Economics is not a science
It would be nice if political decisions could be made by technocratic mathematical calculation but they can’t.
Let’s take a moment to review why real science works. Real science’s predictive power comes from models that are applied under conditions where they work.
So for instance science has a model that says energy is conserved.
The Law of Conservation of Energy states that the total energy of an isolated system remains constant; energy can neither be created nor destroyed, only transformed from one form to another.
But you have to read the fine print:
The principle of energy conservation applies locally. If you measure energy in a localized, unchanging region (like on Earth), it holds true. However, it fails on a global, universal scale.
So science allows you to make predictions under the right conditions. Economics pretends to be science but for predictive power:
- Scientific theory
- Very educated guess
- Educated guess
- Biased educated guess — the best economics lives here
- Very biased educated guess — average economics lives here
- Mystic bullshit — economics endorsed by the powerful lives here
Even the best economics suffers from status quo bias, natural tendency to prefer the current state of affairs, and hindsight bias, belief that the past easily predicts the future.
The related field of history is much more honest about itself. The International Prize for History does not call itself a Nobel Prize. The Prize in Economic Sciences in Memory of Alfred Nobel created in 1968 by the central bank of Sweden insists on doing that even though human rights lawyer Peter Nobel (great-grandnephew of Alfred Nobel) has complained.
If you are Sanjay Subrahmanyam, the 2022 winner of the International Prize for History, and write a book about Zomia avoiding centralized governance, then that’s an interesting opinion worth studying.
If you are Joe Biden commenting on the Federal Reserve’s launching of a historically steep rise in interest rates in 2022 you can say something like:
My plan to address inflation starts with the simple proposition: Respect the Fed, respect the Fed’s independence, which I have done and will continue to do
- March 17: +25 basis points (0.25% to 0.50%)
- May 5: +50 basis points (0.75% to 1.00%)
- June 16: +75 basis points (1.50% to 1.75%)
- July 27: +75 basis points (2.25% to 2.50%)
- September 21: +75 basis points (3.00% to 3.25%)
- November 2: +75 basis points (3.75% to 4.00%)
- December 14: +50 basis points (4.25% to 4.50%)
You don’t even need to explain the political decision that was reached cause “science” and “independence”. Of course the federal reserve is obviously not independent and President Biden appointed four of its members and also renominated Jerome Powell as Chair.
The actions of the Federal Reserve in 2022 were in no way scientific. They at best landed somewhere between very biased educated guess and mystic bullshit and they potentially contributed to a rise in American fascism. Biden’s appointments to the Federal Reserve are in no way scientists:
Here’s a speech by Michael S. Barr asking for more financial regulation:
In accounting for the macroeconomic costs and benefits of financial deregulation, there is a trade off between short- and long-term effects. In the near term, deregulation can deliver something akin to a sugar high, in the form of more lending or market activities and higher profits. But this comes at the expense of greater vulnerability and risk for the financial system and the economy in the longer term. These risks have often led to devastating crises that have more than offset those benefits and severely harmed millions of households and businesses.
This hiding behind science means that, even when talking about some of the largest fraud in history, Michael can only use language like “trade off between short- and long-term effects”.
Michael can’t appeal to our sense of morality because his cosplay as a scientist requires him to purely make predictions about numbers IE macroeconomic costs. Michael cannot say that giving large sums of money to known thieves and looking the other way is just plain wrong, because he is instead invoking an economic law of conservation of regulation and risk.
Even the terminology “inflation” is deliberately pseudo scientific. As if the decision to cause millions of Americans to suffer was somehow related to the kinetic theory of gases. For instance the minimum wage could be pegged to this inflation, better called wage stagnation if people can’t afford to buy what they need, and suddenly the Federal Reserve “fighting” inflation in a way that makes people more poor and less able to buy what they need would be easily seen for the political decision it is.
