Friday, June 12, 2009

Skidelsky: The Economic Pendulum Has Swung Again

In his commentary in today's Financial Times about the economic policy of government stimulus of the economy, Robert Skidelsky, the noted British author and authority on John Maynard Keynes, declares:

"What is fascinating is that it is an almost exact rerun of the debate between Keynes and the British Treasury in 1929-1930."

pendulum
[Thanks to Thefoucaultproject.co.uk for the image.]

I have already posted about this earlier. He is right, we are right back where we started. In the 1930s Keynes argued against then-current classical economic theory, holding that government spending would put people back to work. At the time, few economists dared to refute his pronouncements. (One notable exception: Edward C. Harwood.)

But the classical school of economics wasn't dead yet. Spearheaded by Milton Friedman, it girded up its loins and made a comeback, using new geeky esoteric mathematical formulas that were effective in shooing the Keynesians. Today, we see the latter group charging forth again to reclaim their territory.

This swinging back and forth says nothing good about economics as a science, and more particularly macroeconomics. There have been no decisive victories in this field since its inception. This is a scary thought when you think that economists are running the show right now.

This unscientific outcome is typical of a number of the social sciences. As Skidelsky points out:

"It is characteristic of the social sciences that their battles are interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault."

I agree, with a nuance. He seems to be saying that the social sciences are ... well, just different kinds of science. He implies that the natural sciences are like a man: logical, Darwinian, forward-looking; and that the social sciences are more like a woman: emotional, spiteful, revengeful.

I think an endeavor is either a science, or it is not. Skidelsky errs in his designation as science the quixotic behavior of certain persons he calls "economists." They may be generally recognized as economists, but they are not scientists.

The debate then becomes: Is the term "economic science" an oxymoron?

This is a very good question, and perhaps THE fundamental question. There are two possible answers.

1. Either it is an oxymoron and economists should re-designate the field of inquiry as an art form; or

2. Economics can be a science, in which case the methodology has gone awry, given the "interminable, temporary defeats being followed by the regrouping of the defeated forces for a renewed assault", i.e. no progress is being made, the pendulum is merely swinging back and forth. In this case, optimists would hold that the methodology can be fixed.

In the early 1950s, a group of scientists formed a group called the Behavioral Research Council to study this very phenomenon in the social sciences. To make a long story short, they premised their foundation upon the hypothesis that the social sciences did have the potential to be just that, i.e. real sciences in the true meaning of the word; but that much gobbledygook must be lifted off the real science that did exist, in order for the various fields of endeavor to make any real progress.

They published two books:

- Useful Procedures of Inquiry, by E.C. Harwood and Rollo Handy, based upon specific dialogue on methodology between two fellows named Dewey and Bentley; and

- A Current Appraisal of the Behavioral Sciences, edited by the above two gentlemen and authored by various social scientists whose work the group respected.

The first is still pertinent to our discussion, pointing out the very flaws in the methods of research in fields like economics, to which Skidelsky makes oblique reference. Apparently, nothing has improved--a scary thought when you think that our economic future depends upon the work of good-intentioned people like Bernanke and his ilk, who believe in policy research that is unscientific in the judgment of a good portion of their own fellow economists.

The second is out of date but still of interest, because it gives the status of each social science as of the last printing. An update of this text would be useful someday.

I'll conclude this post by stating that my observations of human nature, and specifically of those who would call themselves economic scientists and those who would call themselves political scientists, point toward the conclusion that we have a long, long way to go before they start thinking of us and of their science, and not of themselves. Meantime, look what we have allowed them to do to us all.

PS: Keynes had the potential to be a true economic scientist, but I believe he was too enamored of his own glib persona to limit his mutterings to the truly useful, in the scientific sense of the word. Lawrence H. White, on the other hand, is one of the modern economists who counters this new policy swing back to Keynesianism. Read his latest piece over at Cato to learn a scientific economist's analysis of the Great Depression of 2007 and why the Keynesian stimulus idea can't and won't work in the long run.

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2 Comments:

Anonymous Daniel Haggard said...

The question of whether or not to class a given endeavor as a science or not has absolutely nothing to do with it's success at prediction.

It just has to do with whether or not it makes those predictions in a scientific way... i.e. it has to make hypotheses about observational phenomena and it has to provide some explanatory account of those phenomena. Economics does this - it's just that no one has come up with any good theories, nor does it seem to progress as physics does, which over time has been able to account for a greater and greater range of phenomena.

So there is nothing to suggest that this failure indicates an unscientific methodology.

The likely problem is simply insufficient access to data. A good 'experiment' in economics is one that is likely to require decades, and would have to control a great many variables that just can't be controlled because of the limitations to do with the freedoms we accord our citizens. In the meantime, different political factions cease control, change policy, mix different variables in a haphazard way, making it difficult to really draw any conclusions one way or another.

Some say communism was proved a failure by the collapse of the sovient union. But we learnt no such thing... what about a communist society that isn't pressured by a capitalistic superpower and the threat of nuclear annihilation?

So economic science is certainly no oxymorn... it's just beyond our current powers at the moment.

Perhaps when we can simulate individual humans to a sufficient degree, we can begin to model economic systems that will make more successful predictions... this will get around the hypothesis testing problem - but will require many advances in psychology and artificial intelligence first.

9:57 PM  
Blogger Daniel Reeves said...

Actually, there are plenty of things econ has been successful with. Even macroeconomics, and even in the past 10, 20 years. One example out of many: economists know the limitations of aggregate supply/demand in the face of the natural rate hypothesis.

Economists know very well the workings of monetary policy, and they have been using this knowledge to better the whole economy.

If you honestly think that the United States is no better off since the nineteenth century because of our knowledge of econ, then you're living under a shell. Recessions are much further apart and last much shorter than they used to (refer to Wikipedia's list of U.S. recessions). And honestly, the recession we're in right now could very well have ended up like the Great Depression... except even back during the 1930s they had no clue what they were doing. I mean, the Great Depression was huge. Rapid deflation (up to about 30% a year), and massive unemployment (peaked at 25%) and GDP plummeted. And that lasted nearly four years. JFK didn't even really know what he was doing. To the extent that his policies worked, most of it was luck. But if you look at marginal tax rate data from the 30s (i.e. taxes were really high), it's very clear that he didn't know what he was doing at all.

But we live in happier times now. Economists kind of now know what they're doing, and it's a shame people take all of our economic knowledge for granted (usually as the result of ideological stubbornness or a misunderstand of economics).

12:05 AM  

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