Economics is a Social Science: Why Economists are Often Wrong

Many economists and politicians today operate under the delusion that economics is a hard science like physics or mathematics. It is not. Economics is a social science, like sociology, and therefore cannot make reliably accurate predictions. When people are involved, especially masses of people, a certain amount of apparent randomness is bound to occur.

I am not an economist, so you may wonder what business I have propounding on economics. If you’ve been a reader here long, you’ll know that I don’t do that with climate science; I accept the word of the climate scientists. That’s because there is a big difference between a physical science like climatology and a social science like economics: the former relies on hard data and requires a great depth of knowledge in a specific field, while the latter involves real-world data plus humans. That does not mean economists are useless, although certainly most are and I’ll explain why momentarily. It simply means that years of education are not required to understand the human part, so anybody can be an amateur social scientist. How many of us are amateur psychologists in this way? Some people are actually quite good at it.

The Key Difference between Social and Physical Sciences

With the physical sciences, actual real-world measurements of hard data are made and explanations are derived from that. How do we know the Earth revolves around the Sun? Because scientists made observations and took measurements and that’s what the data showed. How do we know there is a link between smoking and cancer? Because scientific researchers studied people with cancer looking for causes, and eventually found an undeniable correlation. How do we know climate change is happening? Again, that’s what the data says. Hypotheses and theories are tested over and over and over again in the real world, and that process continues.

The social sciences, on the other hand, have the very difficult job of attempting to mesh real-world data with the actions of real-world humans, and the results are not always predictable. For example, sometimes if you raise the price of something, people will buy less. Other times, they will buy more, because suddenly the item acquires a certain je ne sais quoi and people believe that it must be better. How do you formulate an economic ‘law’ about that?

The answer, of course, is that you can’t. You can come up with guidelines, but you cannot come up with certainty. Where physical scientists can state with certainty that smoking increases the risk of cancer by a certain (large) percentage, an (honest) economist cannot tell you with certainty what effect increasing or decreasing the price of a product will have.

The Value of Economic Predictions

If predicting consumer behaviour on a single product is unsure, imagine the difficulties predicting the behaviour of the economy as a whole. Thus the old joke, “Economists have predicted 9 out of the last 5 recessions.” In the words of the late, great economist John Kenneth Galbraith:

The only function of economic forecasting is to make astrology look respectable.
– Money: Whence It Came, Where It Went

If you wish to have your illusions about economists shattered, read Galbraith’s The Great Crash 1929. Countless economists, many Ivy-league-educated, came up with countless reasons why the boom would continue indefinitely. Their optimism defied common sense, never mind any rational economic theory. Some examples:

“We will not have any more crashes in our time.”
– John Maynard Keynes in 1927

“There may be a recession in stock prices, but not anything in the nature of a crash.”
- Irving Fisher, leading U.S. economist , New York Times, Sept. 5, 1929

“…despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression such as would entail prolonged further liquidation…”
- Harvard Economic Society (HES), November 2, 1929

When Economic Dogma Collides with Reality

There is certainly value in economics; there is just not much value in most economists or their predictions or prescriptions. They are like many people with MBAs, constantly telling you how important and necessary they are in the face of all evidence.

The uncertainty in economics combined with the vastly inflated egos of many economists has resulted in many of them becoming very doctrinaire. That is, they stick to their pet theory regardless of the facts. Libertarians are currently the worst offenders here, insisting on ever more deregulation – even though every time regulations are reduced on an industry there is disaster. The banking industry is only the latest example; repealing laws passed following the Great Depression led to another crash, though not yet as severe. Libertarians insist that, if only all regulations were removed, the market would self-regulate and Libertopia would result.

That is their theory, because it has never been tried in practice. The closer Libertarian theory approaches practice in history, the greater the exploitation of the many by a privileged few. They conveniently forget the Robber Barons, for example. The reason regulations are imposed in the first place is to prevent consolidation of power and subsequent abuse thereof – and the inevitable crash that follows as the few at the top are unable to restrain their greed.

Libertarian economists (including the Austrians) are detached from reality and unwilling to learn from history. They have become quite dogmatic. You would think that economists would look at times when the economy was good and suggest we replicate contributory factors. In the United States and Canada, for example, the post-World War II decades were boom years: huge numbers of people became middle class, bought houses, attained financial security, and so on. It was a good time for everyone – a rising tide that lifted everyone.

However…taxes on the rich were much, much higher than they are now – the marginal tax rate was 90% at one point. This contradicts Libertarian dogma and the rich don’t much care for it, either. So the Libertopians keep urging tax cuts – mainly for the rich, so we get that “trickle-down” effect. As an aside, Galbraith pointed out that “trickle-down” was a renaming of:

…what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows.

This is the result when social scientists like economists refuse to accept that reality contradicts their theory: horse-shit for the rest of us.

The Return of Political Economy

Galbraith has pointed out that economics used to called political economics, because the two are inseparable. Political theories influence economic theories. When economists pretend that their theories are independent of politics, when they ignore the lessons of history, and when they preference dogma over reality, the result is economic disaster. And until economists accept that theirs is a social science, with all the uncertainty thanks to human behaviour that brings, we will continue to lurch from recession to crisis to disaster.

The psychiatric term for “loss of contact with reality” is psychosis, meaning many economists – certainly the Libertarians – could fairly be called psychotic.

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I recommend any of John Kenneth Galbraith’s books. He believed strongly that economics could be made intelligible to any reasonably intelligent person, and managed to explain economics quite elegantly. (Here I am using elegant in the engineering sense: ”cleverly simple; ingenious an elegant solution to a problem.”) Some of his books, like The Affluent Society, are considered classics. Here are JKG quotes, always insightful and often hilarious. A small sampling:

Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.

Any country that has Milton Friedman as an adviser has nothing to fear from a few million Arabs.

The contented and economically comfortable have a very discriminating view of government. Nobody is ever indignant about bailing out failed banks and failed savings and loans associations… But when taxes must be paid for the lower middle class and poor, the government assumes an aspect of wickedness. – said in 1992!