RoR: Forum

I strongly disagree with Fred's posts. Nearly every detail is flawed and his conclusions are not based on sound arguments. Since his posts were just rants, there's little in them even worth addressing. So let me approach it from a different angle first.

Is economics a science? Does it identify facts about reality and provide a framework for comprehending a part of the world? Absolutely. It's easy to recognize that when the government makes an activity more expensive (such as minimum wage) without increasing the benefit, people are going to have incentives to choose something else. But it's also easy to see that when two companies are competing with almost identical products, the prices will tend to be the same. Why? Because customers prefer paying less for the same benefit. If one company sold a product for more than the other, customers will have an incentive go buy at the lower price.

Now imagine you live in the world of Fred's literal beliefs, where economics is just a religion and doesn't identify anything about the world. It's an insane world where businesses are run by fools. Your company is competing with mine. I am doing better business because of a lower price. What do you do? Well, you won't have any of that nonsense about economics. If you want to make more money, you just increase your price! Maybe someone tells you that you'll likely lost even more customers to me, but you don't believe that cargo cult nonsense. If your profit drops again, just keep increasing the price!

In the insane world where economics is considered a form of mysticism, you decide to support government taxation on your business. Sure, it'll cost you more, but so what? That old-fashioned notion that costs will affect profit is just promoted by ivory tower intellectuals. You know better!

And maybe in that insane world you decide to venture into foreign investments. Some country's currency just plummeted in value and people are saying it's a hyper-inflation. But you won't be fooled by any of that! You trade your dollars in and get a sweet deal on a truckload of foreign bills. When they lose their value as well, you say "How could I have known?".

One day you find out that luxury cars are selling well in a wealthy neighborhood near you. You decide to buy a bunch of them and set up shop in a third world country where nobody has them. Some might call you a fool, but you're not so stupid as to believe that purchasing power impacts their decisions. Instead, you simply believe that they just didn't have the opportunity.

When you lose every penny you have, you can laugh at all of your critics. Ha! If economics was a science, you would be able to explain why I did so poorly in business! Oh, you think you can! Well, that's just cargo cult science!

Of course, this stuff may seem so obvious that you consider it "common sense". But that's like saying I understand when I drop a book that it will fall, so physics is just common sense as well! The fact that a science is grounded in easy to understand principles does not negate it.

There are many concrete things to disagree with as well. The notion of "economies" vs. "economy" makes almost no sense. If the all of the different products, prices, costs, and incentives were rigidly separated, maybe you'd a point. You could have the economy here on earth, and one on Mars, and assuming no interactions, you could treat them as entirely different things. But open a line of communication, and suddenly you'd have a market for ideas or inventions. Using the term "economies" is its own special form of ignorance. It's the belief that the world is largely disconnected, possibly with some minor connections.

Yes, it's foolish to think of the economy as a thing, as politicians do. They talk about stimulating it, or growing it, or managing it, fixing it, and maybe taking it outside for a walk. In reality, it's more like an environment, filled with incentives, opportunities, and costs. You can also think about the market as a process, where people act and react to the various incentives and change the face of the economic environment. But using the term "economies" doesn't help here.

Another concrete place for disagreement is the need for consensus. First of all, even if people largely accept the same framework for a science, there is not always consensus. Physicists argue over quantum theory still, for instance. Every field has debate. Consensus is not a precondition for science. It is a possible result of science, because if you are objectively identifying facts of reality, it's possible that all (and probably that most) of the scientists in that field will eventually agree.

But the consensus issue is even more of a problem if you talk about wildly different frameworks. That's like lumping astrology and astronomy in together, and saying they can't agree on anything so astronomy isn't a science. The fact is that in the field of "economics", there are many different camps that have radically different views of what is even included in the science, let alone the method. The Austrian economists, for instance, believe that economics as a science must be qualitative, not quantitative. Any attempt to make it quantitative makes it no longer a science. Instead of identification of facts of reality, a quantitative approach attempts to formulate predictive models that vary significantly with reality. Not only is there no consensus, there's no consensus possible. Those who think science must quantitatively predict results are identifying science by a non-essential. Science is about identification. Sometimes, this can lead to quantitative predictions. Sometimes, it can't. In economics, it can't because economics does not and cannot predict the preferences of the participants. It can only describe how changes in incentives will motivate different behaviors. It can't even predict if the motivations will be strong enough. An increase to the minimum wage may not result in an increase in unemployment. While there is a larger cost to employing someone, it may be offset by other factors.

The point is that calling completely different things "economics" doesn't not make each of these flawed. It means the word is simultaneously used to refer to more than one concept. One may actually be a science, and the others may not be. It's even possible that more than one can be a science, and they can be different sciences. Saying that economics is flawed in this case is not making a clear or intelligent statement. It's accepting a flawed grouping, and attacking a part of the group as if it were representative of the whole.

