult to generate the wealth of evidence needed to offset market failures, inequities, and even existential threats.
Suggest that more progressive taxation is necessary to raise revenues for productive investments or social insurance, and some group of economists will line up to explain how that will backfire (what we really need to do, they’ll helpfully point out, is to cut taxes on the wealthiest). Deficit alarmism, often based on faulty pseudo-science about the impact of deficits on interest rates and growth, has contributed to the current moment, wherein governments in most advanced economies are pursuing austerity measures that are clearly contraindicated—i.e., they’re not working!
One doesn’t even have to look far to find pseudo-economic science trumping real science. The costs of global warming are heavily “discounted” by economists who present “hard numbers”—many of which come with decimal points!—representing the real growth and jobs we’ll lose if we try to regulate carbon or other environmental threats.
So what good is economics?
Since Hobbes, philosophers have been concerned about the design and management of institutions that will protect us from “the knave” within us all, those parts of our selves tempted to opportunism, free riding and generally avoiding the costs of civil life while securing its benefits. [Philosophers] recognized that an economic approach had much to contribute to the design and creative management of such institutions. Fixing bad economic and political institutions (concentrations of power, collusions and monopolies), improving good ones (like the Fed’s open-market operations), designing new ones (like electromagnetic bandwidth auctions), in the private and public sectors, are all attainable tasks of economic theory.
A key component of the above is the part of economics that I think is the most important: identifying market failures. The best and most useful economists these days are the ones who spot ways in which markets are working badly or not at all. How financial bubbles, output gaps, high unemployment, and poverty can be avoided or offset. How taxing carbon could internalize a negative externality. How financial market regulation could reprice risk that’s underpriced by markets. How investments in disadvantaged families and children could offset the opportunity deficit they’re born into in ways that rob both them and the broader economy of their realized potential.
There’s irony to all this. The most useful economists today are the ones who can most clearly see through pseudo-scientific evidence purporting to show that unfettered markets will self-regulate and that interventions will do more harm than good. In this regard, our best economists are the ones who look upon today’s economic science with a very jaundiced eye.
Economics is either a science – that is a field field of study that applies scientific reasoning to understand economic phenomena – or a religion, or nothing.
Questions of how quantitative specific predictions are is not the central point. It either has some general predictive power, or it’s charlatanism. There is no other option.
Recognizing inefficient markets or other defective economic institutions is a prediction – you are predicting that the current institutional or economic structure will have bad effects. Your claim for some kind of intermediate status doesn’t hold up.
Science or bunk – take your pick.
The effects of wage shopping should have been obvious to anyone willing to look objectively at the issue. However, there was so many billions of dollars to be made by justifying the market tendencies of US domination of global capitalism that no economist was willing to risk career annihilation by suggesting that the obvious forces would result in a huge price to be paid. Perhaps the price would be so high that it would never be paid, that we would let the system collapse rather than do the right thing.
There’s nothing scientific in this. This is entirely about Ayn Rand capitalism, and the ‘liberal’ economists are actually the ones most guilty in this sin.
I feel obligated to add that science in generally (though physics, by its nature, has largely resisted this trend) has been getting corrupt over the last 20 or so years. There has always been (and always will be) bad science because scientists are human and it is the human condition to yield to wishful thinking and rose colored glasses. However, the rate of increase in bad science (where ‘bad’ is research that is knowingly, or should have been knowingly, carried out and published to send a misleading message to the community and society at large) has really accelerated. Yes, the tobacco industry (just to pick one) did a lot of paid ‘science’ to produce certain outcomes, but (as I recall) it was limited in scope. Now people seem to publish bad research simply because it gets them some attention (the Holywood-ization of science: there is no bad publicity) or perhaps in hopes that because they have demonstrated their willingness to publish crap they would get hired to do exactly that. Some cling to justifications that it is the only way to get funding and at least they do publish some meaningful research (there are elements of true to that, sadly), but to others it is just a job.
Economics isn’t alone in its determination to be irrelevant to society while striving to create a relevant smoke screen.
I agree thoroughly that two of economics’ most valuable contributions are identifying market failures and coming up with reasonably efficient solutions to those failures. (I wish Dr Bernstein had emphasized the importance of identifying what is NOT a market failure. I get very tired by claims that health care markets don’t work because health care is a necessity not a luxury, which misses all the reasons we need to be much more aggressive with interventions in health than interventions in food. And I think teaching my MPA students when to back off and let markets work is an important part of my job.)
Dr. Bernstein misses one of the most exciting subfields of economics, though–market design. How to create effective markets when they do not naturally exist. Al Roth won the Nobel Prize this year for his relentlessly practical applications of game theory and empirical work to crafting (non-money-based) markets for assigning medical residencies, for assigning seats in elementary and high schools, for assigning kidneys for transplant…. Work in this subfield ranges from highly mathematical auction theory–that people actually use–to highly readable verbal discussions of key principles and the history of badly designed institutions.
If you have not yet watched Al Roth’s Nobel Speech, it would be a rewarding use of your time.
Design economics (which isn’t my own field) is something I make a point of teaching in my intro classes, because the subfield is so utterly focused on making economic theory relevant to real problems.
