Is Economics a Science?

Here's an engaging read from Sunday's New York Times on why economics doesn't qualify as a science, and, more fundamentally, asking what is it good for, anyway?

On the first point, you'd probably be hard pressed to find even many economists willing to defend our discipline as a science, or at least anything resembling a hard science. As the Times piece points out, "The trouble with economics is that it lacks the most important of science's characteristics -- a record of improvement in predictive range and accuracy."

Right... there's that. And this fundamental limitation grows from the fact that the theories, variables, concepts, even the most fundamental building blocks of economics are social, not physical constructs. You drop a stone, known forces determine its trajectory. You change a price, and economic theory can tell what mighthappen. It can even tell you -- with mathematical precision -- what should happen if that price change is met by fully rational actors with full information.

But it cannot tell you what will happen, nor will it ever be able to do so.

But that doesn't mean economics is useless. The authors come up with some compelling ways in which it can and does help improve society which I'll get to in a second. But first, at least for my money, they actually didn't go nearly far enough in indicting the way the discipline is misused and abused in the real world.

Because economics both poses as a hard science and fails to generate reliable predictions, establishing economic facts is an elusive exercise. Battling statistical analyses come to opposite conclusions on the impact of fiscal stimulus, changes in tax rates, wage mandates, regulations, and so on. Into this void steps money and power, such that today we find ourselves with think tanks staffed by economists who provide their clients with the answers they seek. And since those with the deepest pockets can buy the results that best serve their goals, it is increasingly difficult to generate the wealth of evidence needed to offset market failures, inequities, and even existential threats.

Suggest that more progressive taxation is necessary to raise revenues for productive investments or social insurance, and some group of economists will line up to explain how that will backfire (what we really need to do, they'll helpfully point out, is to cut taxes on the wealthiest). Deficit alarmism, often based on faulty pseudo-science about the impact of deficits on interest rates and growth, has contributed to the current moment, wherein governments in most advanced economies are pursuing austerity measures that are clearly contraindicated--i.e., they're not working!

One doesn't even have to look far to find pseudo-economic science trumping real science. The costs of global warming are heavily "discounted" by economists who present "hard numbers"--many of which come with decimal points!--representing the real growth and jobs we'll lose if we try to regulate carbon or other environmental threats.

So what good is economics?

Since Hobbes, philosophers have been concerned about the design and management of institutions that will protect us from "the knave" within us all, those parts of our selves tempted to opportunism, free riding and generally avoiding the costs of civil life while securing its benefits. [Philosophers] recognized that an economic approach had much to contribute to the design and creative management of such institutions. Fixing bad economic and political institutions (concentrations of power, collusions and monopolies), improving good ones (like the Fed's open-market operations), designing new ones (like electromagnetic bandwidth auctions), in the private and public sectors, are all attainable tasks of economic theory.

A key component of the above is the part of economics that I think is the most important: identifying market failures. The best and most useful economists these days are the ones who spot ways in which markets are working badly or not at all. How financial bubbles, output gaps, high unemployment, and poverty can be avoided or offset. How taxing carbon could internalize a negative externality. How financial market regulation could reprice risk that's underpriced by markets. How investments in disadvantaged families and children could offset the opportunity deficit they're born into in ways that rob both them and the broader economy of their realized potential.

There's irony to all this. The most useful economists today are the ones who can most clearly see through pseudo-scientific evidence purporting to show that unfettered markets will self-regulate and that interventions will do more harm than good. In this regard, our best economists are the ones who look upon today's economic science with a very jaundiced eye.

This post originally appeared at Jared Bernstein's On The Economy blog.