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Economics as a Science - A Discussion

Flamed Diving

As the regulars here will know, we have had many threads in the past with people coming on here to take a pop at Economics. Their arguments are generally weak, poorly referenced and usually half-borrowed from a newspaper article they read. When pressed for further elaboration or sources, their argument simply falls apart.

However, I think that this is a discussion worth having, if it is done properly. So what are your thoughts on Economics as a science? What are its achievements? What are its failings? Where do you see it going in the future? I know I speak in broad terms here, but you may discuss one specialised area of Economics, or whatever.

Oskar Morgenstern in his book Wirtschafts-prognose (Economic Prediction) stated that 'unlike those in Astronomy, economic predictions have the peculiar ability to change outcomes'.

Though this book dates from the early 20th century, this quote is still applicable today. For me, predicting markets is always doomed to failure because if you can create a highly accurate model for predicting stock markets, peoples behaviour will change accordingly (in an effort to optimise the model, assuming they have access to it) and hence the very market the model attempted to describe (ie behaviour) will have vanished.

For the example of markets, I believe that economics is better off describing the behaviour of markets in a far more general sense, and using this to formulate regulatory/legal policy. To ensure stability and fairness, etc.

Thoughts?

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Cloned Alien

New to the forum but good thread op. Its a hard one Economics has so many variables to it which makes it difficult and is ever evolving.

For example today how will the world economy recover will it be v,w or u shaped. This depends on gov approach so many variales which makes it hard to class as a science as there is no set law or therioes. How can any one understand it. that is why so many people lose money like you just said.

However economics gives a blueprint on how to manage an economy. Such as freidman as Keynes approach which can be questioned as being write or wrong which can make it not seen as science but nowadys there is general consense in how to run an econonmy which can make it seem like a science. Its debatable

silverharp

Flamed Diving wrote: »

For me, predicting markets is always doomed to failure because if you can create a highly accurate model for predicting stock markets, peoples behaviour will change accordingly (in an effort to optimise the model, assuming they have access to it) and hence the very market the model attempted to describe (ie behaviour) will have vanished.

Excluding stock market forecats , I don't think that market prediction should be part of Economic Science. If you take the whole telemetry side of economic reporting, its more in the realm of data collection and statistics, at best you try to tease out leading indicators and lagging indicators but as such no theory is required. Different market participants will want different forecasts and industry experts are probably best placed to make their own forecasts.

Anonymous1987

I think a somewhat valid science to compare economics to would be meteorology, both include such a vast number of variables and are highly dynamic, making forecasts and predictions less reliable when you look even a small distance into the future. You could even argue that the economy with its foundations on human behaviour and expectations is more complex that the weather system and thus less effective with regard to mathematical and statistical modeling.

Returning to the question posed, I would think Economics is most definitely a science. Its the application of the scientific method to how we allocate resources. Of course some of the variables are difficult to measure e.g. social and environmental variables but that would be ignoring the variables that can be measured fairly accurately e.g. price as an indicator of demand.

Having said that though, Economic's weakness in measuring the variables mentioned above would seem to make the case that it is a weaker science than meteorology and other more measurable and less complex science's such as Biology and Chemistry nevertheless it is a science nonetheless. Sorry for the lack of references just my own thoughts.

Ostrom

Maybe it is my own limitied reading (hopefully someone better read in economics can give some direction), but I have always been curious about why writings and questions along the lines of what Schumpeter or Joan Robinson had attempted have passed away (or have they?). Was the idea of 'capitalism as natural order' necessary for the positive science approach of economics to take hold?

I cant help but notice it was exactly the time sociology turned to cultural studies, shooting itself in the foot with relativism, and also that sociologists today could benefit from a look through the classics in economics - there seemed to be more of an overlap between the questions both were asking about the permanance of modes of production, deep theory, origins of social relations, and also much better attempts to combine both in analysis.

I get the sense that the Sraffa/Marshall - Neo-Ricardian debates of the mid 20th century were the turning point in terms of what developed into a 'science' in the strictest sense - with the discarding of the labour theory of value. Does that sound fair?

Is it all strictly numbers and models today, or do economists still engage in theory?

Time Magazine

Just a couple of points. Is "science" the method or the result, or both? If you're of the opinion that it's purely the result, then at least to an extent you're debasing mathematics and it's study of randomness. So it seems to me that, initially at least, what really matters is the method of economics rather than "its inability to predict the stock market" or whatever nonsense the Irish Independent is spouting this month.

