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Author Joris Luyendijk: Economics Is Not a Science (theguardian.com)
The Real Dr John writes: A Nobel prize in economics, awarded this year to Angus Deaton, implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modeling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths. In 1994 economists Myron Scholes and Robert Merton, with their work on derivatives, seemed to have hit on a formula that yielded a safe but lucrative trading strategy. In 1997 they were awarded the Nobel prize in economics. A year later, Long-Term Capital Management lost $4.6bn (£3bn) in less than four months; a bailout was required to avert the threat to the global financial system.
Economics is not a science. It is a study of human behavior like Psychology, and as the article points out, it has heavy political overtones. There was no Nobel Prize in Economics until 1969. Maybe it is time to retire that particular prize.
A brain is a terrible thing to waste... Mind? That's debatable.
It's a fuzzy science, similar to cooking.
Sometimes you try stuff, make predictions, and it turns out great.
Sometimes you try stuff, make predictions, and it's dreadful. Like my famous "Peanut Butter & Haggis" recipe, or pickle-flavored ice cream.
Just cruising through this digital world at 33 1/3 rpm...
Nobel didn't originally accept economics as a science either, this economist won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, which was originally provided by the Swedish bank in 1968 through a perpetual endowment to the Nobel Foundation.
If I have been able to see further than others, it is because I bought a pair of binoculars.
When a rocket blows up, it might be the engineers' fault, but you can't blame physics itself. It's not the fault of the field of economics that some bozo lost money and other bozos bailed them out.
People who think economics is not a science usually have no understanding of economics. The author, for example, uses examples of economists (and non-economists) who failed to predict what direction the market would go. This is like saying, "Physics is not science because we still don't have FTL travel. Fail."
Economics is a science, and it has a useful body of knowledge. MV = PQ is among the most tested theories in science. Gresham's law. The business cycle. All other things equal, an increase in supply will reduce prices. The biggest problem of economics isn't the lack of "hardness," it's the difficulty of running experiments (you can't re-run the depression six hundred times), so eliminating variables is difficult.
Anyone who thinks economics is the art of predicting the stock market, will be confused, like the author of this article.
"First they came for the slanderers and i said nothing."
"Constructing inherently imperfect theories" is essentially the definition of science.
Don't just stand there, get that other dog!
This times a million... Economics is much more akin to religion the science. Economist are like the high priests of ancient times.
If this is the case, (economics being religious in nature) then the government would have no business setting rules and regulations that impact the US economy. Church and state first amendment issues aside, if the economy is really so unpredictable, then nothing they do can reliably influence it in the ways that they intend.
deflation is bad (its bad for some actors but its a huge boon for the majority)
Not at all. One thing that is constant in most economies is that the majority of people are borrowers.
Suppose you borrow some money to start a new business or buy a house, then suppose right afterwards that money you owe is now worth more than it was when you borrowed it. If it's worth more, then suddenly you're going to find that you're earning less (because after all, people value their money more so they pay less for the same service, whereas in the past they would have paid more for it.) Now guess what happens? You effectively owe more money than you originally borrowed, and we're not even counting interest yet. When we count interest, things get worse, because now the interest rate you've agreed to is suddenly more burdensome. Deflation is also bad for the lenders as well in many cases, because they often have borrowed money themselves.
In fact, the last time the US saw deflation was a period we now refer to as The Great Depression.
Economics is a social "science". Because it involves money, it feels more quantitative and objective, like an actual science. But it is a social science, arbitrary numbers have been assigned to ill defined metrics, and a delusion is formed. Perhaps those arbitrary assignments are the result of a real competitive process, left to anneal for a period of time, but that's just a further level of self-deception. We cling to these things individually because it is the best we've got socially, but at no level in the universe can you establish the value of an orange at X resources/unit, it's therefore impossible to build any kind of universal truth around a system that is fundamentally based on that sort of value assignment.
So when the talking heads start talking about economics, and making predictions and saying the sky is falling if {such and such}, it is ok to laugh and walk away. We'll make it work or we won't and it'll change.
If that's the measure by what represents science then we're in trouble.
Yes. Again, economics is not the same as "trading on the stock market." It's also not the same as "a plan to get rich."
In fact, explaining why the same get-rich-quick scheme will not work for everyone is economics. Because if everyone does the same thing, then the value of that thing will be very small (supply/demand).
"First they came for the slanderers and i said nothing."
Economics/Econometrics is a science, it's swindling that's an art.
Why would Republicans discredit their primary justification for doing anything? I'd say if such a thing is happening, it's either a convenient Emmaneul Goldstein moment (with a unifying moment for the unclued) or a ploy by a party that routinely headbutts economics.
