The Nobel Prize for Economic Sciences was awarded on Monday to American economists Paul Milgrom and Robert Wilson. But Carolin Benack warns not to really think of economics as a science, but more like writing novels.
By Carolin Benack
When you listen to an economist, chances are you’ll hear a lot of statistics.
Federal Reserve Chairman Jerome Powell’s speech at the National Association for Business Economics on Oct. 6 is a case in point. In the first two minutes alone he referred to a dizzying range of economic indicators: growth, unemployment rate, personal consumption expenditures inflation, labor force participation, productivity gains, real wage gains and so on.
But if you watch the speech, you may notice that he rarely cites the actual numbers. That’s because Powell, and economists generally, tend to be more interested in the direction in which the numbers are going rather than the numbers themselves. Is unemployment high or low? Is the Dow up or down? Is GDP growth trending upward or downward?
In other words, Powell is telling you a story. And although economists have historically wanted their field to be associated with the so-called hard sciences – a conjuring act exemplified by the Nobel Memorial Prize in Economic Sciences – I’ve come to see it as having a lot more in common with literature, especially novels, than physics or chemistry.
As a literary scholar researching economics and its history, I have found that being aware of the similarities between economists and novelists helps us to better evaluate the claims they make. Both are telling stories. Understanding that empowers us to judge the credibility of what they’re saying for ourselves.
Fact and Fiction
The notion that economics shares a lot with fiction may seem counterintuitive. That feeling is not incidental.
Ever since the inception of economics in the late 1800s, economists have sought to associate their discipline with the very opposite of fiction: the natural sciences. Unlike economics, which deals with human relationships, the hard sciences study phenomena in the natural world. As such, a claim by a natural scientist reflects a different kind of truth than one by an economist. For example, the law of gravity describes an immutable physical fact; the law of supply and demand describes a relationship between people.
What we know as mainstream economics today began with the concept of marginal utility, which posits that individuals make purchases by considering how much happiness they will derive from each additional unit of a good or service. What attracted many economists to the concept was that it provided a way to make economics more mathematical.
The concept of marginal utility allowed economists to turn sensations into quantities. Happiness was imagined as a pile of many little units of pleasure, which some economists actually believed could be physically measured. Francis Y. Edgeworth even conceived of a “psychophysical machine” to do precisely that in his beautifully titled book “Mathematical Psychics.”
This is to say that, in the 19th century, the resemblance of economics to the natural sciences fooled even some of its own practitioners.
Economic theory, the stuff that makes economists look at the numbers the way they do, is an endeavor that fundamentally relies on our understanding of fiction.
Literary scholar Catherine Gallagher has argued that this understanding, at least in the Anglo-Saxon world, was shaped by a relatively new genre in the 18th century: the novel.
Readers previously thought of fiction as clearly marked fantastic stories – think flying carpets and talking animals – and perceived stories that appeared plausible enough that they could have happened as lies. Novels shifted that perception. We can now read a realist novel and at once know the story did not actually happen and put that knowledge on hold to follow along.
Models of economic theory require this same suspension of disbelief. We know that there is no world with perfect competition, as one famous economic theory asserts, so we’re asked to set aside the criteria we would usually apply to understand something as objectively real to follow the story the theory – and economist – tells about the economy.
In other words, without the novel first teaching us how to deal with worlds that are not technically true but still believable, theoretical models might not exist in the way they do today.
The Story of Opportunity Cost
This reliance on our attitude toward fiction is not exclusive to the models used in economics. The same could be said about, for example, the idea of a perfect vacuum in physics. We know there is no perfectly empty space, yet we can imagine it.
Where economics becomes more fictional than other academic disciplines is in the content of its theories, especially in one of its most fundamental assumptions: opportunity cost.
According to economic texbooks, individuals make choices by considering how much happiness they derive from different options. Say I have an hour I could use to either buy groceries, catch up with a friend, or take a nap. I assess my options and find that grocery shopping is not that important right now, seeing my friend would be nice, but napping really promises the largest amount of happiness.
