Economania

In the introduction to his 2016 book ‘The Road to Ruin’ James Rickards writes:- “Is economics science? Yes, and there the problems begin. Economics is a science, yet most economists are not scientists. Economists act like politicians, priests or propagandists. They ignore evidence that does not fit their paradigms. Economists want scientific prestige without the rigor (sic).”

He continues, “Scientific method applies readily to economics. The familiar distinction between hard sciences such as physics and soft sciences like economics is spurious.”

Let me say from the outset that I am an admirer of Rickards and have, or have read, a number of his books. But in this instance I want to, if not take issue with his assertions, at least clarify what I believe he is saying.

Rickards describes economists as dogmatists who cling to an old version of their science. Indeed a little later on in the introduction he asks, “Why did medieval believers in a geocentric solar system not question their system when data showed inconsistent planetary motion? Why did they write new equations to explain the so-called anomalies instead of scrapping the system?”

In passing I would like to remind readers who have been with us for a couple of decades that I used this same analogy, that of pre-Copernican cosmology, in an article published in this very organ in late 2011 and also in the Mensa Magazine in January 2012 (Time for a New Reformation). Yes, you heard it here first! Economania is ahead of the curve. (I wonder if Rickards reads Economania? Just wondering.)

My own view, as one schooled in sciences, is that economics should be a science, and indeed could be a science, but in order to be so it must shed its pre-Copernican view of the world. Further, I do challenge Rickards’s assertion that there is no difference between the hard - I prefer the word ‘exact’ – sciences and the soft sciences.

By an exact science I mean such as Newtonian physics. It is Newtonian physics that enabled us to put satellites into orbit. It enabled us to send men to the Moon in 1969. It enables us to send a probe on a 9-year journey to Pluto and to have it arrive at said destination within a few seconds of the calculated arrival time.

The power of the exact sciences lies in their powers of prediction. Newton’s equations of motion are fixed. Though written three centuries ago they underpin our understanding of the motion of the moon and planets such that we can calculate the times of solar eclipses centuries into the future with a precision of seconds and the position of the planets with absolute certainty years into the future. Could an economist calculate the yield on 10-year gilts in 2029?

Meteorology is most definitely a science and has advanced enormously since the days of Vice-Admiral Fitzroy’s attempts to forecast the weather in the 1850s. Nonetheless, and despite the application of massive computing power, it cannot accurately forecast the weather more than 14 days ahead. This is because it is dealing with a complex/chaotic system involving numerous factors which interact in unpredictable ways.

Seismology is, similarly, most definitely a science, yet despite our massively increased knowledge of geology and plate tectonics, we still cannot predict the occurrence of earthquakes with any certainty.

This is not to dismiss such sciences but merely to accept the inevitable limitations of their exactness when it comes to prediction.

I am reminded, with more than a small degree of schadenfreude, that Long Term Capital Management, which opened for business in 1994, and had, so-say, the greatest assemblage of financial minds in history, including two future Nobel Prize winners, and basing its operations on the immensely complex mathematics of the Black-Scholes formula, crashed in a heap in 1998 to the tune of over $4 billion.

To conclude, I cite John Kay’s 2015 book ‘Other People’s Money’, specifically the Epilogue ‘The Emperor’s Guard’s New Clothes’, in which he tells the fictional story of a king who was duped by ‘The Gold Man’. Again, readers of some season might recall an article I wrote in 2011, entitled ‘Heading for a Fall’, which I began with an almost identical allegorical tale of a king being swindled. Again, you heard it here first! Economania leads the field.

Economics might, if it could only ditch its pre-Copernican view of the world, become a science, but at present it remains in the domain of comforting academic dogma. This would not matter were it not that the application of current economic theory is having a deleterious effect on the wealth of nations and on the lives and livelihoods of their peoples. However, those same academics in their bastions of orthodoxy also keep a weather eye on their salaries and will not willingly abandon their faith and recant.

One fears that it will take a further, and potentially catastrophic, global financial crash to break the iron grip of current economic orthodoxy.

Sources

‘The Road To Ruin’ - Rickards, James (2016) publ. Portfolio Penguin
‘Other People’s Money’ – Kay, John (2015) publ. Profile Books
‘Going South’ – Elliott, Larry & Atkinson, Dan (2012) publ. Palgrave Macmillan

Recommended Reading

‘Licence to be Bad – How Economics Corrupted Us’ – Aldred, Jonathan (2019) publ. Penguin.

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

Members can discuss this and other articles on the economics forum at International Mensa.