Economics is a Voodoo Science

Thesis: economics is an art, not a science.

If this sounds familiar, yes: I am echoing the Bush ’41 original criticism of Laffer during a Presidential debate during the 1980 primaries. You were 100% wrong about that, ‘HW’. However, his skepticism of economics generally is well noted.

Calling economics a ‘science’ is akin to basing a theory of astrophysics on the doodles of Picasso. Pick up any college level textbook on economics, and you will discover many impressive mathematical equations, charts, and really pretty graphs, but there is much less than meets the eye.

Economics, and what the Federal government should do about it, dominates the headlines.
Problem:
No one really seems to know what will work. Since the fall of 2008, the US economy has been floundering, and all the king’s horses and all the king’s men seem unable to put the economy back together again.

Consider the following news stories:

**cutting the budget will hurt the economy
**cutting the budget will increase GDP and employment
**cutting taxes will increase the budget deficit and cause more unemployment
**cutting taxes will put money in peoples’ pockets and stimulate the economy
**increasing the deficit will create jobs
**increasing the deficit will increase unemployment

All these positions are equally wrong and equally correct. See, economics attempts to predict the behavior of people. If there is one thing that we as a society have not mastered yet, it is that we are unable to predict the behavior of people, whether individually or collectively.

Permit to exhume my old Econ 101 text and present an example.

This is the Cobb-Douglas model of economic output:
GDP = A*((K^a)*(L^(1-a)))
Where:

A = productivity of resources
K = capital resources
L = human resources (i.e. labor)
a = share of income received by capital
1-a = share of income received by labor

OK, this looks nice and solid and scientific, yes?
Well, it is not. It is akin to the scribbles on a cocktail napkin one creates after a couple of expensive cocktails.
What is the numerical value of A? of K? of L? of a?
Typically, the economist plugs it into a spreadsheet, and, via trial and error, comes up with numbers that will correspond with the current year’s economy. Then, he will do some historical calculations, and come up with numbers that seem to explain many years worth of economy, then proceed to apply this info forward.
Question: will his prediction have value? How does it relate to reality?
Answer: no, and it does not.
Final word: sadly, this is how most of economics operates.