Economics: Fumbling Around in the Dark

Colm Green – Junior Sophister

The perennial question of the claim of economics to scientific status is addressed by Colm Green. In this context, the contribution of econometrics is evaluated, and a comparison is made between economics and psychology. He concludes that although economics cannot be attributed the appellation ‘scientific', this in no way invalidates the value of the contribution it can make.

"Sometimes I just don't know what's going on, things are so strange and change so quickly, I'll think I'll go and lie down"- Eeyore the Donkey.

"I'll tell you what I want/ what I really really want/ I really really really want to zigga-zig-ahhh"- The Spice Girls.

These two disparate quotes, while not drawn from the top drawer of economic theory, shed considerable light on the two major problems that stand between economics and scientific status. The first is that the world in which Eeyore lives, and in which we live, is indeed a very complicated one and the vast churning economy that exists within it would make poor Eeyore's head explode. The second one is that economics makes rather crude simplistic assumptions about what people want, in what way they will behave and that they will behave in that fashion. If the Spice Girls were particularly clear about what they wanted, and certain that they were going to tell us, the clearest thing of all is that there is no way of knowing what it is exactly they want.

What is a science? What do we want from it? There are a number of theorists and philosophers that have made a name for themselves writing on this very topic. One noted commentator on matters scientific is Karl Popper. His major contribution to the scientific theory debate was that a science was a set of theories, which could be refuted, or empirically tested. He was followed by Lacatos who said that there were often competing strands within the discipline who carried out science as part of research projects (schools of economic thought) and as one or other of these strands were falsified, another theory would come along and take their place.

Another philosopher, Feyerabend, said that people sought to seek the truth from science. However science could not provide us with the absolute truth. He sighted the case of Newtonian mechanics which many took to be the absolute truth, yet it in turn was supplanted by quantum mechanics. Since traditional science, he claimed, could not provide the absolute truth, he suggested that it was no more valid than any of the myths it replaced. This is to put penicillin on a par with the tooth-fairy, and while the argument may be logically elegant, it is not very practical. It would also be asking quite a lot of a science to give us the absolute truth (the existence of which is another doctoral thesis altogether). Instead, we seek that science gives us an ever closer and closer approximation to the truth. What must be ascertained is whether or not economics can bring us nearer and nearer to this truth.

This leads us on to economics, which certainly can be described as a set of theories. However to be classified as a science, it must be empirically testable and the theories must have predictive power. This is where econometrics enters the fray. Econometrics is the means by which the attempt is made to give these theories an empirical basis. However it must do this without the benefit of the controlled experiment so beloved of the physical sciences. This means that the econometrician cannot properly determine which factors are involved in influencing the phenomena that are the subject of the theory being tested.

The first stage in econometrics is a simple statement of the theory to be tested. This is where the first problem arises. Economic phenomena are really complicated, and therefore the likelihood that a small but significant aspect may be overlooked is great. Secondly the theory is stated in a mathematical formula. This is where the second problem arises. Economic phenomena are invariably very complex. The mathematical formulae, which describe them, are unlikely to capture the subtleties of the phenomena that they are trying to describe. A tiny, inherent flaw at this stage, given the numbers of measurements required to make the test valid, would render the whole procedure meaningless as regards valid empirical testing.

The next step is to alter this rather dubious mathematical equation into something that may lend itself to empirical testing. This is done by such procedures as adding a variable to account for random variations due to factors which are outside the model. This attempt to fudge the first problem only leads to more inaccuracies that continue to accumulate. The idea that errors can be used to compensate each other is described by Popper as a logical patch, a post hoc means of making the facts fit the theory, and therefore rather unscientific.

So far there have been three problems, each of which has stemmed from the incredibly complicated nature of things. The fourth stage is obtaining the data. However, the pitfalls involved in obtaining the relevant data are numerous. This problem leaves the data open to all forms of observational biases. The next stage is to estimate the parameters of the econometric model from the data. This is also quite tricky, as it depends on the original assumptions made and other technical considerations.

The main consideration is that the techniques used often depend on regression analysis. This type of analysis depends on the assumption that because two factors can be correlated (the hypothesis and the actual cause) they can be causally linked. This is not true as demonstrated in a study by William Smith of Cardiff University which found an almost perfect correlation between the sales of lollipops and the levels of teenage pregnancies. It would require a great leap of faith and logic to suggest that there was a causal link.

What we have seen is that the technical considerations involved in econometrics, all stem from the difficulties outlined by Eeyore regarding the insanely complicated nature of the world. There is another entirely different set of problems that undermine the basis of the economic theories themselves. This is that economics is concerned with the behaviour of people. If the complexity of the economy makes it difficult for economics to be seen as a science then it should be made clear that human behaviour is just as complicated and just as unpredictable as the economy. Another thing, which should be made clear is that even less can be stated with ‘scientific' certainty about human patterns of behaviour. The problem, as any person involved in the field of psychology will tell you, is that it is exceptionally difficult to make any assumption about people's behaviour based on what they tell you.

To hark back to the quotation at the beginning of the essay, the Spice Girls were willing to tell you what they wanted- which is not always the case in psychological research. However, what they want is unclear. Also there is the problem which has dogged psychology since its onset - do they actually want what they tell you they want?

There are many similarities between economics and psychology. Both have sets of theories, which are adhered to by their supporters even when they have been proved to be more than slightly suspect. Neither can call upon controlled experiments- they are impossible in economics, and incredibly unethical in psychology- and they both have to deal with hugely complicated topics in attempting to explain everything to do with human behaviour, albeit from slightly different viewpoints.

Neither can actually be described as a science. Instead they can be viewed as a slightly looser analysis of these topics. An appropriate analogy is that of the activity of football punditry. Before every match, pundits on television will give their considered opinion on how the match will go, drawing on underlying theories dictating how they think the game works (just like the neo-classical school of economics or the Freudian school of psycho - analysis) and their knowledge of the teams' form (the equivalent of econometrics or psychological nosology). They cannot make a science of it because the events on the football field are incredibly complex and random and subject to so many variables - just like economics and psychology. This, however, does not stop them making useful and accurate predictions.

In conclusion, just because psychologists have no idea what causes mental illnesses, how they work, and even how to define them, and ultimately because they lack a scientific methodology, this does not mean that clinical psychologists cannot help patients through their nosology (essentially common-sense and intuition) and prescribe a treatment which may work. Similarly, while economics may not be scientific, it does not prevent economists making some sort of analysis of the factors which affect our lives. Also the scientifically flawed methodology of econometrics does provide us with useful, if inexact estimates, which are at least partially accurate. In summation, economics is not a science in the truest sense of the word. However, just because we do not have the torch of scientific status to help us to find the ‘truth', this does not mean that we should not fumble around in the dark with economics and econometrics.


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The Spice Girls (1996) Wannabe. Virgin Music Publishing: London.