Is economics a science or a religion? Its practitioners like to think of it as akin to the former. The blind faith with which many do so suggests it has become too much like the latter, with potentially dire consequences for the real people the discipline is intended to help.
The idea of economics as religion harks back to at least 2001, when economist Robert Nelson published a book on the subject. Nelson argued that the policy advice economists draw from their theories is never “value-neutral” but foists their values, dressed up to look like objective science, on the rest of us.
It Looks like Science
Take, for example, free trade. In judging its desirability, economists weigh projected costs and benefits, an approach that superficially seems objective. Yet economists decide what enters the analysis and what gets ignored. Such things as savings in wages or transport lend themselves easily to measurement in monetary terms, while others, such as the social disruption of a community, do not. The mathematical calculations give the analysis a scientific wrapping, even when the content is just an expression of values.
Similar biases influence policy considerations on everything from labour laws to climate change. As Nelson put it, “the priesthood of a modern secular religion of economic progress” has pushed a narrow vision of economic “efficiency,” wholly undeterred by a history of disastrous outcomes.
The economic zeal reached its peak several years back, when a number of economists openly celebrated what they called economic imperialism — the notion that the inherent superiority of their way of thinking would lead it to displace all other social sciences. Academics sought to bring the advanced calculus of rationality — with its assumption that everything can be explained by people’s perfectly rational responses to incentives — to the primitives in fields ranging from sociology to anthropology.
The imperial adventure lost much of its momentum in the wake of the 2008 financial crisis. More attention has turned to the psychological, or behavioural, revolution, which has established that the rational ideal of economic theory isn’t even a good starting point as a crude caricature of the way real people act. We’re often goal-oriented, of course, but we seek those goals through imperfect rules and trial and error, learning as we go. If anything, rationality is the anomaly in human life.
Of equal significance is a growing acceptance of Nelson’s larger point: that economics is riddled with hidden value judgments that make its advice far from scientific. In one notable development, the Journal of Economic Perspectives published a paper by economists Daron Acemoglu and James Robinson that examines how value judgments — in this case, the dismissal of political repercussions — have undermined well-intentioned economic interventions.
Most economists, for instance, see the weakening of trade unions in the US and other Western nations in the past few decades as a good thing, because unions’ monopoly power over wages impairs companies’ ability to adapt to the demands of the market. As Acemoglu and Robinson point out, however, unions do a lot more than influence the supply and cost of labour. In particular, they have historically played a prominent role in creating and supporting democracy, in limiting the political power of corporations and in mitigating income inequality.
Narrow policy analyses have repeatedly led economists to push for policies that have had unexpected consequences for the balance of political power. Acemoglu and Robinson cite the push to privatise industries in Russia in the 1990s. The idea was that private ownership, no matter how it came about, would ultimately benefit the entire economy. In practice, a rigged process gave rise to an illegitimate oligarchy and an increase in inequality that set the stage for the ascendance of Vladimir Putin’s authoritarian regime.
One Size Doesn’t Fit All
More recently, the gospel of economic efficiency helped lay the groundwork for the financial crisis, mostly by encouraging over-confidence in the wonders of financial engineering.
Theory-induced dreams of market discipline provided justification for stripping away entirely sensible regulations, such as barriers between commercial and investment banking, and for avoiding oversight of the booming trade in derivatives. One result was an extremely wealthy financial lobby that is still working hard to block reform.
In all these cases, the tragic flaw lies in the heady confidence that comes with a one-size-fits-all theoretical framework. There’s a real danger in seeing economics as an objective science from which all values have been stripped.
Nelson preferred an older, more modest perspective on economics espoused by Frank Knight, a founder of the University of Chicago’s free market school of thought. Knight expressed the view that truly careful social and economic analysis emphasises the limits to human knowledge and “the fatuousness of over-sanguine expectations” from economic-policy designs, including those favouring free enterprise.
In short, economists would do well to derive their prescriptions from observations of how the world really works, with a healthy respect for its complexity. Faith is no substitute for informed inquiry.
(The writer is a theoretical physicist and author of “Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics”)