Saturday, September 07, 2013

 

What Is Economics Good For?

Recent debates over who is most qualified to serve as the next chairman of the Federal Reserve have focused on more than just the candidates’ theory-driven economic expertise. They have touched on matters of personality and character as well. This is as it should be. Given the nature of economies, and our ability to understand them, the task of the Fed’s next leader will be more a matter of craft and wisdom than of science.
When we put a satellite in orbit around Mars, we have the scientific knowledge that guarantees accuracy and precision in the prediction of its orbit. Achieving a comparable level of certainty about the outcomes of an economy is far dicier.
The fact that the discipline of economics hasn’t helped us improve our predictive abilities suggests it is still far from being a science, and may never be. Still, the misperceptions persist. A student who graduates with a degree in economics leaves college with a bachelor of science, but possesses nothing so firm as the student of the real world processes of chemistry or even agriculture.
Before the 1970s, the discussion of how to make economics a science was left mostly to economists. But like war, which is too important to be left to the generals, economics was too important to be left to the Nobel-winning members of the University of Chicago faculty. Over time, the question of why economics has not (yet) qualified as a science has become an obsession among theorists, including philosophers of science like us.
It’s easy to understand why economics might be mistaken for science. It uses quantitative expression in mathematics and the succinct statement of its theories in axioms and derived “theorems,” so economics looks a lot like the models of science we are familiar with from physics. Its approach to economic outcomes — determined from the choices of a large number of “atomic” individuals — recalls the way atomic theory explains chemical reactions. Economics employs partial differential equations like those in a Black-Scholes account of derivatives markets, equations that look remarkably like ones familiar from physics. The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy.
This is what makes economics a subject of special interest among philosophers of science. None of our models of science really fit economics at all.
The irony is that for a long time economists announced a semiofficial allegiance to Karl Popper’s demand for falsifiability as the litmus test for science, and adopted Milton Friedman’s thesis that the only thing that mattered in science was predictive power. Mr. Friedman was reacting to a criticism made by Marxist economists and historical economists that mathematical economics was useless because it made so many idealized assumptions about economic processes: perfect rationality, infinite divisibility of commodities, constant returns to scale, complete information, no price setting.
Mr. Friedman argued that false assumptions didn’t matter any more in economics than they did in physics. Like the “ideal gas,” “frictionless plane” and “center of gravity” in physics, idealizations in economics are both harmless and necessary. They are indispensable calculating devices and approximations that enable the economist to make predictions about markets, industries and economies the way they enable physicists to predict eclipses and tides, or prevent bridge collapses and power failures.
But economics has never been able to show the record of improvement in predictive successes that physical science has shown through its use of harmless idealizations. In fact, when it comes to economic theory’s track record, there isn’t much predictive success to speak of at all.
Moreover, many economists don’t seem troubled when they make predictions that go wrong. Readers of Paul Krugman and other like-minded commentators are familiar with their repeated complaints about the refusal of economists to revise their theories in the face of recalcitrant facts. Philosophers of science are puzzled by the same question. What is economics up to if it isn’t interested enough in predictive success to adjust its theories the way a science does when its predictions go wrong?
Unlike the physical world, the domain of economics includes a wide range of social “constructions” — institutions like markets and objects like currency and stock shares — that even when idealized don’t behave uniformly. They are made up of unrecognized but artificial conventions that people persistently change and even destroy in ways that no social scientist can really anticipate. We can exploit gravity, but we can’t change it or destroy it. No one can say the same for the socially constructed causes and effects of our choices that economics deals with.
Another factor economics has never been able to tame is science itself. These are the drivers of economic growth, the “creative destruction” of capitalism. But no one can predict the direction of scientific discovery and its technological application. That was Popper’s key insight. Philosophers and historians of science like Thomas S. Kuhn have helped us see why scientific paradigm shifts seem to come almost out of nowhere. As the rate of acceleration of innovation increases, the prospects of an economic theory that tames the economy’s most powerful forces must diminish — and with it, any hope of improvements in prediction declines as well.
SO if predictive power is not in the cards for economics, what is it good for?
Social and political philosophers have helped us answer this question, and so understand what economics is really all about. Since Hobbes, philosophers have been concerned about the design and management of institutions that will protect us from “the knave” within us all, those parts of our selves tempted to opportunism, free riding and generally avoiding the costs of civil life while securing its benefits. Hobbes and, later, Hume — along with modern philosophers like John Rawls and Robert Nozick — recognized that an economic approach had much to contribute to the design and creative management of such institutions. Fixing bad economic and political institutions (concentrations of power, collusions and monopolies), improving good ones (like the Fed’s open-market operations), designing new ones (like electromagnetic bandwidth auctions), in the private and public sectors, are all attainable tasks of economic theory.
Which brings us back to the Fed. An effective chair of the central bank will be one who understands that economics is not yet a science and may never be. At this point it is a craft, to be executed with wisdom, not algorithms, in the design and management of institutions. What made Ben S. Bernanke, the current chairman, successful was his willingness to use methods — like “quantitative easing,” buying bonds to lower long-term interest rates — that demanded a feeling for the economy, one that mere rational-expectations macroeconomics would have denied him.
For the foreseeable future economic theory should be understood more on the model of music theory than Newtonian theory. The Fed chairman must, like a first violinist tuning the orchestra, have the rare ear to fine-tune complexity (probably a Keynesian ability to fine-tune at that). Like musicians’, economists’ expertise is still a matter of craft. They must avoid the hubris of thinking their theory is perfectly suited to the task, while employing it wisely enough to produce some harmony amid the cacophony.

