It's not rocket science. It's social science...

"The great advantage of the mathematical sciences above the moral," wrote David Hume in 1748, "consists in this, that the ideas of the former are always clear and determinate."

For example, Hume went on, an oval is never mistaken for a circle, nor a hyperbola for an ellipsis. Yet for the moral sciences, which in the 18th century started to embrace the investigation of the mind and society as well as questions of right and wrong, there was no such precision. "Ambiguity," Hume said, "is gradually introduced into our reasonings."

With that passage the fat Scotsman waddled off to join the wildest wild-goose chase in the history of western thought, which is the attempt to capture for the various sciences of humanity the precision and prestige of mathematics. This desire for universal mathematical laws to govern the behaviour of human beings has burdened the Western world with all sorts of harmless and less harmless nonsense, from astrology to economics.

In other words, mathematical and statistical physics, as the thinking goes, has attained such a sophistication that its insights into the behaviour of particles of matter can be transferred to the mass behaviour of human beings, whether investing in the stock market or racing for the exits after a fire at a football ground. Maybe it's a pathological part of human behaviour to seek certitude and avoid ambiguity at all cost, but the results of this quest tend not to be so hot. The requirement for certainty created the environment that led us to believe that a new economic paradigm had been created over the past 20 years, that would be forever sustainable. Monetarism worked very well, and we thought we had the economic equivalent of the Laws of Thermodynamics. Similarly as economic policy-makers look for the silver bullet solution to the worlds problems, they are probably mis-guided. Human behaviour is far more ambigious than the Natural world.

I'm currently reading a book called "Critical Mass - How one thing leads to another", by Phillip Ball. In this book Ball provides the very latest applications of "social physics" to urban planning, the movement of pedestrians and motor traffic, stock price movements, trade, the rise and fall of corporations, diplomacy, political alliances, voting patterns, the composition of city neighbourhoods, criminology, matrimony, the transmission of culture and fashion, circles of acquaintance, the internet, sexual epidemiology, weapons of mass destruction. In short, it's not far off an attempt at the concept of a "Theory of Everything".

Whether the experiments concern pedestrians crossing the campus of Stuttgart University or Brazilians electing their state governments, the book presents patterns and distributions which apparently resemble those identified by physicists, such as the Ising model of how atoms magnetise or the sudden "phase transitions" that occur when water melts or freezes. The experiments in political or social organisation produce results that "parallel" or "look exactly like", patterns in experiments in natural science.

Personally, though, I'm not convinced. There is clearly some value in understanding trends and the statistics that apply to those trends. An over-reliance on these stereotypes, however, can quickly become a dangerous factor when trying to apply policy and governance. The notion of consistency in human behaviour is considerably different to the consistencies we see in natural physics. Gravity is considerably more predictable, than say the reaction of an economy to a rise in inflation, yet many economists would treat them both as constants.

Social behaviours are dynamic, and the problems are moving targets. In particular, to use George Soros' terminology, applying social science to human behaviour creates "reflexivity", where the biases of individuals enter into market transactions, potentially changing the fundamentals of the economy. A current example of reflexivity is that of the debt and equity of housing markets. Lenders began to make more money available to more people in the 1990s to buy houses. More people bought houses with this larger amount of money, thus increasing the prices of these houses. Lenders looked at their balance sheets which not only showed that they had made more loans, but that their equity backing the loans (the value of the houses), had gone up because more money was chasing the same amount of housing (roughly). Thus they lent out more money because their balance sheets looked good, and prices went up more, and they lent more etc. Prices increased rapidly, and lending standards were relaxed. The main issue regarding reflexivity is that it explains why markets are volatile over time, and do not tend towards equilibrium - they tend to overshoot or undershoot.

On the flipside, because "Natural Laws" like gravity are unthinking and generally unreactive, they do not have biases and consequently don't change their behaviour because of past theories that have been applied to them. To clarify further - the main ingredient in economics is psychology, and the workings of psychology clearly can't be fully known, controlled or fixed. In Nature, there are established and agreed First Principles, that by and large are unchanging through time. In the social sciences, there aren't even agreements on First Principles, and although a form of Chaos Theory could be applied, the capacity for a useful mathematical approach to social science is still a long way off, yet many social scientists speak as if they have uncovered universal truths.

