Economics is widely recognized as an independent branch of knowledge, but this was not the case before Adam Smith’s The Wealth of Nations publication in 1776. Since the Sixteenth Century, Mercantilism had been the dominant school of thought among economists. The mercantilistic perspective views economy, which is already under governmental control, as a means at the disposal of the political power for the territorial unification of the State (Heckscher, 1936). At that time, thus, economics was perceived as a set of proposals aimed at guiding the Sovereigns in the daily administration of their State to prevent them from abusing their power. Smith challenges this idea by addressing several economic issues without taking into account the government involvement in their resolution. For instance, Smith argues that economic prosperity can be achieved by freeing trade from governmental control (Sen, 2016). What is revolutionary about the Scottish philosopher’s thought is that he detaches from politics and ethics, thus enhancing the independency of economics as a science.

Economics is indeed a peculiar science, as it differs from the others for several reasons. The first problem that emerges by comparing economics to natural — hard — sciences is that it can rely exclusively on direct observations of phenomena under real-world circumstances to formulate its theories, whereas natural scientists can carry out an indefinite number of experiments (Mill, 1836). The kind of observations to which economists are bounded necessarily implies the fact that, while studying certain phenomena, an economist cannot get rid of all those disturbing variables that could affect phenomena themselves. Another problem is given by the changing nature of economic phenomena. Whenever an economist succeeds in shaping a reliable model and, based on that, in making a prediction; there is always the possibility that, even after a short period, the conditions that have made that model acceptable change and, thus, the prediction turns out to be false (Hausman, 1992). Hence, the difference between economics and natural sciences is of degree and not of kind. Consequently, being a science, economics aims at providing a set of theories capable of explaining how economic phenomena work, in particular when the surrounding circumstances change — according to the viewpoint of Friedman (1953).

Criticizing this thesis, which gives economics a science status, and, therefore, entitled to make predictions, is the first step for those who, on the one hand, refuse the scientific nature of the discipline and, on the other, see economics as an Ideology rather than a science. The predictive power of economic theories is undermined by the very character of the predictions they make. Economics makes generic predictions (Rosenberg, 1999) which, contrary to specific predictions, lack precision. When an economist makes a prediction he is only foreseeing that something will happen, but he is not specifying when, where, and to what extent a certain phenomenon will affect the economy. Furthermore, often economic predictions are contrasting. Consider, for instance, the dichotomy between Keynes’ and Hayek’s thoughts on the role played by monetary policy. To Keynes, low interest rates boost consumption and investment, thus increasing the aggregate demand. To Hayek, instead, low interest rates cause an excessive credit creation by banks that imply unsustainable investments which, eventually, turn into a loss rather than a profit. Such a disagreement causes disorientation, as it seems that economists, from the moment they choose how to approach a certain issue to the moment in which they interpret evidence, can’t help giving their opinions (Matthews, 1985). An economic prediction, then, may contain a political message independently from whether its author means it or not (McCloskey, 1983).

The Two Theses in Practice

Therefore, the debate is about the real goal of economics. For those who believe economics is a science, the goal is to describe and predict economic phenomena. For those who believe economics is an Ideology, as it fails as a predictive science, its goal is to propose political ideas by hiding them beneath economic theories. However, both agree on the existence of some real-world phenomena that belong to the economic sphere. In other words, regardless of its purpose, economics is indeed about something. The question is whether scholars of this discipline do study such phenomena in a standardized and scientific way or whether they pretend to provide functional theories while, indeed, they are advocating some policies.

At this point, it might be useful, at least for the sake of clarity, to examine the two theses in practice; that is, to analyze which are the two possible goals of a certain economic theory. Akerlof’s “Market for Lemons”, a subfield of the broader Theory of Markets, will be the subject of this analysis. The Market for Lemons is used by Akerlof as a model in which an economic phenomenon, namely information asymmetry, takes place.

