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Facts and Economic Science

Article  in  SSRN Electronic Journal · January 2015

DOI: 10.2139/ssrn.2565728

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Facts and Economic Science

Wilson Sy1

Abstract

Economics needs a set of agreed facts to create a scientific economic paradigm, without which
economics remains trapped in the rationalist-scholastic tradition with many rival schools of
conflicting theories. Physics and other natural sciences are shown in this paper to be based on an
empiricism revived in the European Renaissance, leading to the scientific progress which defines
modern civilization. Misguided by some philosophers of science, economics has put the theoretical
cart before the empirical horse. In a scientific reform of the economic profession and economic
education, this needs to change.

Key words: economics, science, philosophy, methodology, paradigm

1
16 February 2015. Investment Analytics Pty Ltd. The author thanks Carole Sladen for a careful reading of the
manuscript. The content is entirely the responsibility of the author, who has no conflict of interest and is not
paid by any institution.

Page 1 of 19
1. Introduction

This paper explains that economics lacks facts and empiricism. It should be observed that economic
textbooks are not based on facts (e.g. Marshall, 1890; Mankiw, 2009). The economic theories
presented are based on narratives and not on any facts which anyone can recognize as facts proven
from their experience. For example, the observed fact – that an economy can collapse or develop
periodic crises – contradicts most textbooks, which assume collapse and crisis are negligible or
unimportant or unknowable (Sy, 2012). Such and other statistical data are rarely used even in
contemporary textbooks to illustrate or show how the theories presented are relevant to the
contemporary real-world situations (e.g. Varoufakis, 1998; Hill and Myatt, 2010; Keen, 2011).

Outside academia, there is a greater abundance of statistical data presented in the media through
news reports and written publications. But these data do not indicate necessarily an abundance of
facts, because the data are often revised and their statistical and economic significance are often
hotly disputed. For example, data on the global financial crisis (GFC) are still considered accidental
or exogenous “Black Swan” events and insignificant for mainstream economic theory – the global
economic and financial system has remained largely unchanged despite minor reforms. The new
data on the crisis are not recognized as fundamentally important facts for economic theory.

Data are merely clues to possible facts. Data have to be checked for accuracy against other data and
have to be correctly interpreted to turn them into clear and accurate facts about the economy
(Morganstern, 1963) – a difficult and important task, significantly undervalued in economics.
Instead of being economic facts, data are often used superficially to support preconceived theories
for propaganda purposes. What is important for economics is to discover an agreed set of
significant facts which are essential to a scientific economic paradigm. It is shown in this paper that
agreed facts are the foundation of science such as physics.

In economics, even now, there is little agreement about such basic facts as inflation. The inflation
rate in discussions depends on its definition, such as the basket of goods on which price changes are
measured and on the method of calculation. There are actually many different inflation rates. By
ad-hoc changes to the basket of goods (e.g. including or excluding financial assets) and by
adjustments to compensate for increased costs (e.g. goods substitution and hedonic adjustments), it
is possible to manipulate the data to create biased statistics. Critics of official data on inflation and
other statistics have never been properly refuted (SGS, 2013).

Measured inflation is data, not facts. The lack of agreed facts about inflation has led to divergent
monetary policies of central banks: “The Bundesbank, for example, is fighting the threat of high
inflation, whereas the Fed is more concerned about the prospect of deflation” (White, 2014). The
situation was summed up earlier by White (2013): “there is, in practice, no body of scientific
knowledge (evidence based beliefs) solid enough to have ensured agreement among central banks on
the best way to conduct monetary policy”.

The lack of agreed facts plagues all economics, not just mainstream economics. This paper explains
that science is essentially about facts and shows this through specific and detailed examples from
the history of physics and other natural sciences. The importance of facts for economics is discussed
through its implications for reform of the economic profession and of economic education.

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2. Economic Scholasticism
Economics is not science because much of its knowledge is not based on facts derived from the
scientific method, where facts make or break theories which in turn drive the discovery of new facts.
Economics is still very much influenced by the rationalist-scholastic tradition going all the way back
at least to Aristotle who originated many economic terms. Doing economics still largely means
“sitting in a chair and making it up”, even if done with mathematics in “observation-less theorizing”
(Bergmann, 2009).

The rationalist-scholastic tradition believes that reason, innate knowledge and the use of dialectical
methods are the chief sources of new knowledge. Facts are considered obvious or as given. This
tradition is still practised today by a majority of economists, whose point of departure for their
research is referencing the philosophies or theories of other economists within a recognized school
(e.g. Neoclassical, Keynesian, Marxist, and Austrian). The rationalist-scholastic approach leads to an
epistemology based on rhetoric, arguments and disputes, which are typically unresolved, leading to
a pluralism of economic schools – a pluralism of dogmas.

For the schoolmen, only books and research papers published within a particular school are
regarded as knowledge by that school. For example, it is not permissible to introduce the concept of
irrationality in neoclassical economics, which believes rationality in individual decision-making is
axiomatic in how an economy works. The way economic journals are segregated into different
schools, criticisms of a particular school are never published in that school’s journals, where they
could be most useful in stimulating progress for that school. This insularity leads to a view of
economics as religion (Nelson, 2001).

