How Economics Can Become Scientific

The MIT Technology Review blog today reviews a "paper describ[ing] a survey taken by graduate students at seven top-ranking economics programs" on answers to questions, including the following:

• Is neoclassical economics relevant?
• Do economists agree on fundamental issues?
• Can fiscal policy be an effective stabilizer?
• Should the Fed maintain a constant growth rate of the money supply?

The results are mixed. Not a surprise since even among economists the answers to these questions are mixed! But the title of the post raises a large question, which I'd like to answer using systems theory -- i.e., the theory of how highly integrated social networks self-organize. Systems theory has been a central theme for this blog.

If we understand the question in terms of systems, then we can answer in layers the question, "Is economics a science?" These categories are linked to the three generalized components that make "the system of economics":

1. The domain of rules and procedures that make up economic theory;
2. the field of recognized experts who act as gatekeepers to the domain; and
3. the stream of data in the form of observations or measurements used to falsify the domain.

The high-level answer is that economics is a science if it has active components of domain, field, and data. Economics is not only dismal, but dead if none of these is changing. But so long as each of these three have some time-dependence, the difference between economics and other sciences is a difference in degree, not kind.

But on closer inspection, there are indeed apparent problems with these components for economics that do not exist for other sciences. The biggest problem seems to be that at least until about ten or twenty years ago, there was no stream of data on individual or group behavior that could be used to falsify the domain of neoclassical theory that developed around WWII. In other words, there have been few new experiments or new kinds of data sets since neoclassical theory was developed. The field has become somewhat retrenched as it has labored at refining its theories using the same sets of data over and over again.

There are exceptions, of course. I'm in the middle of reading Vernon Smith's Rationality in Economics, in which he describes the interesting ways that actual behavior deviates from neoclassical predictions in actual experiments and field studies. And Smith is not laboring in obscurity, of course. He won a Nobel for his efforts in this regard. But in general, the "science" of economics seems to have been limited by a lack of data. There simply has not been an experimental or observational mechanism for the field to reach consensus on what hypotheses have been falsified.

In perhaps not-so-humble fashion for a non-economist, I would like to propose that experiments and observations of the average time period between individual acts of consumption or production is exactly the kind of data that economists could use to falsify models of individual or group behavior. The fact that such observations have not been made in the past is no accident, for they were generally too expensive to be collected before the Internet became widely available. (Csikszentmihalyi's Experience Sampling Method is a notable exception.)

Journal entries themselves encode the information that is necessary for managers, investors, and owners of corporations to see the frequency spectrum of activity within a firm that provides a unique signature of the firm's activities. Time-averaged measures of costs are not the only variables important to the health of a corporation. Profit is a function of sales and costs of sales over time.

Economics could become more scientific by statistical observations of individual and group behavior over time.

Comments

[Gene Callahan]

"The biggest problem seems to be that at least until about ten or twenty years ago, there was no stream of data on individual or group behavior that could be used to falsify the domain of neoclassical theory that developed around WWII."

Falsificationism as a philosophy of science was "falsified" several decades ago.

"Economics could become more scientific by statistical observations of individual and group behavior over time."

This is done all the time... and is useless. See Tony Lawson's _Economics and Reality_ for why.

[Michael F. Martin]

Who falsified falsification?

I'll add Tony Lawson to my reading list.