20 comments:

Christina Sassone said...

The different view points on what economics is and how it is useful was very interesting. Although i have to agree with the modern economists John Rawls and Robert Nozick and their idea that economics is the foundation of most institutions and it is what keeps our economy developing. I do not like the idea of how some people think economics is a science. Whenever I hear science, I think of chemistry or biology. Although economics is the way individuals interact with society in the way we deal with financial circumstances, I would not even compare it to a science. I also agree that economists have this craft of knowing what to expect in the financial world. They always seem to know what is going to happen and how to handle it.

Anthony Rocco said...

This article was very interesting. From reading the article, I perceived economics as something you cant plan out and predict as states in the article. The economy changes all the time with stuff going on all around the world and you have to constantly adjust and improvise plans and methods to keep up with economics. I personally don't think economics is a science at all. Economics is too unpredictable and theres no science behind it. Like what Christina said, when i hear science i think of biology and lab sciences. One thing i agree with is that there is a "craft" of knowing whats going to happen in economics. And to have this "craft" i feel like experts with many years of experience and study would posses it, not just a random person on the street.

Colby Stover said...

Economics is a very close subject to science. In economics we use theories and ideas to determine how it may affect the world which is similar to the way a scientist uses formulas and theories to apply them to determine the affect. Milton Freidman made a strong point by comparing economics to physics because both subjects are focused around theories and ideas. But i wouldnt consider economics a science because you cant prove the cause and affect of something in the economy.

Nicholas Beato said...

After reading the article I have concluded that economics is not science. Physical science shows records while economics on the other hand does not. Economics involves various causes and effects, that is why Milton Freidman's theory can be agreed upon that things need to be proven through science. Economics is not science because of its unpredictability.

Maria Biondi said...

Economics never struck me as a science, however the more in depth this article was it showed me that economics does contain the fundamentals of science. Although it may not be the science we have in mind such as chemistry and physics. It does contain predictions and theories in which a science is needed about the future economy. Economics does differentiate itself from the basic sciences. In science when a theory or hypothesis is proved wrong scientist go back and fix it, yet when economics is proved wrong the theory isn't tweaked. Like Paul Krugman I too don't understand why economists don't go back and revise their "recalcitrant facts."

Rachel Andal said...

The question "What is economics, and what is it good for?" rattles in our minds; as the debates for the chairman of the Federal Reserve, the nature of economics springs to mind. Economics, though may seem like a science because of its methods and theories, is far from it. What economics lacks is improvement. Friedman argues that false assumptions do not matter in economics just as it would not in physics. However, assumptions are a necessity within this subject because of factors (social constructions) such as institutions, currency, and stock shares.
Economics, although quite unpredictable, seems to be needed. Since philosophers like Hobbs and Hume saw the economic approach to the creation of institutions. These said institutions are present today and are attainable to the economic theory.
One needs to have prior knowledge and experience to fully understand economics.

Kristen Acevedo said...

The article raised some very interesting points. I have to agree with a lot of the students that are pointing out that when an individual hears the word "science", their minds gravitate towards the fields of Chemistry, Biology, Physics, and so on. Merriam Webster dictionary actually defines the word "science" as "a state of knowing." This contradicts the idea of economics completely; an economy is not a constant variable, it is an ever-changing system based on different causes and effects. So therefore, I do not agree with those who claim that economics is a science. Although, it involves theories and skilled professionals, it cannot be considered a science for the mere fact that it is unpredictable.

Anthony Caronia said...

Like music theory, economic theory is just that - a theory. It is applicable, but not adamant. Sure, it acts as a reliable guideline, but it is subject to experimentation. Considering that we are incapable of accurately predicting the future, investigation is a necessary asset!

Mary O'Shea said...

Before reading this article, I never thought of economics as a science, if anything I would have more put it towards a math like category. Economics is a branch of knowledge based on the production, consumption, and transfer of wealth. Just as John Rawls and Robert Nozick said, economics really is the foundation of what keeps our world developing as it is. With this in mind, I still do not believe that economics is a type of science. Economics is based upon theory, rather then facts, and our economy is always changing. Science on the other hand is based more on set facts that are more reliable then our ever changing trend of economic events.

Matthew Ramos said...

What is economics good for? In my opinion economics is important because it creates a hypothetical picture for the future. Economists’ theories and hypotheses are not to be taken literally, they are meant to inform people of possible future scenarios. One of the crucial differences that separate an Economist from a Scientist is the ability to use experimentation to prove or disapprove theories and hypotheses. An economist does not have the ability to prove a theory is correct, but a scientist does. In science, the method of trial and error is used and errors are documented. In economics, calculations are made based on the analysis of data, and assumptions are made and presented. Economists are scientific in the way they analyze data, but Economics is not a Science.