Philosophers never all agree on any subject, as there is no such thing as universal philosophy.
Philosophers also work in the rationalist-scholastic tradition, “sitting in a chair and making it up” on
any subject, including science. Economists have chosen to be guided or misguided by certain
philosophers. For example, influenced by the “as if” philosophy of Vaihinger (1924), the economic
methodology of Friedman (1952) is founded on certain mistaken views:

Yet the belief that a theory can be tested by the realism of its assumptions independently of
the accuracy of its predictions is widespread and the source of much of the perennial
criticism of economic theory as unrealistic. Such criticism is largely irrelevant…

What may be excusable or convenient in specific cases cannot be the basis of a general methodology
(Rogeberg and Nordberg, 2005; Lehtinen, 2013). If “realism” is taken to mean being accurate and
consistent with the facts of reality, then the above view is illogical or harmful to economic
knowledge, as will be shown here how critical are accurate assumptions to the foundation of
scientific theory. Generally, an accurate prediction from inaccurate assumptions is meaningless
either in logic or in science – accurate predictions are not sufficient validation of theory, as accurate
assumptions are necessary as well.

Unfortunately, few actual scientists have bothered to reflect philosophically on what they have been
doing for the benefit of others who aspire to do science. Those economists who have attempted to
break away from the Lakatos’ “degenerative research programme” of rationalist-scholasticism have
not done science, but have merely imitated science, as they have been misguided by certain
philosophers of science.

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3. Imitation of Science

Economics has always envied physics and has sought to imitate it (Mirowski, 1989), and in recent
decades through mathematization and data analysis. The neoclassical school through its concept of
equilibrium has lent itself to the mathematization of Walras and Arrow-Debreu (1954). This has
helped neoclassical economics to distinguish itself from other schools in apparently gaining the
status of science. But neoclassical economics is not science. To put this crudely, orthodox
economics pretends to be science, while much of heterodoxy does not even bother to pretend to be
science.

The mathematization of neoclassical economics does not change the scholastic nature of economics,
because mathematics is merely used to deduce logical conclusions through mathematical arguments
– another form of rhetoric. Neoclassical economics is not science if its axioms or the conclusions of
its theory do not correspond to economic facts of observation. For this reason, even today, most
mathematical models or theories in economics or finance are not science, because their relations to
facts are often contradictory or tenuous at best – the dynamic stochastic general equilibrium (DSGE)
models being important examples which are misguiding central bank policies.

The failure of mathematization to produce anything useful in economics has been blamed on
mathematics itself and formalism (Blaug, 1998; Lawson, 2012). But it is the general mathematical
incompetence of economists which has allowed mathematics to overwhelm the subject, as Debreu
(1991) noted:

The spread of mathematized economic theory was helped even by its esoteric character.
Since its messages cannot be deciphered by economists who do not have the proper key,
their evaluation is entrusted to those who have access to the code. But acceptance of their
technical expertise also implies acceptance of their values.

Most economists do not have the key to decipher mathematical theories and are therefore
incapable of critically evaluating their contents and rejecting them. This incompetence has led to
economists and the public confusing mathematical theory2 with scientific theory.

Unscientific mathematical models and theories have been allowed to spread “helped even by its
esoteric character.” As noted by Leontief (1970) twenty years earlier:

Professional journals have opened wide their pages to papers written in mathematical
language; colleges train aspiring young economists to use this language; graduate schools
require its knowledge and reward its use. The mathematical model building industry has
grown into one of the most prestigious, possibly the most prestigious branch of economics.

The proliferation of “observation-less theorizing” (Bergmann, 2009) with mathematics has hindered
rather than helped economics to be a science, as Leontief (1970) also noted:

Continued preoccupation with imaginary, hypothetical, rather than with observable reality
has gradually led to a distortion of the informal valuation scale used in our academic
community to assess and to rank the scientific performance of its members. Empirical
analysis, according to this scale, gets a lower rating than formal mathematical reasoning.

2
Philosophers of science such as Popper, Lakatos, Feyerabend and Cartwright may have mathematical
training, but have never practised science; they have confused, to various degrees, mathematics with science.
Their rationalist-scholastic philosophies of science conflict with one another.

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It should be emphasized that “preoccupation with imaginary, hypothetical, rather than with
observable reality” is not just a plague on mathematical theories, but virtually all economic theories,
due to the rationalist-scholastic tradition mentioned above. But mathematical theories have an aura
of science and therefore are less easily rejected by those less mathematically competent.

Unlike microeconomics which has very limited data collection, macroeconomics has had systematic
data collection on national accounts for several decades, with the expressed purpose of informing
governments on Keynesian economic management. Unfortunately, econometrics – which is the
statistical analysis of economics data – has not produced significant facts for economics. Summers
(1991) summarized the failure of econometrics as creating a “scientific illusion in empirical
macroeconomics”.

Decades of econometric studies have had very little impact on economics (Summers, 1991), because
there has been no discovery of significant facts which economic theory must explain (not even the
Phillips curve relationship). Most econometric studies are more about statistical techniques which
might be relevant for economics, rather than about economics itself. Applied econometrics typically
leads to results which are neither statistically significant nor economically significant. A partial
explanation may be that economists do not really understand mathematical statistics (Swann, 2009,
2012; Ziliak and McCloskey, 2004).