Consequently, I choose to nap, but the price I pay for my nap is the happiness I would have derived from my second-best option, spending time with my friend. Note that this second-best option did not and will not occur, and the individual in this story knows this as she is imagining her options.
In other words, fiction occupies a very prominent position in the opportunity cost story, and, by extension, in economics at large. Each decision we make, economists are saying, is accompanied by a piece of fiction.
Economists today are aware that their discipline is a social science rather than the study of physical laws of nature. Yet they are unlikely to object to the prestige that comes with a lingering perception of economics as a hard science.
I believe the Nobel Memorial Prize in Economic Sciences, announced on Oct. 12, is an example of this prestige production. If the other research-based Nobel Prizes go to physicists, chemists and medical scientists, economists must have the same claim to being scientists, right?
Recognizing instead that economics shares a lot with literature – another Nobel category – helps us because it loosens the perception of the discipline as a hard science that tells us facts of nature. Understanding economists’ comments and predictions this way also gives all of us more agency to decide whether or not a given story seems credible.
Carolin Benack, is a PhD candidate, Duke University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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There is a lot of truth here, and I am a retired economist.
Economics is a social science – sometimes called “the Queen of Social Sciences” – but it is not a science.
You cannot do controlled experiments.
I never actually understood why the Nobel committee created the economics prize.
Vague hopes of creating a better world?
In the hard sciences, it is often easy to know when a really fundamental discovery has been made, but less so in a field like economics.
Economists themselves, quite unlike physicists or chemists, often disagree on what is or is not fundamental.
A general observation: I think automatically having a prize every year, even in a field like physics, is not a good idea.
Discoveries do not follow the calendar.
All I ever needed was to look at the Black-Scholes awarding wining formula for pricing stock options in the early 70s to know it was all a scam. variable names like ‘ consumer confidence’ seriously included in a pseudo-mathematical formula got them the highest prize.
But I’m confused as to why we haven’t seen articles like this in the past. Thank you Ms. Benack
Of all the ‘soft sciences’, economics is probably the most dependent on the political views of the practitioner/economist, and that goes-for the ones that I agree with too. They sprinkle in a lot of ‘sadistics’ and an aphorism or two that they like to call ‘laws’ (‘Law of Supply & Demand’ – when was that ever not understood? And what profound things can you derive with it?) and some serious gravitas attitude, but they were usually conclusions you could’ve predicted before they started their speech IF you knew their political leanings.
Every country in the world has an ‘economy’. How it is managed and organised depends on the economic narrative that it adheres to. No, economics is not a natural science, neither is trade, manufacturing, tourism, banking, accounting, real estate, etc. These are all *man made* constructs that are real, and part of our everyday lives whether we like it or not.
Dismissing the the validity of economic ‘narrative’ just because *it is* man made fiction and not natural science is delusional at best and very dangerous, because this fictional narrative is still real, because it is implemented in the real world in ways that effects us all…
Let us focus on fictional economic narratives that would be of benefit to most of society if implemented, instead of trying to ignore and/or dismiss the fictional economic narratives that benefit the 1% – i.e. neoliberalism, much to our own detriment.
Else the status quo will prevail, and usher in a new age form of feudalism. (Another man made construct, although it is in some simple ways found in nature in ant and bee colonies for a start.) :-)
I think what is “very dangerous” is that a small group of unelected people in this privately-held cartel (the FED) all believe in their own created narrative and they are steering the ship down a channel based entirely on this story. The ship (and that of nearly every other central bank) may find itself in open seas with calm waters, but it will more likely (in my opinion) fetch up in a dead-end with no way to turn around.
Better yet, taking a nap during a Powell or Yellin or Bernanke speech, yields even greater happiness, and dream of a world where maybe the priority is the greatest good for the greatest number, instead of the inverse which is what we have now.
