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Economics is Not a Pure Science

On another blog, I had the pleasure to exchange opinions with a bloglodyte. What earned this fellow that sobriquet was not the fact that he and I disagreed, but that he pursued his argument without the use of reason or a single cogent fact. Vituperance and envy pretty much shut down all of the higher-cranial functions for this bitter young man. Along the course of his disjointed rants, he attempted to make some of his claims more credible by insisting that he held a master's degree in Economics, a claim his own claims immediately dispelled. As a rule of thumb, one should have at least a passing familiarity with the major concepts and prevailing theories of a subject, before claiming expertise in the field. The fellow took umbrage at my observation that Economics is not really a science in the true sense, but rather a set of sociological behavior matrices, based on mathematic theories applied to conditional scenarios. This basic fact is essential to understanding how Economics works, and why it is so relevant to Politics.

Look at the stock market, for example. Every day, more than a thousand publicly traded stocks are bought and sold at bourses around the world and through online sales. The prices of these stocks are supposedly based on the best estimates of the companies' fundamental performance indicators in terms of revenue, costs, debt, and other salient factors, yet minute by minute the price varies. Why? Because the price of the stock is determined by buy and sell decisions made throughout the business day, based not only on hard data and analysis, but on the emotional belief that a company is worth more or less than it's stock price indicates, driving the price up or down. In fact, it is this emotional component which creates sales of stock in the main; if everyone agreed what the price of a stock should be, the stock price would quickly assume that value and no one would buy or sell from that point onward.

For that matter, look at oil. We're not running out, in the short term at least. Drive to any station, and they will have all you want of all grades of gas, and even on the overall scale, stocks are not in any present danger. So, what drives gasoline prices up and up? The component costs of getting that gas to the station, that's what, such as the petroleum. Why is oil more expensive? Because of the belief that events in the Middle East, concerns about environmental costs, and so on make the oil more expensive. That, and the fact that the eco-morons want cheap gas but won't let anyone drill for oil close to home or build any more refineries, but again, that's an emotional decision and supports what I am saying.

Another example is this whole sub-prime mortgage mess. Granted, it's a real problem, but the problem affected a small percentage of mortgages and a minor sector of home building, not affecting the basic value of a home or the rates on exiting fixed-rate mortgages, as is held by most folks. What changed was brought about by a change in opinion about the stability of the industry, the trustworthiness of mortgage lenders, and the need for the government to act, which is almost always cumbersome, ineffective, and pricey in the long run. It simply needs to be understood, that we the people, to a great degree choose the economic conditions through our reaction to events which are for the most part transitory and minor. That is not to say that the effects are not real, or that people do not suffer tragically in some of these cases, but the humanistic component of all economic conditions must not be ignored.

Which brings us to politics. Obama's faithful believe he will change things for the better, to my mind in spite of all the evidence. Hillary's supporters believe that her time as First Lady and her short service as a Senator give her the qualifications not only to run the country, but also a far better grounding in the requisite capability than Senator Obama. And McCain's team is confident in their belief that he is the best-qualified candidate to lead the country. Ultimately, all three of these candidates are in a race to get the most people to express belief in them, to emotionally invest in the candidate. I cannot recall a national election ever being won on the basis discourse, for good or ill. And because all of the candidates can be counted on to dwell on the U.S. economy and offer up their proposed solutions, what people believe about the economy is an important element to how the race will play out.


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Comments (24)

Ummm... so why is economics... (Below threshold)
JSchuler:

Ummm... so why is economics not a science? You seem to have forgotten to include that information in your post. Yes, there are a lot of difficult to quantify variables. Yes, economists still aren't entirely sure which variables matter. Yes, the target of study has a tendency to act on economic predictions, creating either self-fulfilling or self-defeating prophecies (Heisenberg with a Vengence). None of these factors, however, determines even in part whether something is science. It just means that it's hard.

BTW: In two days I shall hold a Masters in Political Science! W00T!

Water is wet.The s... (Below threshold)

Water is wet.

The sun comes up in the East.

And making decisions on the basis of how you feel is not a Science.

Really doesn't get more obvious than that, Mr. Schuler.

