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Wednesday, April 13, 2011

Economics vs Science

Some really good minds have wasted their valuable mental energy pondering this question:  Is Economics a science?

I have, at best, only a pretty good mind, but I think I have a pretty good answer, and that is -- not only no, but HELL NO!

I guess the only thing that disguises the fact that the question is risible is that Econ clothes itself in the trappings of science - simplification constructs that allegedly attempt to represent real-world phenomena.  Both scientists and economists call these constructs "models."

This is where the similarity ends.  By way of example, lets consider two fundamental "LAWS," from science, the ideal gas law, and from economics, the law of supply and demand.  The similarity between the two constructs is that while each represents a theoretical possibility, neither is applicable to anything in the real world.  The difference lies not in the constructs themselves, but in the way practitioners think about them.

Scientists look at the ideal gas law, and the behavior of real gasses, take note of the difference and try to learn something about matter, based on the deviation from theoretical behavior.  Thus, we get an understanding of things like  Van der Waals force, polarity, and hydrogen bonding.

Economists look at the law of supply and demand, and the behavior of real market interactions, and call anything that deviates from the theoretical a distortion.  Thus, rather than an attempt to better understand reality, we have a reverence for the abstract model.  This is not so bad, per se, but along with it comes the implication that REALITY IS WRONG.  

Unfortunately, in the real world there are lumpy assets, barriers to entry, monopolies, monopsonies, cartels, inflation, deflation, monetary crises, credit crises, tariffs, duties, political disruptions and natural disasters - all of which can make the supply-demand relationship go ka-blooie.   But, dag nab it, the model is right, and these things are all distortions!  Well, at least the ones imposed by governments are.  I'm not so sure about the others, though they affect the model in non-quantifiable ways.

There is an important, but rather simple reason why scientists and economists use models differently.  Science is an exploration into the ultimate truths of life, the universe, and everything.   New discoveries in science are built on old discoveries in science.  With the passage of time, our understanding of things scientific improves, because scientists are building a better and more robust understanding of reality.

Economists have no such goals.  It hasn't always been this way, but now, new "discoveries" in Economics negate previous discoveries in Economics, and along the way, "they reinvent 80-year-old fallacies when they try to discuss the subject."   The basic problem is that economics and politics are two sides of the same coin, and politics is in no way a search for truth.  It is a grasping at power.  And in power politics, as Rethug Senator John Kyl so graphically demonstrated, truth is irrelevant.

There is another correlated and more subtle difference, that relates to the economist's reverence for their models.  Science is probabilistic, and recognizes that there are uncertainties - in measurement, observation, control, and experimental design. 

Economics is absolutist.  Get into a disagreement with an economist, and he will throw models at you - like the "lump of labor fallacy' canard I got from Adam Ozemek (sorry - that is long past, and I'm not going to go search for a link), and that even Krugman falls for.   Or this, that I got from "The Masked Economist" in an exchange at Macromania:  "You still don't seem to get the point that monetary policy doesn't change relative prices and so doesn't increase the cost of the Q1 bundle relative to the Q5 bundle."   The Q's here represent economic quintiles of American society.  How many layers of absolutist assumptions does it take to believe that pumping money into the financial sector boosts the economy, but in a way that has no effect on relative prices of different bundles of goods and services?   That goes beyond the super-neutrality of money to a whole lot of rational and frictionless efficiency, and flies in the face of concurrent movement in commodity, bond and equity prices.

Here's Hayek (quoted in the super-neutrality link, above):
. . . it seems obvious as soon as one once begins to think about it that almost any change in the amount of money, whether it does influence the price level or not, must always influence relative prices. And, as there can be no doubt that it is relative prices which determine the amount and the direction of production, almost any change in the amount of money must necessarily also influence production.

A bit long-runnish, in my view, but certainly not what the Masked Man was telling me.

In principle, Economics could be, or perhaps become, a science.  But to do so, it would have to separate itself from politics.  But in the real world, there's just no way for that to happen.


BadTux said...

The question of whether economics makes any sense divorced from politics is a good one, because in a sense, any modern economy is a result of politics. The very notion of money makes no sense divorced from a government capable of deciding that a specific coinage or commodity is going to be what taxes and thus rents are paid in, without government you have barter, not money, where economic efficiency crawls to a halt due to the intermediaries problem of the various trades necessary to create a complex product reaching a ridiculous and onerous number (the same problem that destroys Communism as a system of economic organization, BTW). No government, no money. No money, no modern economy. No modern economy, a lot of dead people.

Given that, the question of what money should be defined as and how to manage the money supply inherently becomes entangled in politics, as various factions maneuver to get policies that benefit them put into place. I believe that there is a place for a non-partisan science of economics in all of this, a social science akin to sociology or psychology, but no desire for one on the part of the people who matter. What gets funded and encouraged, instead, is partisan hackery. Which, unfortunately, drives good science out of the limelight and dismissed as "discredited", much as Keynesian economics was routinely dismissed until recently (and is still ignored by people who are paid to ignore it).

This, alas, is a problem facing *all* science today, so pointing out that economics is especially prone to it perhaps seems like piling on. Yet it's clear economics *is* especially prone to it. The whole point of economics is the redistribution of wealth -- that is, the movement of goods and services through an economy. Goods and services that don't move aren't an economy -- they're hunter-gatherers or a medieval monastery. And given that the whole point of economics is to model the redistribution of wealth, those models which say that redistribution of wealth to certain classes of people is a good thing will be embraced with all the avariciousness of a wino clutching his jug of wine...

- Badtux the Brainstorming Penguin

Jazzbumpa said...

Perfecto, mi amigo.