Another Biden appointee to the Federal Reserve, Lisa Cook, is so far resisting Trump’s illegal attempt to fire her from a 14 year term.
The problem is that lifetime appointments for Supreme Court justices and 14 year appointments for Federal Reserve members are blatantly wrong. There is simply no precedent for granting political decision makers anywhere near this duration of power.
Across the world, the longest term any politician in a democracy gets is 7 years. Its universally understood that beyond 5 or 6 years accountability is an issue.
Why then have positions in the US government that are deliberately unaccountable? Because they are considered mere stewards of pseudo scientific principles. Take for instance this 2021 economics paper with lead author Lisa Cook.
We built a vibrant middle class in the post-war era because we started to tear down many of the barriers that had kept women of all races and men of color from contributing their full talents. A quarter of the growth in aggregate output from 1960 to 2010 can be explained by improved allocation of talent.
See we don’t have to make political decisions about regulating markets, we simply have to mathematically calculate what will produce the most profit.
Making political decisions requires messy appeals to emotion and working towards a society with a shared sense of values. Making “economic” decisions requires only rationality and logic.
In fact since we are only concerned with profit we need only ask “market contacts” their opinions when we monitor markets as Philip N. Jefferson explains:
As part of our financial stability monitoring work at the Fed, we routinely survey market contacts regarding potential risks to the U.S. financial system. A finding in the most recent survey is likely of particular interest to a conference exploring financial stability in a time of technological change — 30 percent of contacts surveyed cited a turn in the prevailing sentiment toward AI as a salient risk to the U.S. financial system and the global economy. That was up from 9 percent in the spring survey. Participants noted that if such an unwinding were to occur, it could tighten financial conditions and restrain economic activity more broadly. It is not my intention to make a judgement on the likelihood of those, or other scenarios offered in the FSR. Rather, I want to reiterate that I am monitoring the scenarios.
Who are the market contacts? Why banks of course
ASL Capital Markets Inc.
Bank of Montreal, Chicago Branch
Bank of Nova Scotia, New York Agency
BNP Paribas Securities Corp.
Barclays Capital Inc.
BofA Securities, Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman Sachs & Co. LLC
HSBC Securities (USA) Inc.
Jefferies LLC
J.P. Morgan Securities LLC
Mizuho Securities USA LLC
Morgan Stanley & Co. LLC
MUFG Securities Americas Inc.
NatWest Markets Securities Inc.
Nomura Securities International, Inc.
RBC Capital Markets, LLC
Santander US Capital Markets LLC
SMBC Nikko Securities America, Inc.
Societe Generale, New York Branch
TD Securities (USA) LLC
UBS Securities LLC.
Wells Fargo Securities, LLC
In order to govern you ask banks questions about economic numbers and then make decisions about economic numbers! What could be cleaner and more efficient than that?
One important economic number the Federal Reserve follows is explained by another Biden appointee Adriana Kugler
The quits rate, an indicator of the confidence workers feel in terms of finding another job, has been in the narrow range of 1.9 to 2.2% since December of 23 and just a little bit below the average level in 2019.
And what do you do if the quits rate gets too high as it did in 2022?
Why start the steepest rise in interest rates seen in modern times of course!
Squash the “Great Resignation” I previously wrote about here, because you aren’t squashing people — just numbers! You didn’t make a political decision that led to the misery of millions and potentially a swing into fascism — no you just did what the numbers and banks told you to.
As inflation has declined over the past two years due in part to tighter monetary policy, the US economy has remained resilient with a stable labor markets and employment near its maximum sustainable level.
The data as defined by deliberately unaccountable, unelected officials says that we did a great job and since economics is a science there can be no debate over the decisions we took that led in no small part to the destruction of American society in favor of an insanely financialized economy serving only banks and an out of control tech sector.
For where traditional science is responsible for predicting the natural world in ways that can be challenged and proven wrong, our economic science is beyond such possible embarrassment. If society implodes as a result of economic decisions, that’s on society.