The Dismal State of Economics

For a field of study that claims to be a science, economists exhibit an astonishing lack of unanimity about even very basic things like government spending, monetary policy, interest rates, and so on. In comparison with true sciences like astronomy, medicine, and physics, to illustrate how fundamental is the disagreement about basic economic issues among economists, it is as if astronomers still disagreed about whether to adopt the geocentric or the heliocentric model of the universe, whether doctors still debated the merits of bleeding patients, or if the physicists and other scientists involved in the Apollo project to send an astronaut to the Moon disagreed about the equations they should use to calculate the rocket’s trajectory to get it to the Moon and back. Fortunately for the astronauts, there was no such disagreement among the scientists in whose hands they had placed their lives.

But such confusion and disagreement on even basic issues or principles do exist in economics, and this has had very significant harmful effects on the lives of hundreds of millions of people in many different countries, where government policies have been based on mistaken economic theories.[1] Although these failures are not as spectacular as a disintegrating space capsule or exploding rocket, they are nevertheless very real for those who must live with the consequences of economists’ mistaken beliefs, misguided advice, erroneous predictions, and irrational expectations.

As [Friedrich] Hayek later admitted, the notions he referred to were taken for granted among Austrian School economists but were unfamiliar to the British economists, who treated continental [European] economics with the deepest suspicion. Indeed, many of the arguments Hayek assumed his British audience would understand were not available in English.[2]

Except in its rudimentary stages, this kind of disagreement about basic matters does not occur in science. Thus, however unpalatable it may be to economists, the inescapable conclusion is that their field of study is still mired in its adolescence, when it is still in the process of trying different theories, but without having arrived at a generally accepted body of knowledge. In other words, economics has yet to attain the mature wisdom or understanding of adulthood, as true sciences like physics, chemistry, biology, medicine, and geology have been able to do.

Apart from the fact that, in spite of the brambly and highly misleading facade of mathematical precision they often present, most economic theories do a poor job of predicting economic variables and outcomes like the rate of inflation and employment, or total investment and output, or even whether these things will go up or down, the existence of such discord among economists about fundamental issues in their field of study is a sure sign that there is something wrong in their methodology, and that something is rotten in the kingdom of economics. These facts – the existence of widespread disagreement among economists about basic issues in their so-called science, and the inability of their theories accurately to predict economic phenomena – should make economists humble and wary of making dogmatic pronouncements, especially when one considers that the lives of many millions of people may be affected by their counsels. But instead, one finds the opposite, as adherents of competing economic schools denounce their rivals as fools or charlatans, while they confidently declare that they are the only possessors of truth in the domain of economic knowledge. Their behaviour only serves to illustrate the old adage that the greater a person’s ignorance, then the greater is one’s conceit, and consequently there is no greater fool than an ignorant fool.

What, then, is the fundamental error that lies at the heart of economics?

Before we answer this question, let us consider the history of some other fields of study. Physics did not make progress until it abandoned the formerly dominant Aristotelian method of studying natural phenomena, which consisted of reasoning about these phenomena based on very limited and unsystematic observations; likewise, medicine first had to abandon the medieval four humours theory of the human body and instead examine how the human body actually functions before it was able to make progress; and, as is well known, astronomers had to discard the dominant Ptolemaic theory of the heavens before they could embark on the long road that has led them to the present state of cosmological knowledge.

As I have stated elsewhere, the economists’ principle error is the belief that human beings are rational creatures. It is this belief that is primarily responsible for both the wealth of errors that are to be found in economic theories and predictions, as well as the profound disagreement that exists between competing theories like Keynesianism, monetarism, and laissez-faire capitalism. In comparative terms, the study of economics is still mired in the state in which astronomy was in during the sixteenth and seventeenth centuries, when the controversy between the geocentric and heliocentric models of the solar system had yet to be decided, or the state that medicine was in when doctors still bled their patients.[3]

Although the assumption of rationality is the main source of error in economics, it is by no means the only mistaken theory, assumption, or procedure that is held, made, or used by economists. Modern-day economists have larded their discipline with a profusion of complicated mathematical models and techniques, naively believing that these mathematical complications, which render their formulas and papers unintelligible to non-economists, somehow increase the likelihood that their theorems, laws, formulas, and predictions will be true. But mere mathematical complexity or logical consistency is not sufficient, in and of itself, to ensure truth, especially when one’s work is based on a false premise like the premise that human beings are rational creatures. In many ways, the economists’ use of complex mathematics in their attempts to describe and understand human behaviour is like a person who uses an ax to cut a piece of string, or a chain saw to cut a twig.