In relation to facts, contemporary economic theories have not changed from forty years ago when
Kaldor (1972) noted:

In economics, observations which contradict the basic hypotheses of prevailing theory are
generally ignored: the "theorist" and the “empiricist" operate in two isolated compartments
and the challenge of anomalous observations is ignored by the theorist as something that
could be taken into account at the stage of "second approximation" without affecting the
basic hypotheses.

Evidently, even Friedman’s apology that “unrealistic” assumptions are to be judged along with the
accuracy of their predictions, does not hold much credibility in practice, because wrong predictions
are typically ignored. The rationalist-scholastic tradition in economics has long deprecated the
importance of empiricism which is considered the philosophical rival of rationalism adopted
historically by great economists. Economists, listening too much to philosophers, have tended to
reinforce the prejudice against empiricism which is the essence of science. Economics is not science
because it has put the theoretical cart before the empirical horse.

In a discussion on science in finance (Sy, 2008), the scientific method has been defined as an
iterative and interactive process between deductive theory and inductive empiricism. This
description of the scientific method is neutral and silent on the relative merits of where to start in
the circular process: from theory to data or from data to theory? An answer is provided here.

In a very primitive and elemental sense, theory must precede data because some elementary
theoretical concepts are needed to guide data collection. But beyond these first steps, it would be
wrong to conclude theory is more important than data. To battle the scholastic prejudice of innate
knowledge, which is still very strong in economics, this paper emphasizes the importance of
empiricism by exposing some common misconceptions about the relative importance of theory and
facts in science. To avoid the misconception and confusion which are created from generalizations
by philosophers (Hayek, 1952, 1974), specific examples from physics are used to illustrate the
relationship between theory and facts.

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4. Facts in Physics
Science is shown to be empirical as opposed to rationalist-scholastic. Empiricism is primarily about
facts with theory playing a secondary role in organizing facts and in the discovery of new facts. Facts
can falsify theories, but theories cannot falsify facts – only new facts can falsify old facts. Theory
begins with old facts and ends with potentially new facts. To be sure, identifying facts is not always
straightforward, as there are different types of facts: simple facts, specific facts, compound facts,
general facts, etc.

The theories of Newton and Einstein are not rationalist achievements as commonly believed judging
from their deductive-axiomatic presentations – rather, they have their essential origins in
empiricism. It was observed facts and their reconciliation which led them to their theories. They did
not simply sit in their armchairs and dream up their theories from innate knowledge in the
rationalist-scholastic tradition. Newton performed many physics experiments and was well-known
as an alchemist, while Einstein invented devices with 19 patents and was involved in gyromagnetic
experiments even while he was working on the theory of relativity (Galison, 1982).

The theoretical genius of Newton and Einstein consists of understanding which facts are most
important among a plethora of other facts. They were also able to create new theoretical concepts
to explain how those key facts are logically linked. Most people only focus on the mathematical
nature of their achievements without understanding the importance of their empirical foundations.
In a pithy repudiation of rationalism and scholasticism, Einstein (1934) said:

Pure logical thinking can give us no knowledge whatsoever of the world of experience; all
knowledge about reality begins with experience and terminates in it.

To illustrate the importance of empirical foundations in scientific theories, it is useful to provide

some historical details for the specific examples of Newton and Einstein. What is mentioned here
will be neither balanced nor exhaustive, but will be used primarily to make the point about
empiricism.

5. Newton’s Giants
In a letter to Robert Hooke in 1676, Newton himself provided the clue to his genius by saying
famously

If I have seen further it is by standing on the shoulders of Giants.

In addition to agreeing with the common interpretation that science advances by building on what
went before, it is emphasized here that Newton’s theory was based on the empiricism of giants,
particularly Galileo and Kepler, who in turn had built on the empirical observations of other giants
such as Tycho Brahe, Copernicus, and even Ptolemy. All told, Newton’s theory rested on centuries
of experimental and astronomical observations. It was not the apocryphal apple which fell on
Newton’s head that set off the “light bulb” moment of a rationalist epiphany.

Galileo taught Aristotelian philosophy and Ptolemaic astronomy, but rejected them through his own
empirical observations in the manner of Archimedes. Having invented the telescope, Galileo saw
four moons revolving around the planet Jupiter, which immediately falsified the Aristotelian doctrine
that all heavenly bodies must revolve only around the earth.

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Galileo made contributions to the measurement of length and time, studied the motion of
projectiles and made so many discoveries in kinematics (mechanics of moving bodies) that some
scholars maintained that he anticipated Newton’s laws of motion (Hawking, 2002, p. 397). In a
famous experiment in 1589, Galileo dropped two balls of different masses from the leaning Tower of
Pisa and showed that they reached the ground simultaneously, again falsifying the Aristotelian
doctrine that the heavier mass should fall faster.

