Economics is not Precise

Like a social upstart that tries to integrate and ingratiate oneself into the upper class of society, while seeking to conceal one’s lowly origins, economists have sought to distance themselves from their humanities brethren, instead seeking the rarified company of sciences like physics, chemistry, biology, and medicine. Many economists believe they have accomplished this objective, since theirs is the only humanity to be distinguished by the awarding each year of a Nobel Prize.[1] However, reports of economics’ truth, precision, and reliability are much exaggerated, and, as a group, economists are due for a long and hard fall from the pinnacle of their illusory temporary success and sense of superiority over other humanities.

There are many economists who, along with their unquestioning students, naively believe, because their field of study is so thoroughly imbued, permeated, and burdened with exact statistics and complex mathematical formulas, that theirs is a precise science. However, the numerical accuracy that is provided by being able to measure economic variables like prices, wages, taxes, budgets, profit margins, returns on investment, currency exchange rates, and the unemployment, interest, or savings rate gives a false sense of precision to a field of study that, because it deals so intimately with human behaviour, can never be precise. In other words, the numerical precision of economic data masks the fundamentally imprecise nature of economic theories and predictions. To paraphrase Albert Einstein, who was talking about mathematical laws and their relation to reality, “As far as economic theories, formulas, and models refer to human behaviour, they are not certain; and as far as they are certain, they do not refer to human behaviour.”[2] To this one could add, “and, moreover, they are often wrong.”

Another common source of economists’ delusions and many errors is the widespread use of graphs featuring lines and curves to illustrate economic relationships between different variables. If one examines an introductory economics textbook, one will find numerous graphs showing a perfectly straight line or a perfectly smooth curve that illustrates a supposedly regular or inviolable relationship between two economic variables. Some examples are that the demand for a product is inversely related to its price, that unemployment and inflation are inversely related, and that the rate of interest is inversely related to the total amount of investment that takes place in the economy. However, economists are guilty of imposing an artificial regularity on human phenomena that are not so regular or predictable, for in every single one of these cases, it will be found that there exist data points that do not lie on the line or curve.

True scientists perform the laborious task of collecting data and then plotting them to see if there is a relationship between the different variables they are studying. But economists do not bother collecting data, for when they present these lines or curves to their students, usually they present no data points, such as a store’s sales and price data for a certain product to illustrate and verify the belief that the demand for a product is indeed inversely related to its price. This is an extraordinary procedure, for it means that economists are simply declaring or assuming that the stated relationship holds, in all times, places, and situations. It is truly amazing that such an unscientific and, moreover, patently dishonest method of teaching could have become so widely adopted in a profession that has a reputation – which is clearly undeserved – for scientific rigour and precision.

There is all the difference in the world between these two very different presentations. When one first plots the data points, which represent reality, before drawing a line or curve to fit them, one clearly sees that the line or curve is merely a rough approximation of reality – which, however, does not always correspond to reality. But when these reality points are absent, it leads both the teacher and students to believe that this is a mathematically precise relationship or formula like F = ma or c = 2πr. And it is here that the great deception in the teaching of economics takes place, for the irregularity and impreciseness of reality are completely obscured by the perfect smoothness of the line or curve.[3]

For example, it is well known that very small price differences of just a few cents, such as between $5 and $4.99 or $4.95, can make a difference in the amount of a product that is sold, whether at different times or in comparison to similar products that are priced differently. According to economics, such price discontinuities should not exist, for this means that the perfectly smooth demand curve, which is one of the most basic economic relationships on which the rotten edifice of economic theory is built, is discontinuous rather than being perfectly smooth. The belief that this curve is perfectly smooth is intimately related to the assumption of rationality, for a rational person would not be deceived by this simple and widespread marketing stratagem, which consists of writing the “4” in large figures and the “99” or “95” in much smaller figures, to make the gullible consumer think that the product only costs $4 instead of $5. In other words, if human beings were rational, then the demand curve would be perfectly smooth; but the fact that it is not, and there exist discontinuities in it, means that human beings are not rational creatures, thus contradicting one of the basic assumptions of economic theory.[4]

Economists would be much less likely to mislead both themselves and their students if they stopped drawing these artificially straight lines and artificially smooth curves, a very silly and misleading practice that dangerously obscures the imprecise nature of their field of study. It is one thing to declare that there exists a positive or negative correlation or relationship between two variables, and quite another to draw a perfectly smooth line or curve to illustrate it. The second method assumes a precise mathematical relationship that, in the case of economics, almost certainly doesn’t exist. This is comparable to the common practice in glamour or advertising photographs of removing all the blemishes and imperfections from the appearance of fashion models, which gives people a false impression of their physical perfection. In the case of economics, however, instead of a fashion model, it is a misshapen hag that the economists have painted with cosmetics and clothed in fashionable clothes, and consequently have mistaken for a ravishing beauty because of their blindness, not to mention their highly culpable indifference, to the messy inconsistency of reality.

It is truly a great historical tragedy that so many dogmatic and misguided economists have failed to grasp the basic truth that their field of study is not at all precise. The first economists who introduced advanced mathematics into their profession were guilty of leading successive generations of economists and their constantly growing cadre of students down the rabbit-hole of false mathematical precision that, due to the economists’ foolish pride, has led them to mistake economics’ many falsehoods or half-truths for knowledge and wisdom about the world.

So how are we to remedy this deplorable situation, in order to limit the harm that economists continue to do to human beings and other living creatures all over the world, where those whose addled brains have been crammed with mistaken economic theories, laws, and beliefs have gained control over people’s lives and destinies? The answer is, first, by disabusing people of the ridiculous belief that economics deserves to be distinguished from other humanities by the awarding of a Nobel Prize, since the existence of this wholly unmerited prize has done much to elevate economics in the esteem of many people around the world. Economists were not nearly as prominent, arrogant, dogmatic, or blindly trusted by others before the founding of the pseudo-Nobel Economics Prize. Second, by destroying economists’ false pretentions and claims to precision and truth by showing that even some of their most basic assumptions about human behaviour are wrong. And third, economists must learn a measure of humility, of which many of them have not shown any evidence in the past, as they blithely apply their theories to human societies, while causing considerable harm because of their ignorance, including their ignorance of the important fact that much of what they hold to be true is wrong.

[1] That economics does not belong in the company of true sciences like physics and chemistry is shown by the fact that what many people mistakenly call the Nobel Economics Prize is in reality the Nobel Memorial Prize in Economic Sciences, which was founded many years after the death of Alfred Nobel by a few well-intentioned fools who sought to give economics greater prestige so that its practitioners might be more strongly motivated to benefit humanity. But like many of the best-laid plans of human beings, this plan has gone horribly astray by making economists arrogant, confirming many of them in their false beliefs about human behaviour, and encouraging their conviction that their theories cannot possibly be wrong, despite all the evidence to the contrary.

[2] The original quotation is “As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.”

[3] Economics students can help in the unmasking of this intellectual fraud by asking two simple questions of their professors: 1) Where are the data on which the line or curve you have just drawn on the board is based? 2) Have you personally, or has any other economist, ever collected data to test or support the validity of the line or curve you have drawn?

[4] The behavioural economist Dan Ariely has written a number of interesting books that demonstrate the irrationality of human behaviour, specifically in the context of making economic decisions.