Congratulations on your masters degree. What do you plan to do with it?

the fact that the ... (Below threshold)
jpm100:
the fact that the eco-morons want cheap gas
Your point it taken, but this specific detail is in err. Eco-morons want gas prices to be high too. They ultimately want us in a bus

In fact, some of "Big Oil's" & "eco-morons'" wants or objectives align for a time.

Given the senerio
1) Oil @ $50 a barrel selling 10 barrels
2) Oil @ $1000 a barrel selling 1 barrel

Big oil & eco-morons both want #2.

Now eco-morons would prefer the cost increase to be some kind of punitive tax, but they'll let it be in the form of corportate profits long before they'd want consumers to have cheap gas again.

No jpm, you are wrong on bo... (Below threshold)

No jpm, you are wrong on both counts.

The eco-morons, in the main, use gas and want their lives to be easy, but they want the government to magically create an alternative resource while changing nothing in their own lives in terms of responsibility. The ones you are thinking of, I believe, are eco-terrorists, who want to destroy the industry.

Also, there is no "Big Oil". Oil is not a monopoly, and in the main the companies which provide gasoline to the American consumer would much rather enjoy volume and strong brand credibility than high marginal profits. This because oil companies are really owned by shareholders, and all those profits that some folks whine about are going to millions of regular people. And most Americans want a responsible system that meets energy needs in an effective way on all fronts. Trying to demonize the people who actually bring the gas you use, is both illogical and morally wrong.

Wow, DJ, I actually agree w... (Below threshold)
max:

Wow, DJ, I actually agree with your main premise. Economics is no more a hard science than creationism or "intelligent design".

I agree with you, max. Whil... (Below threshold)

I agree with you, max. While I believe that God created the world, the teaching described as "Creationism" is about as scientific as an episode of SNL.

Really, eco-morons want gas... (Below threshold)
SPQR:

Really, eco-morons want gasoline prices to be higher for everyone else.

Economics is a science, but it is not a hard science, it is more of a descriptive social science. Thankfully it is more rigorous than whatever this idiot thinks she's an expert in.

"And because all of the can... (Below threshold)
COgirl:

"And because all of the candidates can be counted on to dwell on the U.S. economy and offer up their proposed solutions, what people believe about the economy is an important element to how the race will play out."

And that comment predicts the outcome of the election. The MSM will do everything in its power to portray the American economy as being in the toilet, no matter what the facts suggest. End of story. . . guess what party wins?

Heard an interesting report today that many state governors are getting on the gas tax suspension bandwagon. Pretty soon the dirty little secret will be out -- taxes account for more of the "profit" in a gallon of gasoline than real profit. In CA alone, the state collects at least 45 cents a gallon, so with the fed tax, that's about 63 cents a gallon. Talk about obscene profits! With a 15 gallon fill up, that's over $9 in taxes.

The people going on about t... (Below threshold)
Maggie:

The people going on about the 'obscene' profits
the manufactoring companies make in gasoline,
are the same ones who bite the hand that feeds
them. Wonder how loud and long they would howl
if the manufactors were to close up shop and all
of our fuel had to be imported?

And making decisions on ... (Below threshold)
JSchuler:

And making decisions on the basis of how you feel is not a Science.

Correct, just as making decisions on the basis of the UV reflectivity of plant matter is not a science, or making decisions based on the flow of electrons is not a science. However, explaining how people come to feel the way they do, or why bees favor one type of flower over the next, or why electrons flow from one plate to another, and what influences those feelings have on human behavior, or the efficiency of a colony to create honey, or the ability of a circuit to turn on a light, is something that can be studied scientifically, albeit with varying degrees of difficulty.

So again, I have to ask you to please provide some basis for your conclusion that economics is not science. Does it violate some principle of the scientific method? Is it not empirical? Can economic theories not be falsified?

I appreciate economics, lot... (Below threshold)
RScott:

I appreciate economics, lots of handy-dandy rules of thumb, but I like thermodynamics better. It still amazes me that people still try to build perpetual motion machines. It also amazes me that people 'believe' in free health care.

JSchuler, just how do you control your variables when you perform experiments in economics?

The eco-morons, in... (Below threshold)
jpm100:
The eco-morons, in the main, use gas and want their lives to be easy, but they want the government to magically create an alternative resource while changing nothing in their own lives in terms of responsibility. The ones you are thinking of, I believe, are eco-terrorists, who want to destroy the industry.