“Welcome to Nellyville
Where all newborns get a half-a-mill’
Sons get Sedan DeVilles, soon as they can reach the wheel
And daughters, get diamonds the size of their age
Help me out now one year get one carat, two years get two carats
Three years get three carats, and so on into marriage
Nobody livin’ average, everybody jang-a-lang
Nobody livin’ savage, e’rybody got change
Even the paperboy deliver out the back of a Range
It’s not a game, it’s a beautiful thang”
– Nellyville – Nelly
When my husband and I visited Sweden some years ago, we visited the Nobel …hall of fame? As we toured it with a guide, we commented that there were some Nobel “Peace Prize” awards that we recommended be rescinded.–That awarded to Henry Kisinger, for example, and that more recently awarded to Barak Obama. And, we said, while you’re at it. rescind the Nobel Prize in Economics awarded to Milton Friedman, for crying out loud! Our guide told us that the so-called Nobel Prize in Economics was, in fact, not a Nobel Prize, all of which were slated to go to Physics, Chemistry, Medicine, Literature and Peace. Rather the economics prize was founded and funded by bankers who “bought the brand”….In our house, it has been known as “The Swedish Bankers’ Prize” ever since. The author of this piece is right–economics, as practiced, is fiction. The Nobel Prize in literature is where, perhaps, it should be considered?
Thus the fantasy “too big to fail” which made a few extremely happy and economic good sense hopeless.
I greatly enjoyed the piece. Ms. Benack covers many of my pet complaints and theories as to the current state of economics. I hope it is not too much to attach something I wrote a few years ago, when I had thought anyone might be interested in reading it. It is intented as a complement to her piece, rather than an argument (the religious references may be due the fact that it was written in Spain during the Semana Santa).
Not that long ago, what we now know as the science of economics was considered to be a branch of philosophy. Today, modern economics is regarded as a science, and is dominated by mathematical and statistical analysis. The work of Nobel laureates in Economics over the last several years is incomprehensible to most people. The subject matter went from being known as political philosophy or political economy, to just plain economics. The use of mathematics in describing economic behavior was originally seen as a useful shorthand, sort of a visual aid to what was being described. One of the early economists to use mathematics, Alfred Marshall, advised one of his students as follows:
“(1) Use mathematics as a shorthand language rather as an engine of inquiry. (2) Keep to them until you are done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often.”
The counsel of Professor Marshall did not last long, however, as mathematical analysis became almost inseparable from serious economic papers by the 1930s. Mathematical formulas and graphs gave the papers an added air of seriousness and certainty. Instead of mere philosophical musings, political philosophy had converted itself into a Science.
In spite of the fact that the age of mathematic economic analysis is now nearly ninety years old, most of the Great Ideas from economics date from the earlier era of economics as philosophy. The works of Adam Smith, JS Mill, Thorstein Veblen, Karl Marx, JM Keyes and others all are written in plain English with examples from real life. More modern economists that eschewed the mathematical route, such as JM Galbraith, have also contributed to a greater understanding of our economic lives. The ascendance of mathematical analysis may be one reason that modern economics has become disassociated from modern life and the economic realities that average people face (see Professor Marshall’s Step (4) above). There are a number of problems with the way the study of economics is currently practiced that have now become too big to ignore any longer.
One problem is that any mathematical analysis requires a unit of measure. The analysis involves a formula or a graph which illustrates the supposed interaction of various elements (independent variables) that result in a measure of our being better off or worse off (the dependent variable). The more accurately we can describe the benefit (or not), the more Scientific the analysis seems. The unit of measure usually selected as the dependent variable is a unit of money – the dollar, euro, pound or whatever. This would work great if our economy was composed of nothing but balance sheets, but most people understand “the Economy” as something much bigger. Being “better off” includes not just our pay, but our work life, our home life, the environment in which we live, and even some consideration for the future – whether we expect these elements to get better or worse over time. Money is just an abstract concept, and not able to measure the things that are most important to us.
