Economics is Never Truly Scientific

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The Nobel Prize — it is the height of academic recognition.

Few accolades carry as much prestige as a Nobel. It is a validation of expert intelligence, craftsmanship, and even compassion.

Recipients can often become overnight celebrities. Their names forever etched in history books.

As you are probably well aware though, the Nobel is awarded across six different categories. They are: Chemistry, Physics, Medicine, Literature, Peace and Economics.

What you might not know though is that one of these is not like the others. See, only five of these fields were originally recognised by Alfred Nobel. The man who established this coveted honour.

No, it wasn’t the peace prize, it was economics…

It wasn’t until 1969 — 68 years after the first awards were handed out — that economics was included in the list of prizes. And it wasn’t well received by all of the Nobel family either.

Where the other categories served to enrich society culturally and intellectually, economics was seen as a field for profiteers. Priortising the importance of money over people.

Ironically enough, it was money that helped secure the rights to issue the prize. That is why to this day the title of the prize is still first and foremost awarded in the name of ‘Sveriges Riksbank’, the Swedish central bank…

It was only after this central bank donated a large sum to the Nobel Foundation in 1968 that the prize was inaugurated. Hence why some treat it as the outcast amongst the other Nobels.

Nevertheless, come Monday we will find out who the latest recipient or recipients will be. The winners who will claim a prize that is now in its 50th anniversary…for better or worse.

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Economics ≠ empirical

Now don’t get me wrong, I’m not here to discredit the Nobel winners.

Many great economists have been lucky enough to receive the award. People who are far smarter than you or I (unless you’ve got a Nobel yourself lying on your dresser).

However, economics is something of a bastard science. And I say this as a disciple of the field myself.

Unlike chemistry, physics or physiology, economics is never truly scientific.

Science is an empirical art form. You take an idea, you remove all unrelated variables and you test it over and over again until you get a result.

That is the scientific method in a nutshell. And that is what the Nobel Prize rewards.

Amazing conclusions derived from empirical testing.

Economics though has yet to, and seemingly never will, reach the same level of academic rigor.

As Bloomberg notes:

Has the prize [in economics] altered the type of research on which economists engage? Should it try to? The answer to both questions is no. Many if not most fundamental breakthroughs have a large element of luck or serendipity about them. They often spring from ideas that originate in unrelated problems, not a head-on attack.

The reason for these limitations is because economics does not operate in isolation. It is a system that is exceedingly complex and intertwined.

It is this complexity that makes a unifying theory of economics almost impossible.

For instance, Newton showed and presented the world with a unified theory of gravity. We can all test and observe this invisible power one and the same.

In contrast, economics has no absolute rules or foundations. Market principles are fluid and influenced by the variable forces at play within them. That is why buying a banana in Melbourne does not cost the same as buying a banana in London.

Unpredictable = opportunity

So, what does all of this mean for you? Why should you care if economics is a science or not?

Well, you should care because it is this unpredictability that breeds opportunity.

It is precisely because economics is not a hard science that individuals can prosper. The system lends itself to winners and losers.

If there was a simple formula, then it would be mundane, perhaps even stagnant. Thanks to the chaos of people, markets, and money though, it is anything but.

All of these variables and factors feed into what we call volatility.

In the stock market, more often than not this volatility is viewed dimly. It is a cause for great concern and unease.

Seeing a stock in freefall is like watching your money burn before your eyes. Watching a stock rise higher and higher though is like collecting free money.

There is no science to it, no required intellect. All you need is time, persistence and a little enthusiasm.

For the Nobels this pursuit may seem greedy or immoral, but they had the luxury of already being rich. Your average investor doesn’t have the same luxury to quibble over such distinctions.

Wealth is not a sin, it is a pursuit. One that we all strive for.

Fortunately markets, economics and the world allow us to do so. It’s not perfect or scientific, and sometimes it’s not fair.

But it is all we have.

As the 1988 winner of the Nobel Prize in economics — Maurice Allais — put it:

We must take the world as it is and not as we would like it to be.

At the end of the day, we owe a lot to economics. And even if we can never truly ‘solve’ it, we will still rely on it.

Here’s hoping we may learn a little more come Monday.


Ryan Clarkson-Ledward,
Editor, Money Weekend

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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