Economics combines elements of both science and art.
Economists try to develop analytical mathematical models which seek to explain economic behaviour in a way that can be theoretically proved. For example working out the elasticity of demand through using calculus.
In macro economic models there are many models which seek to explain macro variables such as inflation, growth and unemployment.
Yet, when applied to the real world these models have significant limitations which can make them of limited value.
For example, much of economic theory rests on an assumption of rational behaviour by consumers. Especially in classical economics, economic theory is derived from a belief that consumers and firms will rationally pursue utility maximising decisions. Yet, in practice human nature is much more complex. Behavioural economics tries to understand these human factors much more – but, this involves many normative / subjective opinions.
In the past few decades the efficient market hypothesis took the assumption, asset prices would be correctly priced – given available information.
Yet, recent events suggest these neat theories have severe limitations in the real world.
Consumers and firms do not always behave rationally, but are subject to irrational behaviour such as
- Irrational exuberance – the belief asset prices can keep rising
- Herd behaviour – the belief the majority must be right e.g. if share prices, house prices are rising it must be based on economic fundamentals. Yet, the majority is often wrong, which is why we get booms and busts quite frequently.
If economics is a science, the obvious question is why did so few economists not predict the current crisis? The answer is that many economists had great confidence in their theories of efficient market hypothesis and didn’t feel the house price rises of 2000-2006 was a boom, but based on underlying fundamentals. In October of 2008, one of the chief architects of the period of great moderation, Alan Greenspan admitted he was in a state of “shocked disbelief,” because “the whole intellectual edifice” had “collapsed.”
If economics was a science, the whole intellectual theory was no longer was satisfactory.
This crisis is not the first time, economic theory has been left failing to give any meaningful explanation. The Great Depression left the economic profession fumbling in the dark for why markets weren’t clearing. Monetarists will claim the stagflation of the 1970s, showed the limitations of Keynesian fiscal expansion.
There are many issues to this question and I’ve only touched on a few. To summarise, in isolation, you can look at an economic issue and analyse them as a science. But, linking theory to the real world is always going to be a very subjective experience. It depends on which sets of data you use, it depends on which assumptions to make. Perhaps the problem in recent decades is that economists have spent too much time trying to fit everything into their neat theories.
The problem is that economics is very complex, there are no easy overarching explanations like E=MC2 of F=MA.
It is said Henry Truman asked for a one armed economist – an economist who would give a straight simple answer rather than ‘it depends’ or ‘on the other hand’. This shows he was hoping economics could be reduced to a simple science but in reality it is more of an art.