Tuesday, October 15, 2013

Economics Isn't Science - "Economics Is Harder Than Physics" Edition

So, while Higgs and Englert got the Nobel prize in physics after the biggest machine we have ever built had produced conclusive evidence that proved them right, the "Nobel prize" in economics went to both Shiller and Fama and additionally Hansen, one of whom has been conclusively proven wrong by the biggest disaster of our time. (Yves Smith posted an excerpt of her book concerning Fama which I completely agree with)

Reading what people had to say about two contradicting ideas) both getting the same price at the same time, I came across this gem, by Justin Fox. It started out great, but seemed to completely collapse in the second paragraph.

He claimed:

This is, to a certain extent, further evidence that economics isn’t a science like physics is a science [..]. But that’s not because economists are all frauds — it’s at least partly because economics is harder than physics.
Wait what? I completely agree with the first part, but the second part is, well, interesting. I would have at least expected some kind of explanation, but non is given. The rest of the post is actually a good read, but that is a pretty big claim. Let me try to explain why economics is in some respects harder than physics and why some economists are still frauds (but often not intentionally).

Let me start out with a word, which Mr. Fox uses three more times: evidence. In physics it is (or was) actually pretty easy to obtain evidence. You make an observation and the you take that observation put it in an environment you control and repeatedly test it (experiment). Of course in the case of the Higgs boson it took forty years and the Large Hadron Collider to be able to test the hypothesis, but in essence, the scientists created an experiment, where they controlled most variables. Since I really cannot talk about such experiments without making a fool of myself let's look at something smaller: letting the same object drop from different heights repeatedly and measuring the time until it hits the ground; which is an easy way to test gravity. Of course, one has to keep in mind that drag (also dependent on atmospheric pressure) will affect the results, possibly in a very extreme manner e.g. if using feathers. Still everybody should at home (though it might not be the same result as at your friends home) be able to obtain pretty good evidence for the existence and even the size of one of the most important forces in our universe.

In economics it is just not possible to make an observation and then test it in a controlled environment repeatedly. Economists mostly have to live with the data they get from this ever changing world. They are staring at a gigantic black box trying to make sense of it with the few available variables which all affect each other, and are even be affected by e.g. the weather.

There is another problem, that we have seen over and over again. Personal believes affect the conclusions we draw from the observations we make. Let's step back from science and look at sports. Thomas Müller is probably the strangest footballer at a top club. He is clearly not as good at dribbling as many other wingers, in the last season his successful pass rate was not as good as that of the other Bayern Munich players, still he played in all important games of the season and assisted and scored a good amount of goals for a winger; and his ability to find gaps in the opposition defense is excellent. Many believe that he is an absolutely essential part of Bayern's and the German national team's success. Others think that he will have a hard time to get in the first team once every player at Bayern is fit again.

We have a lot of statistical data available on Thmoas Müller, also everybody is watching exactly the same game with 22 players, 2 goals, and 1 ball, still opinions differ even from people who are well informed. Former Bayern coach Hitzfeld thought that he might struggle this season, while the current Manchester United coach Moyes hailed him (both in the last season).

In two ways economics is in a similar spot as sports. Data aren't telling the full story. The exact interaction between the different variables is not known and hard or even impossible to deceipher. Also, people are emotionally invested in economic believes. This will affect how they view data and which part they prioritize. A material science engineer does typically not care if alloy A or B will in the end produce the better test results. The engineer will try to explain afterwards, why A or B achieved higher strength.

It is the personal believes - and not the math, which for the most part is just a tool to make the economists look smart - that makes economics harder than physics. It is also what makes many economists frauds. Most people have a hard time changing their believes and intentionally or not these believes will affect the work results. Medicine introduced double blind experiments to avoid this bias. In economics that is basically impossible. The person should be aware of the fact and pay more attention to the possible weaknesses of the own interpretation of the data. I don't see that happening. Results are presented as if they are the truth, the whole truth, and nothing but the truth. Even after been proven wrong time and again, we only see few people admitting as much. Some people at the IMF did(on multipliers); Janet Yellen did (on the housing bubble) other than that it is either *crickets*, excuses, or "theories" to plug the whole in the old "theories". In Germany we see a special kind of economic fraudster. People who want the recession in the program countries to continue: something they call reform pressure.

This is actually the worst kind of economic fraudster. People who have been proven wrong (no Greece and Portugal will not be better off in the long run) and have to use a coded language, because their believes are contrary to what people want.

  • "flexibilisation of the job market" means making it easier to fire people
  • "reforms" are always about slashing the welfare state or shifting taxes from the rich to the poor
  • "the savers" (and "reform pressure") are somehow an excuse to increase the base rate in a low inflation environment
Just like racists they have no choice but to talk about their extremist believes, which have absolutely no foundation in the real world anymore, by using language not to inform like a scientist, but to mislead.

Economics is harder than physics (though believes do play some role in this field also) in the sense that one has to rise above his or her own feelings to be able to actually produce work that is as neutral as possible; and which clearly informs about possible shortcomings. This just isn't happening in many cases; and even worse after economists have been proven wrong they often still continue as if nothing ever happened. Economics directly affects the lives of everybody. We cannot afford to that the personal believes of a few, negatively affect the lives of the citizens of many countries like it is currently happening in southern Europe.

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