Economists' New Friend

January 2013

The global financial crisis has created something of a crisis in economics, at least reputationally. How could a discipline that professes to be both scientific and predictive not have seen the crisis coming? Not everyone was unable to see it, of course, but they and their proposals do not prevail in today’s policy world.

The problem concerns the search for a scientific basis for economics. If its substance or object of observation were hard and physical (perceptible to the senses) then it would be simple enough to give it a Newtonian ground. Its content, however, is values, or prices, or inflation rates. But since when have these ‘things’ been sense-perceptible? And can or will they ever be?

To be scientific, therefore, economics has to find a scientific way of seeing what the senses cannot see. It does this by conceiving economic life as if it were a machine or something physical. Its metaphors are typically allusions to the physical world, especially the world of the industrial revolution, which was of course the context in which modern economics came into existence.

Some have sought to get round the inaptness of physical science to economics by likening the economy to a living process, which indeed terms like currency and liquidity suggest it might be. But such traps as circular flow await, like a central heating system and so needing a pump, an external cause.

When people question the scientific basis of economics, what they should question is its pretence, its faux science its trick of borrowing scientific reputation from its use of maths and stats. “By showing in the 17th century that the universe conforms to natural laws, Isaac Newton encouraged our age to see money as a branch of physics. [But] the City’s faux physicists never go back far enough in their analysis, because the data on the Bloomberg terminal cover a tiny period of history. “Real scientists tend to be much more sceptical about their data and their models,” says William Janeway, an MD of the private-equity firm Warburg Pincus and a Cambridge University lecturer. “They [today’s economists] had all of the maths, but none of the instincts of (real) scientists.”[1] 

What one might call faux finance often begins innocently enough. According to Andrew Haldane, Executive Director, Financial Stability, Bank of England (in a speech to the Financial Student Association, Amsterdam, April 2009 entitled Rethinking the financial network) “many risk management models developed within the private sector during the Golden Decade were, in effect, pre-programmed to induce disaster myopia.” Haldane argued that it is in the direction of virus behaviour, not mechanics that we now need to look to understand global finance. Likening the behaviour of the financial system to that of the internet, or SARS, and even HIV, his point was that continuing to liken the global financial crisis to a physical mechanism or even a computer model is as much faux economics as economics is faux physics. Even so, whether a financial system ‘behaves’ or not is a moot point because that would suggest it exists unto itself, apart that is from the human beings without whom it would not exist.

In contrast to all this, Rudolf Steiner very carefully uses examples from the world of physics – the weight of the brain, Archimedes principle, the thermometer, etc. He also very carefully discusses the nature of economics as a science being both theoretical and practical, not one or the other; neither deductive nor inductive, but descriptive. His image of the economist qua scientist is that he is inside the retort and therefore a part of what he is observing. That is to say, the economist is a knowing doer, a conscious thinker. 

This means we need make no analogies in order for economics to be scientific – we need but observe carefully our own thinking. A simple example: endless growth characterises cultural development, but not the finite world, which is more governed by growth and decay. ‘Growth, growth, growth’ is indisputable for the first therefore, but should not be used as a generality. When we do so we show that we have had an idea but stopped thinking.

A reason for economics finding a link to accounting is the latter’s inherent logic (e.g. double entry bookkeeping). When used in its own right, rather than for profit and tax reporting purposes, accounting becomes an instrument of perception. But that means it is a means for being scientific. Providing its numbers represent and do not distort economic reality, it is the only way we have of making visible the otherwise invisible ‘substance’ of economics, namely, values. Indeed, there is perhaps no better avenue available to economics, if it intends to be scientific, than to take its cue from accounting.

That income less expense = profit; that profit is transferred to the ‘own capital’ account; that assets = liabilities (debt + equity) or A = D +E; such things are universally true, just as the speed an apple falls to the ground is universally true. Both have reality independently of the observer. Surely, this makes of accounting not a faux science, but a match for Newtonian science. That means, however, goodbye cycles; goodbye multipliers; goodbye savings = investment! Hello two kinds of money; hello money and capital are not the same; hello goods market independent of the money market, the latter now linked to capacities! Goodbye price stability; hello true pricing! 

[1] Gall, N. (2009) Millions, Billions, Trillions, Braudel Paper No 43, July 2009, Fernand Braudel Institute of World Economics, Sao Paulo, Brazil.