Economics

Economist Julie Nelson Says Much of Economics is a Sham Science

We undermine our survival if we continue to imagine economics as a ethics-free and care-free sphere

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By Julie Nelson

Most economists, rather than seeing ourselves as studying communities of human beings, pretend to a more physics-like discipline. We model market, national, and international phenomenon using ideas of presumably universal “principles,” “laws,” and “forces.” We consider extreme mathematicization, as well as distance from normative concerns, to be signs of objectivity and rigor. Social research, we think, is for the sociologists. Normative arguments are for philosophers. And this is precisely why serious discussions of ethics in economic research are far, far overdue.

A small crack in this “ethics are not our problem” edifice appeared after the financial crisis in 2008. Media coverage, including the movie Inside Job, revealed cases of, for example, the crass slanting of economic “research” results to fit a funder’s requirements. A very modest amount of self-reflection resulted, resulting in more attention to disclosure of sources of funds. Much bigger ethical issues, however, are yet to be addressed.

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The first, and most important, is the way in which certain core economic doctrines have infiltrated, and caused widespread damage to, academic and public discussion. Ideas that originated with economists have “poisoned the well” from which we now draw our ideas of appropriate personal, organizational, and national behavior. This is having severely detrimental effects on human life on the planet. My second, more inward-looking critique, has to do with the sham nature of much of our “science.”

Poisoning the Well

Economics 101 teaches that people act out of rational, individual self-interest, that the essence of business firms is to maximize profit, and that the measure of success in national policy is a growing GDP per capita. These teachings have become increasingly performative. That is, while they originally purported to merely describe the world, they are increasing shaping people’s behavior and the structure of organizations.

Some research has suggested, for example, that the study of Econ 101 tends to encourage self-interested behavior. The model of the economic agent as a self-interested, rational, autonomous individual utility-maximizer can make “looking out for number one” seem like a reasonable—and even the only reasonable—norm for behavior in economic life. In my economics classes, I increasingly find students willing to behave opportunistically, on the reasoning that if they don’t take advantage of a situation, someone else will. They are quite unapologetic about it, believing that this is simply the way the world works, and that to do otherwise would be foolish.

The “businesses maximize profit” story has even more thoroughly permeated the conceptual well from which, it seems, we all drink. There is, of course Milton Friedman’s famous dictum, “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible”. The idea that businesses have a single, narrow financial goal is now repeated ad nauseam in the business and popular press, as well as forming the foundation for teaching in economics and management. The widening chasm between the compensation of Chief Executive Officers and ordinary workers in the United States has been was spurred by the economic theory that CEOs must be “incentivized” CEOs to act in the interest of shareholders.

Yet the damage goes much further. Many critics of corporate abuses and rising inequality now also subscribe to the economist-created dogma about the essence of business. Arguing the case for an ethics of justice and sustainability from a Buddhist point of view, for example, David Loy argues that “Corporations are legally charted so that their first responsibility is not to their employees or customers, nor to other members of the societies thy are part of, nor to the ecosystems of the earth, but to those who own them, who with very few exceptions are concerned primarily about return on investment”. As a result, most aspirations for “alternative economies” tend to veer towards utopian or state-directed visions of communitarianism that are of limited practical value.

The message seems to be, from both right and left, that business is–by its very nature–an ethics-free, and care-free, sphere. And the pool of poison continues to spread, even beyond the business sphere. One recent article, for example, proclaimed “Whether we like it or not, colleges and universities are a business. They sell education to customers….While the typical for-profit firm tries to maximize its profit, non-profit universities generally try to maximize their endowments or operating revenue…” The poison has even spread to thinking about nations: Applying to nations the economists’ dictum that only actions that serve self-interest will be chosen, Posner and Weisbach argue that global climate “justice” will likely involve poorer nations, who are feeling this environmental crisis first, making payments to richer ones, to compensate them for the loss of GDP they will suffer by taking action.

These narrow, doctrinaire, and ethically scandalous claims could—and should—seem ridiculous to anyone with a modicum of social sophistication and humanistic sensibility. But even if you put ethics aside, standard economics doctrines don’t stand up to a pragmatically and empirically grounded view of the world. Any serious, grounded analysis shows that economic systems actually require a good deal of concern with ethics, interpersonal trust, and other-regarding behavior to function well. Purely opportunistic personal behavior, far from driving a market system, actually destroys it.

