What Economics Can (and Can’t) Do

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Gary Gutting interviews Daniel Hausman in the NYT's The Stone (image Robert Streiffer):

Daniel Hausman: Speaking of predictive power can be misleading. Scientists (and I include economists) are not fortunetellers. Their theories only allow them to predict what will happen if initial conditions are satisfied. Elementary physics enables us to predict how long it will take an object to fall to the ground, provided that gravity is the only force acting on the object. Predicting how long it will take a leaf falling from a tree to reach the ground or where it will land is a much harder problem.

The problems that we want economists to help us solve are more like predicting how leaves will fall on a windy day than predicting how objects will fall in a vacuum. Economic phenomena are affected by a very large number of causal factors of many different kinds. The Greek economic crisis is extraordinarily complex, and it has as many political causes as economic ones. Standard economic theory provides useful tools, but it focuses on a very limited range of causal factors — mainly the choices of millions of consumers, investors and firms — which it simplifies and assumes to be governed entirely by self-interested pursuit of goods or financial gain. When one recognizes all the other factors that affect economic outcomes, from government policies to the whims of nature, it is easy to see that economists cannot predict the economic future with any precision.

In John Stuart Mill’s view, which I believe is basically correct, economics is a separate and inexact science. It is separate from the other social sciences, because it focuses on only a small number of the causal factors that influence social phenomena. It is inexact because the phenomena with which it deals are influenced by many other causes than the few it focuses on.

More here.