Acton Institute Powerblog

The Number One Failure of Modern Economics

Share this article:
Join the Discussion:

In a recent Reuters opinion column, Mark Thoma faults academic economists for their failure to predict the housing crash. He says their failure can be attributed to the disconnect between academia and economic forecasters. I don’t agree with Thoma, but I do think he gets it right when he says the failure of modern day economics,

May have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result.

During the classical period, economics was closely linked to psychology. In the early 20th century, neoclassical economics veered from the study of psychology as economists sought to reshape the discipline as a natural science.

Modern neoclassical economics draws influence dating back to René Descartes. According to Dr. Robert Nelson’s review of Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlack, Cartesian thought encouraged a belief that mathematical equations are equivalent to religious truths. The economic man is seen as,

 ‘A mechanical construct that works on infallible mathematical principles, … and economists are [therefore] capable of explaining even his innermost motives’ through mathematical methods.

Philosophical implications suggest modern economics is essentially attempting to reduce individuals to numbers. Economic models that operate in a perfect abstract framework with absolute assumptions conflict with the unpredictable and sometimes irrational behavior of human nature. This may explain why data forecasting without a full picture of the human person is not sufficient in predicting major market failures like the housing crash.

Karen Ho takes an anthropological approach to the financial crisis in her 2008 book  Liquidated: An Ethnography of Wall Street. As an anthropology graduate from Princeton, Ho is hired to work at an investment bank and writes about the corporate culture on Wall Street prior to the housing collapse. Homogenous recruitment, constant downsizing, high risk/high reward job liquidity, short-sighted bonuses, and deception of shareholder value were among many behaviors she observed. Such irrational and risky behavior should have been a red flag for any economist, shedding light on a major incentive problem.

Though it can be argued that the separation between modern economics and behavioral economics is necessary for empirical data and analysis, some economists want to see the gap close. According to Sedlack, modern economics should deemphasize the role of mathematics. Math is only the tip of the ice berg; it is vital, but not sufficient in economics. Nelson quoted him saying,

‘Below the mathematics lie much more fundamental issues’ of institutions, culture, and basic belief — even of religion. These issues do not readily lend themselves to mathematical methods.

Some human desires simply cannot be fulfilled by economic objects. A price value cannot be placed on the community, family, knowledge of God and so on. It is impossible to commodify or quantify these desires into an economic model. Richard Neuhaus famously said,

To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists. In addition to the economic is the political and, most important, the cultural. At the heart of the cultural is the moral and spiritual.

The number one failure of modern economics is an understanding of the human person that is incomplete. Economists must draw on anthropology, sociology, psychology, philosophy, and theology to better understand what drives human behavior and decision making. Forecasters will never be able to predict the future the way they would like, but social studies coupled with empirical economic analysis may help economists better understand the why questions that numbers cannot explain.

Elise Daniel Elise Daniel is a freelance writer and communications consultant in Washington, DC. Previously, she served as the Press Secretary for the House Committee on Natural Resources, a senior writer for the Institute for Faith, Work & Economics, and has also worked at the U.S. Chamber of Commerce, the Values and Capitalism Project at the American Enterprise Institute, and the Acton Institute. She graduated from James Madison University with a BBA in Economics. She is the editor and co-author of Called to Freedom: Why You Can Be Christian and Libertarian. Her articles have been published in RELEVANT Magazine, Real Clear Religion, the Gospel Coalition, The Federalist, Patheos, and the Daily Caller, among others.


  • Pingback: Modern Economics and the Machine | Raybonomics()

  • That’s what E.F. Schumacher “A Guide for the Perplexed” was all about!

  • i.e. E.F. Schumacher’s A Guide for the Perplexed

  • Josh

    Your conclusion accepts and relies on the assumption that it is, in fact, the realm of the economist to draw forecasts and make claims which rely on difficult anthropological assumptions.  There are those who would define the economist as simply the one who does the math assuming ceteris paribus in every situation —  like you say, isolating empirical economics.  In that case, the “economist” should not be the one making public policy decisions.  Rather, he should be the one supplying cause-and-effect data to someone whose role it is to consider anthropological factors.

    So the question stands:  what is economics?  Should economists maintain a role of pure science, or should they also be the ones deciding which anthropological assumptions to follow when making public policy?

    • Josh, remember that economics has been a word since antiquity, and that for the Greeks it meant the running of a household. So to consider economists pure mathematicians is to change that. Also, we rely on economists to make policy decisions/suggestions now. To the extent that they ignore anthropology they’re being nominalists, but again, to say “they’re just doing the charts now” is to change the role of economists. But whatever we call those whose job it is to synthesize ethics with financial reality, it’s still got to be done–I think that’s Elise’s point. We can call them economists or we can call them policy makers, but right now that synthesis is not happening like it needs to.

      • Josh

        Great reply, Kenneth.  I agree with you, but it is important to point out how we define “economics” as relying on anthropological judgements. Then we need to remember it because it will inform the way we listen to an economist.

  • A great (I think the greatest) economist once said:

    “It is true that economics is a theoretical science and as such abstains from any judgment of value. It is not its task to tell people what ends they should aim at. It is a science of the means to be applied for the attainment of ends chosen, not, to be sure, a science of the choosing of ends. Ultimate decisions, the valuations and the choosing of ends, are beyond the scope of any science.”