Post 21

Monday, July 5, 2010 - 7:13pm

Steve,

I think you're methodology is flawed. You're clearly starting from a position of ignorance (you don't understand economic theory), and yet you're attempting to argue against it. It allows you to say things that are completely ungrounded. It's difficult for me to argue against statements that have no real content. As an example, you say:

But economics relies on a number of concepts from more fundamental disciplines. Human nature is a complex of concepts that includes rationality, emotions, and volition - all of which are needed to explain economic theory. And then there is value theory which properly lives in moral philosophy.

Economics is not concerned with understanding human nature. It relies on some very simple facts about human nature, but is not an open-ended analysis. So what do you mean when you say that economics needs concepts of rationality, emotions, and volition? You haven't made an actual case for any of that, and consequently there's no idea of whether economics is concerned with every aspect of these, or some simple aspects. For instance, economics does not require a moral theory or a strong theory or rationality. It posits that people have preferences, and when they act, they are acting on those preferences. It doesn't say they will always get it right, or the preferences are moral or consistent or stable. It doesn't need a theory of emotions because it takes the preferences at face-value, and doesn't care what the origin is or whether these preferences are in any way correct. And why does it need a theory of volition? It needs enough to say that people are making choices based on their preferences, but you talk as if these minor assumptions are doorways that allow you to bring in any talk about emotion or rationality.

Let's take Mises's view of rationality. He is not making a moral or philosophical argument that everyone is rational. It turns out he doesn't mean very much by it at all. I believe the intent was to point out that actions are the result of a person's preferences, and that what you do is by definition what you wanted to do. You may not think it's a good idea to do it, but if you chose it you clearly preferred it. The important point to take away, as far as I understand, is that economics is not aimed at second-guessing the economic actor. It doesn't attempt to evaluate if it was really a good idea, or if he was driven by emotions, or anything else. It only wants to know whether it was what he preferred at the time he made the choice, which it was.

One example is how most people refer to trade as being mutually beneficial. It's not true if we use a wider sense of beneficial. The drug addicts who buys drugs from his dealer may not actually be benefitting from it. The poor family that buys a house they can't really afford when the housing prices bust is not really benefitting. So in what sense is it beneficial? It's beneficial in the sense that both parties at that time, acting on their own preferences, are transacting a deal that satisfies both of their current set of preferences. They both "win" in terms of their preferences. It is in the same sense of beneficial that's used here that rationality is used. It's not discussing any underlying facts or moral evaluation. It is only discussing the fact that at the time of the trade, both parties were acting in accordance with their preferences.

Objectivists have a long history of getting indignant over the terminology used by Austrians. Some get past it and learn what the words are referring to, and what the theory actually means. Others decide the words mean what they want, and dismiss the theory. BTW, having read Human Action and Ayn Rand's Marginalia, I find the latter a travesty. She focuses so much on each word and sentence that she misses the entire point. It's like dismissing Einstein because he uses colorful language about god.

To save you some additional time, there are many places where similar words refer to very different things. Austrians promote a subjective methodology in terms of values. That doesn't mean that they believe that moral values are whatever you want. It is is methodology choice. It identifies the fact that whether or not the things that you pursue are good for you or not, whether they are based on rationality or not, or whether they are consistent with a moral standard or not, is irrelevant to economic theory. If you are willing to pay $3 for a sandwich, it doesn't matter why you are, it has the same economic results. The laws of supply and demand don't work differently if the demand is rational instead of irrational. It properly ignores the validity of the values because those don't matter to the consequences that economics is trying to describe.

Similarly, Austrian's are against an "objective value theory" in economics. Historically, that referred to intrinsic values, and people tried to explain why particular products were priced the way they were by reference to an objective/intrinsic value. Of course, even an objective theory like Objectivists promote (i.e., relational based on a purpose) would be argued against by Austrians because again, the prices are not based on some kind of ultimate objective benefit to the lives of the individuals. The prices are based on the preferences of the individual, their "subjective" values, regardless of the merit of these values.

So when you say:

I don't think these principles should be derived in economics, but the assumptions regarding there use do need to be stated up front in economics.

I have to disagree. While the words are similar, the concepts are different and their validity is dependent on the context. In economic theory, the moral validity of a person's values/choices/preferences is not only irrelevant, but it is fundamentally flawed to discuss it within the context of economics. It's the same as talking about how an automobile is propelled by an internal combustion engine. The question of whether you are driving to a morally acceptable location does not change the nature, and if you insisted on bringing it up, a scientist or engineer would say that your reasoning is flawed.

Going on to the rest of your post, you say:
"Strong emotions can change economic indicators without representing irrationality or diminished reason."
You go on to try to defend it. Maybe you don't even know what you're here. It's simple. If you are acting based on your reason, you perform action A. If instead you perform action B, you are not acting based on your reason. If you think you should only spend $10 on an item, and then because you feel strongly you actually spend $11, the emotion has clearly diverged from your reasoning. If the two are coherent with one another, it would still be $10, not $11.

