The Flawed Scientific Claim of Economics: Equilibrium, Self-Interest, and the Limits of Prediction

Economics' aspiration to be a hard science, akin to physics or chemistry, hinges critically on the concept of equilibrium, which economists often view as the equivalent of gravity in the natural world. Mainstream economists believe the economic system is predictable, governed by reliable and measurable motives, and best expressed through mathematical models and statistics, leading Paul Samuelson to label economics the "queen of the social sciences." However, this perspective is challenged by the speaker, who argues that the foundational idea of equilibrium in economics is often groundless and that a story not expressible mathematically is unfairly relegated to "scientifically inferior" disciplines like history or sociology. The discussion delves into the historical development of economic equilibrium, from Galileo and Newton's observations of natural balance to Alfred Marshall's analogy of a pendulum and Léon Walras's theory of general equilibrium, which posits instantaneous balance across all interdependent markets. A significant portion of the analysis highlights the numerous problems with the concept of equilibrium in economics. The term itself is used promiscuously, encompassing various types such as optimal, Keynesian underemployment, dynamic, short-run, and Nash equilibria, each with distinct implications. The speaker questions whether the notion of pendulum swings accurately explains actual economic movements, suggesting that disequilibrium might be a more fitting description. Furthermore, the search for an economic equivalent to gravity leads to the hypothesis of "self-interest," specifically "rational greed," which is assumed to make economic behavior predictable in fully decentralized and competitive markets. However, the duration and severity of deviations from equilibrium, often explained by "frictions" like sticky wages or national frontiers, pose a challenge to the core doctrine, with neoclassical economists advocating for their minimization to maximize market efficiency. The podcast critically examines the policy implications of this equilibrium-centric thinking, arguing that the belief in the automatic tendency of market systems towards an optimal equilibrium, provided they are not interfered with, leads to a "baleful effect" on policy, primarily advocating for laissez-faire. This perspective was notably challenged by Keynes, who, while not abandoning equilibrium entirely, posited that most equilibria are not optimal and that economies do not self-correct solely through relative price adjustments. Heterodox economists, including figures like Kaldor, Lachman, Robinson, and Shackle, have gone further, abandoning the idea of equilibrium altogether, citing ignorance about the future and the inherent dynamism of economic life. The enduring appeal of equilibrium thinking is attributed to economists' longing for the certainty of natural sciences and the conviction that an underlying, orderly structure exists beneath apparent messiness, which can be captured by logic and mathematics, a notion tracing back to Descartes. However, the speaker suggests that if a principle of balance exists in social life, it is a much broader concept than market equilibrium, manifesting in historical cycles of rise and decay, or alternations between opposing forces (e.g., democracy/authoritarianism, Puritanism/licentiousness). These broader cycles, while reflecting a form of balance, are too loose and imprecise for the kind of specific event prediction sought by mainstream economic models, underscoring the fundamental difference between the "science" of economics and the complexities of human and social systems.

is economics a science like physics or chemistry well I would say no and perhaps most people here would say no but most economists do think of economics as a science

Paul Samuelson called economics the queen of the social sciences

mainstream economists believe that a story which cannot be told in maths is not part of economics but of some other scientifically inferior discipline like history or sociology or literature

equilibrium is absolutely crucial to economics is claimed to be a hard science

Alfred Marshall wrote if a stone hanging by a string is displaced from an equilibrium position the force of gravity will at once tend to bring it back to its equilibrium position

what is the economists equivalent to the law of gravity the answer is contained in a single powerful hypothesis and that is self interest

frictions do a huge amount of work in maintaining the grand theory of equilibrium economics by explaining the possibility of deviations from it without endangering the core doctrine

this whole way of thinking about economies... has a baleful effect on policy it leads to the unthinking belief in the automatic tendency of a market system to an optimal or the satisfactory equilibrium provided it's not interfered with therefore the best policy is lace a fair let things be

heterodox economists have abandoned the notion of a natural tendency of markets towards any optimum equilibrium

Schumpeter is is a tormented soul he clings to the idea of equal but of course his famous notion of creative destruction is quite contrary to it

Marx said exactly the same thing capital it is constantly revolutionising the means of production and the social relationships of each productive a stage

equilibrium is a semental construct designed to explain a feature of NAIT nature which is not evident when you first see it when you look at it namely the principle of orderliness