How Scientific Is Modern Economics?

It was May 1919. An expedition led by Arthur Eddington had reached the remote island of Príncipe in order to confirm the theory of general relativity put forth by Albert Einstein. The observation of the Hyades star cluster during the solar eclipse has shown that the light is deflected by the gravitational field exactly the way Einstein predicted it. Overnight, the relativity has moved from being an unproven theory to a confirmed one.

This was perhaps one of the most dramatic examples of the scientific method: the process of observing a phenomenon, formulating a hypothesis, making a falsifiable prediction based on the hypothesis, and finally verifying that prediction either through experiment or observation.

The scientific method as we know it today has been gradually developed over the course of last few centuries. Prior to that, scientists were using Aristotelian scholastics – a process largely dogmatic and detached from reality, and therefore unable to handle any but the simplest of subjects reliably.

So here is the question about economics: is it a science in the full sense of the word, or is it a philosophy where the number of valid opinions may equal (or exceed!) the number of practitioners in the field?

We are repeatedly pushed towards the opinion that it is in fact a science. Macroeconomic data is constantly used to prove or disprove economic claims about efficiency of this or another policy. At the same time, we see little or no reference to the validity of the underlying model, without which no meaningful use of the data can happen.

In other words, it is useless to say that (to quote Douglas Adams) “whenever I go click, all I get is hum” if you do not have an established theory that clearly states the rules according to which the clicks and the hums behave.

Many authors object to the notion that Economics uses scientific method on purely philosophical grounds: you cannot have a controlled experiment in economics, and an economy is created by human behaviour that is hard or impossible to predict. These objections may be valid, but they too are philosophical arguments. We can debate these points endlessly, and in fact we do.

But what if we apply the same method to economics as a science, that the economics itself is claiming to apply so successfully to the economic phenomena that it studies? In other words, we can establish objective criteria which would identify a “true” science, calibrate them against an established science such as physics, and then try to apply them to economics.

The criteria are easy to come by. I’d suggest two:

  1. A true natural science will have little or no different, warring schools of thought. If the science is based on an objective scientific method, there should be little room for disagreements and interpretations.
  2. A true natural science would be able to predict significant phenomena in the domain it studies, and the same predictions would be made by all of its practitioners. It’s not enough that some physicists predict gravitational lensing: once the theory is established, all physicists must be able to predict it.

We can clearly see how physics passes these tests by a wide margin. While there are always people who claim that the Earth is flat, there can be no disagreements among physicists today as far as established theories like Relativity or Quantum Mechanics.

Similarly, physicists are able to accurately predict major phenomena, and the fact it’s only thanks to these abilities that we can have reliably functioning technologies such as computers or GPS.

With economics, it’s a different story. There are so many schools of thought that they had to be further subdivided into Supply-side and Demand-side. Classical, Keynsian, Neo-Classical, Neo-Keynsian, Monetarist, Austrian… all these are schools that have many followers today, and even though only some of these call themselves “mainstream”, they are not as prevalent as Relativity is in physics.

Similar situation exists with predicting economic phenomena. Any astronomer could predict a Solar eclipse based on physics, however, only some economists were able to predict economic booms and depressions, and most of those who did, did not do that reliably.

And here again, the important point is not that some economists were able to predict (or even identify) booms and depressions. What is important is that there are many recognized and distinguished economists that didn’t – including the Chairman of the Federal Reserve. The number of these economists is so vast that one can hardly attribute this failure to individual incompetence. A failure on this scale can only happen in the domain of philosophy, not science.

One objection that could be raised is that economic environment is similar to weather – it is impossible to forecast its future developments. This objection is not valid: we are not demanding to predict temperatures to a fraction of a degree, or the weather next year. Identifying imminent market crash or depression is more equivalent to identifying a cold front or a hurricane developing – tasks easily accomplished by today’s meteorologists. In fact, meteorologists do their job so well that many people from sailors to pilots rely on this information in situations where their very lives could depend on its accuracy.

Another objection is that it’s only the “most difficult” questions that generate so much controversy. Whenever we’re breaking new grounds or discussing global macro-economic policies, we may have disagreements. But it seems that the disagreement is on such basic questions that it can hardly be explained away. Should we raise or lower taxes? Should spending be higher or lower? How about interest rate? Unemployment benefits? If we do not know the answers to these, what is the point of trying to answer anything else?

But the best one is by Paul Krugman: he says that it’s some economists that are not scientists, while there is nothing wrong with economics. Conveniently, the only people that receive his dubious honour are those that disagree with Krugman himself.

Science is all the rage today, and rightly so. Applying scientific method and looking at objective data has given us the tremendous progress and improvement in the quality of life that we have seen in the last few centuries. It is understandable that we want to apply this method and this thinking – that has proven itself so successful elsewhere – to everything that we do. Mentioning something scientific, or appearing to be based or science will give you upper hand in any argument.

However, we also need to be able to recognize our limitations, and make sure the methods are applied where they are appropriate. It seems – empirically! – that applying scientific methods to economics did not produce the results we were hoping for.

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One comment on “How Scientific Is Modern Economics?
  1. […] of all, let’s do away with credentials here. Economics is not like physics. For any opinion in economic policy, it is entirely possible to find a decorated scholar (up to and […]

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