The Market for Lemons is a market for second-hand cars, where the quality of cars ranges from very bad, the lemons, to very good. Sellers know the quality of their cars, whereas buyers don’t. Still, buyers know that the cars are not all alike. Both parties are aware of the different economic value of cars. Consider, for instance, a value X for low-quality cars, a value Y for medium-quality cars, and a value Z for high-quality cars (such that X < Y < Z and that there is an equal number of cars of each type). As buyers know that they are taking the risk of the car turning out to be a lemon, they will try to set the price as close as possible to Y, the price of the medium-quality cars. Sellers of high-quality cars, which are valued more than Y, will go out of the market. When new buyers approach the market, only low-quality and medium-quality cars will be available. As a consequence, they will try to set a price that is in-between X and Y. This way, sellers of medium-quality cars will exit the market. This process goes on until no trade takes place at all.

Akerlof identifies several institutions capable of counteracting this process. A guarantee, for instance, is the seller’s promise to repair or change a product that turns out to be defective. Then, there are brand-name products, that usually indicate high-quality. As far as services are concerned, licensing practices reduce the uncertainty about quality (Akerlof, 1970).

Therefore, Akerlof predicts that, when certainty lacks, a market should fail. What is the meaning of this? If economics is a science, then Akerlof’s goal is simply to propose a model that describes the way a market behaves when there is information asymmetry. If economics is an Ideology, then Akerlof’s goal could be to sponsor large-scale retail trade at the expense of small businesses or, more generally, to advocate a more intense regulatory activity by the government.

On Economics Predictive Power

Which of the two standpoints prevails? To answer this question, the best thing to do is to take the perspective of those who may benefit from an economist’s predictions. Business community, for instance, makes use of these predictions. Its members are interested in their predictive accuracy, rather than in whether their underlying theory is ideological or strictly scientific (Hands, 1984). This argument can be generalized to state that the scientific nature of economics cannot be questioned unless its predictions turn out to be specious.

Consider Akerlof’s Market for Lemons once again. Let’s analyze its predictions more in-depth. Lynch, Miller, Plott and Porter (1986) study how information asymmetry affects an experimental market. Participants are divided into two groups: sellers and buyers. Sellers have to decide whether to produce Regulars, low-quality goods, or Supers, high-quality goods. The production costs for Supersare higher than those for Regulars, even though trading high-quality goods is more profitable. Also buyers have higher values from purchasing Supers. In the first bargaining round, prices gravitate in-between Regulars’ and Supers’ equilibrium prices, even though they are closer to the Supers’ ones. This may suggest that both parties have understood that it is better to trade high-quality goods rather than low-quality goods. However, some buyers find out that they have overpaid Regulars. As a consequence, in the second round, they try to set the price as close as possible to the Regulars’ one. Sellers, who cannot afford to produce Supers and sell them at that price, will move to Regulars. In the following rounds, only low-quality goods will be sold.

Therefore, the experiment shows that Akerlof’s prediction is right: information asymmetry causes market failure, as high-quality goods are driven out of the market. Furthermore, the experiment brings evidence to Akerlof’s conclusions; that is, as warranties and the effect of sellers’ reputation are introduced, the average trading price increases.

On Economics Disagreements

It might still be argued that the Market for Lemons case is not a good one to prove that economics does predict economic phenomena. Indeed, Akerlof’s model is one of the most influential models in economics of Information and, thanks to it, he was awarded the Nobel Prize in 2001. Furthermore, when Akerlof proposed his model there were no other theories about the consequences of information asymmetry; whereas a problem of economics is that it is likely to find two contrasting theses on the same economic phenomenon.

For instance, Matthews (1985) grounds his argument on a disagreement between two economic predictions. He reports the following statements: “Only if real wages are reduced can competitiveness be increased sufficiently to ensure an increase in employment” and “Cutting wages depresses demand in the economy, and leads to further unemployment” (p. 52). From this point, Matthews concludes (p. 58) that economists are unlikely to give up their opportunity to influence public opinion when predicting economic phenomena.

