Economics Is Not A Science

Like many people, I've been reading a lot about the current financial crisis, and one thing that has really struck me is how thoroughly people have drunk the Kool-Aid when it comes to economics. Here's a quotation from the comments of a blog I frequently read. "Even Krugman is coming under fire from his readers for whining about savings rather than spelling out a strategy he thinks will work! If a Nobel Prize winner can't do it, who can?" This commenter apparently believes that economics is a science, and that a leading figure like Krugman should have the expertise to know how to approach the current crisis. Likewise, when Obama appointed Summers and Geithner to their posts in his administration, he was criticized on the grounds that they were among the people who got us into this mess. Supporters responded that, although this might have been true, they were possessed of the expertise required to deal with the current situation. Both of these responses imply the belief that economics is a science on the order of physics or chemistry, and that it's practitioners will best know how to deal with ongoing crisis.

Nothing could be further from the truth. Economics is rife with unsupportable assumptions and faulty reasoning. The Australian economist Steve Keen documents many of them in his fine book Debunking Economics: The Naked Emperor of the Social Sciences. I won't try to summarize everything he says. I'll just give a taste of it. As he points out at the beginning of his book, economic theory assumes "that the best social outcomes result from individuals looking after their own self-interest: the market will ensure that the welfare of all is maximized." When it comes to modeling consumption, economists assume: "(a) that all people have the same tastes; (b) that each person's tastes remain the same as her income changes, so that every additional dollar of income was spent exactly the same way as all previous dollars -- for example, 20 cents per dollar on pizza, 10 cents per dollar on bananas, 40 cents per dollar on housing, etc." As Keen points out, those assumptions are patently absurd but they have the virtue of making possible the smooth demand curves demanded by the mathematics of econometric models. However, there are other consequences that attendant upon this approach. For one thing, by making unrealistic assumptions like these, economists can demonstrate that unregulated markets lead to the best possible outcome in meeting consumers' demands. For another, these assumptions banish class from economics.

I won't try to summarize anymore of Keen's arguments. I will just refer the reader to his book. It really is excellent, though it's tough sledding. I might add though that Keen is not a Marxist or anything like that. He's not pushing a radical agenda and using his critique of economics as a way of realizing that agenda. Rather, he's a university professor who is trying to effect a quantum revolution in his field of study. Addressing the question of why economics has not advanced, here's what Keen says. "There are many reasons for this failure of economics to accept fundamental criticism, and to evolve a different but richer theory. As I discuss later, these include the undeniable complexity of economic phenomena, and the impossibility of conducting crucial experiments to decide between competing theories. But a key reason -- the one which motivated me to write this book -- is the manner in which economics is taught."

Okay, I'll agree with that, but I'll go on to ask the following question. Why is it taught that way? Why don't those economists with a more profound understanding of the subject rise to prominence and thus influence the way economics is taught? Keen doesn't ask the latter question, probably because that's where political ideology rears its ugly head. I would maintain that the Chicago school of neoclassical economics has risen to prominence because it supports the status quo, and I don't see much prospect for that changing.

Here's how I see it working. It is only natural that the government and the large financial institutions are going to hire economists who support their policies and practices. Given their positions, these economists will come to be seen as dominant figures in their profession. When they leave the government or Wall Street, they will take positions in the economics departments of the elite universities like Harvard and Yale. The PhD's who graduate from the economics departments of those institutions will be seen as the most desirable hires by other universities. They will get their papers published in the most prestigious journals, and thus rise to the top of their profession. Next thing you know, the theories that support the status quo end up as the accepted doctrines. I don't believe that this is just the case in capitalist countries. I suspect that something similar happened in the past in the Soviet Union.

The upshot of what I'm saying is that economics isn't a science, not in the sense of physics or chemistry. Back in the nineteenth century, the discipline was called political economy. That was probably more accurate, since it will always have a political component. As for Keen, the approach that he champions is based on systems theory. You don't have to be an economist to believe that it's a much more realistic approach to economic behavior since the world's economies are, in fact, complex, dynamical systems.