The Failure of Economics as a Predictive Science
by Julien Haller
In the twentieth century, the study of economics shifted greatly toward a more mathematical expression of its concepts. This allowed economists to derive complex theories starting from fundamental concepts. However, many scientists have decried this shift in focus to be the result of “gross simplification” on the part of the economists. They claim that, in so doing, economists reduce man to the state of a homo economicus, and all the complexity of life and society is sucked out so that they can make use of mathematical tools.
In defending their discipline’s claim to be a valid mathematical science, economists have often tried to compare their work to physicists’. Pointing to simplifying assumptions physicists make such as the “frictionless vacuum” and perfectly symmetrical geometric configurations, they claim that their assumptions are no more “gross simplification” than those of physicists’.
All of this would be quite illuminating and insightful if it were not for one pesky detail: it is painfully wrong. There is a fundamental difference between what the two disciplines are trying to simplify and why. Physicists make simplifying assumptions concerning arrangements and initial conditions, such as a spherical charged body with radius b and a charge density proportional to the distance from the center. This type of arrangement would never be found in nature; its geometry and symmetrical charge density are too perfect. But I guarantee that you would find it in undergraduate level electromagnetism textbooks everywhere, asking students to find the electric field of the object, because, even though the situation is artificial and constructed, its simplicity helps illuminate fundamental laws of nature, such as the nature of charge, without making any assumptions concerning them. In this case, the spherical arrangement and charge distribution are assumed, but the fundamental nature of charge, that its electrical field is inversely proportional to the distance squared, is not. It is a given in all situations concerning charged bodies, not by assumption, but rather by empirical observation.
Unfortunately, this is not the case in economics. For economics to function as a predictive science, it must assume characteristics into its fundamental laws. Here are two of the most fundamental laws in economics:
1) That of value, and that we are “rational” enough to order our desires by virtue of some abstract quantity of value each desire holds.
2) That of self-interest, and that we will act in such a way as to maximize our net benefit (i.e. seek objects of high value with minimal obtainment costs).
But predictions cannot be made from these laws. They are tautological at best. Any choice a man makes can be retroactively deemed to be benefit maximizing by virtue of being the choice the man made, but that is not a prediction. For a prediction to take place, the economist must make an assumption, or, as I like to call it, an educated guess, on what the individual holds as valuable.
For example, economists might run a game theory experiment where iterative games are played in which the participants’ choices are to cheat or comply with the others playing the game. The models are constructed on the assumptions that the participants value the acquisition of money more than anything else in the game, and that they have full information concerning the game.
The second assumption is easily found untenable when you realize that the game was constructed with mathematics most people are unfamiliar with. But what about the first assumption? Well, its truth lies in a statistical anomaly. Statistically speaking, it is found that most people act in such a way as to maximize their material gains with little regard for their fellow man’s welfare. In such a case, winning more cash will become the greatest good for the participant and that is what he will seek within the game.
But this is not necessarily true. It is not a fundamental law. Sure, as animals we are likely to lustfully seek for more wealth, however it may be defined, but it is not necessary. Sure, our culture does more to vindicate such selfishness than it does to prevent it, but that is not necessary. Sure, the very existence of a mainstream “popular culture” suggests that, more often than not, we conform to what is given rather than boldly create, but this is not necessary.
We can choose otherwise.
So what if we entered the game with a charitable spirit and a giving heart? What if, even in anonymous transactions, we chose to value the love of the other more than our own material wealth? Is that possible? Yes, it is, and insofar as it is, economics rests on shaky ground.
(***NOTE: I realize that economists even have models for charitable giving. Again though, the models are based in tautological truths, that we do what benefits us, and for any prediction to be made (i.e. will the decision a man makes follow a more charitable course or a self-serving one?) an assumption concerning the individual’s character must be made.)
In physics, the core constituent of a charged body has no choice but to create an electric field inversely proportional to the distance squared. But people do have the choice to choose love and charity over greed and material gains. So how does economics find itself increasingly accurate within ever climbing statistical significances? Because, throughout history, we have come to conform more and more to the machine (see my post on steroids in sports for an explanation on the imagery of “the machine”). Every century we lose more of what makes us human and fall further into the mire of blind automatism. Economics may fail as a predictive science, but until we choose love over war and slavery (see Stories of Who We Are and How We Eat for an explanation of the “love, war, and slavery” imagery), we give the economists every reason to believe otherwise.
So rise up and choose love, because your only other option is to be an economist’s unit of input in the war and slavery of the machine.