Why Economics Will Never Be a Legitimate Science

"If we expect an economic theory to behave like a theory of physics, with non-trivial predictions about the future, we're never going to get one."

Back in August I explored Why Isn't There a Demonstrably Correct Economic Theory?. Many commentators have noted the obvious, that economics is a pseudo-science rather than a real science: beneath the fancy quantification and math, economics is fundamentally the study of human behavior, and that complex mix of dynamics cannot be reduced to a tidy econometric model that spits out accurate predictions.

One key element of science is that the results must be reproducible, that is, the same experiment/conditions should yield the same results time and again. I suspect that economic models are not applicable across all times and situations; a model might "work" in one era and in a very specific set of circumstances, but fail in another era or in a similar set of circumstances.

Since human behavior is based in culture as well as in naturally selected (genetically driven) behavior, then cultural milieus and values obviously play critical roles in shaping economic behaviors.

So presenting an economic model as "scientific" and quantifiable is in effect claiming that the bubbling stew of human culture can be reduced to quantifiable models that will yield predictions that are accurate in the real world. This is clearly false, as culture is not a static set of objects, it is a constantly shifting interplay of feedback loops.

This helps explain why human behavior is so unpredictable. Virtually no one successfully predicted World War I in 1909, and no one predicted the collapse of the U.S.S.R. in 1985.

Another reason all economic theories fail as scientifically verifiable models is that economics boils down to a very simple dynamic: those in power issue financial claims on resources as a "shortcut" way of gaining control of the resources without actually having to produce the resources or earn the wealth via labor and innovation.

I think this is the one fundamental dynamic of economics, and it does not lend itself to reductionist models.

Longtime correspondent Chuck D. recently explained why economics will never be predictive (i.e. a real science) like physics:

If we expect an economic theory to behave like a theory of physics, with non-trivial predictions about the future, we're never going to get one. If, on the other hand, we accept economic theories which explain why we'll never get the kind of economic theory we'd like to have, the kind that would support investment decisions and government policy formulation, we can formulate THAT kind of theory. (If you want a physicist to decide whether light is a stream of particles or a pattern of waves, you're not going to get an answer.) 

Von Neumann and Morgenstern came pretty close when they applied mathematical game theory to economic behavior. In game theory terms, if there existed an economic theory which provided any kind of advantage to those who understood it, either it would be kept a secret (so as not to give up the advantage), or the "game" itself would adapt to invalidate the theory. 

The reason for the failure of economics to produce "the theory we'd like to have" is not merely that people are complex, just as modern physics doesn't say that "electrons are really hard to locate;" the problem is that any conceivable process for observing the electron disturbs its position and/or momentum, invalidating the observation. A theory of economics cannot be both useful and well-known. (Can we call this a statement of "meta-theory"?) 

So, the competitive (game-like) nature of economics means that the usual incremental accumulation of knowledge that applies in natural science is impossible. To succeed in the market, I need to have better information and/or interpretation than at least one other trading opponent (oops, I almost said "trading partner"!) There are two ways for me to have better knowledge than you do: either I think hard about the data I gather (and keep the results to myself), or I promulgate disinformation and misinterpretation (see "talking my book"). 

In other words, I don't need to be smart if I can make you stupid. It's just the opposite of science. It's not even necessary for everyone to proliferate misinformation, as long as there's enough of it around to create uncertainty about the truth. (You and I, for example, can see things quite clearly, and still not turn the tide of madness around us.)

Thank you, Chuck, for an insightful, thought-provoking commentary.


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The Nearly Free University and The Emerging Economy:
The Revolution in Higher Education

Reconnecting higher education, livelihoods and the economy

With the soaring cost of higher education, has the value a college degree been turned upside down? College tuition and fees are up 1000% since 1980. Half of all recent college graduates are jobless or underemployed, revealing a deep disconnect between higher education and the job market.

It is no surprise everyone is asking: Where is the return on investment? Is the assumption that higher education returns greater prosperity no longer true? And if this is the case, how does this impact you, your children and grandchildren?


We must thoroughly understand the twin revolutions now fundamentally changing our world: The true cost of higher education and an economy that seems to re-shape itself minute to minute.

The Nearly Free University and the Emerging Economy clearly describes the underlying dynamics at work - and, more importantly, lays out a new low-cost model for higher education: how digital technology is enabling a revolution in higher education that dramatically lowers costs while expanding the opportunities for students of all ages.

The Nearly Free University and the Emerging Economy provides clarity and optimism in a period of the greatest change our educational systems and society have seen, and offers everyone the tools needed to prosper in the Emerging Economy.

Read the Foreword, first section and the Table of Contents.

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Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Once we accept responsibility, we become powerful.

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