Moving to the organizational level, the widespread belief that profit maximization is required by corporate charters, or by other legal or economic mandates, is actually false (Stout, 2012). Even when leaders of corporations may seem to be trying to “maximize” something, in practice profits for shareholders is generally not the goal. Personal wealth and/or expansion for expansion’s sake are far more frequent, among the possible self-interested goals. The profit-maximization story also obfuscates socially positive business goals, supported by many leaders who have a broader and more long-term perspective. These include providing useful, healthy products; creating good places to work; promoting environmental sustainability; and supporting innovation. Among non-profits, some leaders act like self-interested business executives, but some still try to educate, promote health, or serve another social purpose. While short-sighted national self-interest may include a concern for GDP per capita, aspirations related to territorial power and pride seem to be at least as prominent. Taking a longer-term view, national interests clearly must include attaining the sort of global cooperation needed to seriously addressing climate change. Businesses, non-profits, and nations are social communities of humans, with all the complexity that this implies. A more accurate and balanced understanding of human personal and organizational behavior as including both reasonable self-interest and reasonable care–for others and for the natural environment–offers, I believe, our best chance for a survivable future.

So why do the economic ideologies have so much power? One explanation is that since such teachings serve the short-term interest of various wealthy and powerful parties, they can receive well-funded dissemination via education and the media. Yet there is another important reason: The effective disguising of economic doctrines as “scientific.”

Pretending to be a “Hard Science”

Good science can be described as a process of systematic and open-minded investigation. Results should be carefully and intelligently compared to evidence brought forth from a wide and diverse community of investigators before being accepted as reliable. Models should be presented as what they really are: devices that some particular group of humans have found to be useful for examining some particular set of issues.

Examined in light of these standards, much of economics is a sham science. Instead of being open-minded about our core models, assumptions, and methods, we have made narrow selections and then allowed these to harden into dogma. There is a clear “macho” bias in preferring explanations based on self-interest to consideration of community interest, preferring mathematical analysis to qualitative analysis, preferring consideration of rational motivations to inclusion of emotional ones, and so on. In our textbooks, we teach our narrow models as revealed truth, rather than as limited tools. Instead of seriously evaluating the reliability of our knowledge, we follow established habits of claiming “rigor,” based on the mathematics of our models and on econometric “tests.” The recent popularity of Randomized Control Trials has tended to revitalize a belief that objectivity can be achieved by simply following formulaic rules, with little attention to context or to the possibility of implicit biases.

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I could point out how these biases comprise economic practice with many examples, but for brevity let me focus on just one. Recently, there has been a growing awareness in many fields–particularly in the biomedical sciences and in psychology–about the dangers of using “statistical significance” to decide which results are worthy of dissemination. The notion of rejecting null hypotheses based on p-values had been, for a long time, taken as the definition of “rigor” in empirical practice. Yet, as is now being shown, the following of such simplistic, mindless rules can actually cause severe distortions to arise in a literature. With many variations in data samples and model specifications open to most researchers, “p-hacking” to create publishable results has become rife. In a recent meta-analysis I undertook of the economics literature on preferences for risk-taking, I found not only publication bias (a preference towards statistically significant results), but also confirmation bias (a preference for results which confirm an author’s own stereotypes about gendered behavior). Yet I have seen little action within the economics profession, much less within economics education, to—honestly and ethically–face up to the fact that our customary beliefs about “rigor” are seriously flawed.

Conclusion

We seriously undermine the ability of the economy to do its job—that is, to provide for the sustaining and flourishing of life—if we continue to imagine it as an ethics-free and care-free sphere. Economic dogmas, misleadingly presented as scientific and widely disseminated through education and the media, are largely to blame for this damage. The field of economics is far overdue for an thorough-going ethical wake-up call.

Originally published at ISRF Bulletin.

2016 December 6

References

Brennan, Jason and Phillip Magness (2016). “Estimating the Cost of Justice for Adjuncts: A Case Study in University Business Ethics.” Journal of Business Ethics.