The fact that all bodies fell with the same acceleration was critical to both Newton’s theory of gravity
and Einstein’s general theory of relativity. Galileo’s part in overthrowing rationalism and
establishing empiricism was recognized by Einstein when he said (Hawking, 2002, p.397):

Propositions arrived at purely by logical means are completely empty as regards reality.
Because Galileo saw this, and particularly because he drummed it into the scientific world, he
is the father of modern physics – indeed of modern science.

Kepler took Tycho Brahe’s astronomical data, abandoned the Aristotelian ideal of perfectly circular
orbits used by Copernicus and modified them into elliptical orbits to develop his three empirical laws
of planetary motion, which effectively summarized centuries of astronomical observations.

Newton’s genius was to recognize the key empirical facts which needed to be linked and to be
explained with a new theoretical concept. Newton’s law of gravitation states that two bodies attract
with a force proportional to their masses and inversely with their distance squared. This law forms
the axiomatic foundation for explaining and deducing Kepler’s laws.

It would be wrong to think Newton discovered “rationally” the law of gravitation first and then
deduced from it Kepler’s laws and elliptical orbits later – it was just the reverse – Kepler’s laws and
Galileo’s constant acceleration of falling bodies were used to deduce the law of gravitation. The
deductive, axiomatic presentation of the Principia (Hawking, 2002, pp. 725-1160) could mislead the
casual reader into thinking that it was rationalist achievement, like Euclid’s theorems. Nothing can
be further from the truth.

From the law of gravitation, other facts (e.g. the paths of comets and the tides) and known
astronomical data of his time can be deduced from mathematical calculations and, of course, the
law can be used also to predict the future movement of the planets and other astronomical
phenomena. Over the centuries, Newton’s laws of motion have been applied widely in many other
areas of physics.

6. Einstein’s Giants
Einstein also stood on the shoulders of empirical giants: Maxwell and Michelson-Morley, whose
observations formed the foundation of the special theory of relativity.

James Clerk Maxwell’s genius was to summarize centuries of empirical discoveries about electricity,
magnetism and their interactions as electro-magnetism in just four partial differential equations,
describing electrostatics (Gauss’ law), static magnetism (Gauss’ law for magnetism) , dynamic
electricity (Ampere’s law) and dynamic magnetism (Faraday-Maxwell’s law of induction). There
were large numbers of experimentalists who contributed to the facts of observation behind
Maxwell’s equations, including Gilbert, Franklin, Galvani, Volta, Oersted, Ohm, Ampere, Faraday,
Hertz, etc., even without mentioning the ancients.

Page 7 of 19
Today, Maxwell’s equations are applied flawlessly every second of the day in electric power
generation, lighting, heating, electrical appliances, telecommunication, transportation, aviation,
medicine, etc. It is remarkable that Maxwell’s equations can be combined to derive wave equations
for the electric field and magnetic field, which are predicted to travel at the speed of light in vacuum.

Under rationalist doctrines of Aristotle and Descartes, even in early twentieth century, most
believed light must travel through a medium (like sound through the air), which was called the
plenum, an invisible substance permeating the universe. If there were such a medium through
which light propagates, then due to motion of the earth through the medium, the speed of light
must vary depending on direction, whether it is with, against, at the right angles, or at other angles
relative to the motion of the earth.

In experiments performed in 1881 by Michelson, in 1887 by Michelson and Morley, and between
1902-1904 by Morley and Miller, the measured speed of light was constant to within experimental
error, and detection of the medium (then called luminiferous aether) failed. The significance of the
null result was appreciated by Einstein, who saw that the aether idea was unnecessary to the
explanation of the facts.

Einstein postulated the principle of relativity which assumes (Hawking, 2002, pp.1167-1190) that
Maxwell’s equations and the speed of light are the same for all frames of reference independent of
their relative uniform motion. It should be emphasized here that the theory of relativity was not the
result of brilliant mathematical deduction in the rationalist tradition – it was not the product of
“pure reason” made up sitting in a chair – as Einstein was driven by experimental facts in an
empiricism which needed to be reconciled by a new theory.

The linking of previously unrelated facts led to a theory which predicted other new facts. The
principle of relativity requires the laws of physics to be formally invariant under Lorentz
transformation rather than Galilean transformation, which remains a good approximation at low
velocities. But at high velocities, Lorentz transformation implies new physical phenomena such as
length contraction, time dilation, Doppler effect and the famous equation for mass-energy
equivalence: E = Mc 2 . At first, some of these implications may appear unrealistic or even absurd,
but they have been verified in accurate agreement with the facts of observation. Of course, Einstein
also went on to generalize the principle of relativity to accelerated motion under gravity which is
described by the geometry of curved space-time.

7. Natural Sciences
The two famous examples described above show that facts in axioms and conclusions of theory are
vitally important. Being “realistic” or otherwise in the Friedman sense (1952) is subjective and ill-
defined. Certain facts may appear at first to some to be “unrealistic” or absurd – e.g. God has not
made the earth at the centre of the solar system, or planetary motions are not perfect circles but
elliptical, or all swans are not white, etc. What is considered real is often subjectively based on
preconceptions (e.g. Aristotelian doctrine of a heavier body falling faster), but the reality is
objectively established through repeated observations as facts. In science, facts are what matter
and they are constantly being tested and re-tested, even if they do not appear “real” to common
intuition.

