Economics is just another social science

The Economist is a London-based magazine, and probably the world’s most globalised one. It includes special sections on the USA, the Americas, China, Asia, Europe and Britain and covers matters most of its international competitors neglect. I’ve been reading The Economist for years and find it very useful, though sometimes I find its ideology of “markets always knowing best” irritating. I’ll probably write something about that soon.

In its most recent edition of 23 January, however, The Economist does something unusual in its weekly column “Free exchange”, which deals with economics as an academic discipline. The paper discusses how ideological biases matter in economics and what impact they have. This kind of open-mindedness is most welcome. The idea that economics is somehow more scientific and unbiased than other social sciences is – and was always – absurd. Nonetheless, it is deeply entrenched. 

One thing many economists are proud of is the use of sophisticated mathematical models. The more maths is involved in a study, they feel, the more that study becomes “scientific” in the sense of accurate and verifiable. Several things are wrong with this idea.

• First of all, to do sensible calculations, you need solid data. All too often, economists don’t have the numbers they would need to do really relevant numbers crunching. I’ve discussed this before (http://www.dandc.eu/en/blog/scholars-should-not-fall-safety-numbers)
• Complex mathematical models divert economists attention from the empirical reality. Too often, researchers become more interested in the mathematical intricacies of their model than with how that model fits the real world. The basic idea is that they keep modifying and improving their models until they do fit the real world, but they really do not have any reliable method that would tell them when that is achieved. Moreover, once the model really reflects the real world in all its dimensions, it has to be so complex, that it will provide rather few insights.
• This problem is compounded by the fact that some of the most important models start out with unrealistic assumptions. In theory, markets are perfectly transparent. Buyers and sellers know what is on offer, they can assess competition and then make a rational choice. In truth, some of the most important markets are not transparent. Some goods are complex and hard to understand. One reason for the global financial crisis of 2008 was that some financial products that supposedly made credit risks controllable actually hid a lot of bad debt.
• Economists use the fiction of “homo oeconomicus”. In this perspective, human beings maximise their own wellbeing, chose rationally and always know what their priorities are in precisely what order. In truth, human beings are social beings who are influenced by others, change their minds and are led by emotions. Culture matters very much. Moreover, there are collective interests, which is something not all economists appreciate. Some market radicals theorists, for example, argue that collective wage bargaining always distorts labour markets.
• Yet another issue is that economists cannot run experiments. One of their favourite phrases is “ceteris paribus” which means “all other things equal”. When they use their models to test their hypotheses they pretend that everything else, apart from the one variable they are manipulating, could stay the same. In the real world, everything keeps changing. If all, rather than just some, economists factored environmental change into their models, our planet might be in better shape. In most economic reasoning, however, “growth” is considered healthy. In the models, it does not matter that natural scientists tell us that the environmental consequences of growth, including climate change and the loss of biodiversity, are destroying what human existence depends on. 

None of this means that economics is useless. It does, however, show that one should take economists’ often displayed self-confidence with a pinch of salt. I know many intellectually fascinating economists and appreciate their work. They are good at assessing social needs, environmental hazards and many other things. Moreover, they happily admit that models have limits. They are sincerely interested in designing models that illuminate relevant aspects of reality.

At the same time, there are lots of economists who serve powerful interest groups. Their models don’t include considerations that might adversely affect their paymasters. Moreover, they criticise anyone who disagrees with them as biased and unscientific. They pretend that their arguments are “science” in the sense of irrefutably true. In truth, their models are unrealistic and utterly self-serving.

Full disclosure: I studied economics for a while but then opted for sociology. I didn’t find the maths too difficult. I found the entire approach unconvincing.