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All-inclusiveness (anamnetic) – It must encompass, integrate, and incorporate all facts known about economic behaviour. Coherence – It must be chronological, structured and causal. It must explain, for instance, why a certain economic policy leads to specific economic outcomes - and why. Consistency – It must be self-consistent. Its sub-"units" cannot contradict one another or go against grain of main "theory". It must also be consistent with observed phenomena, both those related to economics and those pertaining to non-economic human behaviour. It must adequately cope with irrationality and cognitive deficits. Logical compatibility – It must not violate laws of its internal logic and rules of logic "out there", in real world. Insightfulness – It must cast familiar in a new light, mine patterns and rules from big bodies of data ("data mining"). Its insights must be inevitable conclusion of logic, language, and evolution of theory. Aesthetic – Economic theory must be both plausible and "right", beautiful (aesthetic), not cumbersome, not awkward, not discontinuous, smooth, and so on. Parsimony – The theory must employ a minimum number of assumptions and entities to explain maximum number of observed economic behaviours. Explanatory Powers – It must explain behaviour of economic actors, their decisions, and why economic events develop way they do. Predictive (prognostic) Powers – Economic theory must be able to predict future economic events and trends as well as future behaviour of economic actors. Prescriptive Powers – The theory must yield policy prescriptions, much like physics yields technology. Economists must develop "economic technology" - a set of tools, blueprints, rules of thumb, and mechanisms with power to change " economic world". Imposing – It must be regarded by society as preferable and guiding organizing principle in economic sphere of human behaviour. Elasticity – Economic theory must possess intrinsic abilities to self organize, reorganize, give room to emerging order, accommodate new data comfortably, and avoid rigid reactions to attacks from within and from without. Many current economic theories do not meet these cumulative criteria and are, thus, merely glorified narratives.
But meeting above conditions is not enough. Scientific theories must also pass crucial hurdles of testability, verifiability, refutability, falsifiability, and repeatability. Yet, many economists go as far as to argue that no experiments can be designed to test statements of economic theories.
It is difficult - perhaps impossible - to test hypotheses in economics for four reasons.
Ethical – Experiments would have to involve human subjects, ignorant of reasons for experiments and their aims. Sometimes even very existence of an experiment will have to remain a secret (as with double blind experiments). Some experiments may involve unpleasant experiences. This is ethically unacceptable. Design Problems - The design of experiments in economics is awkward and difficult. Mistakes are often inevitable, however careful and meticulous designer of experiment is. The Psychological Uncertainty Principle – The current mental state of a human subject can be (theoretically) fully known. But passage of time and, sometimes, experiment itself, influence subject and alter his or her mental state - a problem known in economic literature as "time inconsistencies". The very processes of measurement and observation influence subject and change it. Uniqueness – Experiments in economics, therefore, tend to be unique. They cannot be repeated even when SAME subjects are involved, simply because no human subject remains same for long. Repeating experiments with other subjects casts in doubt scientific value of results. The undergeneration of testable hypotheses – Economic theories do not generate a sufficient number of hypotheses, which can be subjected to scientific testing. This has to do with fabulous (i.e., storytelling) nature of discipline. In a way, economics has an affinity with some private languages. It is a form of art and, as such, it is self-sufficient and self-contained. If certain structural, internal constraints and requirements are met – a statement in economics is deemed to be true even if it does not satisfy external (scientific) requirements. Thus, standard theory of utility is considered valid in economics despite overwhelming empirical evidence to contrary - simply because it is aesthetic and mathematically convenient.
So, what are economic "theories" good for?
Economic "theories" and narratives offer an organizing principle, a sense of order, predictability, and justice. They postulate an inexorable drive toward greater welfare and utility (i.e., idea of progress). They render our chaotic world meaningful and make us feel part of a larger whole. Economics strives to answer "why’s" and "how’s" of our daily life. It is dialogic and prescriptive (i.e., provides behavioural prescriptions). In certain ways, it is akin to religion.
In its catechism, believer (let's say, a politician) asks: "Why... (and here follows an economic problem or behaviour)".
The economist answers:
"The situation is like this not because world is whimsically cruel, irrational, and arbitrary - but because ... (and here follows a causal explanation based on an economic model). If you were to do this or that situation is bound to improve".
The believer feels reassured by this explanation and by explicit affirmation that there is hope providing he follows prescriptions. His belief in existence of linear order and justice administered by some supreme, transcendental principle is restored.
This sense of "law and order" is further enhanced when theory yields predictions which come true, either because they are self-fulfilling or because some real "law", or pattern, has emerged. Alas, this happens rarely. As "The Economist" notes gloomily, economists have most disheartening record of failed predictions - and prescriptions.
Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, PopMatters, and eBookWeb , a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory Bellaonline, and Suite101 .
Visit Sam's Web site at http://samvak.tripod.com