Facts are so important in physics that nearly 90 percent of publications in a survey (Morgan, 1988)
are on empirical analysis and the rest are on theory and modelling. The special theory of relativity

Page 8 of 19
and its axioms have not altered in any significant way for over one hundred years, but the facts of
the theory have been constantly enlarged, tested and refined. For example, with ever increasing
technological sophistication over the years, many different experiments have been conducted to
test and re-test the constancy of the speed of light, which was last measured to be accurate to less
than one part in 1017 in 2009.

As science moves to more and more complex systems, where the elementary units are more
complex – e.g. molecules in chemistry, DNA in genetics, cells in biochemistry, organisms in biology,
organs in anatomy, humans in medicine, etc. – more and more work consists of discovering and
organising new facts, rather than deductive theorizing. For example, nearly 100 percent of
publications in chemistry are on empirical analysis (Morgan, 1988).

Perhaps due to the nature of complexity, even small changes or dynamics can lead to many different
forms, possibilities and outcomes. For example, except for very simple cases, there is no deductive
theory able to predict the products of a chemical reaction of two different large molecules, even
though there are some physical laws such as those of thermodynamics. It is not clear whether there
is, or can be, any biological laws (Dhar and Giuliani, 2010; Dorato, 2011; el-Showk, 2014), without
which non-trivial theoretical deductions about biological phenomena are virtually impossible.
Natural sciences, outside physics, may have universal organizing principles such as natural selection
in evolutionary biology, but may not have significant universal laws from which to indulge in
deductive theorizing.

One of the goals of science may be to discover universal laws to create deductive theories, but to say
science must have universal laws is a common philosophical fallacy, e.g. as Popper (1935, p.37)
stated:

The empirical sciences are systems of theories. The logic of scientific knowledge can therefore
be described as a theory of theories. Scientific theories are universal statements.

If this were the definition of science, then only physics is science, not chemistry or biology and
certainly not medicine – an absurd conclusion. On the contrary, the empirical sciences are systems
of facts. Philosophy and philosophy of science are not where economists should learn about
science. Most natural sciences, outside physics, do not have significant deductive theories, but are
mainly concerned with discovering and organizing facts of observation. The main activity of
scientists is establishing and confirming facts and not deductive theorizing.

8. Economic Theories
Economics consists mainly of economic theories which are regularly falsified by facts. Economists
have confused deductive theorizing, particularly using mathematics, as science. Under the
rationalist- scholastic tradition, economists have not bothered much with facts, but have been
theorizing based on deductions from “innate knowledge” expressed as economic laws: the law of
demand, the law of supply, the law of diminishing marginal utility, etc. But these laws are not laws
of science based on well-established empirical facts.

Economic laws are assumptions or working hypotheses which are often factually false. For example,
as a basic law of economics, the law of demand is regularly violated in financial markets. As the
price of a stock rises its demand often increases rather than decreases (and vice versa), contradicting
the law of demand, in an empirically well-established “anomaly” called the momentum effect in

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modern finance (see e.g. Schwert, 2003). Yet a downward sloping demand curve is still taught in
economic textbooks as though it is a universal law.

Economic laws are not established facts and hence deductions from them, even with sophisticated
mathematics, have dubious validity. For example, the DSGE models used by central banks have very
poor forecasting records. The credit risk models used by rating agencies, too-big-to-fail banks and
regulators are based on false assumptions (Sy, 2008) and the global financial system is based on the
assumption that risk management is a science where the amount of risk capital is assumed to be
accurately calculable. It is likely that all these fallacies gave rise to policies which caused the GFC.

The global financial crisis has not been properly understood as a falsification of the basic premises of
economic and finance theories. The quadrillion over-the-counter (OTC) derivatives market has been
built on the same false premises and has been allowed to grow unregulated. These developments
clearly demonstrate that economists ignore facts, even those which are as dramatic as economic and
financial collapses. Economists have made little effort to research those facts or to analyse their
significance for their economic theories – there has been nothing radically new theoretically in the
several years since the GFC, as will be discussed below. A year or two after the GFC, the then
President of the European Central Bank, Trichet (2010) lamented:

Macro models failed to predict the crisis and seemed incapable of explaining what was
happening to the economy in a convincing manner. As a policy-maker during the crisis, I
found the available models of limited help. In fact, I would go further: in the face of the crisis,
we felt abandoned by conventional tools.

In the absence of clear guidance from existing analytical frameworks, policy-makers had to
place particular reliance on our experience. Judgement and experience inevitably played a
key role….

But relying on judgement inevitably involves risks. We need macroeconomic and financial
models to discipline and structure our judgemental analysis. How should such models evolve?

The situation has not changed and shows no signs of changing more than four years after those
comments, as central banks continue to experiment with non-conventional measures based on
“judgement” without ”macroeconomic and financial models to discipline and structure our
judgemental analysis”. It is possible that ad-hoc and undisciplined measures, particularly to extreme
levels beyond historical precedence, could have serious unintended consequences.

