What economics should be

It should be obvious to even the most casual observer that economics is not a science. That this is not obvious to many is clear evidence that epistemology, the philosophy of knowledge, is little understood by economists. There is no possibility of repeating experiments because the “laboratory” conditions keep changing. As a consequence, there is no possibility of establishing causality, or at least not in a rigorous fashion. Predictive validity, therefore, cannot be achieved. As William Sherden has outlined the problem with economic predictions is that they do not work – or at least only work when the predictable happens. With surprising events, it is better to toss a coin:

 

Each year the prediction industry showers us with $200 billion in (mostly erroneous) information. The forecasting track records for all types of experts are universally poor, whether we consider scientifically oriented professionals, such as economists, demographers, meteorologists, and seismologists, or psychic and astrological forecasters whose names are household words. In fact, these experts whose advice we pay handsomely for routinely fail to predict the major events that shape our world, or even the major turning points–the transitions from status quo to something new–whether it be the economy, stock market, weather, or new technologies.

Such inaccuracy would never be tolerated in science. One can only call economics scientific if one takes science to mean “rigorous” which is, to say the least, a loose definition.

Far better to ask the question: “If economics is not a science, then what is it?” My answer is that it is a specialized language devised to talk about transactions. This is not to downgrade it – I do not subscribe to the popular myth that science is the only route to real knowledge – but to see it more accurately.

By positing economics as a language, the relationship between what is the same and what is different can be rethought (the approach to likeness and difference is one of the key issues in epistemology). Science necessarily works on what is the same. The law of gravity, for example has to always apply, otherwise it is not a law.

In science, any differences in an experiment have to be accounted for so as to eliminate them. The point of science is to find what is always the same (that is why, for instance, quantum mechanics has proved so problematic to science because the results can differ each time depending on when the observations are made).

In economics, such an approach is pointless. There are simply too many differences and too few likenesses. But if economics is viewed as a specialized language, the emphasis can change. The focus can become on what is different and the implications of those differences. This requires a knowledge of what stays the same (difference can only be defined in relation to the unchanging). But instead of trying to force events into a quasi-scientific theory, the insights can be of a different nature. I believe they would be far superior.

I can remember seeing a presentation at the Pacific Rim Forum from perhaps my favourite economist, Kenneth Courtis. It was an erudite analysis of economic history, tracking the economic rise of China, various trends in the world economy and some historical parallels with the rise of Germany, Britain and the United States. It was insight rather than prediction.

Two other well known economists at the Forum decided that what Courtis was saying was, while engaging, history rather than economics. Not enough treating human affairs as the operations of a giant machine, I suppose. All three economists were fluent in the same language of economic statistics, but their approach was different. Courtis’ method, I believe, should be the future of the discipline. He was tracking the differences that make a difference, not trying to display protean insight into the immutable laws of economic behaviour. But such art will not be pursued while economists can make money out of pretending to be scientists.

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Comments

  1. The creativity that is rife through accounting practises does not help either.
    Banksia appeared to have a provision for bad and doubtful debts of just $2.3m instead of almost $200m.
    Reliable information is key in an environment when the rules of the game keep changing.

  2. SoN, if people don’t study the economic reality by following the right methodology, it is obvious that the result would be non-science.

    First, the economy is driven ONLY by people’s interests and to study something else (mechanically) instead people’s interest will never give you scientific picture about economic reality.

    Second, the scientific view and concept about economy is called political economics. There is no other economics. If you want to follow the development and the prospect of any economy, follow the money, e.g. the driving interests, e.g. the driving forces. They are not just “interest rates, capital, wages, bonuses, stimulus, credit, loans, prices etc., but always some groups of people with their specific interests and interactions.

    Third, I think there is plenty of evidences that many economists warned the regulators about the incoming disaster (GFC). It is highly unfair to ignore those people, because of the rest and mainly the banks interests, the greed of financial brokers and traders and the corrupt politicians, who didn’t want to hear the voices of reason.