Friedman, Milton (1982). Capitalism and Freedom. Chicago, University of Chicago Press.

Loy, David R. (2015). A New Buddhist Path: Enlightenment, Evolution, and Ethics in the Modern World. Boston, Wisdom publications.

Nelson, Julie A. (2014). “The Power of Stereotyping and Confirmation Bias to Overwhelm Accurate Assessment: The Case of Economics, Gender, and Risk Aversion.” Journal of Economic Methodology 21(3): 211-231.

Nelson, Julie A. (2016a). “Husbandry: a (feminist) reclamation of masculine responsibility for care.” Cambridge Journal of Economics 40(1): 1-15.

Nelson, Julie A. (2016b). Poisoning the Well, or How Economic Theory Damages Moral Imagination. The Oxford Handbook of Professional Economic Ethics. G. DeMartino and D. McCloskey. Oxford, Oxford Univesity Press: 184-199.

Posner, Eric A. and David Weisbach (2010). Climate Change Justice. Princeton, Princeton University Press.

Stout, Lynn (2012). The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. San Francisco, Berrett-Koehler.


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  • Profit maximization as the primary or sole goal of business – and being useful to Society when such is the case – is predicated on a whole lot of tacit assumptions. That Business plays by the rules of Society and those rules are not put in place solely at the behest of Business. THAT would mean that the ethics of conducting business are taken care of by way of Society putting in place the rules by which Business operates. THAT Business does not drive the discussion and the science that establishes demand for the product – effectively it is assumed that Business fulfills a demand not that it creates it. THAT rational choice is possible for all or a majority of customers – which would mean not merely the presence of choice but also that the available choices and the comparison are both within reach of a customer. Getting drowned out by too many choices vitiates the condition as much as having no choice does.

    The problem lies in how far reality diverges from the ideal assumptions under which the postulate of Econ 101 works best.

  • Tom

    If business people (and other non-science disciplines) are getting their idea of what science is all about from “economics as a science” as taught in standard economics classes, then it is no mystery why they do not understand how real science works. And it explains why these people find it so easy to dismiss climate research. Years ago, when taking my science degree, I was required to take Economics 101. I truly could not believe the utter trash they were presenting as a “science.” It was nothing but ideology dressed up in some (abused) statistics.

  • russnelson

    Evonomics is always amusing … and not in a good way. Amusing like when someone *else* steps in dog dirt. Schadenfreude.

    • LuisUreña

      I agree with you. Its incredible how this guys think that everything can be solved through taxation, and even are obsessed with gender and moral superiority. Amusing. This guys are an example of the reason why less and less people believe in “experts”. I dont blame them, it has been a Liefest since ideologues repted their way up into academy and started shouting their leftist dogmas down.

      • leif

        Nothing added of value. Then again what would one expect from the Mises crowd.

        • LuisUreña

          What would one expect from the Mises crowd?

      • Not sure what russnelson meant, or how you agree. Even less sure how your response fits. What did ‘this guy” (who is a woman) say about taxation or gender? How is it leftist to suggest that what we are taught in Econ 101 does not fit reality?

        Then you say don’t trust experts and complain of ideologues? Isn’t that agreeing with what she said? I’m not sure you read or understood what was written, or perhaps your post was too short to explain what you meant.

        Which ideologues are you referring too? There are all kinds in academia.

        None of it strikes me as science, just multiple versions of wrong.However, I do agree that a just and free society requires morality to function. Economists seem to avoid the question: What is a fair trade? For example, how many eggs is a chicken worth? Should be a basic question and easy to answer.

        “Kill or be killed” is not an economic system; it’s war where nobody can win.

        • LuisUreña

          Hes talking about evoconomics, and so do I, not only about this particular article, thats why the word “guys”. And yes, they talk about gender (like always). I copy from this article: ” I found not only publication bias (a preference towards statistically significant results), but also confirmation bias (a preference for results which confirm an author’s own stereotypes about gendered behavior)¨”. And before that you read the laughable “macho bias”, why that particular choice of words? There you go, Leftist dogma: Everybody is sexist. Evoconomics is plagued of examples like this. If they are not leftists, why do they talk like leftists?