An even greater problem has to do with the nature of money itself. What exactly is money? Once upon a time money consisted of precious metals, usually stamped with some symbol or likeness of an important person. Paper money came along and, whether it was backed by anything like a precious metal or just good faith, it was issued by a government. Most economic theory involves the idea that there is some quantity of money out there, and that governments print more or less of it as they choose. What this ignores, however, is that governments do not have a monopoly on the creation of money. Banks, local governments, corporations and financial institutions have the ability to issue credit, which is money (bearing interest of course) created out of nothing more than an expectation of being repaid. Different kinds of money from governments all over the world, and credit (debt) of all kinds can be converted back and forth from one to another. The underlying values that the particular kinds of money or credit may have once represented are not at all important, as they have all been converted into Money with a capital M. This faith based view of the world is what modern economics deals with, and why it has become completely disassociated from Professor Marshall’s “examples that are important in real life.”
As a faith-based system, modern economic science has had to ignore, or explain away, occurrences in real life that are not compatible with the known certainties of the faith. This happened in the Middle Ages when astronomy, medicine and physics were based on Church doctrine. Today, modern economic science is trying to explain away, or simply ignore, a number of inconvenient facts that threaten the revealed faith. In no particular order these include a belief that a Free Market exists, that economic growth (measured in money) is essential, that natural resources are not limited, that government services are more efficiently provided by private enterprises, that environmental protection is harmful to national prosperity, that restrictions on the freedom of financial transactions impedes economic growth (again measured in money), that economic efficiency equates to a social benefit, and that capitalism and democracy are somehow linked.
Along with the conversion of economics into a Science, the word “political” is no longer used to describe the subject matter. Does this mean that political concerns are no longer within the scope of economic thought? Far from it. Whereas political systems were once seen as means to establish a beneficial type of economic system, the dominance of orthodox economics has resulted in an almost total agreement as to the role of political systems. The proper role of politics is to stand back and get out of the way of economic activity. Instead of governments, through the political process, directing economic activity it is the financial sector, through the wise men who interpret the mysteries of the Science of Economics, that are directing government policies that affect our daily lives. Just as the Medieval Church was able to ignore the realities of the physical world, the new Church of Economics is ignoring the environmental and social realities that are more apparent in our daily lives every day.
Actually, the “Nobel Prize” in economics was never a part of the list of awards that Alfred Nobel created. It’s awarded by a bank, not by the Nobel prize committee. Economics (and statistics for that matter) would like to be considered sciences but, in general, economics starts from an assumption of behavior that bears little relationship to actual behaviors. The only one that comes close is Keynesian economics which depends on fairly measurable quantities like savings, government spending, taxation etc. Statistics is really nothing more than arithmetic.
The Nobel Prize for Economics is awarted by the Swedish Central Bank, who favor “traditional” economics, the kind of economics which make a tiny few incredibly rich and put the many in dire difficulty.
There is another school of economics, including Michael Hudson, Steve Keen, Jacques Sapir, etc, who give a clear view of how economics works to destroy the quality of life of the many. Worth reading the works of these latter economists to understand how things work in our era.
As far as I know, Steve Keen is the only economist that is attempting to create a realistic model of economic behaviour with his software program called “Minsky”. This is based on double-entry bookkeeping practice which is about the only “hard science” aspect of economics that exists; no psychology of any kind is factored into his mathematical models. The tool is a good way of personally understanding the dynamics of markets, government spending (or not), etc.
Google “steve keen minsky” to find articles and YouTube videos about this software. You can even download a free copy for yourself to learn about it.
Economic activity is manufactured, modified, and distributed as needed. As Benack observes, science attempts to understand immutable natural phenomena. You cannot lie, or cheat, or rig the natural world. You can destroy it, and change it by human behavior, however you cannot replace natural fact with fiction. Economics are all about lies, cheating and rigging the system for human gain. Nobel prizes have been denigrated by awardees that have – in some cases – done nothing whatsoever to better the human condition, or to further understand the world in which we live. I am entirely with Benack on this. There is no way that economics can come anywhere near 100 kilometers of close of being recognized as a hard science.