When someone says you are acting on your emotions, it is almost universally used to mean that you are not using the alternative, which is reason. You are attempting to excuse this misleading approach by claiming that sometimes emotions are compatible with reason. Even though that is true, it creates the impression that reason has nothing to do with the decision. And when you say that your emotions are causing a change in behavior from what your reason would do, you are not even talking about the case where they are compatible.

I generally try to understand where the other person is coming from and whether there is some bit of truth to what they are saying. But this is ridiculous. There's no generous way to say it. I think I can say, with just a bit of irony, that you are clearly arguing based on your emotions!

Going on:
"In most economic situations for each person that is happy about the days transactions, another is unhappy - there is an averaging going on in human activities because of different circustances and different beliefs."
...

You misunderstood what I was attempting to say. I didn't mean the two parties to a transaction. I was referring to the average level of happiness with economic things across the nation as a whole.

First, read what you wrote. Second, there is no averaging! You might claim there is an average, in the sense that at any time there is an "average" happiness, assuming happiness or any other emotion can be averaged. But there is no averaging! If one person becomes happier, there is no need or expectation that someone else will become unhappy. The average just goes up? Similarly, if someone becomes unhappy, it goes down. If these happen to occur at the same time, maybe they average out, but there's nothing at all connecting them.

You said "for each person.....another is...". Even the qualifier "in most economic situations" doesn't fix it. That statement implies a connection that isn't there at all.

Instead of trying to salvage this nonsense, you should just drop it an move on to your conclusion.

If anyone wants to explain a sudden increase in the demand component of money without referring to people across the nation feeling more uncertainty (an emotional component), they are probably talking gibberish.

Once again, see where you are smuggling in the premise that people are irrational and emotional? You tried to base this faulty conclusion on average levels of happiness, as if the demand for money is simply emotions gone wild. Where is reason? Where are the incentives? Where is rational expectations of the future? In your view, emotions dominate and magically arise without other conditions creating them.

I've already explained this without reference to emotions. So I'm assuming your insult was directed at me. Why do people hold onto more money? One, because their implicit safety net has disappeared. Two, because the distortions of economic information have become so clear that people realize they don't know what is "normal" anymore, and any action taken will necessarily have more risk than normal. Three, because their is an expectation that certain prices will drop because the boom was artificially keeping them up. Four, when banks appear ready for bankruptcy, people hold onto more cash.

Instead of being an insane herd of animals who panics when the first person does, people are reacting to real changes. There are plenty of people screaming "the world is ending" during the boom, but that doesn't change most people's behavior. But when companies start collapsing, unemployment goes up, and everyone admits that the market was so distorted that they don't know which side is up anymore, people start holding onto cash. These are real changes. These are real conditions. When people see these and act accordingly, it is not that their emotions have suddenly taken over and rationality is tossed aside. The rational response to these conditions is to hold onto more cash!

How is this gibberish? Are you saying that it is an irrational reaction to these events to hold onto money? Are you saying that these things don't occur?

Let me tell you what is gibberish. It's the idea that some magical wave of unhappiness makes people irrationally hold onto money. Why would it? If you are depressed, do you suddenly hold onto more money? Many people I know, when they are depressed, go shopping.

How about fear? If someone threatens to kill you, is the natural response to start saving? If you watch a scary movie, do you suddenly feel compelled to start spending less?

What you really mean is when people "feel" uncertain. But they don't just feel it. They ARE uncertain. They don't know what the future is going to hold. If they did, they would ignore or dismiss the "feeling" of uncertainty. The fact is that they are justified in actually being uncertain. And they are justified in believing the risks are higher than normal. And they're justified in believing their safety net is not as robust as they believed. These are not feelings. They are rational understandings of their situation. Those rational expectations may cause them to feel fear or unhappiness, but it is the rational evaluation of the changing facts. And when they respond by adding to their safety net, lowering their risks, and preparing for events that are suddenly more likely, they are acting rationally!

The introduction of emotion here simply obscures the real changes in conditions, and promotes the idea that these significant economic events are just run-away emotions. Politicians love this, because it puts the blame on the market participants, instead of their own policies. And they make things worse by believing that if they can simply "talk up" the economy, and pretend that everything is okay, suddenly all of the problems will go away. This is why these amateur explanations of economic events by reference to emotions is nothing but destructive.

Post 22

Monday, July 5, 2010 - 10:12pm

Joe,

In your post, you referred to a line of mine where I said something about people talking gibberish. I was NOT talking about you. My apology for the sentence structure, because I had no intention of insulting you - if you had come to mind as one of the "people" being referred to, I wouldn't have written it, because it wouldn't have made sense to me.

You still don't get the point I was making about emotions, and it is too small to continue with. At this point, if I found a way to express what I wanted to convey, you'd might say something like, Of course, that's obvious. But that is just a tiny thing. Why have you made such a big deal of it?"
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You said that you considered Ayn Rand's Marginalia a travesty. You should reconsider that, because here brief notes were never put into words that she intended to publish. She wrote what were short-hand notes to herself. I have to assume that had she decided to write an article for publication that she would have produced her reasons, provided context, and put things into perspective. I say that having read so much of what she has written, that I could not come to any other conclusion. It simply means that a person needs to read what she wrote in the margins very, very differently than anything else she has written. If you disagree with that... much of what I written from this point forward won't be your cup of tea :-)
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You said, "I think you're (sic) methodology is flawed. You're clearly starting from a position of ignorance (you don't understand economic theory), and yet you're attempting to argue against it. It allows you to say things that are completely ungrounded. It's difficult for me to argue against statements that have no real content. As an example, you say:
But economics relies on a number of concepts from more fundamental disciplines. Human nature is a complex of concepts that includes rationality, emotions, and volition - all of which are needed to explain economic theory. And then there is value theory which properly lives in moral philosophy.

First, I'd like to say that came across as condescending. I assume that it wasn't intended that way.

And, I disagree. I am bringing up things that have come to my attention, and that were of concern to George Reisman, and that bothered Ayn Rand. There is nothing flawed in my grasp of basic principles, and I prefer my grasp of the basics over the detailed grasp of 'modern' economics as held by most academic economists. At the new thread I started, I gave a little more content to a number of issues and I'd suggest looking there. The complaint about Mise's use of the concept 'value' came from Rand.

And even though much of what Fred writes is hard to follow because of the heavy use of colorful metaphors, he does have a point about the problems of economics and to ignore the facts he brought up would be to ignore some of what is wrong in the science. There are reasons for the disagreements between supply-siders, monetarists, Austrians, Neo-Austrians, Classisists, Marshallian Neoclassical Economists, Keynesians, The Contemporary Chicago School Economists, the Public Choice School Economists, Evolutionary Economists, Rational Expectations School Economists, etc. Those disagreements often arise out that area that should be labeled "The Philosophy of Economics."

I disagree with both you and Fred. He is right that they can't agree on why things happened the way they did in the past, provide an explanation on what is happening now, or make predictions on what will happen next. And I disagree with you that we don't need to examine the philosophy of economics - or I should say, the lack thereof.

If you think that I'm not competent to discuss these issues, then we disagree on yet another thing - one I can do nothing about.
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You said, "Economics is not concerned with understanding human nature. It relies on some very simple facts about human nature, but is not an open-ended analysis. So what do you mean when you say that economics needs concepts of rationality, emotions, and volition?"

Joe, I agree that it isn't the place of Economics to study or come up with an understanding of human nature, but an economic theorist does have to state where his theory stands where there are different ways to understand a concept that the theory will depend upon. Ayn Rand had strong disagreements with Professor Mise (and as far as I can tell, even stronger disagreements with other Austrian economists). These disagreements were on a fundamental level and included things like what he means by rationality and by value. On page 2 of Ayn Rand's Marginalia the editor give a passage from Human Action and then gives a translation that Rand wrote. She took the time and effort to convert a paragraph of Mise's into her own words and I'll let them speak to this disagreement we are having.

In dealing with interpersonal exchange, one can not avoid dealing with individual motivation. Then one deals with the field of philosophy by inventing a new science (i.e., Praxeology) whose boundaries one cannot define.

Reiman in Capitalism states that "...based upon his nature as a rational being, man possesses a limitless need for wealth. This, in turn, is shown to give rise to the central problem of economic life, which is how steadily to raise the productivity of human labor, that is, the quantity and quality of the goods that can be produced per unit of labor." (page 10)

Is that your understanding of man's rational nature?

Ayn Rand identified many, many passages where she considered that Mise's epistemology in use as the base for his theory was logical positivism and she believed that his work showed an outright hostility at times to morality. If one's intention is to integrate economic theory with their existing understanding of epistemology and moral theory, that is important.

Reisman says that Capitalism is based upon the rational self-interests of all men under freedom. I agree, but then I know that he and I agree on our terms. And he is doing what he should, grounding his economic theory in a specific moral philosophy which he is making explicit.

Page 3 of Human Action, "Choosing determines all human decisions." He has jumped into epistemology with this strange thought. In epistemology and psychology 'valuing' is done before choosing - but that gets us into another area.
Page 13 of Human Action, "The incentive that impels man is always some uneasiness." He has leaped into psychology (and not landed well!) As Rand has pointed out, he often implies (and even states) that no actions arise from positive emotions. Not my view of psychology or human nature.
Page 17-18 of Human Action, "Concrete human value judgements and definite human actions are not open to further analysis. We may fairly assume or believe that they are absolutely dependent upon and conditioned by their causes. But as long as we do not know how external facts - physical and physiological - produce in a human mind definite thoughts and volitions resulting in concrete acts, we have to face an insurmountable methodilogical dualism." He goes on to claim that there is no connection - no bridge between the inner and outer worlds. And, at that point, he is not just abandoning thought, emotions, reason and valuation to set a working methodology for his science - he is philosophically abandoning Objectivism.

Post 23

Tuesday, July 6, 2010 - 12:06am

Steve,

Have you actually read Human Action? Or have you just read the short bit in Rand's Marginalia? You keep suggesting that Mises doesn't spell out his ideas, but he spends a massive amount of time/pages discussing the limits. Just because he doesn't use the words in Objectivist manner doesn't mean there is no content, or that you can simply dismiss the content. Go to the source instead of taking Rand's first impressions!

You are free to take my words as condescending or not. I am stating a fact. You are ignorant. You don't understand basic economic theory (Bill tried to explain demand vs. quantity demanded, for instance, and it was clear that you didn't recognize the distinction). It is also clear that you haven't familiarized yourself with Austrian economics, as most of your complaints don't apply and have been addressed. So I don't mean to insult your intelligence. I mean to say that you don't know what you're talking about, and instead of trying to find out, you are just jumping in and claiming everyone is wrong. This never bodes well for a discussion. You've made up your mind without bothering to get the facts.

On top of that, you carelessly lump every person who calls themselves an economist into a single group. Austrians (and Mises in particular) have spend considerable effort pointing out why other schools of thought cannot be called science, and yet you identify the beliefs of these other schools of thought as your proof that economics isn't a science. I'm not accusing you of dishonesty. I think you just don't know enough to make the distinction. But there is a distinction. We can provide you with information on the differences, but you've made up your mind.

Take the philosophy of economics. Mises devoted a massive amount of his book describing the methodology, why it's necessary, how it differs from others, and why it all matters. I don't have a problem with discussing the philosophy of economics. But you've started with the assumption that Mises and the other Austrians haven't provided any details or thought it through. Far from being a bold insight on your part, it once again shows how little you've bothered to educate yourself on the topic. The Austrians are very, very big on methodology, and spend significant time detailing their assumptions, grounding the science, and describing why it must have the identity it has.

Take your complaint that they can't agree on what happened in the past, provide an explanation for what is going on now, or predict what will happen. The Austrians reject the idea that economics is quantitatively predictable. And not simply because they feel like it. It's because of the nature of the science, and what it does and doesn't try to explain. It doesn't try to explain individual preferences. It doesn't even try to measure these. That's because those preferences can and do change.

Think about what that means for any kind of quantitative prediction. Economics can point out that an increase to a cost with all else being equal will create an incentive to chnage behavior. If you like two things, A and B, and A is slightly less expensive, you might choose A. If the cost goes up enough, B will start looking better. Why? Because you have certain preferences. You slightly prefer A to B given the price, but if the price goes up, A becomes a less attractive alternative. Maybe you still buy it, though. Maybe the additional cost wasn't enough for you to change your behavior. So Austrians make it clear that an increase in cost does not necessarily change behavior. An increase in price, with all else being equal, indicates that the quantity demanded will decrease or stay the same. You can't quantify it, though.

But what happens if the people's preferences change as well, which they constantly do? Then you can't even make this statement. You could have an increase in price and and increase in quantity demanded. But that means that two things have changed.

This is methodology here. What are the limits of economics as a science? Can it make firm predictions in the real world? Can you predict the behavior of people, even qualitatively? No. Because these descriptions of causal relationships are always "all else being equal". And the real world, there are many changes.

This is why debates on the past are complicated. If there was only one factor that changed, and the consequences happened immediately and they were measurable and measured, there wouldn't be a problem. But when you look at the Great Depression, there were countless things changing, and the effects were delayed. The Austrian account of the business cycle describes how these effects happen over time, and the economic indicators first lead people to make non-optimal choices without knowing it. But even aside from that, the government enacts policy after policy. Many of those would be expected to cause economic chaos, and identifying which ones actually contributed and to what extent is impossible.

So here you are, suggesting the economics is flawed because it doesn't make firm or quantitative predictions, or can't describe what happened in a situation with countless changes. And here's my problem with your approach. You assume economic theory is flawed and doesn't go into the philosophy of economic science enough because it doesn't do what you would like it to. But if you read more about the philosophy of economic science, specifically the Austrians, you'd realize that your criteria is deeply flawed. In fact, the reason for significant disagreements and problems in more mainstream economic theory is that they try to do the impossible. They try to make economics do what you want. They try to make firm predictions when there are an unknowable number of factors, and that even if you had every economic indicator in the world, people's preferences change constantly over time. They try to measure what can't really be measured, all in the hopes of making economics into a "science".

But science does not mean quantitative, mathematical, or even predictable. Science is a systematic method of identifying facts of reality. Properly understood, economics does not make guesses about the future. Instead, it studies causal relationships. It takes simple facts, like people have preferences and they act on them, and attempts to see draw connections. What happens when there is jus tone buyer and seller? What happens when there are many? What happens when information is not available about certain options? What happens when it becomes available? How does money come about, and what purpose does it serve? If people people want more money, how does difference in the rate of profit act as incentives for people to switch careers? What happens if the rate of profit increase?

None of this would be news to you if you familiarized yourself more with Austrian Economics.

Now again, some comments:

Reisman says that Capitalism is based upon the rational self-interests of all men under freedom. I agree, but then I know that he and I agree on our terms. And he is doing what he should, grounding his economic theory in a specific moral philosophy which he is making explicit.

I disagree with your assessment here. Economics, like any other science, should be grounded on the facts of reality. If it is grounded in a specific moral philosophy, meaning it requires a morality of self-interest to be valid, it isn't a science, and it would be relevant in a world where people were mostly altruistic. Economics should focus on what is, and not what should be.

That doesn't mean you can't define capitalism as a system of freedom, and it doesn't mean you can't defend it on moral grounds. You can even defend the free market on moral grounds, in that you agree with the process and or the results. To the extent you can talk about the results of the free market, they have to be identified through science, and then evaluated with morality. But if economics was based on moral theory, it would not be focusing on real causal connection. It would always be conditional. Does minimum wage cause unemployment? That depends on your moral theory? No.

Reisman is performing two tasks. He's explaining economic theory, but he's also defending free market on moral grounds. These are two different tasks. Economics should deal with identity and causality, describing the causal connections. The effect should no be contingent on whether you believe in self-interest or altruism. If it is, you aren't talking about facts any more.

...his work showed an outright hostility at times to morality.

Morality has no place in economics, just as it has no place in physics or biology. Once you stop talking about causality and identity, and instead focus on which alternative you think is better, you've stopped doing science.

And for Mises:

"Choosing determines all human decisions." Which human decisions are not choices? Why is this a strange thought? Or are you unhappy that he's only talking about the last step, and not the earlier steps? But isn't that by design? Isn't the point that you're choosing based on some kind of preference, whether rational or irrational, and either way it has economic effects?

"The incentive that impels man is always some uneasiness." I've seen others get upset about this. But you're again trying to introduce psychology and ethics into this. What if the point is to avoid all of that? People act because they expect the result of their action to be better than the result of not acting. They act because there's something not perfect about their current situation, which they can improve. This isn't saying that people are driven by negative emotions, but stating a fundamental fact that you wouldn't perform and action if you were already in a state that couldn't be improved. If action is due to an expected improvement from the action, this statement is trivially true.

"Concrete human value judgements and definite human actions are not open to further analysis. We may fairly assume or believe that they are absolutely dependent upon and conditioned by their causes. But as long as we do not know how external facts - physical and physiological - produce in a human mind definite thoughts and volitions resulting in concrete acts, we have to face an insurmountable methodilogical dualism." Again, I don't see your problem here. Certainly this is an appropriate place to stop in economic analysis. Even if you think that someday we'll have perfect knowledge about a human mind, it doesn't make sense at this point to try to analyze any further. Nor do we need to. Economics can function very well as a science without having to subject these to further analysis. That's why he describes it as a methodological dualism. It's adopting this view as a method of economic analysis.

But let's assume that you are correct that he doesn't think we can ever get to that point. Let's assume he thinks value judgments really can't be subjected to further analysis, and that they are inherently disconnected. What's the problem? If his approach to economics is sound, what does it matter if you disagree with him on an issue you both agree is outside of the scope of economics. He was not an Objectivist. It's even likely that he was wrong about many things. That's irrelevant in discussing/dismissing his economic theories.

Post 24

Tuesday, July 6, 2010 - 8:26am

Joe:

This is a very complex thread and I don't claim to have radical insight but I think it's necessary to clarify one concept. You say:

Think about what that means for any kind of quantitative prediction. Economics can point out that an increase to a cost with all else being equal will create an incentive to chnage behavior. If you like two things, A and B, and A is slightly less expensive, you might choose A. If the cost goes up enough, B will start looking better. Why? Because you have certain preferences. You slightly prefer A to B given the price, but if the price goes up, A becomes a less attractive alternative. Maybe you still buy it, though. Maybe the additional cost wasn't enough for you to change your behavior. So Austrians make it clear that an increase in cost does not necessarily change behavior. An increase in price, with all else being equal, indicates that the quantity demanded will decrease or stay the same. You can't quantify it, though.

This is certainly true for a single individual but, for a large number of individuals participating the same way, surely observations can be made to quantify the "elasticity of demand."

Comments?

Sam

WIJG?

Post 25

Tuesday, July 6, 2010 - 1:17pm

Hi Sam,

There are a few issues with this. Let's start with what you're measuring. If you try to measure how elastic the demand is, you're really trying to get some statistics on the recent behavior of the market participants. Maybe you can say that this is what they've been doing recently. But that is at best an indicator of what their past preferences were. What reason is there for believing that behavior will continue? I think the reasonable answer is that people's preferences don't usually change very quickly or very dramatically. So it's tempting to try to make predictions, and it may even be useful to. But it's outside of the scope of economics. Economics deals with certain kinds of causal relationships. It is able to describe the incentives, barriers, and opportunities that are created from the market mechanism. And it can describe how individual's acting on their preferences ultimately modify these conditions. But it doesn't describe why people have the preferences they have, or what will cause them to change those preferences, or how often. In other words, when you start making those predictions, you're stepping away from the science of economics.

