Is economics a science?

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I made the observation a few days ago on this blog that economics is not a science. Some from the right have, predictably, argued to the contrary.

Unfortunately, their arguments do not hold water. The fact is that most people now think economics is the subject that is taught under that heading at universities. This activity emerged from the more appropriately named moral philosophy that Adam Smith, for example, considered he taught. In the process it was corrupted.

When the likes of Keynes were teaching economics the involvement of mathematics was, to be polite, limited. And that was appropriate. After the Second World War the likes of Samuelson debased the subject in my opinion, reducing its to a quasi mathematical analysis were an argument had either to be resolved through the resolution of formulae or by statistical regression.

There were two problems. The first was the illusion of spurious accuracy. The second was the exceedingly poor mathematical ability of the economics profession.

To take an example of the first, and to highlight an issue which underpins the whole of neoliberal economics which is based entirely upon this mistaken philosophy and methodology, it is assumed that markets, and markets alone, allocate resources efficiently within society. Of course, as some of my critics have noted, some very eminent economists have since tried to relax this assumption, and I do not dispute that they have made progress in doing so, but what that proves is that they are the exceptions to the rule, and that the rule remains intact, as the whole of the drive for deregulation, low tax, and the undermining of government has proven.

This logic that well-being is maximised when profit is maximised is, however, entirely untrue. First of all, the profit which is referred to as the sum total of the future value derived from current economic activity. It is assumed that this is known. As a matter of fact it is not. Accountants even make the rather odd assumption that historical data approximates to this sum of the future well-being. Second, the model only works on the basis of revealed preferences i.e. that if I prefer A to B and B to C I will prefer A to C. Everything that I know about human behaviour suggests that this is an entirely inappropriate conclusion. It shows how far removed from the real world economic theory is. Third on the basis of this idea it presumes that there is always a downward sloping demand curve for any product and always an upward sloping supply curve meaning that a single, discreet and permanent equilibrium state for the economy can be achieved. Unfortunately, if revealed preference does not work, and as a matter of fact it does not, then it is relatively simple to prove that demand curves can be upward sloping and supply curve downward sloping for the same product at different points, so creating the possibility of multiple equilibria, none of which can necessarily be considered optimal. At that point a choice has to be made between them, and all pretence that science has been foregone.

But let’s also look at just one of the numerous mathematical errors upon which economic theory as most on the right now teach it is based. It again refers to that absolutely fundamental model of perfect resource allocation by the market when perfect competition is in operation. To achieve this optimal outcome it is assumed that there are so many sellers in the market that none of them have any control on the price at which the goods they sell are priced: they are all price takers and the addition of one further supplier in the markets, or the loss of one supplier in the market, makes no difference to this situation.

This assumption is absurd. If it were true that they would be infinite people joining the market, and yet it is assumed that a marginal operator exists: the one for whom marginal revenue equals marginal cost. For that person to decide whether they are, or are not in the market it is necessary for the price to convey meaningful information. It cannot be argued that this is just with regard to revenue because each of the operators within the market will also have a cost base and their demand for the materials they require to supply the needs of the market must have implication for price through a market feedback mechanism or no one would ever equate a marginal revenue with marginal cost because neither will ever change. In fact, the addition or loss of another supplier will change the marginal cost for all supplies if the assumptions used in this model work, and neither costs nor revenue are therefore independent variables of the number of suppliers in the marketplace. In that case it is unrealistic to assume that any number of additional supplies can be added to the market without having implication for revenue just as it is unreasonable to assume that any number of suppliers can be added without having implication for marginal cost.

I accept the difference in price may be very small, but that does not matter. In fact it is critical because this is the fundamental error of economists. When using this model they assume that a very small change in price, which is what the last producer will in fact induce, approximates for all practical purposes to zero, and can therefore be ignored. Unfortunately, chaos theory shows that even the smallest of numbers behaves completely differently from zero. That is the whole basis on which chaos is based. The neoliberal economic model has never noticed this. That is because it is based upon poor mathematics which creates a lousy approximation to science which is used for political purposes to advance a particular philosophy which requires the believer to accept leaps of faith that any rational, observing human being would consider quite ludicrous if they were aware of them.

One of the things that will be swept aside as a consequence of the current financial crisis is neo-liberal economics. Much of what is taught as economic theory will have to go with it. We will be better off for its demise.