The "eco-morons" as you just described them about constitute about 40%-60% of the public. They recycle, maybe buy a hybrid to show off, etc. but for the most part want their lives preserved. However, they can be manipulated by big scares like AGW.

The "eco-terrorists" want the end of all technology and civilization through violence.

There's a big group in between. The "eco-hardcores". They are lucid enough to create the AGW-like fairytales that are used to manipulate the "eco-morons" and have the ear of legislators. Case in point. The "energy" legislation the Democrats passed that included heavy gas taxes was really anti-global warming legislation to appease this group.

These eco-hardcores really want to minimize the human footprint on the planet. So they want you out of your car. The car prevents people from living in a city apartment and taking mass transit to work. Anything that makes owning and operating a car more expensive or less fun, they want. That includes the price of gas.

These people talk up alternates to placate the 'eco-morons'. Its the sugarcoating for the bitter pill of legislation meant to drive you out of your car.

They'll vilify an alternative if its too painless and may become too much a practical reality. As long as its pie in the sky, its OK. They turned on ethanol months and months ago. The only upside to them was its high cost and that might go away in a few years.

As a side note, Democrats only lament the price of gas because its one of the few economic pseudo-stats they can use to attack Bush. That's the beginning and end of their concern on the price of gas.

Also, there is no "Big Oil". Oil is not a monopoly,
I was using "Big Oil" as a euphemism for people who profit from oil. But oil does have its production controlled by a cartel. Government regulation has made the refining business a closed club of pre-existing refineries.
and in the main the companies which provide gasoline to the American consumer would much rather enjoy volume and strong brand credibility than high marginal profits.
The business of business is to maximize profits. Anything else would be a disservice to shareholders and could likely be a potential SEC violation or worse. There's no problem with that. That's how its suppose to work.
This because oil companies are really owned by shareholders, and all those profits that some folks whine about are going to millions of regular people. And most Americans want a responsible system that meets energy needs in an effective way on all fronts.
Most people don't have voting shares, nor preferred stock that pays significant dividends.

The only way I can benefit is if the small portion of oil in the small portion of energy sector of the 401(k) mutual funds my company offers gains equity. That growth won't outstrip the $4500-$5500 in gas I will pay this year. Not even close.

I could own 'oil' outside the venue as I'm sure many people do and profit nicely from it if they own enough. Most people don't fall in this category.

Trying to demonize the people who actually bring the gas you use, is both illogical and morally wrong.
Making angels out of them is equally illogical and morally wrong. I'd say they could be considered victims. But with record profits, it seems overall they've benefited from government intervention in prohibiting increased supply.

My analogy is like they were thrown in jail but with Megan Fox as a cell mate and their only food is oysters.

Sheesh, DJ. That moron shou... (Below threshold)

Sheesh, DJ. That moron should have used MY debating tactic when it comes to economics. Instead of claiming an advanced degree, I loudly and frequently proclaim my absolute ignorance, lack of education and training, and utter inexperience, and THEN start opining. And it's served me well so far.

Wotta maroon...

J.

JSchuler, just how do yo... (Below threshold)
JSchuler:

JSchuler, just how do you control your variables when you perform experiments in economics?

Just to clarify, economics is not my field, although I do run up against it, so be warned.

The standard way of controlling variables is through multiple regression (please don't ask me to explain in detail: I still have headaches from the class). But, I can give you an example. Grabbing an old paper, I studied the impact of corruption (as measured by the World Bank's Governance Indicators) on foreign direct investment inflows. In this example, I controlled for democratic institutions, GDP growth, per-capita GDP, changes in the exchange rate, and trade and tax policy. This basically means I gathered data for all of those variables and included them in one gigantic equation where I was thankful to have a computer do all the work for me. I had complete data for 127 countries over a three-year period. Running the regression on it, which basically tells you how much of the variation in your dependent variable (in this case, FDI) is explained by your independent variables (everything else), I found that my model explained about 74% of what was going on, with corruption being an insignificant part of the picture (with only a 33% chance that it mattered at all, which is really small when you're looking for at least a 95% chance).