    Economics is not exact science like physics etc. Economics doesn’t deal with the individual as the Western economics teaches us, but with large groups of people, who can be differentiated by their position in the economy. Social experiments with such large groups of people are of cause impossible (in the sense of other science) and unethical, but that doesn’t mean one can’t make valid research and find stable repeating and predictable pasterns of behavior and responses (consequences) to environmental stimulus, which patterns we call economic laws or tendencies.

    Economics like any other social science is different from sciences about the nature. The fact that one can’t or is not willing to see or analyses the deeper causes of economic phenomenons doesn’t give him the right to call economics a non-science. Economics is a science about the most inconvenient truth – how people relate to each other when interacting during the economic processes (transactions, productions, consumption, investing etc.) If you ignore those relations, you treat the economy like a machine, which it is not and that is why all very abstract mathematical models actually are nothing but fairy tales at the end.

    I suppose, maybe a trader defines economics as “a specialized language devised to talk about transactions” which is understandable, but very incorrect and incomplete definition. The traders relate to the rest of society in a different way from, let us say, teachers, doctors, workers etc…. They deal with money, with the universal form of wealth creation and accumulation.

    It is regrettable when one doesn’t see the people with their different positions in economy and group interests, with their relations and complex behavior, but sees only the transactions. If one doesn’t see or differentiate the quality behind the numbers of different quantities of transactions then one can’t see economics as genuine social science. In science the knowledge about defined quantity is important as long as it helps us to picture the different social and economic qualities of people’s relation to each other in economy and to improve those relations, e.g. people’s lives. Everything else is propaganda of vested interests.

    • “It is regrettable when one doesn’t see the people with their different positions in economy and group interests, with their relations and complex behavior, but sees only the transactions. If one doesn’t see or differentiate the quality behind the numbers of different quantities of transactions then one can’t see economics as genuine social science.”

      A bit more than regrettable, I would suggest. Downright pernicious, in my view.

  3. Still believe that economics is primarily a study in human behaviour. It’s a profession that desperately seeks a credible recognition that mathematical sciences like engineering and chemistry have achieved. Unfortunately, human behaviour can not be replicated in a mathematical model (i.e ration economic man) as humans are not rational; never have been, never will be.

  4. I understand the impulse to disdain the use of mathematics in economics, which is in essence what this timeworn criticism of modern economics boils down to. But it seems to me that it is necessarily made by people who do not properly comprehend by the nature of the application of mathematics in economics. There is the mistaken tendency to suppose that because physics uses maths to describe natural laws, when economists use maths they must be pretending that human behaviour conforms to similar natural laws.

    For an alternative viewpoint, Noahpinion had a good piece last week http://noahpinionblog.blogspot.com.au/2012/10/what-is-math-and-why-should-we-use-it.html. The Krugman quote neatly summarises the flaw in your prescription, SoN.

  5. It’s a sign of low self-esteem when one spends most of the time pretending to be someone else. I guess that applies to Economics (Economists) too.

  6. Although, a quick search of the Web will tell us that economics is indeed a science. And if the root of the word holds true, it’s as scientific as any other body of knowledge. Perhaps those that reject economics as a science fall into the same trap that they accuse economists of falling into; ‘knowing’ that their view is right! ( ie: Economics may be the science that hasn’t yet proven itself to be?) “Science (from Latin scientia, meaning “knowledge”) is a systematic enterprise that builds and organizes knowledge….”

    • This broader concept of the term ‘science’ is retained in the German-speaking countries where “Wissenschaft” is also used to describe the humanities, “Geisteswissenschaft”.
      “Science”, as we in the English-speaking world understand it, is the study of “natural” forces, that is “Naturwissenschaft”. But what indeed is “natural”? Even (or especially!) in Germany, psychology is compelled to dwell in an epistemological grey zone, one not too disimilar from that occupied by economics I think.

      • To further that, Germans also use the word “Wirklichkeit” for ‘Reality’.
        That brings it back to basics, saying that reality is just the way things work which includes any bias caused by misperception. It is not, nor is it meant to mean truth.

