Economics is not a science, but it is much more than that
I hate the way Economics is presented as an exact science. And unsuspecting engineering students who just love numbers assume that this is an exact science. A batch mate of mine from IIT-B was furious when Delhi capped Uber’s surge pricing. In a statement laden with expletives, he said that “These people are idiots (he used a different word, but let’s keep this civil). They don’t understand that it’s just supply and demand, laws of economics.” As if this were one of Euclid’s axioms. And, at that time, I agreed with him. Just because it was being quantified with equations, we both conflated it being an exact science.
It is far from it. In “The Value of Everything”, Mariana Mazzucato explains how Economics was originally called Political Economy. Some shrewd people realised that they needed to rebrand the subject, and leverage math to make it quantifiable and smart-sounding^. Undoubtedly, quantification has made things better. But the thoughtless mathematicisation of the subject had many perils. Apart from making my batch mate believe in immutable laws, it also led to lazy thinking and assumptions. Like neatly dividing the economy into agriculture, manufacturing and services, or assuming financial services was always considered productive (it wasn’t, for a long time). It took us a while to even calculate GDP, and some methodologies remain contentious to this day^^.
Take for instance the idea of an “econ”, a hypothetical person who behaves rationally. Yes, some of our irritable friends have lived up to that archetype. But it has taken decades of work by legends such as Daniel Kahneman, Amos Tversky, Richard Thaler, and many others to demonstrate that people don’t behave the way classical economics textbooks assume.
In “Narrative Economics”, Robert Shiller explains how narratives have shaped broad public behaviour. During the Great Depression, displays of wealth were frowned upon, which meant people postponed purchases of cars, which further extended the depression. Similarly, narratives around pain being bad and potential miracle pills enabled the Sacklers to push their addictive opioids onto the population. Narratives are an anthropological phenomenon and should be studied from that lens.
And what is the fair price of borrowing money? In “The Price of Time”, Edward Chancellor explores how it took us centuries to understand what interest rates are and how they shape society. It took foolish experiments and bubbles (e.g. the Mississippi Bubble) for people to figure out that printing money to buy stocks in worthless companies can bankrupt entire nations (Sounds familiar, right?). The “correct” interest rate wasn’t derived from first principles. It is a topic always up for debate, even now.
The revered (and often criticised) Adam Smith didn’t write the rules or axioms of capitalism. He made sharp observations of what was already happening in society and attempted to structure it.
Economics has been a subject of deep interest for the mathematically curious, a philosophical laboratory for sharp observers, and a tool to shape a nation’s destiny for the politically ambitious. It has been so much more than a pure art or an exact science.
Students like my batchmate and I should not miss a century of argument about what a “fair price” even means. So when students are taught this wonderful subject, it should be presented in all its forms, in all its contradictions, and in all its beauty. It might not make for a neat 60-minute lecture with perfect supply and demand curves, but it will surely be more enlightening.