Here are some of the current cunundrums, troubling those who are addressing the world economy:

Consumer confidence and spending are weak. We want to stimulate, but we don't want to replace weakness with hyperinflation.

We're willing to drop fiscal discipline in favour of deficit spending, but we don't want to scare away offshore investors from the government bonds we'll issue to fund our deficits.

We're willing to distribute stimulus cheques, but we seem unable to make frightened individuals spend the money rather than save it.

We know consumers got into trouble by spending more than they earned, and now they should build some savings. But whereas in the recent past consumer spending grew faster than incomes, a rising savings rate means spending would grow slower than incomes, just at a time when incomes are falling and spending is needed.

Likewise, with tax revenues down, governments, states and local authorities have to balance their budgets. One way would be to raise income tax and sales tax rates, but this will further depress local economies and increase the burden on their beleaguered citizens.

We want to recapitalize the banks, but we don't want to reward past mistakes and accidentally encourage those mistakes to be repeated.

We're thinking about buying the bank's bad assets, but if we pay above market prices that's a subsidy to the reckless at the behest of the cautious. If we pay at market, or below market prices, that will further erode the capital base of the banks in question.

We want the banks to lend, but we can't let them make loans to non-creditworthy borrowers.

We don't want the depressing impact of auto companies going bankrupt and suppliers and dealers following suit. But we also don't want to pump money into the industry unless it can produce the right cars at the right prices, which they haven't done for years.

We want to curb speculation in derivatives, but we don't want to make it harder for businesses, farmers, insurers and investors to legitimately hedge risk.

We want to prevent excesses on the part of business, but most people don't think it's a good idea to nationalize companies or have the government tell them how to operate.

Each of these issues and many more need to be addressed in some way through changes in government policy. Each are conundrums because they are dependent on the reactions of the people in the world economy, where there is no established "cause and effect" relationship. Each response will likely have some good effects and some bad effects, but anyone who claims to know the long term implications of these policy responses is probably mistaken. As Thomas Friedman put it in the NY Times:

"Everyone is looking for the guy - the guy who can tell you exactly what ails the world's financial system, exactly how we get out of this mess and exactly what you should be doing to protect your savings... but here's what's really scary: the guy isn't here. He's left the building...
There is no magic bullet for this economic crisis, no magic bailout package, no magic stimulus. We have woven such a tangled financial mess with subprime mortgages wrapped in complex bonds and derivatives, pumped up with leverage and then globalized to the far corners of the earth that, much as we want to think this will soon be over, that is highly unlikely"

In an effort to be 'that guy', the "I know" school of social scientists is still making predictions. Statistical comparisons are being made to past recessions and solutions extrapolated from those experiences. There are projections of a stock market rebound based on the average time between past declines and the recoveries therefrom. I am glad that the engineering concepts that apply to the plane I plan to fly in tomorrow are not based on such pseudo-science.

To the conundrums above, I don't know the answer. I think it would be healthy if more of the "scientists" who helped to create this mess also stood up and acknowledged the likely shortcomings of all responses. I'm not saying that there aren't better solutions than others, but more that it is more art than science, and that ambiguity needs to be embraced as opposed to ignored.

In the film "Charlie Wilson's War", about US covert operations in Afghanistan in the 1980s, a CIA officer played by Phillip Seymour Hoffman tells a cautionary tale about the need for humility in those who make America's moves on a global chessboard. I think it applies similarly to the requirement for humility amongst social scientists.

On his 16th birthday, a boy gets a horse as a present. All the villagers say, "How wonderful!" The Zen master says, "We'll see." One day, the boy is thrown from the horse and is hurt and can no longer walk. All the villagers say, "How terrible!" The Zen master says, "We'll see." A short time later, war begins, and all the young men of the village are taken away to be soldiers, but this boy can't fight, so he is spared, and all the villagers say, "How wonderful!"

And the Zen master says, "We'll see..."