        Reality is a much foggier word which just pretends to be the state of things as they actually exist – which we can’t know.

        Many of the great philosophers have pondered upon reality. I would give German philosophers a head start because their language is more precise which makes German texts such a tough read. Always so bloody Gründlich. In principle it should give German economists an advantage. Economy is also just about how things appear to work.

  7. Agree: “If economics is not a science, then what is it?” My answer is that it is a specialized language devised to talk about transactions.

    Whereas nature can be defined by universal rules e.g., gravity you mention, man makes it all up when it comes to economics. For example, negative gearing good in Oz, but practically nowhere else. Talk about arbitrary.

    Who makes the rules?
    Would it be vested interests dumping their ideo-financial restrictive structure on the economy via such peak bodies as Board of Taxation?

    You are right, economics is not a science, just a agreed way to describe financial machinations.

  8. ‘As William Sherden has outlined the problem with economic predictions is that they do not work – or at least only work when the predictable happens. With surprising events, it is better to toss a coin:’

    This can be demonstrated in many other branches of science as well, and in those sciences is held up as evidence that the underlying models which integrate cause and effect with a set of input variables are not accurate enough (with the understanding that they can never be 100% perfect)….which typically leads to tweaking of the models to enable better predictions. so by a stepwise process the models improve (but only if we have a complete understanding of the range of relevant input variables and the relationships between them).
    This is a useful process which often improves predictability…but it is important to never lose sight of the fact that predictions of what will be are based on probabilities and no matter how accurate a model of cause and effect may become it can never account for those stochastic events where phenomena with very low probabilities do in fact occur. It is precisely those rare phenonmena which should lead us to question the validity of the paradigms upon which our models are built.
    The problem with economists (rather than economics) is that too many become seduced by dogma…and become inflexible in their acceptance of the idea that we can always reliably predict what will happen based on the currently accepted models of how the world works for their discipline. This often because to state otherwise has negative consequences for reputation and career.

    The steadfast acceptance of dogma is not exclusive to economists though is it? It is in fact a common human condition.

    Note I use the word ‘model’ here in both the empirical and epistomological contexts

  9. “..it is a specialized language devised to talk about transactions.”

    Why does a person – say, a secondary school student – decide to study and become “qualified” in economics in the first place? Could it be primarily due to a motivation to earn an income from it?

    Nothing wrong with that, of course. But a noteworthy fundamental nonetheless.

    I see all human language as being rooted in a desire to ‘name’ things. A process of labelling. Whether it be of the seen or the unseen.

    In that context, a “qualified” “expert” in the language of economics is not unlike an “expert” in any other “language”. They are adept at, and indeed, earn a living by reason of, applying a range of labels, to a range of things. As specialized language experts, they are also adept at combining and recombining words in order to paint whatever word picture they see as fitting to a given set of circumstances, and to the desired outcomes of their ‘speech’. This might include, for example, the circumstance where (a) the base condition is their own desire to earn or continue to earn a living, and where (b) their previous word pictures do not accord with the real world picture that others are seeing.

    As such, it is interesting to compare the remarkably similar ways in which astrologers study and employ their own specialised language to both describe and ascribe causation to past, current, and predicted future events.

    Including their own failure to correctly do so.

  10. Nicely written. I also happen to agree that as the world is not a Turing Machine predictions is unreliable and (as you say) because conditions unrepeatable hypotheses are in testable.

    Now all we have to do is make this all what is taught in the mainstream

  11. Economics may be ‘science’ as in ‘social science’, without it being regarded as a ‘physical science’.
    Landing a vehicle on Mars requires a different type of precision to having an educated guess on how the markets will move next month.

  12. The Epistemology of Economics has been a long interest of mine. Funnily enough, the only author to have touched on the subject is Von Mises; who like all Austrian philosopher decided it was important to go back to German philosophers by denying the universality they continuously promoted through their Phenomenology.

