(My thoughts: This is a letter to the editor of the Financial Times published on April 21, 2010. It is a very well thought out response to the failure of modern day economics. It is worth the read...enjoy!)
Sir, John Kay is only partially correct about the failure of economics (“Economics may be dismal, but it is not a science”, April 14). Economics is indeed a science, just like psychology or sociology. The problem is that, just like certain psychologists and sociologists, many economists today are not acting scientifically.
In the social sciences, knowledge acquisition is limited first by the focus on human conduct that is itself not yet fully understood, and second by the difficulty of isolating human experimental subjects from their social, cultural and temporal contexts. We are, after all, studying ourselves. Yes, recent macroeconomic theory has gone astray. However, the reason for this departure is not in the individual ideas, but in the public administrators’ (and certain scientists’) premature reliance thereon to make policy decisions that are way beyond the scope of current economics.
Markets are efficient; but they don’t take only data into account, they also react efficiently to fear and excitement. Most long-term investors may resent being subject to these sometimes violent market stimulants.
Rational expectations theory doesn't suggest people act rationally in the sense of “logically”. The stickiness here is one of word definition. People are sometimes emotional, and scientists should “rationally expect” seemingly irrational behaviour resulting – quite rationally – from the play of emotion.
The dynamic stochastic general equilibrium theory can be a useful tool to understand certain cause-effect relationships, but it cannot be applied outside the laboratory without risk. Anyone but an ivory-tower theoretician realises that too many unexpected variables will invariably spoil the desired effect.
My father, Edward C. Harwood, founder of the American Institute for Economic Research, spent his life studying the acquisition of knowledge and the nature of economics as a science. He, professors George A. Lundberg and Stuart C. Dodd of the University of Washington, and a small team brought a good dose of common sense and insight to economics, but unfortunately the unpopularity of true scientific rigour limits its appeal and prevents a more lucid evaluation of the validity of the results.
I hope that George Soros and his New Economic Thinking are serious about their effort to re-energise the field, but let’s hope he goes about it in the right direction, ie, towards modesty. It will not be easy, because most academic economists and their political counterparts just don’t have the incentives. Humility doesn’t lead to “breakthroughs”, published work, tenure, and public office.
Marina Del Rey, CA, US