Then, more generally, how scientific is "science"? Physics is only scientific in the sense that it conforms to what humans consider scientific. Physics if of course for the most part true, but it is not true because it is scientific. Conversely theology and philosophy more generally cannot be considered scientific, but there's not much false about cogito ergo sum.

efla wrote: »

Is it all strictly numbers and models today, or do economists still engage in theory?

What's the difference between mathematical models and theory? Genuine question.

Ostrom

Time Magazine wrote: »

What's the difference between mathematical models and theory? Genuine question.

My interpretation? Models deal with predictability and are assessed on their ability to account both for phenomena observed in the present, and their future states. Theory, in the sense that I mentioned the above was more to do with the assumptions upon which such models, in economics at least, are based.

There isn't much of a difference I suppose, a good theory is judged by the same merits, but the types of questions that were asked in the past, I dont think were easily translated into mathematical models, and had more of a historical dimension.

Flamed Diving

efla wrote: »

Is it all strictly numbers and models today, or do economists still engage in theory?

Of course economists still engage in theory, I think that the reason it may have fallen out of the spotlight in the recent past was due to the wealth of datasets that have arrived, which previously didn't exist. So, for the first time, economists were actually able to test these theories. In addition, the availability of cheaper and faster computing hardware and more powerful statistical packages have further aided this boom in empirical economics.

But the theorists are still there, it's just that they are no longer the sole standard bearers of the discipline. Anyway, here is a journal with open access:

http://www.econtheory.org/

gerry87

My work in progress analogy for economics (just thought of it and wanted to test it out...)

Economics is like reversing a car with loads of trailers.

Does it work?? :pac:

Amhran Nua

I think a little peer review and accountability might be of value, too many economists just trotting out whatever they were paid to say over the last few years. Does that make them much different to for example climate science, perhaps not, but they have dragged the name of economics through the mud pretty comprehensively.

Flamed Diving

Amhran Nua wrote: »

I think a little peer review and accountability might be of value, too many economists just trotting out whatever they were paid to say over the last few years. Does that make them much different to for example climate science, perhaps not, but they have dragged the name of economics through the mud pretty comprehensively.

It would be useful if your assertion was a little more comprehensive. Would you care to give some examples?

Amhran Nua

Sure:

"The year 2007 will be another strong one in terms of transactions. We are likely to see something of the order of 85,000 to 90,000 houses built again. We are in for a period of modest house price inflation - something in the order of 3 per cent per annum in 2007 and 2008."
Dan McLaughlin, chief economist Bank of Ireland

"I think it is only slightly provocative to suggest that a more pertinent question is to ask why Irish house prices are rising so slowly. We expect house prices will rise by 10 percent on average in both 2006 and 2007."
Austin Hughes, Chief Economist IIB Bank
speaking on 12th May 2006

Here we have two well known economists in positions of great authority spouting unbelievable horse manure that the cats and dogs in the street knew at the time was false. They knew it was false, the banks sold and leased back their premises while they were saying it. I'm not taking a poke at economics, its very useful if correctly applied, but there should be some accountability for the science. Leave the PR to the PR people.

Ostrom

Amhran Nua wrote: »

Sure:

"The year 2007 will be another strong one in terms of transactions. We are likely to see something of the order of 85,000 to 90,000 houses built again. We are in for a period of modest house price inflation - something in the order of 3 per cent per annum in 2007 and 2008."
Dan McLaughlin, chief economist Bank of Ireland

"I think it is only slightly provocative to suggest that a more pertinent question is to ask why Irish house prices are rising so slowly. We expect house prices will rise by 10 percent on average in both 2006 and 2007."
Austin Hughes, Chief Economist IIB Bank
speaking on 12th May 2006

Here we have two well known economists in positions of great authority spouting unbelievable horse manure that the cats and dogs in the street knew at the time was false. They knew it was false, the banks sold and leased back their premises while they were saying it. I'm not taking a poke at economics, its very useful if correctly applied, but there should be some accountability for the science. Leave the PR to the PR people.

