Is economics more religion than science?

In “Twilight of the Money Gods,” John Rapley argues just that—and is fairly convincing

December 20, 2017
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Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong by John Rapley, (Simon & Schuster)

How old were you when your parents first told you that money doesn’t grow on trees?

Before 2008, if you asked a congregation of economists why we couldn’t simply print money to pay for what we need, they would first scoff. Then if you persisted they would invoke Germany’s inter-war hyper-inflation as proof of the doctrine that this leads to higher prices and so there is no magic money tree.

However, since 2008, the world’s major central banks have printed $12trn as part of their “quantitative easing” programmes. But the inflation needle gently bobbed up and down and many continued to be worried about the perils of deflation—not inflation. QE is a Lutheran moment for the Church of Economic Science.

The question here is whether economics may be more religion than science. And while he doesn’t focus in on QE specifically, this is the case prosecuted in John Rapley’s brilliantly titled Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong. Rapley argues that much of what counts as economic theory is pure doctrine, supported by narratives or beliefs rather than evidence. The book is a must-read for all.

Some economists would haughtily counter that they follow Karl Popper’s philosophy of science. They establish hypotheses and use data to refute them. They discard the refuted theories and the rest are added to the canon of theory.

Rapley argues in lucid, fast-paced prose, that this is a veil and that such a methodology cannot work when you are studying human behaviour and beliefs. Economic belief, he argues, changes the data, rendering prophecies self-fulfilling. If enough people believe that bitcoin is valuable, then it will rise in value. We assume that scientific ideas are shaped by reality. In economics, reality is shaped by ideas.

For instance, the wealthy sponsor ideas around the belief that attempts to chasten the well-off will inevitably cause economic instability. If a government gets elected with radical left-wing ideas, the wealthy send their capital abroad, thereby causing markets to crash. Consequently, economic analysis is hopelessly conditional and contestable. Rapley tells us that the high priests of economics justify their exalted position as the most influential courtiers by pretensions of science rather than hard science.

It is worth remembering however that models of self-fulfilling booms and crashes have been in the economic locker for decades. While I sympathise with Rapley’s overall argument, perhaps he does not take sufficient account of this fact.

In criticising a central plank of "economic science," Rapley states that maximising our gain “is not always our principal motive for action, nor is it clear that the endless accumulation of wealth always makes us happier. And when we do make decisions, especially those having to do with matters of principle, we seem not to engage in the sort of calculus that orthodox economic models take as a given. The truth is, in much of our daily life we just don't fit the model all that well.”

That is perhaps an unfair caricature of economics, which paints a more complex picture than granted here. Still, Rapley reveals vast knowledge and is a master of powerful imagery. The book is for the most part wonderfully provoking.

Is it, in the end, convincing? Can we really not trust the accuracy of economic predictions? Let's take stock.

Freer trade has caused the greatest shifts in income distribution in the history of humanity, mostly good, but not for everyone—just as orthodox economics predicted. The architects of the Chinese and Indian growth miracles would argue that their countries have moved closer to the precepts of economics rather than departing from it. In 2008 we could easily have followed the path of the 1930s—a financial crash after a long boom, precipitating the deepest economic depression that only ended with the most bloody world war. This didn’t happen because of economic policy: fiscal stimulus, no new trade tariffs and the printing of cash. If 2008 was the twilight of the money gods the night was short.

Rapley has done an important service to economic inquiry here, but it may not be reason enough to abandon scientific pursuit in economics.

Read more: Dismal ignorance of the "dismal science"—a response to Larry Elliott