Economics is not science. In this, the modern economic age, not one economist has ever been right. All have been wrong and for good reason. Economics is pure guesswork masquerading as science.
Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the Prize in Economic Sciences in Memory of Alfred Nobel, to give it its full title. Ten years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the worst panic since the 1930’s that followed. And yet the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue.
The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy.
A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modeling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.
To illustrate just how dangerous that kind of belief can be, one only need to consider the fate of Long-Term Capital Management, a hedge fund set up by, among others, the economists Myron Scholes and Robert Merton in 1994. With their work on derivatives, Scholes and Merton seemed to have hit on a formula that yielded a safe but lucrative trading strategy. In 1997 they were awarded the Nobel prize. A year later, Long-Term Capital Management lost $4.6bn in less than four months; a bailout was required to avert the threat to the global financial system. Markets, it seemed, didn’t always behave like scientific models.
In the decade that followed, the same over-confidence in the power and wisdom of financial models bred a disastrous culture of complacency, ending in the 2008 crash. Why should bankers ask themselves if a lucrative new complex financial product is safe when the models tell them it is? Why give regulators real power when models can do their work for them?
Many economists seem to have come to think of their field in scientific terms: a body of incrementally growing objective knowledge. Over the past decades mainstream economics in universities has become increasingly mathematical, focusing on complex statistical analyses and modelling to the detriment of the observation of reality.
Consider this throwaway line from the former top regulator and London School of Economics director Howard Davies in his 2010 book The Financial Crisis: Who Is to Blame?: “There is a lack of real-life research on trading floors themselves. To which one might say: well, yes, so how about doing something about that? After all, Davies was at the time heading what is probably the most prestigious institution for economics research in Europe, located a stone’s throw away from the banks that blew up.
Economics is a discipline, not a science. Physics can send a satellite to orbit Jupiter, tell you exactly when it will arrive and the altitude it will orbit at. Economics can barely describe what happened yesterday — and without any particular precision. The major reason why economics is not a science is that a lot of it is not based on evidence. If you study economics you will spend a great deal of time studying perfect competition, a state of affairs that almost nowhere exists. Utility is another concept which plays a huge part in economics that is so vague and undefined that it is hard to know if it exists or how you can possibly maximize it.
Economics has little predictive power, another important feature of science. Asking an economist what the consequences of a certain policy will be is the same as asking for their best guess.
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