Economics is a phony science - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 6 November 2013
Economics is a phony science A  A  A

Baltimore, Maryland

Dow off 20 yesterday. Gold down $6. No biggie.

On Monday and Tuesday, we visited our son, Edward, a sophomore at the University of Vermont. His roommate joined us for dinner.

"Okay...let me explain it to you," we said.

The roommate was wondering if he should switch his major to economics:

"Economics is a phony science. And the more you study it the more nonsense you know...the more you think you know...and the less you really know about how an economy actually functions...

"I'll explain why in just a few sentences.

"If you are a real scientist, you start with things you can know...and you can build on them.

"Water boils at 212 degrees Fahrenheit at sea level, for example. The molecules heat up...and then suddenly change from liquid to gas...and the pot boils, right? Happens every time. You can count on it. And with this knowledge you can build a steam engine.

"So, the simpleminded economist comes along and says: 'Hey, an economy is like a pot of water. You heat it get more activity...and the economy grows.'

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"The analogy holds up superficially. You heat up the economy by putting some fire under it. If you're a central banker you lower interest rates. If you're a politician, you increase the deficit.

"You know there's a risk of overheating...or causing a bubble. But you think you understand how it works. You think you can predict and control the outcome, because you're a scientist, using your mathematical models, just like a real engineer.

"But the problem is that you don't really know anything. You don't know if an economy really is like water. You don't know where sea level is. For all you know, you're high in the Alps. And you don't know whether the fuel you're using adds to the fire...or subtracts from it. QE, for example, may help heat up the economy. Or it may not. No one knows for sure.

"And get this...all those little know...those people in the great economic pool. As soon as they catch on to what you're doing, they will change their economic behavior. That's the big difference between water and people. Water does the same thing no matter what you say or what you think. People don't.

"We talk about the economy being like water. Well, try to imagine the contrary...imagine water as though it was like a real economy. Imagine that the water knew you were going to bring it to a boil. Then, instead of turning into vapor at 212 degrees, it might boil at 100 degrees or 170 degrees or 50 degrees - in anticipation.

"And then, after you've brought it to a boil a few times, the water gets sick of being manipulated like this...and it boils off even if it suspects you're thinking of warming it up."

The kid started to fidget and look away. He was afraid he had run into some cranky old nut-job who was going to keep talking all morning.

"Well, I guess I'll stick with engineering."

"Good idea."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Economics is a phony science"


Nov 6, 2013

Economics is a SOCIAL science. Neither physics nor chemistry or any other exact science.

It has to do with the understanding of economic behavior of the various people and groups that integrate society and its consequence. Peoples actions are not boiling water.The LAWS of Economics are no more than a few principles that underly personal and group economic behavior like opportunity cost or supply and demand. They are useful in analyzing and defining useful policies.



Nov 6, 2013

Whose fault is it if economics is treated as a science like physics or chemistry? If attempts to systematize some branch of knowledge or measure certain phenomena and arrive at some hypotheses based on such attempts is treated as science, well aren't we trying to do it more or less in all aspects of our knowledge?
Actually Economics as a body of knowledge is fast evolving to integrate insights gained in social psychology, behavioral science and even neural processes involved in decision making. i make bold to suggest that methods of epidemiological studies should be applied to studying widely prevalent but mild versions of certain conditions like depression, bipolar disorder, obsessive compulsive disorder, and gambling addiction (ludomania) across swaths of populations and how they impinge on economic decision making by large numbers of individuals collectively and indivdually. We have the technological reach and depth and, computing and statistical skills to do this.
Actually we should look forward to bright young minds bringing to bear on Economics interdisciplinary knowledge and incisive thinking as mentioned above so that we make progress in avoiding the booms and busts that economic activity now appears doomed to precipitate perpetually. This dynamic is exploitative and is heavily tilted in favour of the well to do. Over several decades, in developed economies, this dynamic has resulted in the reduction of average income and economic well being of a majority of people while enriching a small percentage of people at the top of the social pyramid - a finding that an increasing number of experts now seem to focus upon. This dynamic of booms and busts is also highly disruptive of social harmony and it may even challenge geopolitical stability. We should actually look forward to working our way out of this disruptive dynamic with the creative contributions of bright young minds as described above and not dissuade such young minds from studying Economics, as the author seems to have done.

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