Alexa Piccoli said...

Economics cannot be considered a science for many reasons. When using economics to predict future economies there is no reliability or predictability and too many assumptions are made. When economics is compared to other sciences that make assumptions, like physics, there are some similarities with methods but the end result is not conclusive. While the methods of physics improve predictability, the methods of economists do not. Another thing to take into consideration as to why economics is not a science is the fact that nobody seems to mind that their predictions are not correct as stated in the article. Although there are many points as to why economics is not a science it is still an important part of our society because it does give us insight into the economy. When a new chairman needs to be chosen it is important he or she understand that this study is not a science but should be taken into consideration when making decisions.

Rich Gordon said...

Economics is a unpredictable theory that us humans can only hold on for the ride. Sure we might be able to predict slight changes in the way the economy moves but at large, we are in the dark. The main characters of economics are the consumer, producer and the government. With all these three things balanced on a scale, our economy would be perfect. These three things are not balanced and our economy can shift at any moment. In the article, economics is compared to a science. They are far different from each other. I agree with this because a science is very intricate and always predictable. Economics can bounce off the wall when economists think everything is going well. I do believe economists can predict small things that fall into the micro economic category. When it comes to macro economics there are to many factors that play in to predict the next step.

Kristoff Kolodko said...

I believe that Economics, though unpredictable, is still used for people to understand what to do if something goes wrong. Like one of Paul Krugman’s predictions, a lot of them happen to go wrong. But, economics finds different ways to fix problems in both GDP and the government and shows multiple ways how to fix the problems therefore making it important.

Dominic Gomez said...

I agree that economics is not a science. Unlike science, economics is not concrete. You cannot rely on past economic data and modules to predict what is going to happen next. That is why nobody foresaw the recession of 2008. There is no specific method or formula that is a hundred percent accurate in predicting what is going to happen next. Unlike scientists, economics cannot prefect their theories, meaning that economists cannot count on their theories working all the time. This is why, as the article stated, the Fed Chairman needs to have that “rare ear” to predict what is going to happen.

Tiffany Pabon said...

This article showed me that I was wrong in my prior perceptions of what economics was. I never thought of economics as any type of science. When they argued the point that it was a science because of the theorems and expressions it involved I was shocked. I knew there were methods that economist used to predict the financial future but I never would have thought that would make economy a science. I had thought biology and physics were sciences not economics. The fact that it isn't a precise prediction of the financial future is what I found difficult to grasp before this article. I never thought about it, though the article brought to the light that many things can be drastically changed or even be destroyed and these kinds of events are unpredictable in the economy. I agree that the next Federal Reserve chairman should have the years of experience and a "green thumb" for economy.

Bakhoya Mangoli said...

Economics deal with current(difficult) events that happening towards current society. Its how a person/reserve helps us over come it. Economic so we have learnt that can not be predicted in the distant future because we cant really determine how the economy, political stance or improve what seems to be working at the current time. The world keeps changing every time and we have to adapt towards it because what could be working for now may not later. Economic is not a Science because science is predictable you could know how something could be 10 years later unlike economic.

Kenneth Reilly said...

Since economists have yet to successfully predict what will happen in the world, and for the foreseeable future it seems that they will still be unable to predict what happens specifically, it is hard to call economics a science. Economics is a scarcity and how societies react to it. Scientists deal with a completely different element than economists do. Scientists do not have to deal with people and how they act when it comes to buying and selling materials. It is almost impossible to predict a humans actions. I believe economics is more similar to math than science.

Ashleen Ulysse said...

The textbook definition of "science" is the SYSTEMATIC knowledge of the physical or material world gained through observation and experimentation. Economics as a whole whether Macro or Micro is not at all systematic, economics fluctuates each and everyday as the market develops, as technology increases, and as we learn more about our society. So in essence I agree that an economist needs to have a craft to attempt to hypothosize what will come next in the economy. The craft is not a preset textbook formula or a pre-written definition.

Jamie Santavy said...

This article was very interesting because it calls into question the very purpose of modern economics. Many people who do not understand the fallacies that are intrinsic to economics see economists on CNBC and expect them to have all of the answers. When they see the economic issues that have been going on over the last several years they feel like one of these economists was supposed to see this coming, and that economic institutions like the FED have let them down. The truth is the state of the economy is a matter of perception more than concrete numbers. In times of great economic success less people are afraid to spend money on themselves, to take out loans to start a small business, and to invest their money in the stock market. What these people don't realize is that it's these types of actions that continue to propel the economy forward. While the U.S economy has been recovering slowly for several years people are still much more hesitant to spend their money and take chances with it than they once were. This is why the article claims that the next chairman of the FED is going to need to be a wise craftsman. It is going to be this person's job to restore public faith into the economy and shift the public perception on the state of our economy.

Anonymous said...

Matthew Corrie said...
I agree with this article that economics is not a science. You can only predict off of past events what will happen to the economy. Unlike sciences which have exact calculations and proven theories of what will happen, Economics does not fall under that category. The smallest things can result in a big change in the economy and these types of things are unforeseeable by economists making economics impossible to predict.