Is economics a science?
from David Ruccio
“Is economics a science?” It’s the question posed by Alex J. Pollock, to which his emphatic answer is “no.” And it’s all because of uncertainty.
Economics aspires to be a science. But in this it does not succeed. Neither does finance. This despite the fact that there is an annual, optimistically named Nobel Prize in “Economic Sciences.” . . .
But why should this be? Do we not learn from experience? Does economic knowledge not increase? And how about having computers, vast amounts of data and information, and new mathematical models to guide lending and investing decisions? . . .
Consider Moore’s Law of Finance, as I call it (after my bond-market friend Mike Moore): “The model works until it doesn’t.” Perversely, the more everyone believes the model, and the more everyone uses the same model, the more likely it is to induce changes in the market that make it cease to work.
Pollock also explains that managing the risk associated with uncertainty just involves some being able to pass on the risk to others.
Some of these tranches went to buyers who were greatly surprised by the vast losses. This must put us in mind of Stanton’s Law (name after Tom Stanton, author of A State of Risk): “Risk migrates to the hands least competent to manage it.” This is because the more competent can manage their risk by passing it to the less competent.
That was the con: the idea that the system was being controlled and regulated by competent bankers who had solved the problem of uncertainty. And that the models had adequately captured the solution, in the form of efficient markets theory and Greenspanism. That’s why bankers (not to mention their “risk analysts,” media cheerleaders, and policymakers) fostered the belief that economics and finance had become sciences—and that the banks’ actions were guided by such sciences. So, the rest of us had no need to worry as they built more and more complex financial derivatives in order to obtain higher profits.
Out of the mouths of bankers. . .
I’ve just come across a related paper by my colleague Philip Mirowski, “Inherent Vice: Minsky, Markomata, and the tendency of markets to undermine themselves,” in which he characterizes crisis as a “collapse of complexity” and develops a theory of “a market system evolving to a point of ‘inherent vice’: an endogenous development which by its very nature, cannot be tamed through conventional insurance or risk models.”