    “Reasoning and scientific inquiry can never bring full ease of mind, apodictic certainty, and perfect cognition of all things. He who seeks this must apply to faith and try to quiet his conscience by embracing a creed or a metaphysical doctrine.”

    -Ludwig von Mises

    The introduction and first chapter of Mises’ Human Action are all about what you describe in this post. I recommend it to anyone curious about the limits of economics as a science, as well as the importance of theology and psychology to achieving a more wholesome understanding of the human condition.

    • Yes the problem with that view point is that it means one’s metaphysics is slapped on at the end, which is to say it doesn’t direct the inquiry itself. That’s fine for someone like von Mises who didn’t have a metaphysic, but I think it’s fairly clear that to begin with, one’s choice of what to study is affected by one’s metaphysics, as will be his entire study of a question, so that Mises’s quotation works for the atheist but not for the Christian. (Hence Acton’s insistence on melding economics and faith from the start)

      • Roger McKinney

        I think that is unfair to Mises. Mises’ idea of value free
        economics was to let others determine the goals and if those goals involved
        economics, then the good economist would show them how to attain those goals.
        But it is not the job of the economist to dictate the goals.


        However, Mises did assume that people prefer to be wealthy
        instead of poor, all other things being equal. That’s a reasonable assumption.
        And if the assumption is correct, then economics can tell us the best ways to
        be less poor.

  • Elise,

    Interestingly just about the same time “that neoclassical economics veered from … psychology” and “economists sought to reshape the discipline” psychologists were also doing the same thing–looking to the methods of natural science as the foundation of their own research methods. Scholars in both disciplines tried to develop a science of the human apart from a philosophically sound anthropology (which would necessarily include a concern for morality). Instead, and as you correctly point out, to accomplish their goal they looked to the empirical, quantitative methods of the natural sciences (physics in particular). For many social scientists, empirical research methodologies take the place of anthropology and serve as the only basis for ethical reflection within the discipline.

    Unfortunately, whatever value they might otherwise have, empirical, quantitative research methods fall far short of the beauty and mystery of the human person as an economic actor or as a psychological being.
    A good post!


  • Roger McKinney

    I disagree somewhat. The problem with economics is not the
    math, but the theory. Math is nothing more than prose translated into symbols,
    as Mises wrote. If the prose is correct, the math will be correct and useful. Some
    Austrian economists have translated Austrian theory into math models with great


    BTW, all social sciences use math to test theories and it
    doesn’t cause any problems in them.


    Keynes was the problem. Economics had made enormous progress
    until Keynes. Read Mises and Hayek or many other economists from the 1930’s and
    you’ll see how much economics has lost.


    I have an MA in mainstream economics, but when I read
    Austrian econ (decades after earning a degree) I felt like I had left
    kindergarten for graduate school.


    Mainstream economists pretend to rely on their math and
    data, but if you pay attention long enough you find that their policy
    recommendations all come directly from Keynes. As Hayek wrote, Keynes set the
    economics profession back more than a century because his economics was nothing
    but a revival of mercantilism.


    Good economists, like Mises and Hayek, face the same problem
    as good preachers: people don’t want to hear the truth. Like the prophets in
    the OT, the idolaters want to hear that they’re OK, so they flock to the
    preachers who tell them they’re OK. Those preachers then get the chairs at the
    universities and become advisors to the king.


    Good economics tells us that people have to save, invest and
    work hard to prosper economically. People don’t want to hear that. They want to
    believe that the state can wave its want and make everyone rich. They want to
    believe that the Fed can solve any problem by printing money. They don’t want
    the truth.

    • Elise Amyx

      Roger, you make very good points. You’re right, there isn’t a problem with the math in itself, economics definitely needs empirical analysis. But such a heavy focus on math is an issue because it’s a symptom of the larger problem: an incomplete understanding of the human being. So yes, in other words theory is the problem. Keynesian economics is also an issue but no more at fault in ignoring the nature of the human being than neoclassical assumptions, like rational agents acting on perfect information. Economics needs both math and anthropology because it is a social science, but the math is meaningless without the latter.

      • Roger McKinney

        There is very little difference between neo-classical and Keynesian econ. Neo-classical is just Keynesian econ with a few tweaks to it. That’s why I like Austrian econ.

        Mises named his magnum opus “Human Action” in order to emphasize the point that economics is about how humans act in the market place.

        • Elise Amyx

          That’s why I like Austrian economics as well, kind sir. And the good news is that the field of behavioral economics is growing and the Austrian School might be seeing a comeback, “deo volente!”

        • Elise Amyx

          That’s why I like Austrian economics as well. And the good news is that the field of behavioral economics is growing and the Austrian School might see a comeback.

        • Elise Amyx

          That’s why I like Austrian economics as well. And the good news is that the field of behavioral economics is growing and the Austrian School might see a comeback.

  • Roger McKinney

    PS, as Hayek said in his Nobel speech, the main problem with the emphasis on math in economics is that much of the data we need simply isn’t available. Instead of recognizing that and sticking with logical models they build models based on available data and get things drastically wrong.

  • Pingback: Krugman: Aliens Worth More to Economy than Men and Women (VIDEO) | @ActonInstitute PowerBlog()