In the operation of modern economies over the last 100 years, countries have come to rely on economists, and people trained by economists, to steer the economic ‘ship’ so to speak. As the economies have become more complex and the demand for economists has increased, economists have created increasingly mathematically complex models to explain and predict economic behavior and to advocate for policies that they believe are optimal. Many economists have even come to believe themselves to be scientists and have become quite self-assured in their pronouncements. However, the economic performance over the last 6 to 8 years has thrown some much need public doubt, and in some cases self-reflection, on the practitioners of this social science.

The first problem with economics is its pretension to be a science. While it certainly can make observations and perhaps even draw broad conclusions from them, it is not making these observations in controlled lab experiments. In order for something to be considered in line with the scientific method, it must be repeatable and falsifiable. In the real world, the economic ‘observations’ are data points that often occur within many different social, political, and cultural contexts. In other words, it is questionable as to whether these ‘observations’ can truly be classified as ‘repeatable’. While this by itself does not render them completely useless, it simply means that the lessons drawn from them can be of varying relevance when applied to other economies in other situations.  In addition, economic theories are not truly falsifiable in a scientific sense. One wag described an economist as a person who can be always wrong and still be considered an expert. If economic theories were truly falsifiable, and if economists were truly ‘scientists’, then there should be no socialist/Marxist/communist economists, just as there are no anti-gravity scientists. However, the fact that there are many of these types of economists in academia in the West is an indication that we are not dealing with true scientists. Just because central planning did not work to create wealth and prosperity in any context in which it has been tried and applied does not mean that no such context necessarily exists.

The second problem with economics as a science is its over-reliance on mathematics. Many economists create exotic mathematical ‘proofs’ of their assertions which implies a level of scientific precision that simply does not exist in that field. In the field of financial economics and financial portfolio management, theories, recommendations, and financial derivative products are based on statistical models that use past data to estimate and predict what the future will look like. The problem with this is that many of these models are based on observations drawn from one specific time in history (the last 80-90 years). While ‘Black Swan’ events can cause the economy to ‘change course’ as it were, economies (and economic expectations) can also change and evolve over time, with the upshot that the same policy applied at two different points in time can have very different results. One example of changes in perception would be that the generation that experienced the crash of 1929 and the ensuing Depression never really saw stocks as anything more than a wildly risky investment that one would be crazy to base ones retirement on, while the Baby Boomers, and to a lesser extent Gen Xer’s, see them as precisely that. Consequently, investing behavior changes and that changes the paths that stock prices take. A policy of low interest rates by the Fed is going to have differing impacts on stock valuations when applied to these different populations of investors. Note also that the bursting of two financial bubbles and the resulting economic fallout will have a significant, although as of yet unknown, impact on the psychology of those who have come of age during this period. What this means is that simply plugging in historical observations into a statistical model to try and predict the future won’t have the precision to justify the confidence of those making predictions. In the short term (6 to 24 months) price movements can be impacted by any unknowable random thing. In the long term (10 to 40 years), the world can change to such an extent that the prior observations are as meaningless as trying to devise a military strategy for a war today based on the military technology that existed in 1800. It is not likely to be a successful enterprise.

Simply put, the pretention of the field of Economics to be a science leaves a lot to be desired. This is not to say that the field of Economics hasn’t made important contributions to our understanding of how the world works. It most certainly has and will continue to do so. So has philosophy, religion, history and other academic subjects. However, the world is simply too complex and changing too rapidly to be accurately predicted by mathematical models based on historical observations. Remember that the next time someone on television or in the newspaper makes a prediction.