This brief reflection stands upon what we indeed know about Economics, I ask at what point it is our economic knowledge possible and truthful. The main idea of this text came from the speech of Friedrich August von Hayek, when he won the Nobel Prize in 1975.
Every sciences work with abstraction, for example, the purest science – Maths is deeply abstract. The same goes with the natural sciences and the same with the social sciences, namely Economics. In order to reach conclusions we have to make simplifications and experiences (an experience is generally a simplification). But I raise the question, at which point are we changing reality to be able to take conclusions from it? At which point are we in our simplifications changing things, and then taking conclusions from our simplifications, which do not represent anymore the reality that we want to understand?
This division and these doubts in Economics are stated clearly in the establishment of two different schools: the saltwater and the freshwater. People often criticize Economics because of this bipolarization, because of the lack of unanimity in many different areas. As said the President Harry Truman: “Give me a one-handed economist”. However, first it is very important to point out, that division also exists in the other sciences, not only in the social sciences, but also in natural sciences, an excellent example is for example the huge variety of theories in what refers to the universe (if it is expanding, contracting, neither expanding, neither contracting, moving, not moving, etc…)
However, this typical divergence in sciences usually scandalizes more people when it is referred to Economics. I found three good reasons, which justify this discrimination: First, because Economics are a social science, and although natural sciences are also vulnerable to debates, and doubts, in social sciences the problem is sharper, because they refer to humans, which are complex and free; and freedom is independent from material facts, and then it is much harder to measure and to predict. Second because Economics are a relatively recent science, and there is an absence of a strong tradition, then it is difficult to provide a strong statistical analysis on the economic behaviour along time. Third, because Economics are intrinsically related with people’s life and in the same way they are intrinsically related with political beliefs. There is a mix, between personal and political interests, which clearly benefits the existence of divisions and opens the door to personal passions. (For example freshwater economics are more related with right wing policies; and saltwater economists are more related with left wing policies).
I will then focus my attention in one problem, which constitutes a severe obstacle to achieving a rigorous knowledge in Economics (although I assume that there exists other similar problem, which comes from the ambiguity of some concepts, which are abstract but we look to them as real and tangible, take for example demand; I admit to develop this problem in other article):
The problem of measurement in Economics; we deal with very complex facts, the data that we can estimate is often partial, and the real important facts which we want to measure, such as supply or demand, are not directly measurable, we must not forget that the market depends on the actions of many individuals and of many other not observable circumstances.
It is typical that the economist only treats as important the facts which are accessible to measurement. “And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.”
There are many theories in which all the formulation relies and depends only on measurable magnitudes. This provides a huge space to select arbitrarily the facts, which we want to admit as the causes for the events that we see occurring in the real world. This is not at all a rigorous attitude – but it is so, so recurrent! As I previously said, as Economics are an area which depends a lot on personal and political interests, this creates a possibility of adapting the explanations, in order to get the conclusion I want to reach. It is almost hilarious, if it was not so tragic: I completely manipulated the facts to get the results I wanted, but as I found an explanation to prove them, in the final I’m more convinced about them!
Yes, we economists must be much more careful in our reasoning, and especially in the strength we give to our conclusions. Fortunately this crisis made us loose much of our credibility, and the humiliation, which the unpredictability of these new times brought, must have a decisive role in the way that we look to Economics. And this plays a not innocent role:
“The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals”.
António de Carvalho Capela, nº739
- A. von Hayek “The Pretence of Knowledge” (all the quotes from this text were taken from this speech);
- A. von Hayek “The Constitution of Liberty”;
– Paul Krugman, 2009, “How did economists get it so wrong?”, New York Times, September 2;