Robert Shiller on Economics – Is It a Science?

Fresh from winning an economics prize awarded by a central bank (the Nobel prize for economics was established by Sweden's central bank and only uses Nobel's name in memoriam: “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”), Robert Shiller asks in a recent article: “Is Economics a Science?

The article doesn't start out all that well from our perspective, but there are also a few points made in it we can agree on. We will comment on several excerpts below. Shiller begins as follows:

 

“I am one of the winners of this year’s Nobel Memorial Prize in Economic Sciences, which makes me acutely aware of criticism of the prize by those who claim that economics – unlike chemistry, physics, or medicine, for which Nobel Prizes are also awarded – is not a science. Are they right?”

One problem with economics is that it is necessarily focused on policy, rather than discovery of fundamentals. Nobody really cares much about economic data except as a guide to policy: economic phenomena do not have the same intrinsic fascination for us as the internal resonances of the atom or the functioning of the vesicles and other organelles of a living cell. We judge economics by what it can produce. As such, economics is rather more like engineering than physics, more practical than spiritual.

 

(emphasis added)

This is what we meant when we said it doesn't start out all that well, although it certainly begins by asking a good question. However: Necessarily focused on policy? The discovery of fundamentals can be safely ignored? As Ludwig von Mises pointed out (see also further below), economics is the best elaborated branch of the science of human action, but we don't believe that there are no longer any fundamentals left to discover. 'Best developed' is not tantamount to 'fully elaborated, nothing left to find out'.

To name an example, Friedrich Hayek never did write that more in-depth book on capital theory he was once planning to write (his interests shifted to other sociological and political topics). Although a number of contemporary economists have made valuable contributions, surely capital theory could benefit from additional work? Just saying.

 

What is truly cringeworthy though is the equivalence between economics and 'engineering' Shiller is proposing. Yes, many economists and their work are of course involved in 'social engineering', but that really shouldn't be their job. We are not saying that economists should not give advice (the Lord knows, some good advice is sorely needed), but unfortunately most of the advice dispensed nowadays is downright dangerous, precisely because it attempts to provide politicians with a scientific fig leaf for social engineering. The truth is though that there is really nothing to successfully 'engineer', since the economy is not an engine, to put it bluntly. Oddly enough, Mr. Shiller himself seems to realize that to a certain extent, as you will see further below.

 

“The problem is that once we focus on economic policy, much that is not science comes into play. Politics becomes involved, and political posturing is amply rewarded by public attention. The Nobel Prize is designed to reward those who do not play tricks for attention, and who, in their sincere pursuit of the truth, might otherwise be slighted.”

 

Let us not forget that Paul Krugman also received a Nobel prize. Admittedly, so did Friedrich Hayek when Keynesianism was seemingly blown to smithereens in the 1970s (unfortunately it was merely zombified and has risen from the grave again), but Krugman surely is proof positive that political posturing doesn't pose the slightest obstacle to winning the prize. Admittedly there is a lot of interaction between economics and politics. Nevertheless, as a science economics should be wertfrei, i.e., axiologically neutral. Shiller is quite correct that the sincere pursuit of the truth is precisely what it is, or should be, about.

Shiller then writes quite a bit about how genuine science attempted to differentiate itself from pseudo-sciences and crackpot theories in the course of history. We will skip over that part, as it is not really relevant.

 


 

Pundits, Professors and their Predictions: Robert J. ShillerNobel prize winner Robert Shiller: we actually like his work on stock market valuations.

(Photo credit: swiss-image.ch / by Moritz Hager)

 

 


 

Economics, Mathematics and Physics

Next Shiller refers to Nicholas Taleb's well-known disdain for mathematical economists:

 

“Critics of “economic sciences” sometimes refer to the development of a “pseudoscience” of economics, arguing that it uses the trappings of science, like dense mathematics, but only for show. For example, in his 2004 book Fooled by Randomness, Nassim Nicholas Taleb said of economic sciences: “You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment.”

 

Mr. Taleb is 100% correct as far as we are concerned. There is indeed no such thing as a controlled experiment in economics. This is why studies of an econometric nature cannot tell us anything about economic laws, they are merely historical studies. Human action can of course be studied historically. Historical date that are of relevance to the economy can be interpreted with the help of sound economic theory, but that is all as far as economics is concerned. In short, theory must precede the interpretation of data.

