Economics — an empty and inexact science

13 April, 2017 at 11:18 | Posted in Economics | 2 Comments

Of course economics involves cases where economists appear too reluctant to give up their favoured models. You can find similar stories in the hard sciences. There will be more such stories in economics because the inexact nature of economics makes it easier to discount any single piece of evidence. What I cannot understand is what leads someone … to argue against the use of evidence, and instead that “economics is primarily a way of organizing one’s thinking”. Astrology is also a way of organising one’s thinking, but it fails because evidence does not back it up.

ct7x3eovmaa25klThat comparison is slightly unfair, because while the theory behind astrology is obviously implausible, the basic principles of microeconomics are not. In a class on economic methodology I once drew a huge tree that showed how most of economics could be derived from principles of rational choice. But go beyond the basics, and add in complications involving information and transactions costs (to name but two) and you very quickly derive competing models. There is no single model that comes from thinking like an economist, so for that reason alone we need data to tell us which models are more applicable.

Simon Wren-Lewis

It’s hard not to agree that economics is a very inexact science. But — that’s actually not at all the way its mainstream überpriests present it. Especially not in their textbooks. There economics — the queen of social sciences — is portrayed as a rock-solid science on a par with physics.

Reading those textbooks and the heaps of models and forecasts that people like Wren-Lewis produce, it’s hard to really see any difference between mainstream economics and astrology. They are both based on ‘basic principles’ that are ‘obviously implausible.’ We can always derive what ever we want by setting up a suitable set of axioms (‘principles of rational choice’). But as Wren-Lewis himself notices, confronting the theories and models built on those axioms (think of the four pillars of microeconomics — completeness, transitivity, non-satiation, and (when allowing for risk-reducible uncertainty) expected utility maximization) with reality immediately exposes the emptiness of the foundation and the need to ‘derive competing models’. 861cf344575acd50ed67b35d88615f2318610d8148e8c471ad10ca0132cda91eSince the ‘thinness’ of the basic axiom system always forces the economist to supply very ‘thick’ stories to save the model, one really has to wonder: what’s the point? The way the axioms and theorems are formulated standardly leaves their specification without almost any restrictions whatsoever, safely making every imaginable evidence compatible with the all-embracing ‘theory’ — and a theory without informational content never risks being empirically tested and found falsified. Used in mainstream economics ‘thought experimental’ activities, it may of course be very ‘handy’, but totally void of any empirical value.

In physics models are constructed and compared with observations to check if they provide precise explanations and successful predictions. But the miles that the laws of physics take us doesn’t have any equivalent in economics. There the non-existent ‘laws’ don’t move us one single millimeter.

Looking at what mainstream economists have come up with, there is no indication at all they produce rigorous and successful explanations or predictions of real-world phenomena. In physics it’s all different. There one has often been able to produce both rigorous and successful explanations and predictions. But then, of course, the material world is something quite different from the social world …

Mainstream economics is in the story-telling business whereby economic theorists create make-believe analogue models of the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Some people find this ‘the model is the message’ business very impressive and convincing. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality. It is certainly not enough for a relevant social science to prove things about thought up worlds

Without strong evidence all kinds of absurd claims and nonsense may pretend to be science.  We have to demand more of a justification than rather watered-down versions of “anything goes” when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule none is given, which makes it rather puzzling how things like ‘representative agents,’ ‘efficient markets,’ and ‘rational expectations’ have become the standard modeling assumption made in much of modern macroeconomics.

Models may be beautiful. But it’s — as empty an inexact economics shows — dangerous to mistake beauty for truth.

9d5daba794123273e77fca0cb640aa7c_welcome-to-macroeconomics-macroeconomics-meme_430-300Macroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take … In response to the observation that the shocks are imaginary, a standard defence invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions.” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favourite.

The noncommittal relationship with the truth revealed by these methodological evasions and the “less than totally convinced …” dismissal of fact goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”

Paul Romer



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  1. I wonder when the Fed governors will publish the models behind their “dot plot” guesses and actually modify their models every time the real numbers don’t match their predictions (and all previous ones) so that they do. It’ll be quite a trick to pull off.

  2. I wonder what you think of economic sociology, which is more humble but also more grounded (in my humble opinion) in the empirical world and often enough in (often qualitative) inductive theorizing.

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