Economics Should Never Be Treated As Science

Here is a stinging rebuke by Telegraph's Ambrose Pritchard's on the supposed hubris of a Federal Reserve economist, who recently condemned economic bloggers as "chronically stupid and a threat to public order".

From Mr. Pritchard, (bold highlights mine)

``The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin.

``The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science and answers to Newtonian laws.

``In any case, Newton was wrong. He neglected the fourth dimension of time, as Einstein called it, and that is exactly what the new classical school of economics has done by failing to take into account the intertemporal effects of debt – now 360pc of GDP across the OECD bloc, if properly counted.

``There has been a cosy self-delusion that rising debt is largely benign because it is merely money that society owes to itself. This is a bad error of judgement, one that the intuitive man in the street can see through immediately.

``Debt draws forward prosperity, which leads to powerful overhang effects that are not properly incorporated into Fed models. That is the key reason why Ben Bernanke’s Fed was caught flat-footed when the crisis hit, and kept misjudging it until the events started to spin out of control.

``Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a rarer spectacle in science, where disputes are usually resolved one way or another by hard data.

``It is a branch of anthropology and psychology, a moral discipline if you like.

The basic problem with bureau-technocrats and their adherents is that they mistakenly presume the monopoly of economic wisdom solely based on its treatment with mathematical and or scientific equations or from PhD degrees, which Mr. Pritchard rightly lambastes.

This reminds us of Ludwig von Mises who wrote in Omnipotent Government (p. 120),

``Nothing could by more mistaken than the now fashionable attempt to apply the methods and concepts of the natural sciences to the solution of social problems. In the realm of nature we cannot know anything about final causes, by reference to which events can be explained. But in the field of human actions there is the finality of acting men. Men make choices. They aim at certain ends and they apply means in order to attain the ends sought."

Update.

I read the controversial article, and the apparent targets of the Fed Economist Kartik Athreya commentary seem to be the populist bloggers who always paint the world as simple adjustable mechanical instruments.

Says Mr. Athreya, ``They are the patron saints of the “Macroeconomic Policy is Easy: Only Idiots Don’t Think So” movement: Paul Krugman and Brad Delong. Either of these men will assure their readers that it’s all really very simple (and may even be found in Keynes’ writings)...

But outside the unpleasant "ex-cathedra" and "PhD coursework" reference, Mr. Athreya makes some valid points...(bold highlights mine)

``The main problem is that economics, and certainly macroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers: vice versa. What makes macroeconomics very complicated is that economic actors... act. Firms think about how to make profits, households think about how to budget their resources. And both sets of actors forecast. They must. One has to take a view on one’s future income, health, and familial obligations to think about what to set aside for retirement, how much life insurance to buy, and so on. Of course, all parties may be terrible at forecasting, that’s certainly a possibility, but that’s not the issue. Even if one wanted to think of all economic actors as foolish and purposeless organisms making utterly random choices, one must accept that their decisions will still affect, and be affected by what others do. The finitude of resources ensures this “accounting” reality.

``Beyond this, some may recall that Economics 101 is usually insistent on reminding students of the Fallacy of Composition: what is true for some may not be true for all. Much of macroeconomics is dedicated precisely making sure that when we talk about the “economy”, we don’t fall afoul of this fallacy."

I guess what may have gotten Mr. Pritchard's goat is that his writings has been tilted towards the oversimplistic the macro perspective, which Mr. Athreya critiqued.

Nevertheless, Mr. Pritchard's argument about economics as distinct from science is valid, but doesn't refute Mr. Athreya's point on the simplistic macro perspective.