Are Economics And Finance Sciences?

Lately, I’ve been thinking a lot about whether the social sciences, and economics and finance in particular, are even sciences. My conclusion is that they’re really not all that scientific, despite what you read, see on TV, and hear from your professors. Furthermore, there’s a good chance these disciplines will never reach scientific standing, and much of the current methodology maybe fundamentally flawed for studying the social topics at hand. So, I’m going to lay out my case and let you decide. More importantly, I’m interested in what you guys have to say on the topic. Do you think I’m right? If you think I’m wrong, why? Am I being too harsh on these disciplines?

In order to build my case, I’m going to throw out some quotes and comments. Before you read the quotes and comments though,

by Richard Feynman because it really gets at the heart of this discussion. All quotes will come from these two (short) articles: 1) FA Hayek’s Nobel Prize Lecture The Pretense of Knowledge and 2) Richard Feynman’s Commencement Address at CalTech Cargo Cult Science. (Note: You have to erase the stuff after .html in the web address box. I have no idea why it's messing up the link, but just erase that string at the end, and the links will work.)

In the words of Richard Feynman, “We are now in the scientific age… And I’ve concluded that it’s not a scientific world.” He’s so spot on -- science rules everything around us! The fields of physics and chemistry have led to all kinds of great innovations. And we understand things about the physical world that would bewilder our ancestors. However, much of the stuff called science, is, in fact, pseudoscience (or “Cargo Cult Science”). To pick some low hanging fruit, let’s quote Feynman on the academic disciplines of education and criminology:

Feynman:

My curiosity for investigation has landed me in a difficulty where I found so much junk that I’m overwhelmed…I thought about the witch doctors, and how easy it would have been to check on them by noticing that nothing really worked. So I found things that even more people believe, such as that we have some knowledge of how to educate. There are big schools of reading methods and mathematics methods, and so forth, but if you notice, you'll see the reading scores keep going down--or hardly going up--in spite of the fact that we continually use these same people to improve the methods. There's a witch doctor remedy that doesn't work. It ought to be looked into; how do they know that their method should work? Another example is how to treat criminals. We obviously have made no progress--lots of theory, but no progress--in decreasing the amount of crime by the method that we use to handle criminals… So we really ought to look into theories that don’t work, and science that isn’t science.

An interesting question, is whether or not the methods of the physical sciences will even work for economics and finance? I do not doubt the success of the methodology and epistemology of physics, and other sciences. What I’m skeptical about, is whether or not the same methods are of much use to economics and finance. There are fundamental differences between the “social” and “hard” sciences, so maybe a unique epistemology needs to address whether the methodology of one can be used to study the other. Unfortunately, I’m not aware of such branches of epistemology, and as far as I can tell, we’ve really just been getting a naive adherence to the methods that proved successful in the physical sciences. It’s basically following the form, as opposed to the substance, of science and epistemology. What you wind up with is something that looks very scientific, but, in fact, is not. You have lots of mathematical modeling, equations, and sophisticated statistical techniques; but with one problem, a lack of explanatory and predictive power. Similarly, maybe the underlying subject is just too complex, and can’t be understood by the human mind, regardless of epistemology and methodology. Maybe our attempts to make the social scientific, is a lesson in futility. To quote Feynman and Hayek:

Feynman:

I think the educational and psychological studies I mentioned are examples of what I would like to call cargo cult science. In the South Seas there is a cargo cult of people. During the war they saw airplanes with lots of good materials, and they want the same thing to happen now. So they've arranged to make things like runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with two wooden pieces on his head to headphones and bars of bamboo sticking out like antennas--he's the controller--and they wait for the airplanes to land. They're doing everything right. The form is perfect. It looks exactly the way it looked before. But it doesn't work. No airplanes land. So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they're missing something essential, because the planes don't land… A great deal of their difficulty, is, of course, the difficulty of the subject and the inapplicability of the scientific method to the subject.

Hayek:

It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences - an attempt which in our field may lead to outright error.

Hayek:

Unlike the position that exists in the physical sciences, in economics, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones… In the study of the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement.

Hayek:

I confess that I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false. The credit which the apparent conformity with recognized scientific standards can gain for seemingly simple but false theories may, as the present instance shows, have grave consequences.

Hayek:

There is reason to be apprehensive about the long run dangers created in a field by the uncritical acceptance of assertions which have the appearance of being scientific…What looks superficially like the most scientific procedure is often the most unscientific, and, beyond this, that in these fields there are definite limits to what we can expect science to achieve. This means that to entrust to science more than scientific method can achieve may have deplorable effects… Yet the confidence in the unlimited power of science is only too often based on a false belief that the scientific method consists in the application of a ready-made technique, or in imitating the form rather than the substance of scientific procedure, as if one needed only to follow some cooking recipes to solve all social problems.