A little explanation

Flittering through the financial blogosphere, watching the news, listening to comments I am always struck at the strength of opinion people have with regards to their view on economics. From academics, to economic journalists to the casual observer the one common theme they have about their views on economics is most seem to believe they are absolutely right. They present their opinions as indelible fact and dismiss criticism of their views as the stupidity of ignoramuses or, for the high brow economic commentator, the unwavering rants of an ideologue. Yet by their very nature many of the theories are contradictory or mutually exclusive and as the old saying goes “they can’t all be right”. 

Surely as a profession Economists should be able to agree on the impact of austerity on the performance of economies, or whether or not QE is inflationary or even whether QE is even ‘money printing’. After all, the arguments (and their theoretical basis) are the same arguments that have existed for decades. Discussions of fiscal vs monetary policy as the most effective lever for improving economic growth was rife in the aftermath of the Great Depressions 80 years ago. Yet despite all this time, after all the academic careers, data points collected and analysis conducted we still seem to be no closer on reaching a true consensus on some of the most fundamental questions about macro economics. No matter your view point there will be some academic somewhere (though probably a whole school of academics) who can write you out a complex thesis about why your view is correct, and can cite a vast body of empirical literature that will no doubt provide the experimental evidence to substantiate your claims.

I admit that inertia to change can be strong, the world is full of ideologues – history is littered with people railing against the wall of institutional indifference only to be proven right. It could be the case that one of these world views is absolutely right, and the rest of us are just in denial unwittingly counting down the days until the undeniable, unquestionable evidence of the truth comes forth to sweep away our prejudices. However, I doubt this is the case. 

Economics has pretensions as a science. Like Physics or Chemistry or Biology it is an endeavour in trying to understand and explain the world around us and for the most part, like the physical sciences or Biology, it starts with observations about our environment. Then based on these observations people come up with theories that try to explain these observations. Finally, people go away and carry out experiments that hopefully disprove some of these theories leaving one left that so accurately describes the evidence it is generally considered to be fact. One thousand years ago people observed the sun appeared in the sky every  morning, and watched it disappear in the evening. They came up with a theory to explain this – that the sun moved around the earth. A little while later some other chap named Galileo came up with an alternative theory that the earth actually moved around the sun. Both theories explained the observation of the sun moving around the earth, however it was only after experimentation was Galileo able to come up with the proof beyond reasonable doubt that his theory was in fact correct.

Economics as a profession is very good at the first two parts of science. There are large numbers of theories that are used to explain a vast array of observations, and yet a dearth of conclusive evidence that establishes the dominance of one theory of another. If all these empirical papers are so convincing in proving the supremacy of a theory, why has the body of economic science not rallied around it?

So what’s the point of all this waffle? That as much as people would like to argue that they are right and that the failure of others to understand their point is a failure to recognise the truth – they are wrong. Their is no absolute truth in Economics. Just theories and opinions. That is not to say that we won’t be able to (largely) disprove a few of the more extreme theories along the way, the separation of North and South Korea is about a good as you’re going to get as an experiment that established the failure of an economic paradigm (communism) as a successful way to organise economic activities, but it does mean that the day when we can accurately forecast the performance of, even a small economy, or that we can be certain that the outcome of any one economic policy decision will be the right one, is still a very long way off. So maybe people writing on your message board, or disagreeing with your view, are ideologues, but if you deny their view and blindly dismiss their opinion, than so, my friend, are you.


Author: unreasonableuncertainty

Just another bloody econo-finance blogger.

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