What we have in place is systematic industrial malfunction abetted by theoretical apologies offered by economists, few of whom have stood in the desolation of a desertified ex-forest, few of whom have run a business, met a payroll, or tried to apply their own theories to everyday life. This massive failure of economics was attacked most pointedly by Nobel Prize-winning economist Wassily Leontief, who once analyzed the contents of the American Economic Review and found that only 1 percent of the articles represented studies based on data the author [of the article] participated in gathering. Half of the studies were mathematical models based on no data whatsoever. In the journal Science, Leontief wrote, “Year after year economic theorists continue to produce scores of mathematical models and to explore in great detail their formal properties; and the econometricians fit algebraic functions of all possible shapes to essentially the same sets of data without being able to advance, in any perceptible way, a systemic understanding of the structure and the operations of a real economic system.[4]

How are we to account for these economists’ behaviour? For this behaviour cannot be called rational, since it is not at all rational to do something that is wrong, misleading, harmful, or dangerous. The simple fact is that these economists are simply imitating and conforming to the behaviour of their fellow economists. In other words, it is not reason but imitation that correctly explains the economists’ continual usage of these foolish mathematical models, which do a poor job of explaining human behaviour in the real world that we live in, in contrast to the unreal world that has been created in accordance with the theoretical postulates and assumptions made by economists.

The great advance made by scientists, which enabled science to progress far beyond what had previously constituted knowledge in past ages, was the important step of testing one’s beliefs, conclusions, and predictions against reality in controlled experiments, and to do so not just once, but on repeated occasions, in order to separate true from false beliefs. Only then is one justified in proclaiming one’s theory or belief as true. Despite the fact that many schoolchildren, including future economists, around the world are taught the basic steps of the scientific method, and despite the economists’ belief that their humanity is more scientific than all the other humanities – those imprecise domains like psychology, archaeology, sociology, history, linguistics, and anthropology – economists have failed to follow this crucial step of the scientific method. Instead, they trumpet their theories to the world, as if they were established truths, merely after having deduced their conclusions and ensured that they are logically or mathematically consistent with their premises. Incredible as it may sound, in the methodology that most of them follow, economists behave as if the Scientific Revolution never took place.

It was the economists’ great desire to distinguish their humanity from all other humanities – as being more scientific, rational, and precise – and elevate it above their lowly brethren, that has, ironically, led them into their present predicament. Anyone who labours in the study of human behaviour should understand that it is impossible to achieve the same sort of mathematical precision in these domains as one can in the domains of physics and chemistry. Most other social scientists understand this inherent limitation that exists in all the humanities, and so they publish their findings with the caveat that the results are necessarily imprecise and uncertain due to the complexity of human behaviour. It is only the foolish and arrogant economists, those conceited humanist snobs, who have failed to understand this simple but important fact. Due to this failure, they have often caused great harm around the world, wherever and whenever they have applied their mistaken theories, which are based on the actions of abstract and hypothetical – but unrealistic and imaginary – rational creatures who seek to maximize their utility at all times and in all situations, to the real world and to real people’s lives.

[1] To give one example among many of the crimes that economists have committed against humanity, following the collapse of the Soviet Union, a group of Western-trained economists advocated a radical course of shock therapy in order rapidly to convert Russia’s formerly state-controlled economy into a free-market economy. The disastrous failure of this course of action led to widespread theft of state-owned properties, including large oil and natural gas companies, in the mad rush to privatize state-owned companies in the belief that this would make them more efficient, and the elimination of many government programs and subventions, in the belief that this would motivate people to work harder, since they could no longer rely on the state for support. The result was social and economic chaos and collapse, along with the resultant hardships for many people, when Russia’s GDP shrank by roughly half, and the average lifespan for men dropped by approximately five to ten years. It is truly hard to fathom the level of ignorance, including the ignorance of the important lessons of history, that would lead grown – and supposedly well-educated – men and women to advocate such foolish actions, while naively believing that they could rapidly remake a society of more than one hundred million people, who had no knowledge or experience of free-market practices, into a free-market economy in the absurdly short period of 500 days.

[2] Keynes – Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott, p. 70. W. W. Norton & Company, New York, 2011.

[3] In a very real sense, the austerity measures that are advocated or imposed on entire countries by the economists, or those who have been trained by economists, who work at institutions like the World Bank and the International Monetary Fund are a modern-day equivalent of the once widespread but harmful practice of bleeding sick people. The main difference is that, whereas doctors could only bleed one patient at a time, economists can bleed many thousands or millions of people with their imposed austerity measures.

[4] The Ecology of Commerce: A Declaration of Sustainability by Paul Hawken, chapter 4. Harper Collins, New York, 2010.