Class Warfare Blog

April 24, 2013

The Dismal Science . . . Really!

Apparently the study of economics (formerly named “political economy”) has been called “the dismal science” since the mid-1800’s. The phrase was invented by historian Thomas Carlyle. At the time, the skills required for writing poetry were referred to as the “gay science,” so Carlyle decided to call economics the “dismal science” as a clever turn of phrase.

It takes some time, apparently, to grow into one’s name, but economics has done so: economics is the dismal science because as a science it is dreadful, quite dismal.

I am reading “Econned” by Yves Smith in includes a history of the transition of economics from a narrative-based discipline to a mathematically-based, science-like endeavor and it is quite appalling. The dominant trend in economics, neoclassical economics, has come up with the following “truisms”: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful. Do any of these sound familiar?

We have gotten to this situation through a number of effects. One is that economists have decided to put on airs, namely that their discipline is something approximating a “hard science,” like physics. All of that math rally does add an assurance that what they are calculating must be true, no? Another is that they have ignored the lessons learned in the other sciences (what you don’t know can affect you).

One such gaffe is an economic hypothesis that economies naturally reach an “equilibrium” as their natural state. Here is a simplistic example: a producer of widgets tries to sell them at price P, but that price is too high for most buyers, so demand is low. The producer, recognizing this cuts the prices and the demand picks up. If he sets the price too low, the widgets literally fly off the shelves and the producer can’t keep up the demand, so he realizes that he can raise the price, does so, and the demand slackens until he can keep up with it. This is “self-correcting behavior” and it is typical of equilibrium systems.

There is only one problem: despite the “self-correcting behavior” of the widget pricing scenario, economic systems are not naturally equilibrium systems and any “hard” scientist could have told them that. Since I am a chemist, I will use a chemical example. Let us take two chemicals and mix them: hydrogen and oxygen. These chemicals do react with one another quite well (in essence hydrogen burns).

2 H2 + 1 O2 → 2 H2O + heat

But if we were to put them in a sealed container, a different sort of situation occurs: namely that the reaction will not finish; you will be left with a mixture of all three chemicals when it “stops.” The reason is that when the atoms of hydrogen and the atoms of oxygen separate in order to form water molecules all of the atoms needed to remake the molecules of hydrogen and oxygen (H2 + O2) are still in the container (now in the form of water molecules). The atoms are immortal and are just rearranged into new combinations in a chemical reaction. The only thing needed to turn water back into hydrogen and oxygen is heat and the heat given off by the reaction is still in the container, so the reverse reaction becomes viable.

2 H2O + heat → 2 H2 + 1 O2

These two reactions cannot stop happening because all of the things necessary for them to occur are present. So what you end up with is called a “dynamic equilibrium” in which the two reactions continue forever, eventually reaching a situation where the total amounts of all three chemicals become constant. The reason for this constancy is that in the beginning only the reaction of hydrogen and oxygen to make water can occur because there is no water. As that reaction goes on there is less and less hydrogen and oxygen and more and more water. Consequently the first reaction must slow down as the chemicals diminish in concentration and the reverse reaction (water becoming hydrogen and oxygen) speeds up as more and more water and heat become present. The slowing down reaction must reach a point where its speed is the same as the speeding up reaction and then all appearance of anything happening ceases.

Now, what chemists know and economists do not, apparently, is that it is very, very hard to create such perfectly closed containers. If the heat in the above system were to leak out, the initial reaction would not be affected, but the reverse reaction would be as the heat is needed to make the transformation, so the “forward reaction” would continue and the “reverse reaction” would slow down. This is the basis for the self-correcting behaviors of equilibrium (or near-equilibrium) systems. But it is bloody hard (essentially impossible) to wall off a part of the universe and prevent heat from moving in or out. Look how hard it is to insulate your house, for example.

So, most systems are “open” and do not end up at some equilibrium point with opposing forces/transformations reaching a balance. Some systems, even an open container, can approximate a closed system but only for very short periods of time. For example, for just a few seconds, little heat can leave a container, neither can much liquid evaporate, etc. But this quasi-equilibrium is a very short term behavior.

The economist claiming that “all economies naturally seek equilibrium” didn’t even try to establish that an economy approximates a closed system (it does not); he just made the assertion and didn’t even indicate for how long this condition would last! From that assertion many “consequences” have been deduced. But if the initial assertion is wrong, none of the rest of it can be right, either.

These pseudo-scientific approaches, wrapped in impressive mathematics, have influenced some policy makers. Let me see: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful . . . hmm, I’m guessing Republicans (Hi, Paul Ryan!).

The only problem with these “principles” is that they are wrong . . . which any “hard scientist” could have told them, had they asked.

The sad thing is that economists have some standing in our politics. But if you had a room full of them and asked them to predict the future, you would get myriad answers. But once the future has happened, all of them, being proud academics, will say “I knew that would happen” and be able to give you complex explanations for why their particular pet (but wrong) theory predicts it to be that way. Explaining the past is often a route to predicting the future, but not if that is the only thing you do.

The European economists who are claiming that austerity will lead to new heights in Europe, contrary to mainstream economic thought, are seeing their economies tanking, just like mainstream theory would predict. Is this changing any of their minds? No, because reality doesn’t hold the same sway over economists as it does chemists and physicists. There is an old joke that says “you can lay 100 economist end to end and they still won’t reach a conclusion” but once they have taken a position they stick to it like glue, possible because they aren’t used to correcting their thinking when getting bitch slapped by reality, or maybe it is just ego driven.

When a “hard” scientist offers a new theory, it might receive some initial criticism (hopefully constructive) about its internal consistency, but the proof of the pudding is in how well it describes nature, so the testing begins: nature says this, the theory says that, do they match? This happens over and over until either the theory is discredited or folded into the mix of pre-existing theories. The approach is to try to prove the theory wrong and if we fail then maybe, just maybe, it is right. This doesn’t seem to happen much in economics. Consequently their theories are pretty but lack any real substance.

At predicting, economists are little better than priests. Priests insist that their god has a plan, but they haven’t the foggiest notion of what that plan is. How they can be so sure a plan even exists is part of the mystery, I am sure, but economists are pretending there is no mystery.

Economics is not the dismal science, at this point, it should be called the shameful science.

Advertisements

5 Comments »

  1. Well, why don’t you let us know how you really feel, Steve 🙂

    Excellent article. To your point “The European economists who are claiming that austerity will lead to new heights in Europe, contrary to mainstream economic thought”… did you hear today that the Europeans (the Greeks in particular) have said “Ok, we’ve done enough austerity….” and are now saying “growth policies might work a little better.”

    Like

    Comment by john zande — April 24, 2013 @ 2:26 pm | Reply

    • Took ’em long enough. Wasn’t 25% unemployment a sign or sumptin’ for Thor’s sake?

      Like

      Comment by stephenpruis — April 24, 2013 @ 2:33 pm | Reply

      • I had to giggle. the way it was presented on the news was like “Oh, yes, yes, it worked just fine, it’s just that now we think we’re ready for something a little different.”

        Like

        Comment by john zande — April 24, 2013 @ 2:35 pm | Reply

        • Yeah, it is amazing. Reality, I don’t need no stinking reality. I got my theory to keep me warm.

          Can you tell I was a pragmatic theortist? (Which means I made the mistakes of both theoritists and empiricists.)

          Like

          Comment by stephenpruis — April 24, 2013 @ 2:46 pm | Reply


RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: