Economics and Science

This is the second entry in what I expect to be a series of loosely connected posts on economics. The first entry is here.

Science is unnecessarily daunting to the uninitiated, which is to say, the vast majority of the populace. Because scientific illiteracy is rampant, advocates of policy positions — scientists and non-scientists alike — are able to invoke “science” wantonly, thus lending unwarranted authority to their positions.

Here I will dissect science, then turn to economics and begin a discussion of its scientific and non-scientific aspects. It has both, though at least one non-scientific aspect (the Keynesian multiplier) draws an inordinate amount of attention, and has many true believers within the profession.

Science is knowledge, but not all knowledge is science. A scientific body of knowledge is systematic; that is, the granular facts or phenomena which comprise the body of knowledge must be connected in patterned ways. The purported facts or phenomena of a science must represent reality, things that can be observed and measured in some way. Scientists may hypothesize the existence of an unobserved thing (e.g., the ether, dark matter), in an effort to explain observed phenomena. But the unobserved thing stands outside scientific knowledge until its existence is confirmed by observation, or because it remains standing as the only plausible explanation of observable phenomena. Hypothesized things may remain outside the realm of scientific knowledge for a very long time, if not forever. The Higgs boson, for example, was hypothesized in 1964 and has been tentatively (but not conclusively) confirmed since its “discovery” in 2011.

Science has other key characteristics. Facts and patterns must be capable of validation and replication by persons other than those who claim to have found them initially. Patterns should have predictive power; thus, for example, if the sun fails to rise in the east, the model of Earth’s movements which says that it will rise in the east is presumably invalid and must be rejected or modified so that it correctly predicts future sunrises or the lack thereof. Creating a model or tweaking an existing model just to account for a past event (e.g., the failure of the Sun to rise, the apparent increase in global temperatures from the 1970s to the 1990s) proves nothing other than an ability to “predict” the past with accuracy.

Models are usually clothed in the language of mathematics and statistics. But those aren’t scientific disciplines in themselves; they are tools of science. Expressing a theory in mathematical terms may lend the theory a scientific aura, but a theory couched in mathematical terms is not a scientific one unless (a) it can be tested against facts yet to be ascertained and events yet to occur, and (b) it is found to accord with those facts and events consistently, by rigorous statistical tests.

A science may be descriptive rather than mathematical. In a descriptive science (e.g., plant taxonomy), particular phenomena sometimes are described numerically (e.g., the number of leaves on the stem of a species), but the relations among various phenomena are not reducible to mathematics. Nevertheless, a predominantly descriptive discipline will be scientific if the phenomena within its compass are connected in patterned ways, can be validated, and are applicable to newly discovered entities.

Non-scientific disciplines can be useful, whereas some purportedly scientific disciplines verge on charlatanism. Thus, for example:

  • History, by my reckoning, is not a science because its account of events and their relationships is inescapably subjective and incomplete. But a knowledge of history is valuable, nevertheless, for the insights it offers into the influence of human nature on the outcomes of economic and political processes.
  • Physics is a science in most of its sub-disciplines, but there are some (e.g., cosmology) where it descends into the realm of speculation. It is informed, fascinating speculation to be sure, but speculation all the same. The idea of multiverses, for example, can’t be tested, inasmuch as human beings and their tools are bound to the known universe.
  • Economics is a science only to the extent that it yields empirically valid insights about  specific economic phenomena (e.g., the effects of laws and regulations on the prices and outputs of specific goods and services). Then there are concepts like the Keynesian multiplier, about which I’ll say more in this series. It’s a hypothesis that rests on a simplistic, hydraulic view of the economic system. (Other examples of pseudo-scientific economic theories are the labor theory of value and historical determinism.)

In sum, there is no such thing as “science,” writ large; that is, no one may appeal, legitimately, to “science” in the abstract. A particular discipline may be a science, but it is a science only to the extent that it comprises a factual and replicable body of patterned knowledge. Patterned knowledge includes theories with predictive power.

