Tuesday, 8 February 2011

Economics: the Dismal Pseudo-science

It was Thomas Carlyle in 1849 who called economics 'the dismal science'. I think he was too kind. Economics could be a very important discipline, if only economists could figure out what it's meant to be about. You may detect that I have an antipathy towards most economists and you'd be right, although some - a minority - are very charming and well-meaning. Part of this antipathy stems from the fact that I am a mathematician, also trained in psychology. From what I can make out, economics appears to be a sort of unpalatable pizza, consisting of a base made from psychology and social science which is 50 years past its sell-by date, topped with high school maths. This would probably not irritate me so much, as long as people understood the limitations of economic theories and did not accord them such great reverence. Unfortunately, we often hear phrases such as 'economic inevitability' or 'economic realities', as if these were immutable laws of nature, like gravity. They are not.

From Adam Curtis' wonderful film, The Trap (2007)

My antipathy is also tinged with jealousy because there is no Nobel Prize for mathematics, but there is one for the highly prestigious subject of 'economic sciences'. Mathematicians make do with something called the Fields Medal, which only mathematicians have heard of, so there's really no point having one. Try telling your mother you've just won a Fields Medal and she will most likely inquire as to when you took up the pentathlon. My righteous and envious anger does not end there. Being a mathematician, I can see that it is possible to obtain a Nobel Prize in economics merely by re-packaging the simple (trust me, it is) mathematical idea of a logarithmic random walk and using this to work out the price of a fancy schmanzy financial derivative called an 'option'. This is the Black-Merton-Scholes option pricing model (1973), for which Messrs Merton and Scholes received their Nobel laureates in 1997. (Mr Black did not get a prize because he committed the faux pas of dying first - possibly of embarrassment). The fact that most people will not know what the hell I'm talking about only serves to illustrate perfectly why there is no Nobel Prize in mathematics. Meanwhile, economists are hailed as the gurus of our age, whom no power can ignore. Mathematicians, by contrast, are viewed as irrelevant egg-heads or potential serial killers with poor personal hygiene. They may well be, but so are economists.

The different esteem in which society holds mathematicians and economists is perhaps a good example of one of the many things which is wrong with mainstream (i.e. 'free market') economic theory. "What's aught but as 'tis valued", says Troilus in Shakespeare's Troilus and Cressida (act 2, scene 2), when Hector expresses his doubts that Helen is worth all the hardship and carnage of the Trojan War. Troilus was the first economist. I'm certainly not suggesting that we should entrust our happiness to mathematical technocrats; I couldn't imagine anything more dystopian, in fact. It just puzzles me that we do seem to allow economists to tell us how we should arrange our societies, and this has led to an equally dystopian outcome. The reasons are easy to divine:

Robert Kennedy is famous for having said that Gross National Product "measures everything ... except that which makes life worthwhile." In truth, it measures even less than that. A vast amount of worthwhile, even 'economic' activity is not counted in GNP figures, because it is unpaid work, much of it done by women. Most child-rearing doesn't count, for example. Neither does housework, many leisure activities or random acts of kindness.  Everything without a price tag is deemed to be bad. As Kennedy pointed out, GNP does include things like advertising, footballers' salaries, bankers' bonuses, the costs of pollution, crime and road accidents, tabloid newspaper sales and Justin Bieber.  These are all deemed good. If someone (male or female) were to give up their job in advertising, in order to take care of their children and paint in their spare time, an economist would see this as a contraction in the economy, soon to be followed by the end of civilization. If we were to bother thinking about it, we'd understand that this is nonsense, but we don't think about it. We just continue to worship the god of GNP. In a developing country, there may be some point to this, but in a rich country, the continued obsession with GNP growth is as dysfunctional as an addiction to junk food. 

If you stuff your face with burgers every day, your waistline will grow pretty fast, until you inevitably drop dead from a heart attack or bowel cancer. Just before that happens, you'll probably wish you'd spent less time in the office, wasting your life to enrich someone else, and a bit more time doing something genuinely worthwhile.

And another thing: I haven't even touched on the basic assumption underlying almost all economic theory, that we are all just rational actors, motivated purely by self-interest in the pursuit of 'utility', which in practice means 'money'. This was only ever an approximation to the truth and its limits have been recognised in recent research on behavioural economics. More pointedly, if we hold economic theories up to the same standards as scientific theories, we find them severely wanting: considered as a science, economics is dismal indeed; more so than psychology or even sociology. 

Scientific theories are supposed to make fairly precise predictions, at least in statistical terms. The predictions of economic models tend to be woefully inaccurate. A scientist confronted with such a failure would question the assumptions of the model and change it. Neo-liberal economists don't do this, as far as I can see. They just keep spouting the same old dogma and applying the same failed policies ad nauseam: ever lower taxes, more privatisation, less regulation. Well, as long as the rich keep getting richer, who cares?

For more on this, see Adam Curtis' brilliant documentary series, The Trap: Whatever Happened to our Dream of Freedom (2007).


  1. "Unfortunately, we often hear phrases such as 'economic inevitability' or 'economic realities', as if these were immutable laws of nature, like gravity. They are not."

    Not immutable laws of nature, but maybe often the direct consequence of large numbers of similar psychology? Whether our models for them are accurate or not, our collective situation is a function derived only from our individual behaviors. Which are in turn derived from our psychology, which has come from evolution. Evolution is a physical process of complexity based on the natural laws of the universe. If aliens are found, they will have evolved, they will have economics of some sort. So in that sense, is economics invented, or discovered?

    Irrationality is hard to model, even cognitively people find it hard to get a handle on. Which is chiefly why people have a hard time dealing with me, maybe you as well, who knows? Maybe that's why there's no Nobel prize for Mathematics. :)

  2. Thanks for a thoughtful and well argued comment. Yes, maybe I was a tad harsh on economists. There is a basis for economic theories, flawed though it is, and some of it even works remarkably well in spite of that: the theory of price equilibrium is important and quite beautiful (Adam Smith's original 'invisible hand'). Still, there is often a big gulf between theory and reality.

    Irrationality can be hard to model, but economists do need to try, and some are trying (the behaviouralists). What irritates me is dogmatic economic fundamentalism, which tends to come from the neo-liberals and resembles religion much more than science.

  3. Very entertaining post, thank you for it.

    Are you much acquainted with the Austrian School of economics? Unlike the others it does away with the ridiculous assumption that we can quantitatively measure the outcomes of millions of individuals interacting with each other and perhaps is not subject to many of your other criticisms of economics in general.

    I'd recommend taking a look at the 'methodology' section here:

  4. Thanks for that, Matt. I can claim no expertise on the Austrian School; it looks very interesting although I'm sure I'd disagree with its adherents, such as Hayek, on policy.

    As for methodology, their rejection of empiricism is troubling and seems unscientific to me. Their theories may be well crafted, but are based on axioms which I would find questionable. So, I would not expect their theories to be an accurate description of real economic systems, any more than chess is a good model of medieval warfare, say.

  5. Well written. I believe the quote is actually from Robert Kennedy.

    I don't know that I'd complain about "The different esteem in which society holds mathematicians and economists" It seems to me that economists are mostly reviled while mathematicians are mostly ignored.

    Also, you should never trust economists.

    1. Thanks Joe. Interesting link, too. I suspected as much! Still, I guess we shouldn't generalise about a whole group of people. Poor old economists; they're having such a hard time :) Oh and thanks for pointing out the wrongly attributed quote - I'll have to change that ..