The non-science permeating the field of economics

June 2, 2011 | By | 6 Replies More

Most economists failed to predict the market crash of 2008–so many that it is hard to count them all. But how is this even possible? It’s on a scale of this hypothetical: 98% of  meteorologists failing to predict a huge hurricane hitting the coast of Florida.  Consider this description of the problem:

Like everyone else, we wondered how could the world’s leading economy and its top economists, including the Federal Reserve Chairman, Ben Bernanke – a man who is surrounded by a network of smartest investors, scientists, and think tanks – miss the financial crisis and its impact on the US Economy?

The predictive failures by economists causes a friend of mine to argue that, as a general rule, economists are not scientists at all, and that they are “frauds.”  In my opinion, he’s overstating the point because there were some economists who clearly predicted the burst of the housing bubble, but most of the economists who take to the airwaves don’t seem to be scientists like the scientists who develop vaccines or design solar panels. They are often terrible at making predictions, and their lapses can look cataclysmic in retrospect.  They are like sportscasters, always looking forward to the next game, trying hard to divert attention from their previous failures. They seem more like lawyers or PR specialists than scientists.  This article at Wharton suggests that the economists who failed to predict the housing bubble lack “common sense”:

Among the most damning examples of the blind spot this created, [Wharton management professor Sidney G. Winter] says, was the failure by many economists and business people to acknowledge the common-sense fact that home prices could not continue rising faster than household incomes. Says Winter: “The most remarkable fact is that serious people were willing to commit, both intellectually and financially, to the idea that housing prices would rise indefinitely, a really bizarre idea.”

Here is more fuel for the fire.  No matter what position a prominent politician takes, he/she can pull out 30 “economists” to “support” the proposed policy.   Even worse, there is almost never a rival group of economists who will proceed to demolish what the first group has to say with understandable facts or theories.   It always turns into a bunch of mush.  This Huffpo article on the types of economist “experts” used by the GOP merely fortifies my friend’s contention that much of what passes as economics these days is not scientific.

In the meantime, on whose advice should one rely regarding investment strategy? It would seem that we should all turn to economists to be our stock-brokers.  it would seem.  Here’s something you can bank on: The financial  “experts” (perhaps these aren’t exactly “economists”) who think that one can successfully pick stocks are frauds (so does Dan Smolin).  Unless you’ve got some good inside trader information, like many members of Congress, that is.

I’ll end this rant with some quotes on economists:

“Economists are pessimists: they’ve predicted 8 of the last 3 depressions” Barry Asmus

“Economics is extremely useful as a form of employment for economists.” John Kenneth Galbraith

“Economics has never been a science – and it is even less now than a few years ago.” Paul A. Samuelson

“Economics is a subject profoundly conducive to cliche, resonant with boredom. On few topics is an American audience so practiced in turning off its ears and minds. And none can say that the response is ill advised.”
John Kenneth Galbraith

Ask five economists and you’ll get five different answers – six if one went to Harvard.
Edgar R. Fiedler

Economists are coming to acknowledge that measures of national wealth and poverty in terms strictly of average income tell you little that is significant of the health or viability of a society.
Rowan D. Williams

I believe that economists put decimal points in their forecasts to show they have a sense of humor.
William Gilmore Simms

An economist is a man who states the obvious in terms of the incomprehensible.
Alfred A. Knopf

An economist is a surgeon with an excellent scalpel and a rough-edged lancet, who operates beautifully on the dead and tortures the living.
Nicholas Chamfort (1741 – 1794)

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Category: Economy, Science, scientific method

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (6)

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  1. Brian says:

    You should look into the True Cost Economics movement promoted by Adbusters and others who note that the field of economics is anything but scientific. Google it up and you'll realize there's a whole academic movement to change economics as usual.

  2. Niklaus Pfirsig says:

    Economics is a soft science, which includes psychology and sociology. The popularized image of economics is that of a hard science concerned only with accounting data, but in fact, economics is concerned with the dynamics of market economies and the motivational relationships which drive them.

    One problem with economics as a science is that there is no effective way to test any hypothesis under controlled conditions. As such many economic theories are support by studies of economic sectors where externalities are often discounted or ignored completeley. ( if you think of a market segment as a closed system, externalities are outside of that system, e.g. foriegn investments )

    Many economic tjeories hold up against the test of time. One such example is the "Self-Fulfilling Prophesy". This is when a prediction creates a panic whcich in turn changes the market dynamics in a way that appers to fufill the prediction.

    A good example of a self-fufilling prophesy happened in Nashville, TN in 2008. After storms in the Gulf forced the shutdow of some refineries, a rumor predicting fuel shortages and very high prices hit the radio news in the morning. By noon, there were long lines at the pumps as people begcan hording fuel, filling their cars, Gerry-cans, milk jugs, even pain buckets with gasoline. People who normally used 8 gallons per week stocking upo with 50, 60 , even as much as 200 gallons for fear of a shortage and in the process they created a shortage.

    By early afternoon, The stations with the cheaper gas had run out of fuel and closed up. Lines quickly grew at other stations, who had started to raise prices. By the evening, police were patrolling the few stations with gas, due to fights between enraged drivers. Over the following several days, All businesses suffered as people stayed home, saving what gas they still had in their cars. About three days into the shortage, I made a grocery run out to the local Krogers. I was amazed at how empty the streets were, and it seemed like most of the stores were closed. As I got to Krogers center, a gas tanker truck was pulling in, so I got in the line. The store clerks directed traffic and the store limited customers to 10 gallons. By the time I got to the pump, there were over 100 cars in line,

    It took a couple of weeks for business to return to normal.

    It was interesting to note that there was no shortage of diesel fuel.

    Economics is filled with such aggregrate effects. I think that problem lies in political engineering side of things where ego and lip service iare more important than sound policy.

  3. Jim Razinha says:

    "political engineering", Niklaus? I have a hard enough time with the term "political science" and now you have to tie it to engineering? Cringe, followed by a heavy sigh.

    Anyway, dead on – both Erich's post and your comment. The self-fulfilling prophesy is accurate as well. But when Greenspan commanded the Fed, simple words created ripples in the market. I took a graduate Business for non-business majors class and the prof showed us an analysis of the market response in real time during one of Greenspan's appearances before Congress. There was a noticeable dip just seconds after each time he used words like "caution" or "concern." The point was double: not only how fast the market can react but also how much the players listened to what we might see as routine briefings. From that, it's easy to see how virtually impossible it is for economists to predict anything short term, if only slightly less so for the long term.

  4. Niklaus Pfirsig says:

    Jim,

    "Political Engineering" is a hackish term. Simply explained, if science is the acquisition of knowledge through observation and study of a subject, engineering is the application of the knowledge acquired through science to to produce a desired outcome.

    Political science is the study of the policy-making process which we call politics. Political engineering applies knowledge gained from political science to formulate strategies used to attain political objectives.

  5. Jim Razinha says:

    (whispers to Niklaus: "that was sarcasm") But not entirely so…there can be politics in engineering, but to call anything "[…fill in the blank…] engineering" undermines the professionals that are real engineers. (That was not sarcasm)

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