Economics needs a scientific revolution
November 1st, 2008Jean-Philippe Bouchaud in the journal Nature attacks the discipline of economics as being unscientific.
“The supposed omniscience and perfect efficacy of a free market stems from economic work done in the 1950s and 1960s, which with hindsight looks more like propaganda . . . than plausible science. In reality, markets are not efficient, humans tend to be over-focused in the short-term and blind in the long-term, and errors get amplified, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets.”
Unlike physics or other scientific disciplines, classical economics is built on very strong assumptions that quickly become axioms – axioms that supersede any empirical observation.
Bouchaud argues that the mindset of those working in economics and financial engineering needs to change to become more scientific and to use scientific tools:
“Surprisingly, classical economics has no framework through which to understand ‘wild’ markets, even though their existence is so obvious to the layman. Physics, on the other hand, has developed several models that explain how small perturbations can lead to wild effects. The theory of complexity shows that although a system may have an optimum state, it is sometimes so hard to identify that the system never settles there. This optimum state is not only elusive, it is also hyper-fragile to small changes in the environment, and therefore often irrelevant to understanding what is going on. There are good reasons to believe that this paradigm should apply to economic systems in general and financial markets in particular. We need to break away from classical economics and develop completely different tools.”
What Bouchaud doesn’t understand is that economics has its roots moral philosophy. It first developed as the study of political economy. Only with the harnessing of fossil fuel energy sources did it develop into the complex growth machine that we think of as the economy today. Economics may be more akin to history as a discipline, and its aspirations to science nothing more than pretensions.