"Economic dcotrines always come to us as propaganda. This is bound up with the very nature of the subject and to pretend that it is not so in the name of 'pure science' is a very unscentific refusal to accept the facts. The element of propaganda is inherent in the subject because it is concerned with policy. It would be of no interest if it were not. If you want a subject that is worth pursuing for its intrinsic appeal without any view to consequences you would not be attending a lecture on economics" - Robinson, Paper to the Delhi schnool of economics (You will have to take me at my word that it just happened to be on my desk

)

I think part of the problem you are getting at is to do with a general refusal to critically examine the assumptions of orthodoxy, something which in my opinion hasn't been a part of mainstream economic discourse for many decades. I think many are also quick to forget where the discipline itself came from, as early as Thomas Mun through to Marshall (and even to the classical lefties like Sweezy and Dobb who had their own interests at stake), it was a movement toward a positive science of economic policy, rooted within vested interests.

The Marshall equivalent of todays apologists are like the ones above who complain that everything would be fine if only the economy conformed to textbook assumptions* - as far as I can see, the willingness to question those assumptions under the guise of scientific impartiality is what separates economics today from the mid-20th century 'fundamental' debates. Which is a shame, because they seem to still have much to teach, especially in light of the last year.

Not to belittle the wealth of knowledge economics provides; one of the things that impresses me most about economist's methods is their ability to penetrate many subecjts that disiplines from ecology to soiology struggle with sometimes - the journal flamed diving linked me to above was interesting, but the type of theory discussed seems to be limited to either theory within very defined and bounded case studies, or broad abstract concepts in mathematics.

(If I'm dragging this off topic, please say so)

* In case it comes up again, this is from the Harvey-DeLong debate

SkepticOne

The paradox of economics is that when it is most needed it at its least useful.

The OP mentions the idea that if a theory were to emerge that could predict markets, it would cease to work since the theory itself would influence market behaviour.

I think this is a bit of a cop out. Take the recent housing bubble. At no point did we get a consensus that there was a bubble. It was a highly contentious notion that a bubble even existed right up to the very end. There is no way you could conclude that the bubble burst because people were influenced by economic predictions.

I think the reason that economics fails us here is that there's a bias towards deterministic models. A bubble is a chaotic system. The best you can do is recognise you are in such a system and possibly determine the scale of it. You might even be able to determine the probability that it will fail over a given period of time, but you can't determine when it is going to pop or how big it is going to get in advance of its its popping, which is what people want.

Therefore we fall back on models that assume a particular period of time is the norm and then drag in various factors until our model curve fits the data. The problem is knowing what factors to include in the model. In the case of a bubble, the movement of the market itself is one of the prime factors but there's no way of knowing whether to include that or to include some other factor that seems to fit the data.

In the case of the Irish bubble, what happened is that it was found that immigration was used as the factor to explain the rise in house prices instead of the bubble when really it was movement of the market itself.

I have used the housing bubble as an example because I have had an interest in it the past several years and it is of crucial importance in understanding the Irish economy but I think these observations apply generally.

The basic lesson is this: in order to understand the economy you need to go outside of economics.

Ostrom

SkepticOne wrote: »

In the case of the Irish bubble, what happened is that it was found that immigration was used as the factor to explain the rise in house prices instead of the bubble when really it was movement of the market itself.

The basic lesson is this: in order to understand the economy you need to go outside of economics.

I'm not sure I get you - by my understanding, part of the problem was a lack of professional economists in the civil service - combined with a post-election concensus on forecasted growth rates now revealed to have been optomistic (based, as they were on the absorption of low cost immigrant labour into production for an inflated housing market).

The particular combinations of policy/analysis that necesserily come with state economic practice are what I would consider to be the primary fault. Combined with a lack of willingness to reflect on its own relationship to the policies it breeds, are what render its predictions seemingly inaccurate.

If anything, the recent troubles have shown the extent of the gulf between academic and policy-profit oriented economic practice - Lucey at al coming to mind.

SkepticOne

efla wrote: »

I'm not sure I get you - by my understanding, part of the problem was a lack of professional economists in the civil service - combined with a post-election concensus on forecasted growth rates now revealed to have been optomistic (based, as they were on the absorption of low cost immigrant labour into production for an inflated housing market).

The lack of economists in the civil service might explain inaction in the face of a consensus among economists generally (not limited to the civil service) that a bubble had developed in the economy, but it does not appear that any such consensus was there in the first place.