A few words to models: economic science does need models in order to explain certain causal relations. Due to the sheer complexity of economic realtionships, one needs to abstract from time to time so as to tease these relations out in detail and be able to formulate valid economic laws. The praxeological method of logical deduction can even be used to explain imaginary states of affairs that do not conform to reality (for instance, as Mises pointed out, even if money did not exist, it would still be possible to conceive of a theory of money. All sorts of initial assumptions can be used in theoretical models). That this is as a rule not done is mainly due to the fact that our actual world is what interests us most.

The problem with models is that one must always remain aware that they are only models, and that they neither describe the far more complex reality, nor  describe states of affairs that are worth striving for (in fact, they are not realizable anyway, as change constantly intervenes in the real world. Conceptions such as a static or an evenly rotating economy will always remain conceptual). Mathematical formalism can be employed in models, but one must ask, what for? Logical deductions can be expressed verbally, so why should one translate them into mathematical symbols and then re-translate them into words? They only run the risk of losing precision that way.

Shiller continues:

 

“But physics is not without such critics, too. In his 2004 book The Trouble with Physics: The Rise of String Theory, The Fall of a Science, and What Comes Next, Lee Smolin reproached the physics profession for being seduced by beautiful and elegant theories (notably string theory) rather than those that can be tested by experimentation. Similarly, in his 2007 book Not Even Wrong: The Failure of String Theory and the Search for Unity in Physical Law, Peter Woit accused physicists of much the same sin as mathematical economists are said to commit.”

 

It is certainly true that methodological and philosophical questions are also  worth considering with regard to physics. However, we would point out that the method of the natural sciences is to start out with hypotheses, that are then empirically tested (as controlled experiments are as a rule possible). The problem alluded to above is that the foremost theoretical physicists are discussing such advanced points of theory that the necessary equipment for testing their hypotheses often doesn't exist yet. In some cases it may actually never come into existence. Just to name real world examples, experiments that might prove the existence of the Higgs particle are only possible since the Large Hadron Collider has become operational – but theory has posited the particle's existence several decades ago already. Einstein's general theory of relativity had to wait for a total solar eclipse to receive its first empirical test. With regard to the validity of string theory, there is indeed a rift among physicists, but it is impossible for laymen to come to an informed judgment about it. For all we know, the theory is beautiful and elegant enough to be worth the seduction.

 

Behaviorism and Economics

Schiller then comes to behaviorism, a field which he is a proponent of, especially in the context of his studies of financial markets:

 

“My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles. People can just change their minds and behave completely differently. They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes.”

 

(emphasis added)

It is absolutely correct that people can change their mind, whereas the inanimate objects studied by physics cannot. Once one throws a rock, it is set on its course. As long as no further exogenous force is exercised upon it, it will remain on a precisely predictable path. It most definitely won't change its mind in mid-flight.

However, behaviorism is not economics (even if both Shiller and the Riksbank apparently disagree; by the way, we do believe that it has its place in studies of investor behavior in financial markets. Observer-participant feedback loops and herding are all interesting phenomena worth examining). It belongs to the field of psychology – but psychology is not a branch of science that can furnish us with knowledge about universally valid laws of economics. Psychology has more in common with history than with economics. Its empirical studies can always only refer to specific people in specific situations. The same people may indeed act 'irrationally' or even be deemed 'neurotic' by reacting differently to the same stimuli next time. There is nothing that is universally valid about that. To be sure, psychological traits are innate in human beings – but economics is about purposive, rational action (which at times of course may involve the commission of errors; economics inter alia examines which means are most suitable to attain certain ends).

Shiller then tries to rescue mathematical economics with an off-hand remark:

 

But all the mathematics in economics is not, as Taleb suggests, charlatanism. Economics has an important quantitative side, which cannot be escaped. The challenge has been to combine its mathematical insights with the kinds of adjustments that are needed to make its models fit the economy’s irreducibly human element.

 

See our comments on mathematical economics above. How exactly mathematical models are supposed to receive 'adjustments that make the models fit the economy's irreducibly human element' Shiller doesn't explain, but we believe there really is nothing to explain. How can the 'human element' be expressed in formulas or equations? This probably deserves a more elaborate critique, which we will try to get to on another occasion. Let us just note here that if the 'quantitative side of economics' Shiller refers to concerns statistics and econometrics, these are as noted above not useful in arriving at universally valid and time-invariant economic laws. However, their employment has become an extremely harmful element in the endeavors of interventionist authorities (a.k.a. 'policymakers'). An excellent example we have frequently discussed in these pages is the misguided 'stability policy' with its focus on price indexes as practiced by central banks.