Note: running the regression does not tell you why the variables matter, or that you measured them correctly. It doesn't even necessarily confirm that you have the right variables (although it can tell you if you're barking up the wrong tree). This is where theory comes in, and it's what makes social science so damned frustrating and probably why DJ (incorrectly) doesn't consider it science.

So, how do you do establish theory: You do the work qualitatively, where you study a handful of cases in depth. In these cases, you go by a method of either most similar or most different. In the most similar method, you look for cases that have similar conditions (e.g. economic policies in Germany and Italy) yet vary in an important variable that you are looking to explain. In the most different cases, you would look at very different countries (e.g. Britain and Uzbekistan) and try to explain a similar outcome. These approaches give you an excellent way to see the inner works of individual systems and allow you to craft hypothesizes that you can then test quantitatively as above. The quantitative analysis will then not only tell you if your hypothesis has some basis in fact, it will also point out some odd-ball cases that deserve additional qualitative study (in my case, Cameroon, Kuwait, and Luxembourg). It's a messy process and not very accessible, but it does follow scientific principles.

A regression analysis can a... (Below threshold)
COgirl:

A regression analysis can also prove your theory is full of shit. Democrats like to crow about how well they have done in reducing crime in large cities with their programs and big ideas. It just so happens that the drop in crime is also highly correlated with the increase in number of abortions being performed, thereby reducing generations of criminals to come. So you have to take the regression results with a grain of salt.

Regression analysis isn't rocket science. But can be used to distort many points.

Masters degree in Poly Sci?... (Below threshold)
moseby:

Masters degree in Poly Sci? Great for holding cake at the graduation ceremony...

Your comment on "... scienc... (Below threshold)
alecthemad Author Profile Page:

Your comment on "... science in the true sense..." interests me. I think you need to define "true science" before you can dismiss fields of study as not being sciences. I think you will find the attempt to be somewhat of a tar baby similar to "what is obscene" and "what is art."

Don't get me wrong here; my argument would be that Economics is really just game theory and should be taught under the math department.

Multicollinearity alone mak... (Below threshold)

Multicollinearity alone makes many regression analyses suspect.

GIGO, you see.

Multicollinearity alone ... (Below threshold)
JSchuler:

Multicollinearity alone makes many regression analyses suspect.

Which would be why regression analysis provides tolerance scores for the variables, that you can use to produce a variance inflation factor to give you some idea how badly multicollinearity is throwing your results. If you tried to presented a study where everything had tolerance scores of .2, no one would take your results seriously.

Political science is anothe... (Below threshold)
RScott:

Political science is another science that isn't science.

Political science is ano... (Below threshold)
JSchuler:

Political science is another science that isn't science.

Thank you for the astounding contribution. Please, while I'm waiting for someone to actually tell me what specific principle(s) of scientific inquiry economics violates that makes it "not really a science," can you do the same for poli-sci? I'm not really picky, any principle will do.

"Water is wet."Wat... (Below threshold)
UseBiggerWords:

"Water is wet."

Water is not actually wet, wet meaing coated in a liquid such as water. So what you just said was water is coated in a liquid, when in fact it is itself the liquid.

"The sun comes up in the East."

The sun only comes up in the East because you live on Earth. If you lived on Venus or Uranus, the sun would rise in the West.

The point being, your "true sciences" are no more science than economics. Scientific laws are based on repeated observation. The difference in economic laws are that "you" are the variable and therefore have a deeper understadning of cause and effect. You are not an atom and can no more say its actions will ALWAYS hold than you can anything else in the world. It is all a matter of probability and environment. Any engineer can tell you that no matter how exacting your calculation you always have a margin of error. This is the same as your observation of economics. I can empirically show you the law of supply and demand always holds, you just need to allow for a margin of error. As scientific study expands, I do not doubt that somewhere in the vast universe even they may find their Giffen good (although eocnomics has yet to find theirs).

JSchuler is correct - wheth... (Below threshold)
JohnS:

JSchuler is correct - whether it is or not, you have shown no valid reason why we should not view economics as a science. Produce a short argument in logical form (N->P, N-P) of why you think this is the case and then your claim (and its assumptions) can be honestly evaluated.

As an eco-moron, I disagree... (Below threshold)
Bill:

As an eco-moron, I disagree. We want people using less gas, and are ok with prices going up as long as it encourages this. The higher gas prices are, the more interested people are in efficient vehicles.




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