A scientific theory is a hypothesis that has thus far been confirmed by observation. Every scientific theory rests eventually on axioms: self-evident principles that are accepted as true without proof. The principle of uniformity (which can be traced to Galileo) is an example of such an axiom:

Uniformitarianism is the assumption that the same natural laws and processes that operate in the universe now have always operated in the universe in the past and apply everywhere in the universe. It refers to invariance in the metaphysical principles underpinning science, such as the constancy of causal structure throughout space-time, but has also been used to describe spatiotemporal invariance of physical laws. Though an unprovable postulate that cannot be verified using the scientific method, uniformitarianism has been a key first principle of virtually all fields of science

Thus, for example, if observer B is moving away from observer A at a certain speed, observer A will perceive that he is moving away from observer B at that speed. It follows that an observer cannot determine either his absolute velocity or direction of travel in space. The principle of uniformity is a fundamental axiom of modern physics, most notably of Einstein’s special and general theories of relativity.

There’s a fine line between an axiom and a theory. Was the idea of a geocentric universe an axiom or a theory? If it was taken as axiomatic — as it surely was by many scientists for about 2,000 years — then it’s fair to say that an axiom can give way under the pressure of observational evidence. (Such an event is what Thomas Kuhn calls a paradigm shift.) But no matter how far scientists push the boundaries of knowledge, they must at some point rely on untestable axioms, such as the principle of uniformity. There are simply deep and (probably) unsolvable mysteries that science is unlikely to fathom.

This brings me to economics, which — in my view — rests on these self-evident axioms:

1. Each person strives to maximize his or her sense of satisfaction, which may also be called well-being, happiness, or utility (an ugly word favored by economists). Striving isn’t the same as achieving, of course, because of lack of information, emotional decision-making, buyer’s remorse, etc

2. Happiness can and often does include an empathic concern for the well-being of others; that is, one’s happiness may be served by what is usually labelled altruism or self-sacrifice.

3. Happiness can be and often is served by the attainment of non-material ends. Not all persons (perhaps not even most of them) are interested in the maximization of wealth, that is, claims on the output of goods and services. In sum, not everyone is a wealth maximizer. (But see axiom number 12.)

4. The feeling of satisfaction that an individual derives from a particular product or service is situational — unique to the individual and to the time and place in which the individual undertakes to acquire or enjoy the product or service. Generally, however, there is a (situationally unique) point at which the acquisition or enjoyment of additional units of a particular product or service during a given period of time tends to offer less satisfaction than would the acquisition or enjoyment of units of other products or services that could be obtained at the same cost.

5. The value that a person places on a product or service is subjective. Products and services don’t have intrinsic values that apply to all persons at a given time or period of time.

6. The ability of a person to acquire products and services, and to accumulate wealth, depends (in the absence of third-party interventions) on the valuation of the products and services that are produced in part or whole by the person’s labor (mental or physical), or by the assets that he owns (e.g., a factory building, a software patent). That valuation is partly subjective (e.g., consumers’ valuation of the products and services, an employer’s qualitative evaluation of the person’s contributions to output) and partly objective (e.g., an employer’s knowledge of the price commanded by a product or service, an employer’s measurement of an employees’ contribution to the quantity of output).

7. The persons and firms from which products and services flow are motivated by the acquisition of income, with which they can acquire other products and services, and accumulate wealth for personal purposes (e.g., to pass to heirs) or business purposes (e.g., to expand the business and earn more income). So-called profit maximization (seeking to maximize the difference between the cost of production and revenue from sales) is a key determinant of business decisions but far from the only one. Others include, but aren’t limited to, being a “good neighbor,” providing employment opportunities for local residents, and underwriting philanthropic efforts.

8. The cost of production necessarily influences the price at which a good or and service will be offered for sale, but doesn’t solely determine the price at which it will be sold. Selling price depends on the subjective valuation of the products or service, prospective buyers’ incomes, and the prices of other products and services, including those that are direct or close substitutes and those to which users may switch, depending on relative prices.

9. The feeling of satisfaction that a person derives from the acquisition and enjoyment of the “basket” of products and services that he is able to buy, given his income, etc., doesn’t necessarily diminish, as long as the person has access to a great variety of products and services. (This axiom and axiom 12 put paid to the myth of diminishing marginal utility of income.)

10. Work may be a source of satisfaction in itself or it may simply be a means of acquiring and enjoying products and services, or acquiring claims to them by accumulating wealth. Even when work is satisfying in itself, it is subject to the “law” of diminishing marginal satisfaction.

11. Work, for many (but not all) persons, is no longer be worth the effort if they become able to subsist comfortably enough by virtue of the wealth that they have accumulated, the availability of redistributive schemes (e.g., Social Security and Medicare), or both. In such cases the accumulation of wealth often ceases and reverses course, as it is “cashed in” to defray the cost of subsistence (which may be far more than minimal).

12. However, there are not a few persons whose “work” is such a great source of satisfaction that they continue doing it until they are no longer capable of doing so. And there are some persons whose “work” is the accumulation of wealth, without limit. Such persons may want to accumulate wealth in order to “do good” or to leave their heirs well off or simply for the satisfaction of running up the score. The justification matters not. There is no theoretical limit to the satisfaction that a particular person may derive from the accumulation of wealth. Moreover, many of the persons (discussed in axiom 11) who aren’t able to accumulate wealth endlessly would do so if they had the ability and the means to take the required risks.

13. Individual degrees of satisfaction (happiness, etc.) are ephemeral, nonquantifiable, and incommensurable. There is no such thing as a social welfare function that a third party (e.g., government) can maximize by taking from A to give to B. If there were such a thing, its value would increase if, for example, A were to punch B in the nose and derive a degree of pleasure that somehow more than offsets the degree of pain incurred by B. (The absurdity of a social-welfare function that allows As to punch Bs in their noses ought to be enough shame inveterate social engineers into quietude — but it won’t. They derive great satisfaction from meddling.) Moreover, one of the primary excuses for meddling is that income (and thus wealth) has a  diminishing marginal utility, so it makes sense to redistribute from those with higher incomes (or more wealth) to those who have less of either. Marginal utility is, however, unknowable (see axioms 4 and 5), and may not always be negative (see axioms 9 and 12).

14. Whenever a third party (government, do-gooders, etc.) intervene in the affairs of others, that third party is merely imposing its preferences on those others. The third party sometimes claims to know what’s best for “society as a whole,” etc., but no third party can know such a thing. (See axiom 13.)

15. It follows from axiom 13 that the welfare of “society as a whole” can’t be aggregated or measured. An estimate of the monetary value of the economic output of a nation’s economy (Gross Domestic Product) is by no means an estimate of the welfare of “society as a whole.” (Again, see axiom 13.)

That may seem like a lot of axioms, which might give you pause about my claim that some aspects of economics are scientific. But economics is inescapably grounded in axioms such as the ones that I propound. This aligns me (mainly) with the Austrian economists, whose leading light was Ludwig von Mises. Gene Callahan writes about him at the website of the Ludwig von Mises Institute:

As I understand [Mises], by categorizing the fundamental principles of economics as a priori truths and not contingent facts open to empirical discovery or refutation, Mises was not claiming that economic law is revealed to us by divine action, like the ten commandments were to Moses. Nor was he proposing that economic principles are hard-wired into our brains by evolution, nor even that we could articulate or comprehend them prior to gaining familiarity with economic behavior through participating in and observing it in our own lives. In fact, it is quite possible for someone to have had a good deal of real experience with economic activity and yet never to have wondered about what basic principles, if any, it exhibits.

Nevertheless, Mises was justified in describing those principles as a priori, because they are logically prior to any empirical study of economic phenomena. Without them it is impossible even to recognize that there is a distinct class of events amenable to economic explanation. It is only by pre-supposing that concepts like intention, purpose, means, ends, satisfaction, and dissatisfaction are characteristic of a certain kind of happening in the world that we can conceive of a subject matter for economics to investigate. Those concepts are the logical prerequisites for distinguishing a domain of economic events from all of the non-economic aspects of our experience, such as the weather, the course of a planet across the night sky, the growth of plants, the breaking of waves on the shore, animal digestion, volcanoes, earthquakes, and so on.

Unless we first postulate that people deliberately undertake previously planned activities with the goal of making their situations, as they subjectively see them, better than they otherwise would be, there would be no grounds for differentiating the exchange that takes place in human society from the exchange of molecules that occurs between two liquids separated by a permeable membrane. And the features which characterize the members of the class of phenomena singled out as the subject matter of a special science must have an axiomatic status for practitioners of that science, for if they reject them then they also reject the rationale for that science’s existence.

Economics is not unique in requiring the adoption of certain assumptions as a pre-condition for using the mode of understanding it offers. Every science is founded on propositions that form the basis rather than the outcome of its investigations. For example, physics takes for granted the reality of the physical world it examines. Any piece of physical evidence it might offer has weight only if it is already assumed that the physical world is real. Nor can physicists demonstrate their assumption that the members of a sequence of similar physical measurements will bear some meaningful and consistent relationship to each other. Any test of a particular type of measurement must pre-suppose the validity of some other way of measuring against which the form under examination is to be judged.

Why do we accept that when we place a yardstick alongside one object, finding that the object stretches across half the length of the yardstick, and then place it alongside another object, which only stretches to a quarter its length, that this means the first object is longer than the second? Certainly not by empirical testing, for any such tests would be meaningless unless we already grant the principle in question. In mathematics we don’t come to know that 2 + 2 always equals 4 by repeatedly grouping two items with two others and counting the resulting collection. That would only show that our answer was correct in the instances we examined — given the assumption that counting works! — but we believe it is universally true. [And it is universally true by the conventions of mathematics. If what we call “5” were instead called “4,” 2 + 2 would always equal 5. — TEA] Biology pre-supposes that there is a significant difference between living things and inert matter, and if it denied that difference it would also be denying its own validity as a special science. . . .

The great fecundity from such analysis in economics is due to the fact that, as acting humans ourselves, we have a direct understanding of human action, something we lack in pondering the behavior of electrons or stars. The contemplative mode of theorizing is made even more important in economics because the creative nature of human choice inherently fails to exhibit the quantitative, empirical regularities, the discovery of which characterizes the modern, physical sciences. (Biology presents us with an interesting intermediate case, as many of its findings are qualitative.) . . .

[A] person can be presented with scores of experiments supporting a particular scientific theory is sound, but no possible experiment ever can demonstrate to him that experimentation is a reasonable means by which to evaluate a scientific theory. Only his intuitive grasp of its plausibility can bring him to accept that proposition. (Unless, of course, he simply adopts it on the authority of others.) He can be led through hundreds of rigorous proofs for various mathematical theorems and be taught the criteria by which they are judged to be sound, but there can be no such proof for the validity of the method itself. (Kurt Gödel famously demonstrated that a formal system of mathematical deduction that is complex enough to model even so basic a topic as arithmetic might avoid either incompleteness or inconsistency, but always must suffer at least one of those flaws.) . . .

This ultimate, inescapable reliance on judgment is illustrated by Lewis Carroll in Alice Through the Looking Glass. He has Alice tell Humpty Dumpty that 365 minus one is 364. Humpty is skeptical, and asks to see the problem done on paper. Alice dutifully writes down:

365 – 1 = 364

Humpty Dumpty studies her work for a moment before declaring that it seems to be right. The serious moral of Carroll’s comic vignette is that formal tools of thinking are useless in convincing someone of their conclusions if he hasn’t already intuitively grasped the basic principles on which they are built.

All of our knowledge ultimately is grounded on our intuitive recognition of the truth when we see it. There is nothing magical or mysterious about the a priori foundations of economics, or at least nothing any more magical or mysterious than there is about our ability to comprehend any other aspect of reality.

(Callahan has more to say here. For a technical discussion of the science of human action, or praxeology, read this. Some glosses on Gödel’s incompleteness theorem are here.)

