Economics once got the nickname “The dismal science”, a name that has stuck with it long after it ceased to be true.
It used to be. The first economists were very… depressing. One of the first, Thomas Malthus, made a famous prediction that since the growth in food production was growing at the same rate (linearly) every year, but the population was growing faster each year (exponentially). So as time passed, the gap between the supply of food and the demand for food would viden. This meant that starvation would increase every year as more people were born, but not enough food could be produced to feed them.
Truly a dismal prognosis, that, luckily, didn’t come true.
Adam Smith claimed that what made a country rich was a combination of capital, labour and land. This was also depressing, because the current idea at the time was that a country was rich because its citizens were superior. Europe was richer than Africa because the white race was superior to the black race. But according to Smith, there was a much more scientific explanation that had nothing to do with the racist explanation.
Economists used to be politically incorrect. Famous for their gloomy outlooks and criticism of established beliefs about the world, they were never the most popular guys in the room. But they sure told the truth the way they saw it, even if it was inconvenient.
And when they didn’t know, they said so. A famous joke goes that if you ask 5 economists the same question, you’ll get 6 answers. Economists are in general better at discussing subjects than actually reaching a conclusion, and in general, they’ll reach more than one conclusion (“on the one hand this, on the other hand that”). This may be annoying, but the purpose of economics isn’t only to teach us about the world, but also to teach us how little we really know about the world. Not only to predict the future, but to teach us how hard it is to predict the future and how little we can know about it. To pretend to be more certain than one am would be dishonest. In the words of FA Hayek (The fatal conceit), “The curious task of economics is to demonstrate to men how little they really know, about what they imagine they can design”.
But no-one wants to hear about how little they know or how hard it is to predict movements in the economy and stock markets. So naturally, research grants go to the economists at the other end – the mathematical economists who believe that human behavior can be simplified into numbers and that a recession is like an equation that we must solve.
These economists are far from dismal. As a matter of fact, they got their party hats on. Because, if every economic problem can be solved through supercomputers, then what is there to worry about? Modern economists, during the last decade, really did everything they could to rebrand economics: Instead of warning about the housing bubble, they wrote books about how it would never burst. Instead of encouraging people to save 40 % of their income (something like that rate would yield the highest long-term growth), they sat idly by as more and more people took on loans they would never be able to pay back. They laughed at their colleagues, dismal scientists like Peter Schiff and in Europe, Morgan Kelly.
Economists today aren’t interested in telling the truth, they’re interested in looking smart by making precise predictions. Do you know why economists predict inflation to the closest tenth of a %? To prove they have a sense of humor. No-one can make such precise predictions as economists make today, and the rationality that economists assume humans have simply isn’t there.
I’m not saying mathematics is useless, only that we rely on it too much. All the models, are, well, models – simplifications of reality, not reality itself. Economics is as much a soft, behavioral science as it is a hard, mathematical one. If you analyze old economics articles from Smith, Ricardo and Keynes, you’ll see the amount of math is miniscule. They rely on (far from perfect, but still) reason, logic and an understanding of the human nature rather than on quantitative methods.
When economics turned quantitative, or maybe we should say, “turned happy as opposed to dismal”, is a matter of debate. It didn’t happen over night, but it happened because when you take the human nature into account (behavioral economics/praxeology), a lot of stuff that politicians like to do becomes hard to justify. Case in point: When you take into account moral hazard (now how do you put moral hazard into an equation?), bailouts become harder to justify.
Economists used to have the role of the party pooper who tells everyone to calm down and be realistic, but instead, the economist is now the guy in the middle of the party, drinking beer straight from the keg. The people who used to be interested in telling the truth no matter how inconvenient it was, are now more interested in being popular and seen as the smartest guys in the room. Which they are. Provided that they’re alone.
I liked the old economics better. I take the dismal guys who always did their best, over the happy fellas who deep inside know they’re wrong.
I’m an economist in training, doing a degree in Finance and economics with one year left. When I graduate, I’m going to write “Dismal scientist” on my business card. I’m not ashamed over being a pessimist – there are too many reasons why I should be, and you should be too.
The Eurozone is collapsing, the US is about to hit the debt ceiling and lose its credit rating, the Asian economy is slowing down and the mortgage bubble in China could burst any moment. Yet, most economists are still reciting talking points from the politicians about how we’ve turned a corner and there’s nothing to worry about; just go out and shop and everything will be fine. It’s not true and they now it. I hate this development, and I’m determined to be a part in ending it. Economists have to become realists again, and if that means we won’t get invited to cocktail parties on the White House lawn, then that’s just the price we’ll have to pay.
It’s time economics goes dismal again. Long live the Dismal science!