In a recent book which received many accolades including the award (though honourably rejected by
the author) of the Legion d’Honneur (the highest decoration in France), Piketty (2014, p. 28) put the
place of economic theories in perspective:

…there has been no significant effort to collect historical data on the dynamics of inequality
since Kuznets, yet the profession continued to churn out purely theoretical results without
even knowing what facts needed to be explained. And it expected me to do the same.

The significance of Piketty’s book lies not so much in his attempts at theoretical explanations or at
policy to address wealth inequality, which have been easily attacked (Varoufakis, 2014), but rather in
his introduction of facts into a new economic empiricism on the subject of wealth and income
distribution (Piketty, 2014, p. 29):

Page 10 of 19
 As I explained earlier, I began this work by collecting sources and establishing historical time
series pertaining to the distribution of income and wealth. As the book proceeds, I sometimes
appeal to theory and to abstract models and concepts, but I try to do so sparingly, and only
to the extent that theory enhances our understanding of the changes we observe.

Piketty’s main legacy will be that he valued facts over theories and that he was one the authors of
“The World Top Incomes Database” (Alvaredo et al, 2014).

Economic theories have been found inadequate by central bankers who sought to apply them to
decisions on economic policy. The reason for the failure of theories is not that orthodox economics
was a wrong choice, or that heterodox economics had the right answers, or that the correct theory
had escaped the attention of policy makers. The reason for the failure of economic theories is that
none of them is scientific, as none of them is based on facts. The question now is: how to reform
economics to create scientific economic theories?

9. Reform of Economics
The rationalist-scholastic approach has led to economic dogmas and theories which are unscientific
and fallacious in different ways. For example, the faith in the “invisible hand” of free-market
capitalism of classical, neoclassical and Austrian economics has led to inequality and instability at
various times in history and recently caused the global financial crisis (Sy, 2012). On the other hand,
faith in the government of Marxist and Keynesian economics has led to inefficiency, tyranny and
poverty at other times in history and recently after the GFC. Different economic theories have
caused different disasters.

The flaws in different theories are well-known and they have been extensively exposed and analysed
by economists of rival schools. But the criticisms have been ignored without resulting in any
improvement in any economic theory. There has been little progress in the understanding of how or
when market or government can or cannot be solutions to economic problems faced by society,
because economics is organized to prevent progress.

The lack of progress in economics comes from the way the economic profession is organized in
research funding, in journal publication and in academic promotion. Essentially economics is still
organized in the rationalist-scholastic tradition where economists proudly identify themselves
according to their schools: Keynesian, Austrian or whatever, much like declaring one’s religion. With
distinct schools, the economic profession has institutionalized groupthink where inconsistent and
counter-factual ideas and propositions are accepted without question within each group.

Economists are thus organized into “silos” where they only interact or communicate with others of
the same faith. Keynesians only read and publish in Keynesian journals and only attend Keynesian
conferences. New ideas and criticisms in economics have been systematically discouraged for
decades (Shepherd, 1995) with critical commentary in economic journals in continuous secular
decline (Coelho et al., 2005; Dollery et al., 2008). Austrians only read and publish in Austrian
journals and only attend Austrian conferences. Criticisms of Keynesian economics appear only
outside Keynesian journals, usually in Austrian journals for example. Any general criticism of the
economic profession, such as this paper, is not welcome anywhere in the economic community.

Yet it is obvious to thinking people everywhere that neither the market nor the government alone
has all the answers to the different needs of the economy. In practice, the government, which has

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the ultimate power on policy, has adopted a mixed approach in economic management, where the
government, in a democracy, delegates many economic decisions to markets. Yet this actual
approach involving both the market and the government is often seen as a political compromise to
placate the left or the right, without real economic coherence. The mixed approach is considered
inconsistent and contradictory by all sides of the economic divide, with one group wanting more
free-market and the other group wanting more government, with the groups in constant
antagonism.

The “silo mentality” of the economic profession means that there is little possibility of bringing all
sides of the argument together in a reasoned way for an objective resolution. There is little
agreement or acceptance of the facts that markets have failed unambiguously in some situations
(e.g. the GFC) and that governments have failed unambiguously in other situations (e.g. Soviet
Union). The lack of acknowledgement and acceptance of agreed facts mean that few resources have
been allocated to the understanding either market failures3 or government dysfunction.

The mixed approach leads to ad-hoc choices between the market and the government, without any
systematic process to validate or improve policy decisions. After decades of privatization of most
government enterprises and the deregulation of markets, without any factual appreciation of the
consequences, the global financial crisis, seen as market failure, has provided rationale for
government intervention everywhere in price fixing, market manipulation, wealth transfer, etc.
through zero interest rate policy, quantitative easing, bailout of too-big-to-fail banks, inflation
targeting, commodity price suppression, etc. All policy actions have been based on the theory of
expectation formation through “forward guidance” and market manipulation to create false
confidence in the economy – a rationalist theory without any empirical justification.

There has been no effective economic theory which provides discipline for those ad-hoc measures,
because there has been no theory which recognizes and understands both market failure and
government failure as facts of observation. Economic theory has little relevance or purpose if it does
not recognize, or have, clear facts or problems which it needs to explain or to resolve. Neoclassical
and Austrian economics ignore the failures of the free-market, while Marxist and Keynesian
economics ignore the failures of government.

