Is Economics A Science Or Is It Mostly Bull***t?

Sometimes an economist gets into a bad mood and wonders why he is an economist. It starts with the premise that it is a science and then he realizes that it is not like the real sciences that deal with inanimate objects that don't think about how they might behave. Economics has the problem of trying to build a science around the way people behave. Many economists have watched how people behave and they have developed a pretty good understanding of how things might work in particular situations. Keynes, for example, understood that low interest rates would not lead a business person to increase capacity when the business had excess capacity and the business does not have a backlog of orders. This violated one of the rules of microeconomics, however, which assumes that borrowing will increase when the cost of borrowing declines. Business people are very strange. Sometimes they will even borrow when interest rates are very high. They do that when they feel good about the prospects for their business. They really can't be sure that the rate of return on their investment will be greater than the interest, rate, but they will do it anyway in some situations. This puts economists into a difficult situation. They would like to build a mathematical model that describes how businesses will respond to changes in the interest rate, but they have no way of measuring the view that business people have about the future. The only way to handle that situation is to build an investment demand curve that shows the demand for borrowing increasing as interest rates fall, and then to have the investment demand curve shift to the right, or to the left, in response to some other factor that cannot be measured as easily as the interest rate.

Uncertainty about the future is typical of most of the decisions that businesses or individuals are faced with. Its impossible to be certain about the outcomes of an investment under normal circumstances. We are fortunate that people will take risks when the outcomes are seldom certain. Our economic problem is that we sometimes take on too much risk, and sometimes we are hesitant about taking any risk. This is not the kind of situation upon which one can build an science. We can make some educated guesses about what to do when we find ourselves in a particular situation. For example, when businesses are not borrowing the savings made by others, and investing in the future, the economy will fall below the level required to keep everyone working. Keynes argued that government could borrow and spend the excess savings, and that might increase employment. Others argue that government borrowing will crowd out the investments that private industry would otherwise make, and that will drive up interest rates, and make the economy worse. Either of these arguments may be correct, but there is no way to determine which is correct by relying upon economic theories. It turns out that practical experience, and a good understanding of economic history might be helpful. Sometimes economists are good at this and sometimes they are not.