As long as you are making good money in hoaxing yourself and others into believing economics is a science then good for you. No economic theory has ever been able to predict the massive collapses that have occurred over the centuries and no economic theory , Nobel prize or not, will ever be able to predict these massive collapses. Even after the collapses, economists like those jungle worms, hide under rocks and only show up years after millions of humans have lost their life savings or done away with themselves. The bankers, finance managers , and economists continue to live on Park Avenue regardless of theories and collapses. Economists should in truth be either got rid of or sent to some remote mid Pacific island where they might enjoy living off coconuts and oysters or what ever is to be found.
But I will also add that I believe I can definitively prove mathematically that rising in equality did cause this depression.
When you take into account several widely-available studies showing the effects of redistribution vs.no redistribution, the marginal utility of a dollar to a rich person vs. a poor person as a consumer, and the marginal utility of a dollar to a rich person as a means of cementing in their place in society, you can mathematically prove that that dollar has a higher utility as a means of cementing that position rather than using it as a consumer.
I can definitively prove that capitalism is inherently unstable without the right level of redistribution.
Yes, this might be “verifiable,” though it is an explanation that tends to discount other possibily relevant factors in explaining the onset of the Depression. But more fundamentally, economics (like the other so-called “social sciences’) not only has trouble with human irrationality and unpredictability (what behavioral economics is hoping to “scientifically” assess) but — unlike the physical sciences — it is in its very premises — be they capitalist or socialist or something in between — with the realm of human choice and value. That property is a private thing doesn’t have the same universal status as the inverse square law of gravitational free-fall (within our immediate cosmic setting at any rate). By unpredictable and always revisable choice or imposition members of society can hold property in common or in a fiduciary manner rather than in the private mode typical in “advanced” Western economies today. Within economics, methodological individualism implies the assumption of an artificially abstracted individualism of a kind that was historically created only in certain societies at certain times and then often “spread” by the exertions of power as much as anything else. Economics within any particular socioeconomic regime is not mere ideology and indeed can be a useful tool in guiding our understanding and policies within that regime — though hardly with the certainty and precision of the type we expect from our physics — but it is (unless one is an unreconstructed Hobbesian) always fundamentally premised on the unscientizable choices, value, habits and, yes, ideologies that different peoples/societies have created in different times and places rather than on the discovery of one singular, natural, objective “out there.”.
Two groups have disproportionate influence on government — lawyers and economists. Both should get their own houses in order.
Having said that, there is substantial value in economics, as long as it is tempered by the knowledge that the use of math does not make econ a science.
Personal pet peeve:
From the economists I know and what I know of the education process, one can get three degrees in econ without ever taking a single business or accounting course, yet economists are constantly making judgments about and lecturing businesses on all sorts of topics. This is like me explaining physics – way out of my field.
Second personal pet peeve:
“I am a _________ economist.”
Lately I hear a lot of “I am a health care economist.”
What exactly allows an economist to declare a specialty, particularly a young economist? Uwe Reinhardt is for sure a health care economist. Newly minted PhDs? Not so much.
Economics almost made it to being a science at the turn of the 20th century, but was deliberately sabotaged in that effort.
One of the biggest failing of economics since then has been the failure to understand the role of land in production. It is the Land Cycle, described by Homer Hoyt, Mason Gaffney, and most of all, Henry George (1879), which we now know occurs in roughly 18-year rotations, that causes the major economic depressions (the last 2 were 2008-09 and 1990-91). Hoyt laid this out in over 18 steps, and Gaffney refined it further.
Fred Harrison used the Land cycle to predict the 2008 crash…in 1997. Read more about that here: http://www.opednews.com/articles/The-Land-Cycle-and-the-Sto-by-Scott-Baker-130728-228.html
Without understanding the role of land, you might as well be practicing physics without understanding heat, or gravity. It’s not possible.
Now, why has the role of land been neglected? Because the land grant universities were backed by landed interests in the early 20th century, and beyond, and they didn’t want anyone telling them that their collection of rent was counter-productive, as it is. Land, unlike production from labor + capital, gets its increase in value from demand and population growth. It is nothing the landowner does. Furthermore, land (locational values) can’t be increased through labor, so when speculation drives the price up, as it always does, there is a swift and violent resetting. The only real solution to this is a land value tax.
Additionally, without going into all the research in this limited space, about 1/3 of GDP is some form of economic rent. Historically, when it goes much above that, you get social unrest, even revolutions. In this country, it has reached 40%, producing de-stabilizing wealth inequity.
There are legitimate predictions made by economists about the future. Take Vassily Leontief’s prophetic 1970 AEA presidential address: “Theoretical Assumptions and Nonobserved Facts.”
“A natural Darwinian feedback operating through selection of academic personnel contributes greatly to the perpetuation of this state of affairs (the use of increasing complex mathematical and statistical methods). The scoring system that governs the distribution of rewards must naturally affect the make-up of the competing teams. Thus, it is not surprising that the younger economists, particularly those engaged in teaching and in academic research, seem by now quite content with a situation in which they can demonstrate their prowess (and incidentally, advance their careers) by building more and more complicated mathematical models and devising more and more sophisticated methods of statistical inference without ever engaging in empirical research.”
And, in total conformity with Leontief’s observation, those people have taken over the economics profession.
Jared, really nice writeup.
However, I might spoil one thing here, too. In my opinion science is much more of economics than you think.
“The most useful economists today are the ones who can most clearly see through pseudo-scientific evidence[…]” – just replace economists with scientists and pseudo-scientific evidence with pseudo-science (or cargo-cult-science, my favorite: http://en.wikipedia.org/wiki/Cargo_cult_science 🙂