    The fact that Economy is still considered a science and never questioned on these grounds is unfortunately also due to the taking over of statistics and – doing what economists always do – the feeble attempt to confuse causal truth with numbers and equations.

    I don’t agree with the analogy between Economy and language. There is a science of the language; which is very logical in nature… Language is a lot more precise and certain than economy.

    • Hi globiboulga, I’m interested in your last comment on language. Could u expand? tks. I would have thought language can struggle to be precise (multiple meanings etc.) So when I say a language I mean a very restricted, technical language.

  13. Even though human behaviour should be somewhat predictable, the study of economics can never really lead to a reliable understanding of patterns in economies. It would seem that because such knowledge can generate wealth, and because the economy is purely a closed human construct focused to that end, the creation of any reliable knowledge is immediately absorbed by the construct and immediately becomes unreliable. In fact, on this basis an economy cannot have discernable reliable rules.

    It’s akin to testing the law of gravity and finding that as soon as you’ve measured and understood it, it must change or the universe cannot exist.

    So yes, perhaps all economics can hope to do is name and describe transactions, and maybe catch a fleeting snapshot that shows the truth as it once was.

  14. One of the things that strikes me is that economics tries to be two things: one of those is a science, and the other engineering. I am not sure this works at all.

    For example, in science, as in economics, there are flaming arguments about theoretical concepts – such as we have in the various ‘schools’ of economics. However, with science (as opposed to economics) those flaming arguments seldom spill over into public policy until one side or the other prevails.

    At this point, the science becomes engineering, and the engineers apply various safety factors and simplifying assumptions to real world systems.

    In economics today, the problem is that the theoretical schools have not agreed on the ‘science’ and those various schools are trying to apply their disputed theories in the real world, without the use of safety factors, and simplifying assumptions.

    It would seem to me that for economics to gain credibility would be for it to re-form itself along the science/engineering structure. In this model of the profession of economics, the various theoretical schools of economics could slug it out in private, and those of a more practical bent could develop models based on whatever is the prevailing doctrine of the time PLUS reality checking, simplifying assumptions, and safety factors to provide workable models for system design and analysis.

    This is how the science of electricity led to the ability of engineers to model systems with tens of millions of switches operated by tens of millions of people with a very high degree of reliability. If economics is dealing with the exact same people, maybe the flow, storage, pressure and instability of money flows could be modelled in the same way that flow, storage, pressure and instability of water and electrons is done right now by engineers.

    What seems clear to me is that if the people who are dealing with the high end science of water and electricity, were also tasked with designing the local power or water networks, they would still be at it, and if the network designers were to try to take the science forward, we would still be using water wheels. The point is, that the split between science and engineering has been of benefit to both. I suspect the same would be the case with economics.

  15. Thanks SoN. Interesting. I think that economics is a science. But not similar to the traditional view of science of the physical creation.

    Economics is a science; many of its propositions are rationalist; based on cause and effect. But instead of its object of study being the relationship between physical phenomena, it is a social science, with many of its propositions based on human choice. So the object must be an individual and his or her choices in the context of a world of scarce resources.

    If you have a pile of bricks next to a house next to a pile of gold next to a pile of food, I am sure that a decent mathematical economist can ably explain their functional relationship. But this could provide no useful explanation as to what is of value to an individual, who has continuing innate needs and wants, and then ranks and values each pile or specific good as to how effectively and how soon it will satisfy his need or want. However, contrary to teh neclassicals or Marxists we do not know people’s internal value scales, so economics must deal with the way people act. And no mathematical model can model that, no matter how sophisticated.

    So, yes, indeed, statistics serve a useful purpose, but epistemology and ontology are more important in order to understand how the internal choices of individuals reflect in the real world of economic action.

  16. thomickersMEMBER

    John Mauldin said that each economic philosophy (ie austrian/chicago/keynsian/post-keynsian) was like a different religion and you need to ‘worship at every alter’ to understand what benefits/disadvantages/critique each economic philosophy presents.