Is Economics a Failed Science?

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Gaurav Seetharam's picture

Writing in the New York Times op-ed section this past September, Paul Krugman mused about the failure of economics. The Nobel laureate-turned-columnist openly disparaged his colleagues, declaring that "...the failings of economics were greatly aggravated by the sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism."

But Krugman soon quarantines the failure to practitioners, making clear that his admonishment does not extend to the economics itself. The field, he argues, contains all the insight that we needed, but key decision makers are deaf to it. They simply gravitate towards the theories which give them cover to achieve political and ideological goals. Krugman paints the rubber stamping economists as stooges of a broader policy agenda. It is hard to argue considering that Joseph Stiglitz, another Nobel winner, was just blocked from a panel to oversee high-frequency trading. A Republican Commissioner at the Securities and Exchange Commission (SEC) opposed Stiglitz without reason. When asked about it, Stiglitz responded with: "I think they may not have felt comfortable with somebody who was not in one way or another owned by the industry." 

So yes, decision makers are wilfully blind to conclusions they do not favor. But let's not be so hasty to absolve economists of all blame. The International Monetary Fund (IMF) was championing austerity in Europe all through the post crisis era. Even now their reports can barely go three pages without scolding nations on the need for fiscal consolidation. Those recommendations devastated the European labor force, cratered domestic demand, and applied deflationary pressure. In spite of all this, the IMF was ambivalent about Japan's consumption tax. When it premiered in April 2014, the IMF warned it may be a little contractionary, but that debt reduction was still progress. Two quarters later and Japan is officially in recession. It did not matter that a liberal economist like Olivier Blanchard was at the helm, because the dogma was not confined just to radicals and conservatives. They were wrong and are resistant to correct course.

I agree that intellectual dishonesty was hugely at fault for the crisis, but it's not the complete picture. Economics is altogether a fragmented field with too many territorial schools of thought. For economics to be more useful in practice, it needs to emulate the rigor of its sister sciences. A few months ago I sat down with Eric Weinstein, managing director at Thiel Capital, to discuss how this might happen. His insights are fascinating.

Read the full interview.

Comments

I'm always a bit confused with Krugman. He criticizes the status quo economist, yet the textbooks that educate every young economist are written by him and remain the most status quo of them all.

If Krugman is to 'rethink economics,' he might be wise to start with a book that doesn't focus on broken theories. A logic structure with unrealistic assumptions has never been and never will be a science.

Well, to be fair, his condemnation does distinguish between the textbooks and economists. He believes the subject has been successful as describing how the world works. But, Krugman would argue, key practioners are incentivized to prop up bad ideas. Sometimes it's a product of who is funding thier research, other times it is to guard against 'losing face'.

That being said, I agree there are fundamental limitations to economic theory in its present form.

Does the subject (economics) describe how the world works? Any description of the world (in market terms) should be based solely on the world itself, no?

In economics, a certain set of assumptions must hold true for the predicted outcome to occur. Nevertheless, practitioners (including Krugman) tend to sideline any differences between theoretical model assumptions and reality.

According to me, Economics is not Science.Like human beings which are unpredictable animals; Economics is also another unpredictable animal! Thanks to liberalised policies of most of the Governments in the world Economics has become unpredictable. Physics is Science, Economics is arithmetic. Physics has had more successful history than economics. Economics should try to adopt tools and methods more like those that physicist use.

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