The Dismal Mind - Economics as a Pretension to Science - Part II

III. The Scientific Method

To qualify as science, an economic theory must satisfy the following conditions:

All-inclusive (anamnetic) - It must encompass, integrate and incorporate all the facts known.
Coherent - It must be chronological, structured and causal.
Consistent - Self-consistent (its sub-"narratives" cannot contradict one another or go against the grain of the main "narrative") and consistent with the observed phenomena (both those related to the subject and those pertaining to the rest of the universe).
Logically compatible - It must not violate the laws of logic both internally (the narrative must abide by some internally imposed logic) and externally (the Aristotelian logic which is applicable to the observable macro world).
Insightful - It must inspire a sense of awe and astonishment, which is the result of seeing something familiar in a new light or the result of seeing a pattern emerging out of a big body of data ("data mining"). The insights must be the inevitable conclusion of the logic, the language and of the development of the narrative.
Aesthetic - The narrative must be both plausible and "right", beautiful (aesthetic), not cumbersome, not awkward, not discontinuous, smooth and so on.
Parsimonious - The narrative must employ the minimum number of assumptions and entities in order to satisfy all the above conditions.
Explanatory - The narrative must explain the behaviour of economic actors, their decisions, why events develop the way they do.
Predictive (prognostic) - The narrative must possess the ability to predict future events, the future behaviour of economic actors and of other meaningful figures and the inner emotional and cognitive dynamics of said actors.
Prescriptive - With the power to induce change (whether it is for the better, is a matter of contemporary value judgements and fashions).
Imposing - The narrative must be regarded by society as the preferable and guiding organizing principle.
Elastic - The narrative must possess the intrinsic abilities to self organize, reorganize, give room to emerging order, accommodate new data comfortably, avoid rigidity in its modes of reaction to attacks from within and from without.
In some of these respects, current economic narratives are usually theories in disguise. But scientific theories must satisfy not only most of the above conditions. They must also pass the crucial hurdles of testability, verifiability, refutability, falsifiability, and repeatability - all failed by economic theories. Many economists argue that no experiments can be designed to test the statements of economic narratives, to establish their truth-value and, thus, to convert them to theorems.

There are five reasons to account for this shortcoming - the inability to test hypotheses in economics:

Ethical - Experiments would have to involve humans. To achieve the necessary result, the subjects will have to be ignorant of the reasons for the experiments and their aims. Sometimes even the very performance of an experiment will have to remain a secret (double blind experiments). Some experiments may involve unpleasant experiences. This is ethically unacceptable.
Design Problems - The design of experiments in economics is awkward and difficult. Mistakes are often inevitable, however careful and meticulous the designer of the experiment is.
The Psychological Uncertainty Principle - The current position of a human subject can be (theoretically) fully known. But the passage of time and the experiment itself influence the subject and void this knowledge ("time inconsistencies"). The very processes of measurement and observation influence the subject and change him.
Uniqueness - Experiments in economics, therefore, tend to be unique and cannot be replicated elsewhere and at other times even if they deal with the SAME subjects. The subjects (the tested humans) are never the same due to the aforementioned psychological uncertainty principle. Repeating the experiments with other subjects adversely affects the scientific value of the results.
The undergeneration of testable hypotheses - Economics does not generate a sufficient number of hypotheses, which can be subjected to scientific testing. This has to do with the fabulous (=storytelling) nature of the discipline. In a way, Economics has affinity with some private languages. It is a form of art and, as such, is self-sufficient. If structural, internal constraints and requirements are met - a statement is deemed true even if it does not satisfy external (scientific) requirements. Thus, the standard theory of utility is considered valid in economics despite empirical evidence to the contrary - simply because it is aesthetic and mathematically convenient.
So, what are economic narratives good for?

Narratives in economics offer an organizing principle, a sense of order and ensuing justice, of an inexorable drive toward well defined (though, perhaps, hidden) goals, the ubiquity of meaning, being part of a whole. They strive to answer the "why's" and "how's". They are dialogic and prescriptive (=provide behavioural prescriptions). The client (let's say, a politician) asks: "Why am I (and here follows an economic problem or behaviour". Then, the narrative is spun: "The situation is like this not because the world is whimsically cruel but because...and if you were to do this or that the situation is bound to improve". The client is calmed by the very fact that there is an explanation to that which until now bothered him, that there is hope and - providing he follows the prescriptions - he cannot be held responsible for a possible failure, that there is who or what to blame (focussing diffused anger is a very policy instrument) and, that, therefore, his belief in order, justice and their administration by some supreme, transcendental principle is restored. This sense of "law and order" is further enhanced when the narrative yields predictions which come true (either because they are self-fulfilling or because some real "law"- really, a pattern - has been discovered).

IV. Current Problems in Economics

Neo-classical economics has failed on several fronts simultaneously. This multiple failure led to despair and the re-examination of basic percepts and tenets:

1. The Treatment of Government

Government was accorded a special status and special treatment in economic theory (unlike other actors and agents). It was alternatively cast as a saint (seeking to selflessly maximize social welfare) - or as the villain (seeking to perpetuate and increase its power ruthlessly, as in public choice theories). Both views are caricatures of reality. Governments do seek to perpetuate and increase power but they use it mostly to redistribute income and not for self-enrichment.

2. Technology and Innovation

Economics failed to account for the role of innovation in growth and development. It also ignored the specific nature of knowledge industries (where returns increase rather than diminish and network effects prevail). Thus, current economic thinking is woefully inadequate to deal with information monopolies (such as Microsoft), path dependence and pervasive externalities.

3. Long Term Investment Horizons

Classic cost/benefit analyses fail to tackle very long term investment horizons (periods). Their underlying assumption (the opportunity cost of delayed consumption) fails beyond the investor's useful economic life expectancy. Put more plainly: investors care less about their grandchildren's future than about their own. This is because predictions concerned with the far future are highly uncertain and people refuse to base current decisions on fuzzy "what ifs". This is a problem because many current investments (example: the fight against global warming) are likely to yield results only in the decades ahead. There is no effective method of cost/benefit analysis applicable to such time horizons.

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