Having said that, I'm not seeing the alleged extra hate this year.
In fact, the last time the US saw deflation was a period we now refer to as The Great Depression.
But not because of the deflation. The cause of the Depression was a widespread credit contraction, following an illusory boom—actually malinvestment, encouraged and masked by inflation—which resulted in a "house of cards": lots of investment profit on paper with nothing real to back it up. When the bills came due and people tried to pull "their" money out, they suddenly discovered that they didn't have nearly as much money as they thought; their savings accounts consisted mostly of IOUs from bankrupt banks. That was the cause, both of the deflation and the Depression. Deflation was merely a side-effect.
In other cases where deflation has been observed internationally, it has not been correlated with anything like the American Great Depression.
"The state is that great fiction by which everyone tries to live at the expense of everyone else." - Bastiat
Imagine people saving money while working hard when they can (20s-50) and never needing a pension if they did save money.
That is imaginary, not real. Most people in their 20s-50s go deep in debt to buy a house, own a car, educate their kids, etc. Their wealth is in the assets they own, not cash under a mattress. They do NOT benefit from deflation.
Whether or not it's a science, economics is horrid at predicting the future. Case in point: all the economists who insisted that the Clinton tax hikes in the '90s would cause a recession, or all the economists- probably the same ones, really- who insisted that Obama's policies would result in a spike in inflation. In both cases, the exact opposite occurred: the economy boomed in the '90s, and inflation has remained a non-issue since Obama took office.
Economics is an attempt to explain, well, how economies work. If economics were any good at this, then one would expect that economists would be able to use their theories to predict how a given policy would play out in the economy. And, in a huge percentage of cases, they fail miserably at this. To be honest, beyond supply and demand, I'm not entirely what economic theories can been shown to actually have any predictive value.
-Z
It's a social science to be exact
Study the iterated prisoner's dilemma. That can easily be mapped onto parts of economics. Cut away the parts that don't work and you have a sound piece of economics.
Just because there are hard problems that can't be solved doesn't mean that no problems can be solved. Unfortunately, in the case of economics it seems to repeately mean that the most important problems can't be solved.
Of course, we don't really know what problems economics could solve if it tried, because politics always gets mixed up in things, and that usually tries to run things for the benefit of a small group of people who maintain power by lying to everyone else. So economic theories are tested not because there's any reason to believe they are good things, but because the benefit those who are selling them, and benefit those who currently hold power. Often the theories that are tried bear little resemblance to the theories that are claimed to be being tried.
I think we've pushed this "anyone can grow up to be president" thing too far.
Care to elaborate?
He is saying that it is only "science" if it is easy or if we already know all the answers. Since he doesn't understand economics, and is too lazy to learn, it can't be science.
The fundamental for a "science" in the English language sense is that it should make statements which are potentially falsifiable. Experiment should rule. The problem with Economics is that the theory of Economics is affected by economics its self. For example, take the grandparent's statement
deflation is bad
This is actually true, at least now. If everybody knows there will be deflation then they know that if they hold on to their money it will be worth more in future. This encourages the flow of money to stop and gradually kills all economic activity. However, what if we go back to a world where nobody knows that deflation is bad, or even better, nobody is even aware that deflation is going on. In this case there will be no problem since nobody will realise that they should hold onto their money to take advantage of deflation.
More generally, if you come up with a theory to predict economic behavior perfectly then that theory will be used to make its self invalid!
The cause of the Depression was a widespread credit contraction,
That was the cause of the crash. What turned the crash into the Great Depression was the insane anti-recovery policies of Hoover and Roosevelt that kept the economy in the shitter until 1946.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
The argument for this is that it enables relative prices to shift without running into the sticky price problem; workers are very unwilling to accept lower wages, but if inflation is 2% - which is the consensus target of our Central Banks overlords - firms in declining industries are less likely to have to get into a fight with their employees as their wages are slowly nibbled away.
A more complex issue is the degree to which some inflation means that the central banks have some room to crash interest rates down to when a crisis strikes. The current quantitative easing comedy is caused by the fact that it is very hard to set interest rates at less than 0%. So if interest rates are 2.5% - the historic average - plus 2% inflation - that gives 4.5% worth to cut when a crisis strikes. Our present crisis is being stretched out because it's been so hard to get central banks - especially the Germans - to accept the need for QE.
But it won't be cheaper, and there's opportunity cost to time so, in the end, if you need a computer now you'll buy it now, otherwise you won't buy it because of what you said.