There are some places where you don't have to know the exact mechanisms to make predictions. Flipping coins is a good example. You don't need to know all of the factors that make it land on heads or tails, but you can predict the results when you have a large enough sample set. But this economic forecasting isn't like this. There is no underlying facts that create such a determined outcome. People's preferences can change at any interval, and can change radically. What you measure today might not be true at all next month, or even tomorrow. You might believe that preferences don't change drastically or often, or that over a large group it doesn't make a big difference. This assumes some amount of stability. But this is merely an assumption, not a causal identification, and at any time the assumption can be blown away by the facts.

That means when you make a prediction, you're not making a scientific prediction. You're not basing it on firm principles that explain at least the most significant effects. You may be using scientific insights, and couple them with some rules of the thumb that seem to work a lot of the time, but the result is just an educated guess. Emphasis is on guess.

There's also the question of whether you're getting enough information when you are trying to measure something, like elasticity. Say you change the price of a product (say by adding a specific tax on it), and you get a new measurement of the quantity demanded. Now you have two data points. Of course, there's a lot you don't know still. The problem with thinking about supply and demand with a single product is that the demand curve for that product is dependent on what else is going on. Bill mentioned how prices of other things, or changes of income, can affect the demand of this product. Since it's preferences that matter, and those are between various products/services, a lowering of the price of another may make you stop buying any of the this product.

Also, there are questions about whether you can measure it. If government creates a special tax on gas, you can see how much the new price causes the quantity demanded to change. The new data point may give you insight onto the specific question of how much people were willing to continue to buy at the higher price. But that could be due to several reasons. It could be because there is no attractive alternative. It could be that it's overall cheaper to continue driving their gas inefficient car for now instead of buying a more expensive one. It could be that they are going to buy a more efficient car, but it's taking them time to save up or get the car that they want. It could also be that they suddenly want to travel a lot more (it's vacation season), and people are actually reducing their use significant, and others are using it more. The point is that even measuring something simple is not a straightforward task. And all of this is just to tell you whether people will still buy gas at the higher price. But if the prices goes up any more, you don't know at all whether there will suddenly be a significant reduction.

And finally, to the extent that people buy more efficient cars due to the higher price, you're probably also changing the quantity demanded at the original price. In other words, if government removes the tax, people may continue to buy less. The act of changing the economic situation to measure the second point may inadvertently change the original point leaving you with less information than you had. And to recognize it doesn't always go in one direction, people may be putting off long trips because of the higher price, and when price lowers, they decide to take a lot more. The act of measuring disturbs the economic situation and corrupts the previous data points.

The physical sciences try to measure constants. Even flipping a coin has a constant in terms of average. But things like elasticity aren't really constants. They can change by random magnitude at random frequencies. Of course it's not really random, but it's also not a natural constant or a result of a simple equation. Treating it as a constant makes it easier to make predictions, but since the underlying facts are not consistent with the assumption, there will be times where you're off, and sometimes drastically off.

Post 26

Tuesday, July 6, 2010 - 3:30pm

Joe:

I take your point that conditions change so that the measurements can become unreliable. However, the concept of "elasticity of demand" remains. An entrepreneur, trying to determine the best price for a new vacuum cleaner, for example, can perform isolated experiments to get a feel for the best price. Of course, the entrance of new competitors and so on, can skew the results.

As far as modeling is concerned, I was very influenced in my early years by Jay Forrester and his application of System Dynamics, however, the Club of Rome made drastic mistakes using this modeling technique due to faulty assumptions as to the technical innovation effect on the economy. The advantage that System Dynamics has is the discipline of forcing the basic assumptions to be explicit and out in the open so that they may be addressed and debated.

http://en.wikipedia.org/wiki/Jay_Wright_Forrester

Counter-Intuitive Behaviour of Social Systems.

Society becomes frustrated as repeated attacks on deficiencies in social

systems lead only to worse symptoms. Legislation is debated and passed with

great hope, but many programs prove to be ineffective. Results are often far short

of expectations. Because dynamic behavior of social systems is not understood,
government programs often cause exactly the reverse of desired results.

...

First, social systems are inherently insensitive to most policy changes that

people choose in an effort to alter the behavior of systems. In fact, social systems

draw attention to the very points at which an attempt to intervene will fail.

Human intuition develops from exposure to simple systems. In simple systems,

the cause of a trouble is close in both time and space to symptoms of the trouble.

If one touches a hot stove, the burn occurs here and now; the cause is obvious.

However, in complex dynamic systems, causes are often far removed in both time

and space from the symptoms. True causes may lie far back in time and arise

from an entirely different part of the system from when and where the symptoms

occur. However, the complex system can mislead in devious ways by presenting

an apparent cause that meets the expectations derived from simple systems. A

person will observe what appear to be causes that lie close to the symptoms in

both time and space�shortly before in time and close to the symptoms.

