The Victorian historian Thomas Carlyle gave economics the nickname ‘dismal science’. Why does the discipline have such a poor reputation? Philosophers disagree over the relation between the social sciences and the natural sciences. Naturalists take the view that the social world and natural world are roughly identical and governed by similar principles. On the other hand, antinaturalists claim that the social sciences are inherently distinct from the natural sciences and that there is a corresponding difference between the methods appropriate to the two areas. Another philosophical debate concerns reductionism versus holism. Reductionism is a theory that asserts that the nature of complex things is reduced to the nature of sums of simpler or more fundamental things. In contrast, holism is the idea that all the properties of a given system cannot be determined or explained by the sum of its component parts alone; instead, the system as a whole determines in an important way how the parts behave. Reductionism is the foundation of the unity of science, which is a thesis in philosophy of science that says that all the sciences form a unified whole. For example, anthropology is reducible to sociology, sociology is reducible to psychology, psychology is reducible to biology, biology is reducible to chemistry and chemistry is reducible to physics. The most successful science is physics. In contrast, the social sciences are often charged with being less scientific than the natural sciences, suffering from the greater complexities of the human world. Social sciences also tend to be compromised more frequently by politics. Joel Cohen coined the term physics envy when he used it in a critical review of a book which applied general unifying mathematically-formulated physical principles to theoretical biology (Cohen 1971). Perhaps economics has a bad reputation because it suffers from physics envy, but is an approximation of psychology.
Economics is often criticised for being founded upon dubious assumptions of rationality, unrealistic risk preferences and fanciful normally distributed returns (see, for example, the capital asset pricing model (CAPM) (Treynor, 1962; Sharpe, 1964; Lintner, 1965; Mossin, 1966)). You may have heard the joke about the three hungry castaways on a deserted island who are trying to open a can of food. The physicist proposes breaking it open with a sharp rock, the chemist suggests heating the can until it bursts, and the economist says ‘Assume we have a can opener…’.
Econometricians seem obsessed with linear regression analysis. The optimal nature of least squares linear regression is often justified by the Gauss-Markov theorem, which rests on the assumption of linearity, which itself rests on little. This is an important point because outside quantum mechanics, no model of a real system is truly linear. Having said that, a linear model may still be useful for modelling a non-linear process. For example, the simplest non-trivial model obtainable from the Taylor expansion of any infinitely-differentiable function is a linear model (the first-order expansion of the Taylor series).
Economics is unique among the human and social sciences in that it is egalitarian. It starts from the premise that all races, social groups, societies and individuals are created equal, i.e. have equal potential. Economists speak of ‘developing nations’ and ‘developed nations’, there is never any question of whether or not the developing nations will one day be developed, it is taken that they will catch up. The problem with the assumption of egalitarianism is that scientific psychology and work on intelligence shows that it is profoundly wrong. See, for example, Herrnstein and Murray (1994), Lynn and Vanhanen (2002), Lynn (2006), Lynn and Vanhanen (2006) and Lynn (2008).
To conclude, I consider it unfair to criticise economics on the basis that the models are wrong, so long as the first principles are correct, because all models are wrong, and science is about generalizing. However, the real crime in economics is the absurd egalitarian assumption.
Osborne (1977) shows that, contrary to the economics taught in texbooks, price is the independent variable, supply is a non-decreasing function of price, demand is a non-increasing function of price, supply and demand are items and supply and demand are functions of time. In reviewing Osborne's book, McCauley (1999) states that ‘Osborne tears the `mathemology' of Samuelson's Economics text to shreds by pointing out that the famous supply-demand curve can't be constructed from any sort of data. The main point is that price does not exist as a function of either supply or demand. Example: suppose that 25 tomatoes are available (supply). What's the price? Answer: anything or nothing (nonuniqueness). Even better, Osborne shows that one can obtain data on both supply and demand as a function of price, so that discrete (noncontinuous) supply and demand curves can be plotted for a given commodity in a given market.’
Specialization makes human society greater than the sum of its parts. Specializing means that:
As a species, we benefited through the sexual division of labour, with men hunting and women gathering.
For the sake of simplicity, let us assume that one car can be exchanged for one computer. Assume also that Japan is good at making cars and very good at making computers, whilst the UK is bad at making cars and very bad at making computers. Japan is clearly better at making anything and everything than the UK. Yet it still makes sense to trade, both Japan and the UK are better off for trading. The key to solving the apparent paradox is to consider the concept of time in the form of opportunity cost.
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| Neoclassical | Neoclassical economics assumes that people have rational preferences, maximize utility and act independently on the basis of full and relevant information. |
| Austrian School | The Austrian School emphasizes the spontaneous organizing power of the price mechanism, holds that the complexity of subjective human choices makes mathematical modelling of the evolving market extremely difficult (or impossible) and therefore advocates a laissez faire approach to the economy. |
| Keynesian | Keynesian economics emphasizes the role of demand-side factors, as opposed to supply-side factors, in the determination of aggregate output. The theory advocates activity by the public sector to stabilize output over the business cycle. |
| Monetarism | Monetarism holds that the supply of money in an economy is the primary means by which the rate of inflation is determined. |
| New Keynesian | The New Keynesian approach assumes both rational expectations and the stickiness of prices and wages. |
| Post-Keynesian | The distinctive feature of Post-Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competitive market economy has no natural or automatic tendency towards full employment. |
Mainstream economics is largely dominated by the neoclassical synthesis, which combines the neoclassical approach to microeconomics with the Keynesian approach to macroeconomics.
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