To Matthews, thus, economics is non-scientific because there are different standpoints on the same economic phenomena. However, disagreement between scholars cannot be considered evidence to state that a certain discipline is not scientific. For instance, when Copernicus proposed his Heliocentric System, also the Geocentric System was able to match the empirical facts, namely the positions of the planets; the choice of the model was to be grounded on commonsense (Frank, 1951). Even so, nobody, at that time, questioned the scientific nature of Astronomy because there were two possible theories.

On Economics Use of the Scientific Method

The impossibility to apply the scientific method to economic theories is the last factor that could undermine the thesis according to which economics is a science. This is probably the weakest reason since it is about something acknowledged by economists too. Nevertheless, some might still argue that, to be a science, a discipline must make use of a strictly, traditional, scientific method: “a method of investigation in which a problem is first identified and observations, experiments, or other relevant data are then used to construct or test hypotheses that purport to solve it”(according to the Collins Dictionary); that is, an inductive reasoning. However, a discipline like Mathematics, which is commonly recognized as a Science, has very little to do with induction; whereas it has a lot of deductive reasoning (McLaughlin, 1954).

Therefore, economics cannot be blamed for not using the scientific method if other disciplines, labelled as sciences, do not use it as well. Moreover, science is a social construct and, as such, its procedures are agreed upon among people (Guthrie, 2010). A method that someone considers scientific today may turn out to be non-scientific tomorrow, and vice versa.

Conclusions

In conclusion, then, it is possible to reject the idea according to which economics cannot be a science. Still, this doesn’t mean that economics is a hard science, as it is undoubtedly an atypical one. As for the fact that often economic theories include political programs, this is due to the very nature of the subject. Economics is strictly related to the process of policy-making, but this doesn’t mean that economics is part of Philosophical Politics. Its theories simply have political implications, but this is not a degrading factor. No doubt, economics is a science; even though with all the above-mentioned limitations.

References

Akerlof, G.A. (1970) ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, The Quarterly Journal of Economics, 84(3), pp. 488–500

Frank, P.G. (1951) ‘Three Aspects of Science (Logical-Empirical, Metaphysical and Sociological) [Abstract]’, Bulletin of the British Society for the History of Science, 1(6), pp. 163–164

Friedman, M. (1953) ‘The Methodology of Positive Economics’ in Essays in Positive Economics, Chicago: University of Chicago Press, pp. 3–43

Guthrie, G. (2010) ‘Research Methodology’ in Basic Research Methods, Delhi: SAGE, pp. 38–50

Hands, D.W. (1984) ‘What Economics Is Not: An Economist’s Response to Rosenberg’, Philosophy of Science, 51(3), pp. 495–503

Hausman, D. (1992) ‘The Limits of Economic Science’ in Essays on Philosophy and Economic Methodology, Cambridge: Cambridge University Press, pp. 99–105

Heckscher, E.F. (1936) ’Revisions in Economic History: V. Mercantilism’, The Economic History Review, 7(1), pp. 44–54.

Lynch, M., Miller, R.S., Plott, C.R., and Porter, R. (1986) ‘Product Quality, Consumer Information and “Lemons” in Experimental Markets’ in Empirical Approaches to Consumer Protection Economics, Federal Trade Commission, Washington, DC, pp. 251–306

Matthews, A. (1985) ‘Economics and Ideology’, The Crane Bag, 9(2), pp. 52–59

McCloskey, D.N. (1983) ‘The Rhetoric of Economics’, The Journal of Economic Literature, 21(2), pp. 481–517

McLaughlin, P.J. (1954) ‘Scientific Method’, University Review, 1(2), pp. 38–46

Mill, J.S. (1836) ‘On the Definition and Method of Political Economy’ in Hausman D.M. (ed.) The Philosophy of Economics: An Anthology, 2 (1994), Cambridge: Cambridge University Press, pp. 52–68

Rosenberg, A. (1999) ‘Economic Theory as Political Philosophy’, The Social Science Journal, 36(4), pp. 575–587

Sen, A. (2016) ‘Adam Smith and Economic Development’ in Hanley R.P. (ed.) Adam Smith: His Life, Thought, and Legacy, Princeton; Oxford: Princeton University Press, pp. 281–302