The Limitations of Economics
…I’m not an economist, but I
play one on TV
By Jon N. Hall
NOTE: This
article appeared in March of 2009 at James Glassman’s TCS Daily. I considered updating, rewriting,
Americanizing punctuation, and testing the links, but decided to slap it up
warts and all, just like I submitted it to Glassman’s now-defunct website. The
article, of course, ran during the Great Recession, shortly after the financial
crisis:
Not so very long ago we often
heard this: “The business cycle has been repealed”.
Economics, it was suggested,
was such a complete, mature science that the experts could engineer “soft
landings”, sparing us the pain of recession and the heartache of depression.
All we needed to do was put our faith in the economists. This was also about
the time we heard about “the end of history”.
Anyone who reads the business press
knows that the mood these days is one of "what, me worry?" optimism.
After six years of fairly steady growth with surprisingly quiescent inflation,
every major newspaper and magazine has either suggested or flatly declared that
the business cycle is dead -- that the recession of 1990-91 was the last such
slump we will see for many years to come.
Well, that was then and this
is now. Seems economists didn’t understand the economy quite so completely as
they had thought. Not only have we had a “hard landing”, we’re looking into the
maw of a possible depression. Indeed, some parts of America may already be in
depression. Maybe the experts didn’t wield as much control over the economy as
they thought. And history? History is back, and with a vengeance.
I’ll leave it to the social
scientists to determine whether the social scientists of the 1990s suffered
from delusions of grandeur or just good old hubris. But given the reversals in
the economy of late, one might ask:
Is economics really a
science?
In a “hard science”, like
physics, prediction is paramount. A star that you’d think would be obscured in
an eclipse of the sun is nevertheless visible, just as Einstein predicted.
Without the ability to predict, a “science” isn’t truly a science.
The paucity of predictive
ability in economics is illustrated by economist Alan Greenspan’s surprise at
the current downturn. (Slashing interest rates to the bone might produce a
bubble? Who knew?) Lester Thurow, another economist, thought neither America
nor Japan would be able to compete with the European Union in the economic
arena. But Europe is a mess, and pretty soon, Europe won’t even be Europe. (If
you doubt that, check out America Alone by Mark Steyn.)
In addition to prediction,
the hard sciences involve measurement. In 1969, for example, the hard sciences
enabled us to do what no man had done before: We “slipped the surly bonds of
Earth” and went to the Moon. We were able to do this (and on the first attempt)
because we had made all the measurements. We knew precisely how much fuel would
be needed, and how much oxygen for the crew, and we included a little extra for
good measure. In the 1940s, we invented a device that produced a form of energy
no one had ever seen. We knew precisely how much fissile material would be
needed to achieve critical mass and how much force to use in slamming the
hemispheres together, and it, too, worked on the first try. These are examples
of real science.
One of the things
practitioners of a “soft science” do when trying to gain stature for their
discipline is to “mathematize” it. It can’t just be all theory; it must have
data if it’s to be taken seriously as science. So economists start devising
formulae, applying numbers to things, and amassing mountains of “data”.
But just what are these
things economists apply numbers to? Are they the discrete measurable phenomena
we find in the hard sciences? What are consumer confidence, productivity, gross
domestic product and the other economic phenomena?
The things to which
economists apply numbers are nothing less than the constructs of economists.
They are things that economists come up with, invent. They are abstractions,
and as such are highly debatable. In his new book Enough: True Measures of
Money, Business and Life, former head of Vanguard Mutual Fund Group John C.
Bogle writes: “By worshipping at the altar of numbers and by discounting the
immeasurable, we have in effect created a numeric economy that can easily
undermine the real one. [p. 100]”
So measurement in economics
is highly problematic. How do you measure GDP? Again, that depends on what it
is. What do you include in GDP? Should the “product” of homemakers be included?
GDP is a measure of the health of an economy. But as we drift further into
becoming a nation of consumers, not producers, how do we measure our product,
our GDP? Our apparel, consumer electronics and other manufacturing industries
have been shipped abroad—so is our post-industrial economy’s GDP to be measured
by our burger flippers and baristas? And then we have economists changing the
criteria by which they measure, as they’ve done in dating recessions.