In closing Shiller says:

 

“The advance of behavioral economics is not fundamentally in conflict with mathematical economics, as some seem to think, though it may well be in conflict with some currently fashionable mathematical economic models. And, while economics presents its own methodological problems, the basic challenges facing researchers are not fundamentally different from those faced by researchers in other fields. As economics develops, it will broaden its repertory of methods and sources of evidence, the science will become stronger, and the charlatans will be exposed.”

 

We agree that 'economics presents its own methodological problems'. That is in fact the main bone of contention. Unless one sorts out which methods are appropriate to economic science, one is not likely to get very far.

We will leave you with an apposite quote by Ludwig von Mises that briefly encapsulates what the 'Austrian' standpoint regarding the method that should be employed in economic science is (from the essay “The Task and Scope of the Science of Human Action” in “Epistemological Problems of Economics”):

 

“The science of human action that strives for universally valid knowledge is the theoretical system whose hitherto best elaborated branch is economics. In all of its branches this science is a priori, not empirical. Like logic and mathematics, it is not derived from experience; it is prior to experience. It is, as it were, the logic of action and deed.

Human thought serves human life and action. It is not absolute thought, but the forethought directed toward projected acts and the afterthought that reflects upon acts done. Hence, in the last analysis, logic and the universally valid science of human action are one and the same. If we separate them, so as to contrast logic and practice, we must show at what point their paths diverge and where the special province of the science of action is to be found.

 

(emphasis added)

 


 

Mises-thumbs-up
Ludwig von Mises: let's try logic.

(Photo via Wikimedia Commons)

 


 

 

 

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3 Responses to “Economics Is a Science”

  • SavvyGuy:

    IMHO, economics can be studied as a social science only in free societies that do not suffer from the distortions caused by a Central Bank.

    However, in societies that are plagued by fiat money coupled with fractional-reserve lending, economics is degraded to the mere expediency of political convenience. Move along folks, nothing to study here!

    • gpond:

      No, no, a thousand times NO!

      Economics as studied by Mises is a social science that is subjective and a priori. It can not only be studied in free societies because as long as humans exist, the praxeological study exists. As long as humans exist it is timeless and epoch-less.

      One of Mises’ premises is the opposite of what you state, that under certain conditions it “is degraded to the mere expediency of political convenience.” The politicians WISH that were true.

      Economics as studied by Mises shows that there are exact laws which can not be avoided.

      As a matter of history, certainly take a look at what is happening in Venezuela. To look at Venezuela’s current situation is not to suggest an empirical study, but rather to see how the economic theories play out in history. Venezuela is an example of the situation you suggested where “economics is degraded to the mere expediency of political convenience.” How they wish it were so!

      As soon as Venezuela instituted price controls, the outcome was sealed. Economic exact laws foresaw what would be next: Shortages. Political convenience would prefer that price controls could be instituted without causing the shortages that were inevitable. But they were and are inevitable. They were as inevitable in Venezuela as they were when Richard Nixon imposed them upon the US.

      In urging us to move along, and that there is nothing to study here, is surely to miss the whole point of the thing. In societies that are “plagued by fiat money coupled with fractional-reserve lending” the exact laws of economics are more relevant than ever if we wish to correct our course.

  • Mark Humphrey:

    Thanks for another good article concerning the foundations of economics.

    Tibor Machan wrote somewhere that the difference between science and philosophy is a matter of emphasis–except I forget how he defined the broad difference.

    I always think of economics as a branch of philosophy, namely of ethics: the moral value of wealth and how people interact to attain it in a social setting. Rothbard somewhere defined it as a branch of ethics also.

    People these days wrongly assume that philosophy is a waste of time, a parlor game that’s detached from the real world. That idea, of course, is an expression of the philosophical nihilism that attacks the foundations of knowlege in various ways.

    The proper perspective is that philosophy explains the nature of the universe with precision, coherence and realism. So good economics is every bit as exacting logically as good physics, although the epistemological approach to the science of physics and the philosophy of economics differ.

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