I omitted an important passage from the preceding quotation, in order to single it out. Callahan says also that

Mises’s protégé F.A. Hayek, while agreeing with his mentor on the a priori nature of the “logic of action” and its foundational status in economics, still came to regard investigating the empirical issues that the logic of action leaves open as a more important undertaking than further examination of that logic itself.

I agree with Hayek. It’s one thing to know axiomatically that the speed of light is constant; it is quite another (and useful) thing to know experimentally that the speed of light (in empty space) is about 671 million miles an hour. Similarly, it is one thing to deduce from the axioms of economics that demand curves generally slope downward; it is quite another (and useful) thing to estimate specific demand functions.

But one must always be mindful of the limitations of quantitative methods in economics. As James Sheehan writes at the website of the Mises Institute,

economists are prone to error when they ascribe excessive precision to advanced statistical techniques. They assume, falsely, that a voluminous amount of historical observations (sample data) can help them to make inferences about the future. They presume that probability distributions follow a bell-shaped pattern. They make no provision for the possibility that past correlations between economic variables and data were coincidences.

Nor do they account for the possibility, as economist Robert Lucas demonstrated, that people will incorporate predictable patterns into their expectations, thus canceling out the predictive value of such patterns. . . .

As [Nassim Nicholas] Taleb points out [in Fooled by Randomness], the popular Monte Carlo simulation “is more a way of thinking than a computational method.” Employing this way of thinking can enhance one’s understanding only if its weaknesses are properly understood and accounted for. . . .

Taleb’s critique of econometrics is quite compatible with Austrian economics, which holds that dynamic human actions are too subjective and variegated to be accurately modeled and predicted.

In some parts of Fooled by Randomness, Taleb almost sounds Austrian in his criticisms of economists who worship “the efficient market religion.” Such economists are misguided, he argues, because they begin with the flawed hypothesis that human beings act rationally and do what is mathematically “optimal.” . . .

As opposed to a Utopian Vision, in which human beings are rational and perfectible (by state action), Taleb adopts what he calls a Tragic Vision: “We are faulty and there is no need to bother trying to correct our flaws.” It is refreshing to see a highly successful practitioner of statistics and finance adopt a contrarian viewpoint towards economics.

Yet, as Arnold Kling explains, many (perhaps most) economists have lost sight of the axioms of economics in their misplaced zeal to emulate the methods of the physical sciences:

The most distinctive trend in economic research over the past hundred years has been the increased use of mathematics. In the wake of Paul Samuelson’s (Nobel 1970) Ph.D dissertation, published in 1948, calculus became a requirement for anyone wishing to obtain an economics degree. By 1980, every serious graduate student was expected to be able to understand the work of Kenneth Arrow (Nobel 1972) and Gerard Debreu (Nobel 1983), which required mathematics several semesters beyond first-year calculus.

Today, the “theory sequence” at most top-tier graduate schools in economics is controlled by math bigots. As a result, it is impossible to survive as an economics graduate student with a math background that is less than that of an undergraduate math major. In fact, I have heard that at this year’s American Economic Association meetings, at a seminar on graduate education one professor quite proudly said that he ignored prospective students’ grades in economics courses, because their math proficiency was the key predictor of their ability to pass the coursework required to obtain an advanced degree.

The raising of the mathematical bar in graduate schools over the past several decades has driven many intelligent men and women (perhaps women especially) to pursue other fields. The graduate training process filters out students who might contribute from a perspective of anthropology, biology, psychology, history, or even intense curiosity about economic issues. Instead, the top graduate schools behave as if their goal were to produce a sort of idiot-savant, capable of appreciating and adding to the mathematical contributions of other idiot-savants, but not necessarily possessed of any interest in or ability to comprehend the world to which an economist ought to pay attention.

. . . The basic question of What Causes Prosperity? is not a question of how trading opportunities play out among a given array of goods. Instead, it is a question of how innovation takes place or does not take place in the context of institutional factors that are still poorly understood.

Mathematics, as I have said, is a tool of science, it’s not science in itself. Dressing hypothetical relationships in the garb of mathematics doesn’t validate them.

Where, then, is the science in economics? And where is the nonsense? I’ve given you some hints (and more than hints). There’s more to come.