The Dismal Pseudoscience (Economyths, 2017)

David Orrell. Economyths: 11 Ways Economics Gets It Wrong. (2017) Orrell is a mathematician who’s made his living applying his skills to miscellaneous real world problems. Here he dissects 11 economyths, showing how they fail to match real world data.

Modern economics began with Adam Smith’s The Wealth of Nations. In the mid-1800s Jeremy Bentham and others attempted to mathematise Smith’s insights, and, within the limits of their mathematics, they succeeded. By the mid-20th century, economics had become a thoroughly mathematised social science. Unfortunately, economists didn’t bother testing their models by comparing their predictions against actual data. If the predictions didn’t work out, that was not a fault of the models, but of people’s misunderstanding of the economy, which led them to make the wrong choices. Choices that falsified the predictions must be the wrong choices, you see, because if people had made the right choices, the predictions would been correct. Economics has become a pseudoscience, a cargo cult using mystical algebra.

Milton Friedman went the final step of proclaiming that economic theory proved that free-market, profit-focussed capitalism was the only viable and democratic system. Hence the inability of economists to predict the 2008 collapse of the real estate bubble and the ensuing financial crisis.

That’s a rough paraphrase of Orrell’s thesis. The 2008 crisis occasioned the first edition of this book. This one (2017) includes quotes of criticisms of the first edition and Orrell’s responses. It adds a chapter on money, which proposes that money is quantum-like. Interesting, but IMO at best a first draft of a proper theory of money. Such a theory is difficult because money has many functions, all of which depend on our beliefs about it.

Orrell stresses that the economy is a complex dynamic system, which includes the agents, and so agents’ perceptions and beliefs play a major (and confounding) role. He doubts that economic prediction will ever be better than weather forecasting. He also emphasises that neo-liberal economic theory as propounded by the Chicago school (Milton Friedman et al) has led to economic behaviour whose ecological effects threaten to make the planet at least extremely uncomfortable for human beings. I think he’s right.

I will reread this book. It’s dense with data, history, and anecdote. Here and there I felt almost sorry for the economists that fulminated against the first edition. But their smug ignorance of the limits of applied mathematics, of ecology, of anthropology, of psychology, and of history prevented pity.

Recommended. ****