Flamed Diving

Amhran Nua wrote: »

Sure:

"The year 2007 will be another strong one in terms of transactions. We are likely to see something of the order of 85,000 to 90,000 houses built again. We are in for a period of modest house price inflation - something in the order of 3 per cent per annum in 2007 and 2008."
Dan McLaughlin, chief economist Bank of Ireland

"I think it is only slightly provocative to suggest that a more pertinent question is to ask why Irish house prices are rising so slowly. We expect house prices will rise by 10 percent on average in both 2006 and 2007."
Austin Hughes, Chief Economist IIB Bank
speaking on 12th May 2006

Here we have two well known economists in positions of great authority spouting unbelievable horse manure that the cats and dogs in the street knew at the time was false. They knew it was false, the banks sold and leased back their premises while they were saying it. I'm not taking a poke at economics, its very useful if correctly applied, but there should be some accountability for the science. Leave the PR to the PR people.

Ok, but you were calling for the need for peer review. For what exactly? How would it apply to your above examples?

Flamed Diving

efla wrote: »

the journal flamed diving linked me to above was interesting, but the type of theory discussed seems to be limited to either theory within very defined and bounded case studies, or broad abstract concepts in mathematics.

Well, that sounds like the definition of theory to me. Application of such theories to real scenarios then moves us into the empirical realm.

Time Magazine

Amhran Nua wrote: »

Sure:

"The year 2007 will be another strong one in terms of transactions. We are likely to see something of the order of 85,000 to 90,000 houses built again. We are in for a period of modest house price inflation - something in the order of 3 per cent per annum in 2007 and 2008."
Dan McLaughlin, chief economist Bank of Ireland

"I think it is only slightly provocative to suggest that a more pertinent question is to ask why Irish house prices are rising so slowly. We expect house prices will rise by 10 percent on average in both 2006 and 2007."
Austin Hughes, Chief Economist IIB Bank

To be fair, neither of these are really economists. They're people employed by banks to talk to the media. I don't think Austin Hughes even has a PhD.

efla wrote: »

the journal flamed diving linked me to above was interesting, but the type of theory discussed seems to be limited to either theory within very defined and bounded case studies, or broad abstract concepts in mathematics.

I don't know enough about abstract mathematics to talk about this with any sort of authority, but I believe the sort of discourse on what are essentially axiomatic properties can be debated mathematically.

SkepticOne wrote: »

In the case of the Irish bubble, what happened is that it was found that immigration was used as the factor to explain the rise

Link?

SkepticOne

Just on a further point here.

efla wrote: »

I'm not sure I get you - by my understanding, part of the problem was a lack of professional economists in the civil service - combined with a post-election concensus on forecasted growth rates now revealed to have been optomistic (based, as they were on the absorption of low cost immigrant labour into production for an inflated housing market).

I'm talking about a different problem here which is why I think you don't get me. The problem I'm referring to is why the consensus was wrong in the first place.

Time Magazine

SkepticOne wrote: »

The lack of economists in the civil service might explain inaction in the face of a consensus among economists generally (not limited to the civil service) that a bubble had developed in the economy, but it does not appear that any such consensus was there in the first place.

Many qualified economists did indeed see and forewarn about serious problems with both our fiscal structure and the housing system. For example:

- Philip Lane (IBR, 1998) called on the establishment of a reserve fund because we were due to lose our monetary policy.
-IMF (Report on Ireland, 2003) house values are “16.5 per cent higher than [their] long-run equilibrium”
- John Fitzgerald (QEC, 2005) warned about the large number of vacant dwellings, and that in “some cases these dwellings may have been financed under various tax incentive schemes”.
- Morgan Kelly (QEC, 2007) “predict falls of real house prices of 40 to 60 per cent over a period of 8 to 9 years. The unusually large size of the Irish house building industry suggest that any significant house price fall that does occur could impose a difficult adjustment on the economy” and “[problems of the boom] may require a lengthy period of high unemployment to reverse.”

There are others. You’re less likely to have heard about these because people aren’t all that interested in them before they happen, which is fair enough. It’s not true to claim that there were no warnings, though.

(Sorry for posting that, let's not get off-topic.)

Amhran Nua

Flamed Diving wrote: »

Ok, but you were calling for the need for peer review. For what exactly? How would it apply to your above examples?

Peer review of scientific studies and research allows peers of scientists to review work and attempt to replicate it before it is given the thumbs up and published as more or less established fact. Its an imperfect system, but the best available at the moment, and I think economics could benefit from it.

Basically the removal of the economist from the public front line would be the best idea here. They should produce real estimates and the PR people should do their jobs. Would you disagree that economists as a profession have received a very bad reputation as a direct result of the shenanigans we saw during the bubble buildup?