Economic pluralism has prevented important facts from being recognized. For example, since the
GFC, there have been no real financial markets where prices are determined by the economic
fundamentals of supply and demand. With unlimited fiat currency, governments have manipulated
all markets to rise or fall as they wish and price signals no longer contain useful economic
information. For example, historically low government bond yields are signalling falling inflation and
low credit defaults for many years ahead. But this is a falsehood created by governments which
have been major buyers of their own bonds causing the low yields. Falling bond yields are used, in
turn, to create the “bogy man” of deflation and justify more bond-buying in a Keynesian
perpetuation of permanent monetary stimulus. The fact that market and government have merged
cannot be conceptually recognized by economic pluralism.

The lack of progress in economics and the impasse which is created by economic pluralism can be
addressed by a true application of the scientific method where facts play a pivotal role. Establishing
facts, important and significant facts, is a serious and arduous undertaking which has been under-
estimated and under-resourced by the economic profession. Without understanding or agreeing
about what are the important facts which need to be explained, economists’ preoccupations are the

3
Market failures have often been blamed on government interference rather than more fundamental causes
such as corrupt human behaviour.

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equivalent to those of the medieval scholastics who were preoccupied with questions such as "How
many angels can dance on the head of a pin?"

The global financial crisis has not been properly recognized as to its significance for economics. The
vast majority of economists who are academics did not see the GFC coming and the few who
reported and warned of the macroeconomic imbalances from accounting data are hailed as heroes
(Bezemer, 2010) who are considered to have exonerated the economic profession because at least
they “saw it coming”. But the majority, including academics, central bankers and governments, did
not.

Those few economists who saw trouble looming are Minkyans or Austrians whose explanation of
“boom-bust” business cycles lies in misallocation of credit and malinvestment. However, there is no
mechanism within the economic profession for those Minkyan or Austrian ideas to be included
coherently in fundamental economics and to be recognized by policy makers. Standard textbooks
are still silent on economic crises, pretending they do not exist. Economic graduates who populate
business and government have no disciplined way of anticipating, recognizing or dealing with
economic crises.

The situation shows few signs of changing several years after the GFC. At best, the institutes for
“new thinking” which sprung up in response to the GFC are merely reviving old and defunct
Keynesian ideas and, worse, are Trojan horses to crowd-out genuine new ideas. They continue to
attack the neoclassical orthodoxy on which they blame all economic ills, without acknowledging that
governments have used mixed approaches where Keynesianism has always dominated
macroeconomic policy. The fault of the GFC lies as much with governments as with the markets –
the decisions to deregulate markets or to fix prices (e.g. interest rates) are government decisions.

In order to make progress, the most important reform for the economic profession is to replace the
closed management structure based on the rationalist-scholastic tradition with an open structure
based on the scientific tradition of empiricism and facts. The “silo mentality” of the economic
profession means that there is no common agreement on what are the important facts to be
verified, explained and addressed. Facts must be allowed to breakdown silo walls. Economists need
to treat data and facts with a great deal more respect.

No comment or protest has been forthcoming from the economic profession about the questionable
quality of official statistics released by governments to manage expectation and to assess economic
performance of policy. For example, silence and inaction by most economists have made them
complicit to US Government deception through official distortion and manipulation of data on
inflation (SGS, 2013) and employment (Clifton, 2015). False or inaccurate data seriously hinders the
discovery of valid facts.

Current managers of the economic profession have failed to create the right incentives and
environment to make genuine progress in economics despite apparently enormous resources
devoted to it (e.g. there are more than 300 Ph.D. economists at the US Federal Reserve alone).
Research managers hide behind metrics such as the number of pages or the number of papers
published in ranked economic journals or citations, unwilling to form qualitative judgements. Their
subjective judgement may put their positions and reputations at risk, but it is a responsibility from
which they should not shirk by hiding behind “objective” measures.

Even now, there is no agreement on whether the GFC was the result of economic policy or it was an
accident to be managed like a natural catastrophe. To “save” the global economy, governments and
central banks are doing “whatever it takes” or, more accurately, doing “whatever they think it takes”

Page 13 of 19
without any discipline or valid theory to guide their judgement. Without recognition or
understanding of the real facts when they are accumulating, the next crisis will come as another
surprise like the previous one.

10. Education Reform

The reform of the economic profession may have to start from education reform, since it was bad
economic knowledge learnt at universities which led to bad economic policies. Policy makers did not
know, and still do not know, much about the GFC. University academics did not know enough about
the GFC, before, during or after, to be able to answer questions from their students who saw the
importance of the GFC in the nightly news. It was the attitude of their teachers who pretended that
the GFC never happened or that it was unimportant which prompted the student rebellions, which
demanded changes to the economic curriculum (Cassidy, 2014).

Economic education provides very little intellectual discipline to economic thinking. For example,
concepts of money and banking are not taught in basic textbooks. Even an advanced textbook on
interest rates and monetary economics such as Woodford’s Interest and Prices: Foundations of a
Theory of Monetary Policy (2003) has no discussion on risk and credit default. It is self-evident that
in today’s environment of the risk, credit default is a major determinant of market interest rates.

