Economics is the Worst Social Science

One thing that always irks me is the respected position the discipline of economics enjoys in our national discourse and policy circles relative to the other social sciences. Economists wield, by far, the most power in our society of any social scientists — simply look to the Federal Reserve, a massively influential federal bureaucracy with arguably more independent authority than any other federal agency, and which is traditionally headed by economists and staffed mainly with economists. There is no comparable policy-making institution in the U.S. which is similarly under the supervision of one particular discipline of social science — and the Federal Reserve is hardly the full extent of economic influence in our nation.

After all, the President has a Council of Economic Advisers, but no Council of Sociological Advisers, or Council of Historical Advisers. The IMF, World Bank, and OECD are just a few examples of the international policy-making power of economists. Economics enjoys a singularly powerful position in our culture, above and beyond any social science, and indeed arguably beyond any academic discipline, period. Even the natural sciences, which are paid lip-service to in every STEM-promoting speech and initiative given by politicians, philanthropists, and educators, get comparatively little sway in policy — just ask climate scientists, public health scientists, epidemiologists, or look to the dwindling importance and budget of NASA. No, economists are undoubtedly the academic kings and queens of policy in America, and the world at large.

There are doubtless many reasons for this sad state of affairs (and yes, it is a tragedy), but one of them is the pervasive belief that economics is, among the social sciences, particularly scientific. Compared to sociology, psychology, or especially history and gender/ethnic-studies, economics is considered by most people to be more rigorous, more scientifically demanding. Economists certainly do nothing to dissuade the public of this conception, but it probably has even more to do with the fact that the academic profession — the industry of economics — has perhaps the highest barriers to entry of any social science. Namely, the barrier of very advanced mathematics. Math is hard, and most natural scientists use complex math, so because economists also use very complex math, they must also be very smart and real scientists, not like those silly historians and gender-studies professors who use lowly words.

This is nonsense. Don’t worry — I’m not going to tell you that economics is merely on par with the other social sciences, and that all disciplines are equally rigorous and equally valuable.

No, economics is by far the worst.

Yes, your average gender studies department is far more scientific and empirical than your average economics department, no matter what the common wisdom (i.e., stereotype) is that you may have absorbed. The simple reality is that science is supposed to be based on inductive reasoning, but economics is overwhelmingly based on deductive reasoning, which is inferior and anti-empirical. In this way, economics is actually more akin to philosophy than it is to the sciences. But that simple answer requires some elucidation.

First, we have to talk about equilibrium. Equilibrium is the economic concept, particularly important in neo-classical economics, that economic forces like supply and demand naturally balance each other out and find “equilibrium” points where production and consumption are at their most efficient — prices are perfectly matched to the real value of their goods and services, and no more or less of something is produced than what society actually wants. If you remember your high school or college survey economics courses, the image at the top of this page should be familiar to you as a simplified example of supply and demand equilibrium in a hypothetical market. And, though the math gets a lot uglier as you get into the higher echelons of economic theory, equilibrium is nonetheless a core concept of all economics. The idea that market forces naturally find a point of maximum efficiency, a point which is optimal — and therefore that intervention in markets by, say, governments can only ever move us away from this ideal state — is central to economic theory. Even when markets fail or some negative outcome results, this must be the result of “disequilibrium” external to natural market forces.

Here’s the problem: there are no empirical examples of equilibrium. Every market always exists in a state that economists call “disequilibrium,” though I find it rather odd that the empirical reality of markets is considered by economists to be an unnatural state in conflict with what market forces would normally produce if not for exogenous interference. In most sciences, you would hope that if observed reality differed in every instance from what their theories expected to occur, they would conclude that their theories were wrong. In economics, the conclusion is that reality is wrong. In the humanities, this might be called hubris.

As an example most of us can relate to, look at tickets for very popular musicians. Such tickets are often notoriously hard to come by, especially for mega-acts like Beyoncé, with the demand far outstripping the supply. According to neo-classical economic theory, this should not occur — after all, if the supply is too low, then the suppliers can simply raise the price until the number of people who can afford tickets is equal to the number of tickets available, or they can increase the supply (by, say, adding more shows to a band’s national tour). Yet, in reality, this does not occur. Almost all of us have had the experience of trying to buy tickets to a concert only to find that it sold out within minutes, or even seconds of tickets becoming available. Even scalpers, who effectively raise the price of tickets, cannot bring ticket prices into “equilibrium” with demand. For small acts, the reverse is often true, with many seats left unsold.

So why are concert tickets never in equilibrium? Certainly government intervention isn’t a compelling explanation in an industry where neither the supply nor the demand are meaningfully regulated. There are a number of possible explanations for this reality, but the point is that the reality does not correspond to what economic theory predicts. And ticket prices are not an outlier scenario — they’re the representative norm. Just consider the fact that most prices are static for long periods of time. The price of an iPhone does not fluctuate daily, weekly, or even monthly based on demand. It is static throughout its entire life-cycle. Console video games have been almost universally priced at $60 for at least two decades, despite the fact that inflation has effectively lowered this price even as console gaming has become more popular. The examples are endless.

