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Economics as science

There has been a lot of talk recently about how "experts" are supposedly no longer trusted.

This has been principally because of arguments over the merits of Britain remaining or leaving the EU (but mainly remaining) coming from economists. It has been nearly universally stated by economists that the UK should remain in the EU, and this had led many on the Leave side to question the validity of these experts on the economy.

And they are right to do so, because a fundamental problem with economics today is that economists think they are scientists when they are not.

Economics is not a science, like physics and chemsitry, where the rules have been established, tested and proven to be immutable, it is a social science and is therefore concerned with the behaviour of certain fickle creatures known as human beings.

You can't invent a perpetual motion machine because the laws of physics say so, you can't invent a new drug whilst attempting to deny the periodic table of elements, and it is folly to challenge experts in these disciplines over the laws that determine the nature of reality.

However, economics is a social science because the rules determining how economies function have yet to be demonstrated with an accuracy that can be reduced to mathematical formulae. Perhaps, in time, with the new phenomenon of big data, enough knowledge will emerge where patterns of behaviour can be identified and reduced to mathematical equations, but we are not there yet. For now, economics is as much about psychology and theories of group behaviour than it is a branch of mathematics.

Take an argument over Brexit, that leaving the EU will mean British exports are hit: indeed, if there is a 3% tariff on UK exports to the EU then one might conclude that our exports are reduced by 3% or thereabouts. That is what an economist might deduce by putting a 3% tariff into their economic analysis spreadsheet. But therein lies the problem: a spreadsheet analysis of economic variables will not take into account how human behaviour may change as a result of the new tariffs.

If it becomes a little more difficult to export to the EU then maybe, just maybe, people and businesses will simply get better at exporting. People are adaptable, changeable and can improve, and until economists factor that in to their models they will be no better at prediciting the future than standard weather forecasters are at predicting the weather in a month's time. The weather analogy is quite useful in that Piers Corbyn can predict future weather to a significant degree of success because he employs a different methodology. Perhaps economists should spend more time interviewing members of the public and business owners on how change may affect them instead of spending so much time poring over spreadsheets.

This point was illustrated to me when I had an interview at a company in Sheffield that exports successfully across the world. They have an Export Manager and a small team who have built up knowledge and expertise in overseas markets and the regulatory requirements of exporting. With Britain's woeful export performance there is room for such improvement that I actually think a few tariffs will prove positive in the long run by forcing businesses to learn the knack of exporting that we seem to have lost, or perhaps never had in the first place.

A second problem with economics is that they failed to identify that the world economy was heading for a downturn in the run up to 2008. A few hedge fund managers saw it coming and profited hansomely, but the economics profession did not. How could they have failed to see what was around the corner? I believe this can be explained by reference to a question in a GCSE economics exam which I took back in the early 1990s. I can't remember it exactly but I think it had two graphs at the top showing increasing levels of borrowing in the economy and a worsening trade deficit. The question was "discuss how these two graphs indicate the economy is heading for a recession". It didn't say "indicate the economy may be heading for a recession", it said "IS heading for a recession".

It seems from this question that back in the early 1990s it was a given that a rising trade deficit and a rising debt level indicated trouble ahead. These two economic situations were clearly apparent in much of the economy of the Western world for several years prior to 2008. Whilst economics is not a science like physics or chemistry there are certain fundamentals. If economists had taken their faces away from their complex mathematical models and stuck to the fundamentals then a looming recession would have been all too noticeable. And before you say that everyone is an expert in hindsight, for a few years prior to 2008 I was a regular reader of a website which had a lot of sound economic analysis saying that a recession was coming up.

Economists need to recognise that they are social scientists but also never to take their eyes off economic fundamentals. Just as I'm writing this there is an article in the Economist magazine that is basically saying the same thing, so let's hope this signals the beginning of a recognition of the errors of the modern economics profession.