          Evoconomics has a distinct line of thinking, am sure you note it, and they can ram into their articles all the morality they want, but when it comes to solutions, its always the same answer: taxation. Strong-armed transfer of wealth. Their famous UBI is taxation. Is nothing but the renaming of the welfare state that has created a lot of problems in the west. Dont get me wrong, I despise people that have unearned money, but the welfare state have proved to not be the answer.

          And when it comes to morality, they dont have those answers, theyre economists, not philosophers. They dont have that level of thinking, and society shouldnt look to them for those answers.

  • This argument here points to the assumptions (self-interest in particular) used in positing economics as a “science” are the cause of its worst effects. A separate problem is that equations used in economic theory fail to model the multiple-agent problem accurately except in a few very simple cases.

  • Dick Burkhart

    The problem with economics is not that it uses mathematics, it’s that it uses the wrong kind of mathematics in the wrong way, precisely because mainstream economics is so ideological, instead of scientific. Notoriously, Milton Friedman himself led the way in rejecting the scientific method. Why ? – Because he wanted certain results, results that would validate his ideology, and the prevailing mathematical models wouldn’t do the job. So he said, let’s ignore the false assumptions in the models that give his desired results. The predictable result has been decades of very bad mathematical modeling in economics, with equally bad policy recommendations.

    Now some economists are finally realizing what has long been obvious to many non-economists – that the economic phenomena of most interest, such as booms and busts, are inherently nonlinear. Thus good mathematical models in economics must also be nonlinear, such as agent based modeling and nonlinear dynamical systems. Beinhocker’s book “The Origin of Wealth” gives a good overview. The theoretical framework for both micro and macro economics needs to be thrown out in total. Not surprisingly, behavioral economics fits well into the new nonlinear framework, and is far more satisfactory from an ethical point of view, as in Bowles book “The Moral Economy”.

    • Actually, I think you can explain boom and bust mathematically. If you have ever played a game of Monopoly, then you have seen the problem demonstrated. As prices rise (inflation), income can’t keep up, even though everyone gets paid the same for passing GO. Ignore that the bank is perpetually deeper in debt. Boom is bust! What we have is an accounting methodology problem. If we were to price differently, then the economy could be stable and sustainable. People need ethics to follow the math, but the problem is still mathematical in nature. Making error into a virtue (greed is good, Boom, etc) certainly must reap the consequences of Bust.

      • Dick Burkhart

        A classical model for “boom and bust” is the predator-prey, or Lokta-Volterra, pair of non-linear differential equations (https://en.wikipedia.org/wiki/Lotka%E2%80%93Volterra_equations). We all know who the financial predators are (“Wall Street”), while the rest of us who get sucked in are the prey. They feed off us through various forms of financial trickery until our funds are gone, or we wise-up. Then many of the predators crash too, until the next cycle commences. It’s only a very rough model, but it does capture some of the real world dynamics. For more realistic modeling, and especially the inclusion of debt, see Steve Keen’s debtwatch: http://www.debtdeflation.com/blogs/

        • True enough Dick, and they are approximations with a certain historical utility, and they do not include Kurzweil’s exponentials at present – which threaten to swamp everything as the signal of their 10 month doubling time emerges from noise to dominance very quickly.
          And I do like Keen’s work, and have a copy on Minsky on this machine.

    • SaltyDawg

      Can you offer some other resources for a way to approach economics? Websites, etc.

      • Dick Burkhart

        You can find lots of good, short critiques of conventional economics at http://evonomics.com/

  • I’d venture the hypothesis that economics is a kind of theoretical psychology – based on that part of particularly utilitarian worldview psychology that is (resp. was) mathematizable at a given point in time.

    • ari9999

      “theoretical psychology” — hmm… perhaps better: a kind of psychoneurotic theology

  • It is a little over 40 years ago that I was in the first undergraduate class on the planet to be taught the theory of plate tectonics. 4 weeks ago I lived through a mgnitude 7.8 earthquake nearby my home in Kaikoura. For me the experience was a first hand confirmation of Wegener’s theory, and other than being tired from the amount of things there are to do in getting basic infrastructure (roads, water, sewerage, ports, power, communication, drainage, etc) functioning again, I am functioning normally because I expected the event (even though I had no accurate idea of when, I had a 90% probability of it being in the next 25 years sort of expectation), whereas for most in town it came as a terrifying and unexpected curse from god.