In fact, there’s a huge internal contradiction in economic theory. See, one of the implications of an equilibrium state is that no profit is generated for suppliers. Profit is actually an indicator of disequilibrium, a form of “dead-weight loss” that means suppliers are producing less goods or services than they optimally could if they sold more goods at break-even prices. But, simultaneously, economics tries to explain the behavior of firms and sellers as being motivated by a desire to maximize profit, which of course makes a good deal of sense. So traditional economic theory claims that economic activity will naturally eliminate the motivating factor that leads people to engage in economic activity. Hmm. I think you can begin to see why some parts of economic theory might have trouble matching up to reality.

Anyway, the point of all this is that economics is largely built on this fundamental assumption of an equilibrium state which is never observed in real life, and so economists have to explain why reality doesn’t match their theoretical expectations by adding a whole bunch of parameters and reasons for why markets are “distorted” instead of just abandoning the idea that market forces tend towards equilibrium. That is, economics is largely founded on garbage.

And at the root of this garbage is deductive reasoning. See, instead of observing people and markets, instead of gathering data — which is the foundational act of empirical investigation — and then coming up with theories to explain the data, the historical foundations of economics are basically philosophical. Early economists theorized that all human economic behavior could be explained in terms of rational actions designed to maximize certain outcomes, and they deduced from that premise how people and markets ought to behave — but without ever proving that their premise was correct, or that they weren’t leaving out other important factors. Now, this is not unique to economics. A lot of sciences started out this way — and, indeed, I’m basically describing the act of hypothesizing, which is also fundamental to science. But hypotheses are just that — hypotheses. They’re meant to be tested and, if proved wrong, discarded. What’s unusual to economics is the tenacity with which they hold onto these early theories in the face of empirical contradiction, and indeed the discipline’s overall resistance to simply gathering evidence first and generating hypotheses second.

Just look at one of the huge preoccupations of economists who study the economy at large (as opposed to the behavior of individual firms, workers, etc.): forecasting. Economists, especially those tied to the policy-making apparatus, love to make forecasts for the future based on complex mathematical models of the economy. Here’s the problem: they suck at it. A lot. Here are some of my favorite examples:

The above is a chart of predictions from the Reserve Bank of New Zealand predicting the inflation rate, versus the actual results. As you can see, not only have the analysts been consistently wrong for some time, they’re wrong in the same direction every time. Does this look like the chart of an empirically-informed forecasting system to you? It’s essentially the same prediction every single time: the annual rate of inflation will return to roughly 2%, no matter where it’s starting from, and it will take a basically linear path to get there. And do they revise their models when they keep being wrong? Clearly not. Because the models are deduced from first principles, like equilibrium, and economists will not abandon their first principles just because of silly things like facts.

This is another great one. The IMF, which has wielded enormous influence over the fate of developing economies for decades, can’t predict the course of the global economy for shit. And, once again, like the central bank of New Zealand, we see that the IMF keeps making essentially the same prediction every time, no matter how many times they’re wrong. No matter how long the downward trend continues, they keep insisting that it’s just about to turn around! Why? Because their models can’t account for why global growth is so low, and they’re not about to throw out those models just because they consistently fail every time.

Forecasting global growth is a big task, but the IMF is no better at projecting growth for a smaller subset — emerging economies — as you can see in the chart above. Are you getting tired of seeing the same silly chart yet? Personally, I don’t because I laugh every time.

This is from our own American Federal Reserve, showing how far off their predictions of the inflation rate were from reality. As you can see, they don’t spend much time around zero, and they’re frequently off by 40% or more in either direction — and sadly this chart doesn’t even go into the Great Recession and afterwards, when predictions have consistently been over-estimating inflation for the last eight years. And, of course, as we all know the economics profession was taken by surprise by that very recession, as they are by nearly every recession.

Most macroeconomic models prior to the 2008 crisis didn’t even take into account financial markets, banks, or money. Money. Let me repeat that: most professional economists who tried to model the economy were ignoring money as an influential variable on growth. This is starting to change — slowly — but it demonstrates a shocking divergence between observed reality and how economists think about and try to predict reality. Again, that distance between reality and economic theory is a sign of deep anti-empirical tendencies among economists.

Now, if economics were a discipline with the proper humility and respect for empirical facts, they might stop making these silly predictions altogether, and simply acknowledge that their understanding of how economies work is too primitive for them to even attempt it. Alas, economists are not known for their humility or empiricism.

So, to review: modern economics is built on first principles, like equilibrium, which don’t exist in reality but which they refuse to abandon, and they deduce all their models of the economy from these awful flawed premises and as a result can’t predict how the economy will behave with any accuracy whatsoever. It should be clear, by now, that this is a very bad science, if it can even be called a science at all. Yes, they use a lot of math and charts, but so do the lunatics who try to predict the date of the apocalypse from numbers in the Bible — and coincidentally, neither economists nor doomsayers let a few wrong predictions stop them from trying again.