Economic education cannot be useful for understanding the real-world when it is based on the
fallacy that the economy runs perfectly like a machine, either by the market or the government. It is
far more important for students to learn about the facts of reality than about made-up theories. For
example, students must find absurd the idea that they are supposed to form rational expectations of
the economy, when they are struggling to find in economics anything useful with which to
understand the real-world. The global financial crisis cannot possibly be understood with a standard
economic education, even by academics themselves, when crises are assumed impossible.

Whatever is taught in universities as the orthodoxy is merely one dogma among many others which
constitute the heterodoxy. From the scientific point of view there is little real difference between
orthodoxy and heterodoxy. The pluralism of economic dogmas divides economics into a disunity of
theories which provides no coherent intellectual structure or discipline for economic policy – any
policy can be justified by one or more economic ideas. A pluralism of bad theories merely leads to a
pluralism of bad mistakes in economic policy as it flip-flopped from neoclassical to Keynesian, back
to neoclassical, back again to Keynesian in alternating influence in the past century.

Trapped in the rationalist-scholastic tradition, academic economists are scholars who transmit book
learning from one generation to the next, much like medieval scholastics transmitting knowledge in
medieval universities. Pluralism is scholasticism, where citing original sources and quoting
authorities are still important practices. Most theories taught in economic textbooks are narratives
of how economies should work according to different intuitive logic, as Aristotle did centuries ago.

Introductory economics textbooks are written inappropriately, like introductory physics textbooks.
While the laws of physics taught are based on centuries of empirical evidence, the “laws” of
economics taught are based on little or no empirical evidence. The laws of physics can be applied to
the real-world, whereas the “laws” of economics cannot be applied to the real-world. For example,
the widespread use (Marshall, 1890; Mankiw, 2009) of supply and demand curves intersecting at
states of equilibrium is based on fictional notions, unsupported by facts and not applicable to real
situations (Kaldor, 1972; Kirman, 1989). The diagrams are used for conceptual illustration and

Page 14 of 19
explanation which may be misleading as they are not validated by facts. Economic education in this
way is propaganda and not scientific training.

Economists should adopt something similar to the Hippocratic Oath that they promise to take care
and not to cause harm or damage. As economists, central bankers have often admitted (Trichet,
2010; White, 2014) that they don’t know what they are doing and that they have made serious
blunders (Greenspan, 2008). Then why are they given tasks or missions which they are often not
capable of performing or accomplishing? It is possible that, on the whole, they have done more
harm than good to the economy.

Economics needs a revolutionary transition from its rationalist-scholastic tradition in a similar

manner to what happened for much of learning during the European Renaissance, when science
blossomed. Rather than reading books and accepting dogmas, Galileo, Leonardo Da Vinci,
Michelangelo, etc. made first-hand observations for themselves and discovered a whole new world
of knowledge which is the foundation of science and, indeed, of modern civilization.

Students need basic economic concepts; they do not need to learn economic fallacies. Students
need to learn thinking skills. Therefore economic education must be reformed to teach students
how to seek out facts and how to test, evaluate, interpret and explain them. They need critical skills
to appraise economic theories for what they are: fallacies. Only then can useful economic theories
be developed. The time is ripe for creating economic empiricism. Computing facilities and economic
data are now widely available. All we need are computer programming skills (beyond Excel
spreadsheets) to apply to economic data to discover economic facts and test basic theoretical
assumptions.

11. Conclusion
A revolution is required to make economics a science. Economists have been misguided by
philosophers of science into pursuing a false agenda where “observation-less theorizing” in the
rationalist-scholastic tradition has been its primary activity (Bergmann, 2009). Mathematical theory
has been confused with scientific theory. The lack of attention to the discovery of significant
economic facts has led to most effort being directed to empty theorizing which has not been useful
for economics.

The global financial system is founded on the false assumption that the mathematical models,
including those used in the quadrillion-dollar-worth over-the-counter derivatives market, are
accurate and scientific, which they are not (Sy, 2008). Despite many Nobel Prizes in “Economic
Sciences” having been awarded, modern economics and finance remain unscientific. Unscientific
economic policies leading to economic and financial crises have been the man-made disasters we
are witnessing.

To make economics a science it is necessary to follow the successful examples of science, where
even the greatest achievements in theoretical physics have been shown in this paper to be also
substantial empirical achievements (Einstein, 1934). An economic empiricism needs to be
established with the empirical horse, in front, pulling the theoretical cart along behind it and not the
other way around, putting the theoretical cart before the empirical horse. A set of key economic
facts needs to be discovered which challenges theory to be explained in the context of a new
scientific economic paradigm.

Page 15 of 19
Reform of the economic profession and education requires a revolutionary shift from the rationalist-
scholastic tradition based on made-up theories to a scientific tradition based on observed facts. In
this paper, the reason that economics is not science has been reduced to a single cause: lack of facts,
because facts have so far been neglected relative to theories in the rationalist-scholastic tradition.
The deficiency of facts can be overcome now more easily with advancing information technology
and with proper education, provided the cause of the malaise is recognized.

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