    I am not fundamentally a geologist, I am fundamentally trained as a biochemist, ecologist, and evolutionary biologist, but with a sound practical background in animal husbandry, engineering, electronics, computers, law, politics, education and psychology; and with more than a passing interest in complexity theory and generalised paradigm spaces.

    People are really complex – from the atomic level all the way up through some 20 levels of complex systems to the highest levels of abstract thought that some people manage to operate on for various periods of time.

    It is clear that any exploration of complex systems must start from simple assumptions and work from there.
    This must happen at every level, from the personal in terms of our individual intellectual development to all levels of thought within various schools and disciplines to the outliers operating individually beyond the boundaries of agreement about such things, that work essentially alone for most of their time.

    So we see much missed communication happening, as the adepts within particular disciplines critique what are the obvious shortcomings of the basics of other disciplines they are less familiar with (while the similar failings in the introductions to their own disciplines are so far back in their own intellectual history as to be almost forgotten).

    It seems to me that every individual in every discipline, must logically go through a process metaphorically equivalent to Wittgenstein’s Ladder – we must believe things to be true, in order to get to a place where we can grasps the concepts that allow us to see that the assumptions we used to get to where we are were false, but the place we are at has a utility that surpasses the notion of truth we once believed.

    The idea that things are either true or false is the simplest of all possible logic sets, and is therefore the one that most people encounter first in their experience of being. If they are able to question it, and see beyond it, they will discover an infinite set of possible logics, from trinary to higher state sets and all the way to the purely probabilistic.
    Yet most brains establish a habitual relationship with the certainty of binary logic that is hard to break at all levels (especially if such logic is promoted past puberty, as most educational systems do).

    Anyone with more that a passing aquaintance with complexity theory, with Wolfram’s “New Kind of Science” (NKS) will understand that reality has many levels of systems that are not predictable, as they are already maximally computationally complex (and that is entirely leaving aside the question of if the fundamental nature of this reality we live in is “causal” or “constrained stochastic” – to me the evidence of my existence overwhelmingly favours the latter).

    So there is an understandable gulf between adepts in different disciplines, if they stick strickly to the complexities they are familiar with in their own discipline, while at the same time looking only at the foundational simplicity of introductions to other disciplines.

    Complex systems are capable of infinite complexity, and any exploration of any infinity always looks infinitely longer than the path already explored (however long that path is) – one of the truly humbling aspects of infinities. There is much truth in the old Buddhist saying “for the master, on a path worth travelling, for every step on the path, the path grow two steps longer”.

    So in this context, of potentially infinite levels of awareness, both within and bewteen domains, some things do become clear, and some become more uncertain.

    One thing that is clear, is the exponential technological trend of being able to do more with less computationally, which is exponentially increasing in its influence on our ability to do more with less in terms of manipulating matter and energy (at all levels).

    Yes there are hard limits on things like energy output from the sun, and the amount of matter in the solar system, and these are not limits that are of immediate concern. We have other limits that are much more pressing.

    One limit is the very notion of markets and exchange, and of the encapsulation of the value so measured in the concepts of money and capital.

    Markets are all about supply and demand. The exchange value of anything for which supply exceeds demand in all cases, is zero – evidence air. Air is arguably the single most important thing for every human being, yet in most cases it has no economic value because it is universally abundant.

    What most people have not yet realised, is that automation is moving towards supplying most goods and services in similar abundance to air.
    When that happens, markets fail as a useful measure of value in most cases.

    Economics, as a field that uses markets to measure value, has enetered a phase of exponentially decreasing utility for individual human beings.

    If we take the older and deeper meaning of economics, as an exploration of the systems we use to manage our household (using the broadest sense of household, being the population of all sapient entities in this universe), then it has the potential to expand into disciplines and conceptual fields far beyond markets (which will have markets being but one of an infinite class of possible value systems).

    It seems clear to me that biochemistry is moving us rapidly towards being able to deliver on universal indefinite life extension.

    Such a possibility requires a major rethink of systems predicated on limited life.

