Why economics is rubbish, episode 324. | | MacroBusiness

By David James.

The inadequacies of economics as it is commonly practiced are obvious enough to any thoughtful observer. The question is: why do so few smell the odour? This was the question that occurred to me when reading an analysis of economic academia by Deidre McClosky, called ?The Secret Sins of Economics? (which a reader kindly referenced). McClosky starts by arguing that many of the things that economics is criticised for are not vices but virtues, such as quantification (not a virtue, just a practice) libertarianism (well, if you are a libertarian). She then lists a few venal sins, such as focusing on a model of human behaviour that emphasises prudence, which is fine except that it completely ignores reality.? Then there are some more serious sins, such as total historical ignorance, but she says they are far from peculiar to economics, which is fair enough.

Then she gets to the point, detailing the true sins of economics, of which there are two. She starts outlining what a science should strive to do:

?I am sure you will agree: An inquiry into the world must think and it must look. It must theorize and must observe. Formalize and record. Both. That?s obvious and elementary. Not everyone involved in a collective intelligent inquiry into the world need do both: the detective can assign his dim-witted assistant to just observe. But the inquiry as a whole must reflect and must listen. Both. Of course.?

She then says there is nothing wrong with pure mathematics or abstract thinking, which is also true. But there is a problem:

Economics in its most prestigious and academically published versions engages in two activities, qualitative theorems and statis- tical significance, which look like theorizing and observing, and have (apparently) the same tough math and tough statistics that actual theorizing and actual observing would have. But neither of them is what it claims to be. Qualitative theorems are not theorizing in a sense that would have to do with a double-virtued inquiry into the world. In the same sense, statistical significance is not observing.

She goes on:

It is not difficult to explain to outsiders what is so dramatically, insanely, sinfully wrong with the two leading methods in high-level economics, qualitative theorems and statistical significance. It is very difficult to explain it to insiders, because the insiders cannot believe that methods in which they have been elaborately trained and which are used by the people they admire most are simply unscientific nonsense, having literally nothing to do with whatever actual scientific contribution (and I repeat, it is considerable) that economics makes to the understanding of society. So they simply can?t grasp arguments that are plain to people not socialized in economics.

She describes a confusion between what is qualitative and quantitative:

Hear, oh outsiders. I?ve told you how popular qualita- tive, Why Whether reasoning is in economics. It takes this form: A implies C. Got it? Simple, huh? The crucial point is that the A and the C are indeed qualita- tive. They are not of the form ?A is ?4.8798?.? They are of the qualitative form, ?A is ?everyone is motivated by P-Only considerations?,? say, which implies ?free trade is neat.? No numbers. You realize your lover will be annoyed by the neglected birthday to some degree, but we?re not talking about magnitudes.

This explains something that has puzzled me for a while. How is it that many economic theories are so often circular arguments that go unnoticed by those who prosecute them. Are they really so incapable of defining their terms properly and examining their assumptions? For example the theory of comparative advantage, the so called ?badge of honour? (as described by Krugman) is a circular argument. It says that if countries transact more by specialising, then the transactions per head will rise. That is, the more transactions there are, the more transactions there are. Unarguable, but not especially illuminating. But it is pure theory that need never be troubled by observations of what is actually happening in the real world (lots of lovely obscure mathematical formulae can be attached to the the circle, and perhaps there will even be a Nobel Prize at the end of it).

At one level it is highly comic, a glorious ship of fools. You get the sense that McClosky sees some humour:

?It is all nonsense, which future generations of economists are going to have to do all over again. Most of what appears in the best journals of economics is unscientific rubbish. I find this unspeakably sad. All my friends, my dear, dear friends in economics, have been wasting their time.?

But it is also a dreadful misuse of science, which, for the most part, completely stands or falls on how accurately it analyses the real world.

Which leads to why such nonsense gets such traction, something McClosky does not look into. It is an especially extreme example of scientism. It leads to a sort of homogenous nonsense. As the historian of science Stanley Jaki commented, such confusions are deadly to science itself. ?By assigning unlimited relevance and competence to the scientific method, scientism rules out precisely that test. By setting quantitative exactitude as the only and supreme test of truth, scientism robs of meaning the world of qualities and values. By the same stroke it makes science meaningless as well. He then quotes GK Chesterton:

?Science, which means exactitude, has become the mother of inexactitude. This kind of vagueness in the primary phenomena of the study is an absolutely final blow to anything in the nature of science. man can construct science with very few instruments .. a man might measure heaven and earth with a reed, but not a growing reed.?

That latter point is crucial. The metrics used to ?measure? economic and financial behaviour are growing reeds, they do not stand still. They grow in the minds of those who use them, used for trading strategies, to formulate polices, for the basis of consumer sentiment. Even if the quasi-scientific economic abstractions worked, they would not work.

But what McClosky is describing does not even have the veneer of quantitative exactitude, it is just circular arguments or banalities dressed up as abstract science. Of course, pointing this out will not make any difference, the intellectual edifice economics is too calcified to change and far too many careers depend on it. The best that can be hoped is that it sorts of fades away, doomed by its irrelevance. But while it is convenient for use in the political arena this is unlikely. The abstractions and circular arguments can be used to justify neo-liberal tactics: ?You just don?t understand, we have to liberate markets? and too bad about any social or human consequences ? here are some equations to prove it.

McClosky sums it up thus, with a quote from Milton?s Paradise Lost (you know, that weirdly uneconomic activity called poetry):

Until economics stops believing, contrary to its own principles, that an intellectual free lunch is to be gotten from qualitative theorems and statistical significance it will be stuck on the ground waiting at the cargo-cult airport, at any rate in its high-end activities uninterested in (Really) How Much. High-end theoretical and econometric papers will be published. Careers will be made, thank you very much. Many outstanding fellows (and no women) will get chairs at Princeton and Chicago. But our understanding of the economic world will continue to be crippled by the spreading, ramifying, hideous sins.
Woe, woe is me. Oy vey ist mir. Pity the poor econo- mists. The sins of economics come from pride in formalization, the making of great machines and monsters:
?and called me Sin, and for a sign
Portentous held me; but familiar grown,
I pleased, and with attractive graces won
The most averse.
And pity, I repeat, poor old Deirdre, who appears to be doomed to keep making these arguments, showing more and more plainly that the two main methods of academic economics are nonsense, without being believed.

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Have a good festive season, I?m off for a few weeks.

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Source: http://www.macrobusiness.com.au/2012/12/why-economics-is-rubbish-episode-324/

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