But it’s not enough to point out that economics is a heaping pile of failure — I also mentioned that the other social sciences are superior. The reason for this is simple: those sciences are deeply, profoundly involved in the gathering of data. They care about observation, which is the fundamental cornerstone of all science. As an example, right now psychology is gripped in the throes of a reproducibility crisis that is calling into question many long-held theories on the grounds that the experimental observations underlying them are flawed. On the surface, that looks bad. But on further reflection, it’s actually evidence of a commitment to empiricism.

Psychologists are empirical enough that they founded their theories on experiments and studies and observations in the first place — and they care enough about having their facts straight that they’ve started undertaking massive, thorough reviews of existing observations to see if they hold up, and they’re actually questioning cherished, longstanding theories in the face of contradicting evidence. Economics, unless the discipline changes radically, will never have such a crisis because they don’t base their models or theories on experiments in the first place, and they don’t seem to have much objection to being consistently wrong. It’s an illustration of two totally different worldviews. Psychologists base theories on facts, and change or discard theories as their understanding of the facts changes or grows. Economists base their theories on philosophical assumptions — and if reality contradicts their theories, they simply add more theories on top to explain away the discrepancy without ever questioning the fundamental assumptions.

Even history, which many don’t even consider a social science, is more scientific than economics. Historians can’t conduct controlled experiments, it’s true, but the work of the discipline consists overwhelmingly of gathering, organizing, and interpreting evidence, which is a fundamentally empirical practice. And historians do indeed come up with falsifiable hypotheses all the time, and have their theories overturned by the gathering of new evidence, or the interpretation of old evidence with more sophisticated methods. Something doesn’t have to use math to be empirical — qualitative data is still data — though many historians do in fact use math and gather quantitative data, too.

Gender studies and ethnic studies often come under fire not just for being too qualitative (which, like history, is a stereotype that doesn’t properly reflect the reality of all the quantitative work done in these fields), but also for being too biased, too political. Many people believe that because these are activist disciplines they can’t be objective or empirical.

But isn’t economics the most activist discipline of all? As I explained at the beginning of this post, it’s impossible to argue that any other social science is more intimately involved in the crafting of policy. But it’s not just that economists argue for policies all the time — it’s that they do so based on certain common value assumptions. For instance, the very idea of an “optimal” equilibrium state implies that maximizing production is the ideal state of affairs. Maybe that’s true, or maybe it isn’t, but in any case it is certainly a value judgment and not a fact.

Economists of all stripes, including prominent left-leaning ones like Paul Krugman, will overwhelmingly defend free trade on this ground. If some other country can make cars cheaper than we can here in America, then that means we might lose some auto-manufacturing jobs, but we get cheaper cars in the process. Economic resources (including labor) are used more efficiently and at the global level, total production rises. The cheaper and more plentiful goods we get in America offset any lost jobs. But, of course, this is all based on a whole bunch of philosophical assumptions, at the core of which is the idea that having more stuff will make us all happier and better off — enough so to balance out, say, the economic hollowing-out of the formerly-industrial Mid-West. This is, it should be obvious, an ideological position, not an empirical one.

And that’s fine — every science is activist in some way. Chemists don’t create new compounds for no reason; they know that those compounds will be used, which is in a fundamental sense a political act. Creating or modifying something that will change or influence human existence is an activist endeavor, whether it is something our society considers “politicized” or not.

But gender-studies and ethnic-studies academics will actually acknowledge their activist tendencies. There are even sharp debates within these fields about exactly how activist they should be, and in what ways. They’re open about what their ideologies and philosophical assumptions are, which allows observers and critics to take that into account when evaluating the empirical merit of their work.

Economists, by contrast, often deny the philosophical and ideological underpinnings of their discipline. The “more is better” principle is one that doesn’t get politicized very often — you’ll never hear a politician calling for less GDP growth — so the value judgments of economics are often rendered invisible. But that doesn’t mean they’re not there. Economics is almost uniformly a discipline that pushes neo-liberal capitalist ideology on the basis of certain philosophical assumptions about what makes human beings happy and what we can do to achieve maximum well-being. It is no less activist than the most overtly political academic disciplines — just less honest.

Now, while I’ve had a lot of bad things to say about economics, let me be clear that this is not a permanent condemnation. There is obviously a great deal of value in trying to empirically understand how and why markets and market participants behave the way they do. If we could actually predict recessions — and prevent them — for example, that would be of tremendous value to society. These things absolutely should be studied, and there’s no inherent reason why economists can’t change their ways and become more scientific. In fact, there are plenty of people within the discipline voicing these exact concerns and trying to move it in the right direction. But, until those forces win out, it’s time that we, as a society, stopped privileging the very worst social science. You know, a Presidential Council of Historical Advisers is actually starting to sound pretty good.