Recent debates over who is most qualified to serve as the next chairman of the Federal Reserve have focused on more than just the candidates\u2019 theory-driven economic expertise. They have touched on matters of personality and character as well. This is as it should be. Given the nature of economies, and our ability to understand them, the task of the Fed\u2019s next leader will be more a matter of craft and wisdom than of science.<\/p>\n
When we put a satellite in orbit around Mars, we have the scientific knowledge that guarantees accuracy and precision in the prediction of its orbit. Achieving a comparable level of certainty about the outcomes of an economy is far dicier.<\/p>\n
The fact that the discipline of economics hasn\u2019t helped us improve our predictive abilities suggests it is still far from being a science, and may never be. Still, the misperceptions persist. A student who graduates with a degree in economics leaves college with a bachelor of science,<\/i> but possesses nothing so firm as the student of the real world processes of chemistry or even agriculture.<\/p>\n
Before the 1970s, the discussion of how to make economics a science was left mostly to economists. But like war, which is too important to be left to the generals, economics was too important to be left to the Nobel-winning members of the University of Chicago faculty. Over time, the question of why economics has not (yet) qualified as a science has become an obsession among theorists, including philosophers of science like us.<\/p>\n
It\u2019s easy to understand why economics might be mistaken for science. It uses quantitative expression in mathematics and the succinct statement of its theories in axioms and derived \u201ctheorems,\u201d so economics looks a lot like the models of science we are familiar with from physics. Its approach to economic outcomes \u2014 determined from the choices of a large number of \u201catomic\u201d individuals \u2014 recalls the way atomic theory explains chemical reactions. Economics employs partial differential equations like those in a Black-Scholes account of derivatives markets, equations that look remarkably like ones familiar from physics. The trouble with economics is that it lacks the most important of science\u2019s characteristics \u2014 a record of improvement in predictive range and accuracy.<\/p>\n
This is what makes economics a subject of special interest among philosophers of science. None of our models of science really fit economics at all.<\/p>\n
The irony is that for a long time economists announced a semiofficial allegiance to Karl Popper<\/a>\u2019s demand for falsifiability as the litmus test for science, and adopted Milton Friedman<\/a>\u2019s thesis that the only thing that mattered in science was predictive power. Mr. Friedman was reacting to a criticism made by Marxist economists and historical economists that mathematical economics was useless because it made so many idealized assumptions about economic processes: perfect rationality, infinite divisibility of commodities, constant returns to scale, complete information, no price setting.<\/p>\n Mr. Friedman argued that false assumptions didn\u2019t matter any more in economics than they did in physics. Like the \u201cideal gas,\u201d \u201cfrictionless plane\u201d and \u201ccenter of gravity\u201d in physics, idealizations in economics are both harmless and necessary. They are indispensable calculating devices and approximations that enable the economist to make predictions about markets, industries and economies the way they enable physicists to predict eclipses and tides, or prevent bridge collapses and power failures.<\/p>\n But economics has never been able to show the record of improvement in predictive successes that physical science has shown through its use of harmless idealizations. In fact, when it comes to economic theory\u2019s track record, there isn\u2019t much predictive success to speak of at all.<\/p>\n Moreover, many economists don\u2019t seem troubled when they make predictions that go wrong. Readers of Paul Krugman<\/a> and other like-minded commentators are familiar with their repeated complaints about the refusal of economists to revise their theories in the face of recalcitrant facts. Philosophers of science are puzzled by the same question. What is economics up to if it isn\u2019t interested enough in predictive success to adjust its theories the way a science does when its predictions go wrong?<\/p>\n Unlike the physical world, the domain of economics includes a wide range of social \u201cconstructions\u201d \u2014 institutions like markets and objects like currency and stock shares \u2014 that even when idealized don\u2019t behave uniformly. They are made up of unrecognized but artificial conventions that people persistently change and even destroy in ways that no social scientist can really anticipate. We can exploit gravity, but we can\u2019t change it or destroy it. No one can say the same for the socially constructed causes and effects of our choices that economics deals with.<\/p>\n