Is Economics a Science? A Critical Examination of Equilibrium and Rationality

This podcast episode delves into a critical discussion about the scientific validity of economics, particularly challenging the foundational concepts of equilibrium and the law of supply and demand. The hosts and guest contrast the inductive methodology of natural sciences, which derives laws from empirical observations, with what they perceive as economics' deductive approach, where laws and assumptions about human behavior precede and dictate expected market outcomes. This fundamental difference raises questions about the rigor and empirical grounding of economic theories, suggesting that economics often starts with idealized models rather than real-world observations.

The discussion highlights key distinctions, such as the difference between local market observations (e.g., prices adjusting for unsold goods) that might inspire the *idea* of equilibrium, versus the complex intellectual construct of general equilibrium applied to an entire economic system. It scrutinizes the assumptions underpinning these models, including perfect information and rational actors (Homo economicus), arguing that these idealizations fail to account for the complexities of modern financialized and globalized economies. The 2008/2009 financial crisis is cited as a prime example where models based on such assumptions proved inadequate in explaining or predicting real-world economic shocks.

Despite these critiques, the episode explores why the concept of equilibrium persists in economic thought. Reasons include its utility in mathematical modeling, its intuitive appeal as a cause-and-effect mechanism, and its commonsensical nature. However, the conversation also warns against the dangers of overextending the concept, leading to notions like 'stochastic' or 'unemployment' equilibrium, which may dilute its explanatory power and turn it into an 'empty shell.' The practical insight offered is that equilibrium might be useful for understanding *tendencies* under highly idealized conditions, but it falls short as an accurate description of actual economic reality.

The broader implications of this debate extend to economic policy and ethical considerations. The discussion touches on the Hayekian perspective, which advocates for allowing markets to 'learn' through severe downturns, even if it means significant short-term suffering, as exemplified by Hayek's advice to Margaret Thatcher in the early 1980s. This raises profound questions about the human cost of adhering to theoretical principles and the role of economists in addressing social and political consequences. Ultimately, the episode suggests that a more nuanced, empirically grounded approach is needed, one that acknowledges human irrationality, information asymmetry, and the social construction of preferences, moving beyond simplified models to better understand and address real-world economic challenges.

it seems like actually economics is almost like the opposite of science because science starts with observations and it sees in real-world events correlations and things happening at the same time or happening regularly and then on that basis it infers laws

it seems like economics goes the other way around and it starts with the laws and the assumptions about how things are and how people behave and the basic facts of what determines what happens and then on that basis it says so we can expect to find for example an equilibrium in the market

it seems altogether less rigorous than science

economists when they started thinking about this peculiar behavior of the surplus apples always being disposed of by the end of the day had to appeal to some principle of human nature that enabled this to happen

the very very strong assumption that efficient market hypothesis likes to use isn't it we say ah empirically we we obviously had a bit of a shock in 2008 2009 right but why did we have that sure what did they get wrong

one of them is that we are all rational beings and we all know that we are not

I think I think Schumpeter is a very very good case of someone who knows that equilibrium isn't the right framework but clings to it all the same because it's the only thing he's got if you abandon it you just have chaos

in the long run we'll all be dead

I don't agree with it what you need it's not credible what you need is an immediate cessation of money creation immediately now from tomorrow there will be unemployment of 60% for about a year but after that she'll be fine

the correct status of equilibrium theory is not as an explanation of how things are but how things will be to the extent of the assumptions that lead to equilibrium hold in society