The same applies to money. Deflation incentivizes saving and disincentivizes investment. If people don't have that much money to begin with that might be OK, but when people begin to hoard money THEN you have a problem because it's a positive feedback: the more people hoards money, the greater the deflation; the greater the deflation, the higher is the return expected from investment. In the end, investment stops (if your money grows 20% annually just by sitting in a box, why risk it in a 4% business or bond?). Of course, basic spending has to keep going, but investment is essential to economy. If investment stops, economy stops. Want examples? The financial crisis of 2007-2008, that's what happens when the agents can't find financing (i.e.: banks or other agents investing in their business).
What people need to understand is that money has value when you spend it, and the only purpose of money is being spent: a dollar in a box is worth nothing, a dollar gains value when you exchange it by a loaf of bread. If there isn't enough money to finance the economic activity someone has to put more in the markets or business begin to close. If you make a type of money that punishes spending and stimulates hoarding, you are shooting yourself in a foot.
Precisely this. For my part, this fairly obvious fact is highly likely to account for why inflation is never allowed to stop. Cynical? You bet.
I've fallen off your lawn, and I can't get up.
Psychology 102:
Smart people also do Dumb things.
Dumb people also do Good things.
Good people also do Bad things.
Bad people also do Smart things.
Psychology 103:
Smart people also do Good things.
Dumb people also do Bad things.
Good people also do Smart things.
Bad people also do Dumb things.
Psychology 104:
Smart people also do Bad things.
Dumb people also do Smart things.
Good people also do Dumb things.
Bad people also do Good things.
Second year:
Psychology 201:
How to use statistics to imply anything
Psychology 202:
The zen of tiny sample sizes
Psychology 203:
Regression therapy, or, How to make someone think they remember something that never happened
Psychology 204:
The more letters you have, the more authoritative you can pretend you are. So come back for a baccalaureate!
Congratulations! You are now the proud owner of an Associate's Degree in Psychology!
I've fallen off your lawn, and I can't get up.
Here's the example that disproves the claim: Everyone knows that when it comes to electronics, next year's model is going to be better/faster/more bang for the buck than this years' model, but the electronics industry isn't starving to death because of everyone sitting on the sidelines and refusing to buy devices because they'll get more for their money in the future.
It does no such thing, Yes, everyone does know, but some people need something now, and so buy it now. Pre-announcing has actually been shown to effect sales, just ask Adam Osbourne:
* https://en.wikipedia.org/wiki/Osborne_effect
Or perhaps ask Pebble and/or Motorola about their sales numbers when the Apple Watch was announced.
Inflation benefits governments and other profligate borrowers. Deflation benefits savers (and everyone else, to a lesser extent.)
Yeah, like people with mortgages. As for savers, have you looked at the savings rate over the last few decades (at least in North America)?
No argument there.
Yes, in fact Roosevelt's own Treasury Secretary, Henry Morgenthau, thought Roosevelt was completely insane. He wrote as much in his diary:
We have tried spending money. We are spending more than we have ever spent before and it does not work.
I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises.
I say after eight years of this Administration we have just as much unemployment as when we started. ⦠And an enormous debt to boot!
Sound familiar? It should. Because Roosevelt's interventionist polices have been copied by Obama. Now the Fed has nowhere to go. Interest rates are still at rock bottom, and 3 rounds of "Quantitative Easing" did not work. Worker participation rates are at an all-time low in recent decades.
Many modern economists believe that Roosevelt actually prolonged the Depression, by as much as 10 years. And just look around you today... a result of the same old non-working policies we should have ditched 80 years ago. It's pathetic.
No, actually economies never grew to the scale of what we had today until people were able to borrow. What it comes down to is this: You as an individual likely have a very difficult time securing the capital needed to, for example, start a new business. So how do you do that? Simple, you borrow. Most businesses that exist today, even the most profitable ones, started out borrowing.
Prior to that, the method of securing capital was by waging war on your neighbor and keeping the spoils of war, and then using those spoils to build yet another more powerful army to do the same again to an even more powerful rival. That was called feudalism.
Just like Physics cannot predict the weather in the long term, because the weather is a chaotic system, Economics cannot predict the state of the market, not because it does not have theorems or its theorems are not correct, but because there are too many variables and the outcome cannot be predicted.
Precisely this. For my part, this fairly obvious fact is highly likely to account for why inflation is never allowed to stop. Cynical? You bet.
You know 99% of people are not 1%ers right? That means they owe more than they own so benefitting from inflation and even the rich don't worry about inflation because they invest and investments follow inflation. Only idiots with money in mattresses are hurt by inflation.