Saturday, April 12, 2014

Economics and Dollar Signs

Recently, while having dinner with a friend, the issue of economics came up. My dinner companion, who is trained in both economics and philosophy, suggested that economics is modeled after the physical sciences. This struck me as somewhat strange, and I questioned him about it. His reply was that economics is based on rational mathematical calculation and is internally consistent. I replied, just a bit satirically, that so too is astrology. He said “perhaps,” and we changed the subject.

This controversy isn’t new. Later, when I did a quick search on the subject, I came upon a recent piece in The Guardian by Robert Shiller, one of the 2013 Noble Laureates in economics. His contention was that economics more closely resembled engineering than basic research in the physical sciences—and he emphasized the close relation of economics and public policy. He made a good case for economics as an applied science. However, I don’t think many physicists, chemists, or engineers would be convinced. My guess is they’d be rather scathing about this.

A skeptic is tempted to say that economics would be analogous to engineering if bridges routinely collapsed forty percent of the time. More to the point, engineers almost always come to a consensus as to why a bridge has collapsed. There is rarely such agreement among economists. To take the analogy further, a certain percentage of economists would claim there never was a bridge, or if there was one, they had nothing to do with its collapse, even if they helped design it. People in the physical sciences can’t get away with this sort of thing.

Perhaps economists more closely resemble historians in that they interpret events according to certain assumptions, but unlike historians utilize mathematics to demonstrate their point. For economics to be akin to the physical sciences, economists would have to be able to demonstrate the validity of their claims by conducting experiments and achieving consistent, replicable results.

What particularly sets my teeth on edge is the claim to “internal consistency.” Such consistency may no doubt be important, but more important is external validity—the way in which a given set of claims correlates with the world we live in. If a theoretical claim or interpretation cannot be substantiated by empirical evidence, what remains is speculation, no matter how mathematically derived.

Economics is an academic discipline. It is also a profession. For that reason, I would suggest that rather than engineering, the appropriate comparison is to the practice of law, that what economists do, particularly given the demands of public policy, is closer to what lawyers do. This isn’t necessarily a bad thing, but it in no way constitutes a science.

As Robert Shiller points out, economics ultimately involves analyzing the vagaries of human behavior, not something that is easily predictable.

Physics has in recent decades become increasingly speculative and ethereal, driven by forms of mathematics that few of us can hope to understand, whether used to describe the neutrino or the universe itself. There’s the danger that such increasingly recondite and convoluted theories will serve as a present day analogue to the calculations of Ptolemy, which kept the model of the earth as the center of the universe alive for centuries through the magic of mathematics. Nevertheless, physicists actively seek to devise experiments to demonstrate or refute their theoretical claims. An example is the recent work on demonstrating the existence of gravity waves.

As for economics, there is the question of whether reducing human life to a series of economic imperatives, or to data, is a form of dehumanization. My suspicion is that not many economists would recognize this to be a problem.