Measurement in the hard
sciences is much more straightforward. If, for instance, you want to know what
a cubic inch of gold weighs, you refine gold, pour it into a mold, and put it
on the scales. Each such cube of gold will weigh the same, roughly. But if you
could refine gold to absolute purity and control the number of atoms in each
such cube, each such cube would be identical in weight. This kind of precision
in measurement is pretty much outside the realm of the social sciences.
When you measure GDP, you
must wait for the data to pour in. And this data will come from numerous
sources, some of which will be unreliable, even corrupt. And then you’ll revise
the number. The 4th quarter of 2008 first showed a 3.8% contraction
of GDP. But it’s been revised down to 6.2%, and even that will surely be doubted and debated.
It is precisely this
imprecision and tentativeness that allows everyone to think his opinion about
the economy might have about as much validity as the next guy’s. Folks don’t do
that with the hard sciences; folks don’t have opinions about physics. (Except
for the wacky ideologues who believe physics and, for that matter, reality
itself is a social construct. See Sokal Hoax.)
In physics, there are ways to prove things. So folks defer to physicists. But
in economics, things are often a matter of opinion. That’s why you see major
disagreements between economists over basic things. Economics may be more akin
to the humanities than to the sciences.
Neither economics nor any of
the other “social sciences” have achieved anything that even begins to compare
with the undeniable triumphs of the “hard sciences”.
But then the social sciences
can’t be expected to have the solidity of the hard sciences. After all, the
social sciences deal with the most complex mystifying phenomena in the known
universe—mind, society, government and economy. So if social scientists are
insecure about whether they’re really scientists or not, they can take comfort
in knowing that what they’re studying is the really tough stuff. Even so, that
doesn’t mean they get to claim for themselves the mantle of science. For they
must admit that minds remain as screwed up as ever, societies are breaking
apart, governments are still dysfunctional, and the soft science of economics
couldn’t provide us a soft landing. Insofar as making a better world through
the application of social science, the results are disappointing.
None of this is to suggest
that the social sciences are bunk or that we should ignore them or throw them
out. The social sciences are in their infancy, and we have to expect that
they’ll be wrong some of the time. We have little choice but to address thorny
things like the economy and make as much sense of them as we can. We need the
social sciences; we can’t manage civilization with physics. If economics
doesn’t have the rigor and certitude of physics, so what, it comes with the
territory. We must listen to the professionals while realizing they could be
wrong. (For the record: I myself admire a number of living economists: Thomas
Sowell, Peter Schiff, Arthur Laffer and Don Luskin, to name a few. But there
are others I find downright crazy, even dangerous.)
We bring up the limitations
of economics because of the new economic era America has just entered: The Age of Trillion Dollar Deficits. With such sobering sums on the table, economists
need to display a little “epistemological modesty”. Now more than ever, economists need to be candid
about their ability to measure and predict. Indeed, now is the time for
economists to be more provisional, circumspect and cautious in their
prescriptions. After all, economists didn’t keep us out of recession.
Eventually, the American
economy just might recover. And if it does, that will illustrate another
criterion of science in which economics is deficient: provability. A real
science must only deal in things that can be put to the test, either verified
or falsified. But it’s doubtful that any economist would be able to demonstrate
that the recovery was due to the Trillions Congress spent or in spite of it.
Perhaps a stronger more durable recovery would have happened had Congress done
nothing. It’s rather like the argument about what caused the improvement in
Iraq: Was it the Surge or the Sunni Awakening? It’s hard to know what would
have happened if what had happened hadn’t happened. However, if government were
to do nothing, we’d pretty well know that any ensuing recovery wasn’t due to
government action.
Also, economists won’t know
how long the recovery will last. Surely, spending Trillions is bound to do
something. But will it fix the economy for the long haul, or just buy us a
temporary reprieve? Perhaps the stimulus would only have bought a brief respite
before another deeper plunge, such as happened in 1937. Which suggests that
what we should be doing is restructuring the economy for the long haul,
strengthening the economy’s basic underpinnings, not going from crisis to
crisis putting out fires.
Because government and
economy are the subjects of sciences, when politicians assert that “only government” can fix the economy, they are making a scientific statement.
So let’s put it to the
scientists, the economists: Is that really true? Is it really impossible
for the private sector economy to correct itself?
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