    Creating a stable evolutionary path to the new paradigm of universal security, universal empowerment and infinitely extensible diversity, presents many interesting and ongoing challenges and opportunities for creativity at all levels.

    All such systems must be, by definition, beyond strict centrally contorolled rule based systems. They must involve flexible, context sensitive and infinitely extensible, boundaries characteristic of complex systems.

  • Darah

    General point of this article that free-market economics wrapping itself in a cloak of “objectivity” is a bunch of malarkey is accurate. The implication that this has any causal, neat relationship to gender detracts from that point. Author needs to get over her gender-bias.

  • ICFubar

    This article contains many truisms but the scope is too narrow. When the economy is organized and orchestrated by a small group of Apex Elites with agenda to shape the future for all life on this planet we must look beyond the individual entity, corporate or nation, and ask what should the future life experience on this planet be? This core group have no political ideology or economic ideology.They have killed capitalism, as there are no markets, while communitarianism is as easily controlled. A click of the mouse and unlimited funds is all that is needed. Their abundant literature spells out exactly what they see as the future and we ignore their writings and leave them in the halls of power at our own peril. They are moving on many fronts and levels in simultaneous endeavours that all lead to these ends, the anthropogenic global warming meme included whether real or imagined. They seek ‘to inventory and control all fiances, land, water, minerals, energy, plants, animals, means of production, construction, information, education, human habitation and all humans on this planet.” – Rosa Koire. The complaint within this article is merely against their corporate entourage with the push to grant them sovereignty not mentioned here, being but one front with many levels being geared to achieve outstanding goals by this small group that sit atop the human economy. Ultimate control is done through ownership of the issuance of money and credit.

  • Lev Shakhmundes

    Economics is similar to meteorology. Both sciences deal with immensely complex dynamic processes. Modelling and forecasting are challenging, the results in many key situations do not make people happy. This is in the nature of things. Some say, meteorology was invented to make economics look good. Others say, economics was invented to make meteorology look good. With my tongue in cheek, dear Prof Nelson. You are at the top of the profession. If under your stewardship economics is a sham, why don’t you fire yourself?!

  • A Sethuramiah

    A Very good presentation of economic dilemmas. I have been reading evonomics for a while and noting the genuine concerns. The problem of ethics is well known but we want to achieve just society while at the same time fuelling greed. Hence the problem is one of economic philosophy. We may look back at ‘Small is beautiful’ by Schumacher . The cover page says ‘A study of economics as if people mattered’. Such struggles lay in vain. Man created ‘isms’ and then we become enslaved to these isms (like capitalism). Even Adam Smith if he returns today will not approve the form of capitalism as practised today.
    Coming to some details in the article I do agree with the problem of social factors that can not be predicted before hand. Hence the assumed models do not work well. Mathematics can get more sophisticated in analysing and predicting a given conceptual model. But the problem is in the assumptions. The importance of social aspect in economics was also emphasised by Thomas Piketty. Enriching oneself is almost the norm of capitalism. Both the owners and stock holders want to get the best. The statement ‘winner takes it all’ adequately describes the attitude.
    As a non economist I do not know how curriculum changes can be affected to improve the scenario.

  • Larry Chang

    This because economics is limited to monetarism using a reductionist approach. A systems approach is needed #PlanetaryIndex. See Ted Howard’s excellent comment below.

  • dilgreen

    My first experience of formal economics was at age 15, when I took a correspondence course as no-one at my school could teach the subject.
    In the very first chapter, introducing fundamentals, the difference between demand and need was exemplified thus; “A penniless man dying of thirst has a terrible need, but exerts no demand”.
    Reading this appalling sentence was enough to clarify the total disconnection of economics – the discipline – from the economics I was interested in – optimal allocation of scarce resources to maximally support life.

  • Erwin Amann

    I do not know what economists teach in the US. In Germany we teach merely how markets work and where markets fail, including externalities, environmental economics and informational economics. We teach about market power and regulation. All this is not ethics, but both ethic people as well as egoists can use economics to make the best, either for themselfes or the society. As an economist I can not tell you, wether it is ethic or not to kill animals and eat them. This has to be decided by the people themselfes not by a scientist.