The global financial crisis and the science of economics

One of the underlying causes of the current global financial crisis is the notion that the results of standard economic theory can be considered to be scientific. If so, how can any policymaker ignore economic theory when forming economic policy? It is for this reason that the phrase "economic rationalism" had become prominent in the Australian economic policy debate of the 1980s and onwards.

In the wake of the current crisis many have, appropriately enough, questioned the scientific credentials of economic theory. Those who do so have been correct to denigrate the Efficient Markets Hypothesis of neo-classical economic theory, which underpins neoliberal policy prescriptions. The EMH is based on the theory of rational expectations which assumes that free markets are mechanical systems that exhibit law like behaviour. Rational expectations, in turn, was based on an instrumentally rational or Homo economicus conception of human economic behaviour.

That the GFC demonstrates that the EMH is false has now led to the rise of the view that economics does not, but more importantly cannot, constitute a proper science. I will dispute this claim and will submit that economics can in fact be a science.

But, first, some background.

The scientific enterprise is encapsulated by the philosophy or, perhaps better still the broader "attitude", of naturalism. In this view all that can be said to exist is natural, in some undefined sense. Supernatural entities, such as God or "the force" or something, should not be invoked in order to explain the world.

There are two types of naturalism, what we might call "philosophical naturalism" and "methodological naturalism". Philosophical naturalism is very much tied up with the doctrine of "materialism" or "physicalism". On this view everything that is real is in some sense physical.

Methodological naturalism by contrast is not concerned with the ultimate nature of reality, but rather, is a methodological thesis that asserts that the surest approach to theoretical knowledge is via the norms and techniques of science.

Philosophical naturalism cannot be reasonably defended. At the earliest stages of the scientific revolution philosophical naturalism was very much akin to the mechanical philosophy of Rene Descartes. However, by developing the universal law of gravitation Isaac Newton fundamentally undermined the mechanical philosophy. He did not really explain gravitation; famously declaring in the Principia "hypothesis non fingo" (I frame no hypothesis).

All that remained was what Albert Einstein in a different context was later to call "spooky action at a distance". By invoking Newton rational expectations theorists only reveal their ignorance of the underlying issues.

In a real sense we still do not know what gravitation is, hence the search for a quantum theory of gravity. We do not know what space and time, or better still, space-time is. We don’t know whence comes mass, although perhaps the Large Hadron Collider at CERN will experimentally confirm the Higgs Mechanism. Most matter is in fact "dark matter" and that remains a mystery.

Even worse by far most of the universe consists of "dark energy" that accounts for the process that underpins the existence of a cosmological constant. This energy is called "dark" because nobody knows what it is.

Lacking any hard and fast definition of the physical or of the ontological philosophical naturalism is not rationally defensible, we may thereby conclude.