Ostrom

Flamed Diving wrote: »

Well, that sounds like the definition of theory to me. Application of such theories to real scenarios then moves us into the empirical realm.

It is, but it is theory of a type completely different to that of earlier debates-Marshall, Sraffa, Robinson, Schumpeter, Keynes etc. debated and established the assumptions of economic and social order upon which studies such as those in the journals you cited proceeded. In relation to your OP, it seems as though the success of 'economics as science' has led to a decline (or general feeling of little need for) theory of the classical sort.

Flamed Diving

SkepticOne wrote: »

Why the consensus was wrong in the first place.

But there was no consensus, according to you.

SkepticOne

Flamed Diving wrote: »

But there was no consensus, according to you.

Sorry that is what I meant. While there were some papers warning of some danger in the market, there does not seem to be an overall consensus that there was a massive bubble in the market which there should have been.

Flamed Diving

efla wrote: »

It is, but it is theory of a type completely different to that of earlier debates-Marshall, Sraffa, Robinson, Schumpeter, Keynes etc. debated and established the assumptions of economic and social order upon which studies such as those in the journals you cited proceeded. In relation to your OP, it seems as though the success of 'economics as science' has led to a decline (or general feeling of little need for) theory of the classical sort.

Right, but this has happened in all scientific disciplines. Following the Second World War mathematics found its way into just about every nook of natural and social science. The Scientific Method was simply a move away from using only philosophical methods to answer all questions. This isn't exclusive to just Economics. Though it should be noted that Keynes, Schumpeter, etc are making a comeback, of late.

Ostrom

Flamed Diving wrote: »

Right, but this has happened in all scientific disciplines. Following the Second World War mathematics found its way into just about every nook of natural and social science. The Scientific Method was simply a move away from using only philosophical methods to answer all questions. This isn't exclusive to just Economics. Though it should be noted that Keynes, Schumpeter, etc are making a comeback, of late.

In what sense? Are people turning to them for crisis theory based on recent events or is it just a general turn? I'm just trying to get a sense for it as a non-economist

Flamed Diving

SkepticOne wrote: »

Sorry that is what I meant.

But are you talking about a consensus between academic economists or other types of economists? I'm relatively new to the economics field, but my interaction with academic economists over the past four years led me to believe that the consensus was that there was a bubble and that it was going to burst. Of course this is just anecdotal evidence, but my point is that the consensus in the media appeared to often be more confusing, with the likes of McWilliams (not really an economist) saying its going to end in tears and bank economists coming out to say it was all ok. We all know which side were listened to, in the end. But I consider it misguided to blame an entire discipline for the actions of journalists and bankers.

Flamed Diving

efla wrote: »

In what sense? Are people turning to them for crisis theory based on recent events or is it just a general turn? I'm just trying to get a sense for it as a non-economist

Just in the popular media:

http://www.time.com/time/magazine/article/0,9171,1853302,00.html

Keynesians have and always will be around, in theoretical circles.

Time Magazine

SkepticOne wrote: »

Sorry that is what I meant. While there were some papers warning of some danger in the market, there does not seem to be an overall consensus that there was a massive bubble in the market which there should have been.

Half of economists are microeconomists, so you can rule them out. Then, among macro, there are guys who focus on economic history, those who focus on globalisation, those who deal with inflation modelling, those who deal with development, those who deal with international trade, those (that efla loves) that deal with the history of economic thought, those that deal with exchange rates, ... and then there's the guys who look at stuff like housing markets. I just cited reports from the ESRI, from UCD, from Trinity and from the IMF which collectively said "housing market over-heated, too much reliance on taxation from this sector, this is a problem."

How do you define a consensus?

efla wrote: »

I guess my short form question is do people (students, practitioners, academics) read those authors I mentioned above, or is thinking and debate along those lines considered obsolete?

Some, yes. From the list above, you can get an idea it's not a major part, but it's not willingly ignored either.

Ostrom

Time Magazine wrote: »

I don't know enough about abstract mathematics to talk about this with any sort of authority, but I believe the sort of discourse on what are essentially axiomatic properties can be debated mathematically.

What about the establishment/validity of such axioms? From what I can see the paper deals with creating conceptual links between theories - presented mathematically?

What about something like Say's law for example, considered axiomatic until Keynes? Do economists talk ontology in this sense - is there still any life in political economy?