When speaking or reading about economics, you've probably heard someone drop the phrase the dismal science. If you did not know what this phrase meant, you may have dismissed it as a clever joke, or, harboring a secret passion for experimental observation and beakers, you may have been too shy to question how on earth any science could be dismal. Looking at what the dismal science is and why it carries such a depressing name, however, may help you better understand why you may face uncertainty and contradictions in your investing endeavors.

Origins
The phrase "dismal science" was coined by Thomas Carlyle in response to Thomas Malthus' beliefs that the exponential population growth would outpace the linear growth of the world's food supply, resulting in a global famine. Malthus didn't foresee the leaps in science, such as the development of fertilizer, that have allowed the earth to support many more people than was previously imagined. Still, one of the fundamental concepts of economics is the principle of scarcity - the idea that there will never be enough for everyone. That dreadful outlook is one of the reasons economics is considered a dismal science.

Why Economics Isn't Really a Science
In addition to the blunder of Malthus the phrase dismal science refers to the unreliability of economics in comparison to conventional sciences such as mathematics, physics or biology. Most sciences work through an initial explanation of a proposed phenomenon (also known as a hypothesis). The scientist then forms a model to test and scrutinize this hypothesis until only the important variables remain. These variables are repeatedly tested to determine whether they are the causes of the end result. If in fact a variable can be isolated and determined as the sole cause, then the theory underlying the hypothesis is referred to as a law. (Please keep in mind that this is a gross simplification of the scientific method.)

Economics, like science, aims to explain certain phenomenon, but for many reasons economics cannot fulfill the criteria of the experimental model. To better understand the constraints on the study of economics, let's take at look at what the methods of science demand:

Scientific Method Example - Car Door Experiments
So let's say we're studying the phenomenon of why my hand hurts when I slam it in my car door. For me to use a scientific approach I would form a hypothesis. Suppose my theory is that it's because I'm wearing an Investopedia T-shirt. To test this theory, I create a model to test different scenarios and variables. This model involves slamming my hand in the door while wearing different shirts, including my Investopedia T-shirt. I eliminate factors (variables) that don't affect the result (my pain) and I continue testing other variables until I am left with one that is the cause of my pain: the fact that I'm smashing my hand in a car door.

After several hairline fractures, I've figured out that the real reason my hand hurts is not because of the T-shirt I'm wearing, but because a slamming car door on my hand translates into pain through my nerves. So, a law has been formed: the Andrew Law, which states that if I slam my hand in a car door with "X" amount of force, my hand will absorb "Y" amount of energy causing my nerves to relay "Z" amount of pain to my brain (a gross simplification).

The Uncertainty of Economics
Economics cannot ascertain any clearly defined laws because in the market some unidentifiable factor always may be influencing a particular event or phenomena. It's nearly impossible to isolate any given variable in economics, so the dismal science is mainly based on theories.

These theories may contradict each other, like efficient market hypothesis (EMH) and behavioral finance, but they may be proven true in certain cases or even at the same time. Furthermore, when studying economics, evidence often turns out to be coincidence more than a fact.

Typically, these unreliable characteristics are a result of three specific things that economists cannot control:

Un-testable Economy
Unlike other scientists, economist don't have special laboratories where they can create isolated models to test their hypotheses. A vacuum of the economy just doesn't exist and cannot be created. Because of this, economists can't verify or prove their hypotheses as easily as other scientists. For instance, when Sir Isaac Newton had to repeat his tests for the existence of gravity, all he needed to do was find more apples to drop from different trees. For my law, all I needed to do was wear different T-shirts (and eventually stop slamming my hand in the door). For an economist to test a theory, he or she has to appeal to different governments to implement a specific change in the economy or, even worse, wait for them to do so under their own accord and then take the necessary measurements.

Homo Economicus
Aside from the many different assumptions that economists make when debating their theories, probably the most hotly debated one is the idea of homo economicus, or the rational human. Nearly all economic theories assume that people are rational at all times, that they always prudently allocate their resources in a predictable manner that is beneficial. Unfortunately, this doesn't always hold water in the real world. People will gamble even though the odds are against them; they will forget to go to the supermarket with a calculator to see if the 32 oz. can of soup is cheaper than the 16 oz. can, and they don't routinely analyze the opportunity cost of different goods.

Blind Man's Bluff
Imagine you were blind with a deck of cards laid in front of you and someone expected you to be able to sort out the three of hearts. We know that there is a one-in-52 chance of being right and that, if the cards are randomly sorted, there is no scientific methodology that can help you improve those odds. However, if you pull the right card, you might attribute it to anything: the way you reached out, how many breaths you took, the twitch in your right eye - anything.

Once again you are stuck slicing and applying variables, but you can't repeat the test with any kind of consistent controls. This is similar to economics: the number of testable variables is enormous due to the sheer size of the economy. As a result, there has been little success not only in predicting phenomena but also in proposing reasons for why observable things happen. The economy can't be controlled like a math equation or a science experiment, and there are simply too many variables to test with any sort of reliability and verifiability.

The Bottom Line
So there you have it. Next time you see someone dropping the phrase "dismal science" you can check if he or she uses it correctly; furthermore, you know that the person using the term could not possibly predict or explain market events with any smug confidence.

Related Articles
  1. Economics

    Understanding Organic Growth

    Organic growth is the increase in a company’s revenue and value due to internal operations.
  2. Economics

    Explaining Market Penetration

    Market penetration is the measure of how much a good or service is being used within a total potential market.
  3. Economics

    Calculating the Marginal Rate of Substitution

    The marginal rate of substitution determines how much of one good a consumer will give up to obtain extra units of another good.
  4. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  5. Stock Analysis

    5 Reasons Thoratec Corp. Keeps Impressing Investors

    Learn about Thoratec Corporation and its position in its industry. Understand five key factors why the company has impressed investors.
  6. Entrepreneurship

    Startup Analysis: How Much Is Palantir Worth?

    Learn about the private company Palantir, its valuation and how its valuation was derived. Understand how the company operates and if it deserves the valuation.
  7. Stock Analysis

    Jawbone: An IPO You Should Have on Your Radar

    Learn about the company Jawbone and how it has become successful with multiple product lines. Understand the benefits of investing in an IPO
  8. Economics

    What is a Free Rider Problem?

    In economics, the free rider problem refers to someone being able to get, for less or even for free, what others pay more for.
  9. Stock Analysis

    Startup Analysis: How Much Is Dropbox Worth?

    Learn about the private company Dropbox and how it operates. Understand the company's current valuation, how it was derived, and if it deserves it.
  10. Stock Analysis

    Startup Analysis: How Much Is Lyft Worth?

    Learn about the private company Lyft and how it has become a successful rideshare company. Understand its most recent valuation and if it is deserved.
RELATED TERMS
  1. Sticky Wage Theory

    An economic hypothesis theorizing that pay of employees tends ...
  2. Normal Profit

    An economic condition occurring when the difference between a ...
  3. Supply

    A fundamental economic concept that describes the total amount ...
  4. Black Money

    Money earned through any illegal activity controlled by country ...
  5. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  6. Factor Market

    A marketplace for the services of a factor of production.
RELATED FAQS
  1. What are the arguments against using ceteris paribus assumptions in economics?

    Ceteris paribus assumptions are at the heart of nearly all mainstream microeconomic and macroeconomic models. Even so, some ... Read Full Answer >>
  2. Is economics a science?

    Economics is generally regarded as a social science, although some critics of the field argue that economics falls short ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  5. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  6. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!