However, the apparent causes are usually coincident occurrences that, like the

trouble symptom itself, are being produced by the feedback-loop dynamics of a

larger system. For example, human suffering in cities is accompanied (some think

caused) by inadequate housing. As a result, housing is increased and population

rises to defeat the effort. More people are trapped in the depressed urban system.

As another example, symptoms of excess population are beginning to overshadow

all countries. Symptoms appear as urban crowding and social pressure. Rather

than face the rising population problem squarely, governments try to relieve the

immediate pressures by more policemen, financial aid, busing to suburban

schools, and subsidized health facilities. As a consequence, increasing population
reduces the quality of life for everyone.

Sam

WIJG?

Post 27

Tuesday, July 6, 2010 - 5:03pm

In several lengthy diatribes, Fred Bartlett castigates economics as unscientific, evidently taking as his paradigm of scientific inquiry the physical and biological sciences. Before the 19th Century, the term "science" did not have such a specialized and restrictive meaning; initially it referred to any organized body of knowledge. In the early part of the 19th Century, however, the term began to be used in the more restrictive sense, and as a result, economists, who exhibited what some have aptly termed "physics envy," endeavored to apply the methods of the physical and biological sciences to the social sciences. Since physical science was able to make precise predictions from carefully observed universal laws, it was thought that economic science should do the same.

This slavish imitation by economists of the methods of the physical sciences is what F.A. Hayek called "scientism" or "scientistic prejudice." "The scientistic as distinguished from the scientific view," writes Hayek, "is not an unprejudiced but a very prejudiced approach which, before it has considered its subject, claims to know what is the most appropriate way of investigating it." (The Counter-Revolution of Science, p. 24)

Clearly, economics is no less of a legitimate science than physics or biology, but the subject matter -- human beings and their productive interactions -- requires a decidedly different approach and set of criteria than do the physical sciences. The subject matter of a particular study determines its methodology. To claim that economics is not a science, because it is not amenable to the same evaluative criteria as the physical sciences is to commit what Ayn Rand called "the fallacy of the frozen abstraction," which consists "of substituting some one particular concrete for the wider abstract class to which it belongs�[e.g.,] substituting a specific ethics (altruism) for the wider abstraction of 'ethics'." (The Virtue of Selfishness, p. 81) One commits a similar error, if one takes the methodology of the physical sciences as applying to all branches of science, including the science of economics.

Post 28

Wednesday, July 7, 2010 - 5:34pm

My point was more than just the measurements become unreliable. They also start unreliable. You don't really know what you're measuring. Also, you except for the data points you've collected, you don't know whether there's a trend you can take advantage of. If you are selling goods and increase the price, which lowers sales but not by much and you make a profit, you might think the demand is somewhat inelastic. But if you increase further, sales may plummet completely. You don't have a basic characteristic of elasticity for that product. You have at best how elastic/inelastic it is between the two data points you made. And your act of experimentation changes everything. When you increase the price, you might attract new competitors, or have your current customers switch permanently because they view you as charging too much.

Another major problem with economic forecasting is that the whole point of it is to anticipate changes. If you expected things to stay the same, you wouldn't need any complex modeling. But when you expect things to change, what makes you think that some variables will stay the same. If you expect the economy to change, why do you expect elasticity to stay the same (regardless of whether you can measure it)?

The reason predictions are unscientific in economics is because to make prediction, you have to make assumptions about some variables staying fixed when they don't. You find that you have to make your models for prediction intentionally behave in a different way than reality. Instead of focusing on how things work, you start trying to focus on what assumptions would make it predictable, even if they are no correct. While both goals may be interesting, they are incompatible.

Austrians also focus on what is an epistemological problem (several actually, but one that's relevant here). The market behaves the way that it does because people are acting in a particular way. You buy item A for $X, I buy item B for $Y. Our actions indicate what our preferences are in that particular context. But when changes occur to the context, our preferences can manifest in different choices/actions. The epistemological problem is that you can't tell what complex value systems people have, except how that value system results in action. You only get to see the end result. Guessing how people might behave in different circumstance is just guesswork. Even asking them isn't rigorous. People often put there mouth where their money isn't.

So when change occurs, and it always does, we can't know how people's choices will change with the new context. Of course, you can make guesses, and poll people, etc. And those may or may not be good enough to make some predictions. But you've left the area of science.

Post 29

Thursday, July 8, 2010 - 6:34am

No disrespect, but all I see are qualitative banalities, not quantitative anything that could convincingly guide quantitative policy independent of the incompatible political struggle between freedom and totalitarianism.

As well, the current political use of even the qualitative banalities currently serves only political wrestling, not based on any accepted anything--call it what you will.

And, well, look how deeply and thoroughly the totalitarians have succeeded in imprinting into our psyches -- even here -- the absolute belief in singulars: "... the demand..." and so on.

"If I arbitrarily raise my prices, then fewer will purchase my product at the higher price, but my total revenues might either increase or decrease depending on the new sales level times the new price, and as well, my total profits will be impacted, therefore I will act as if I set my price at the point where it maximizes my total profits" is a qualitative banality. It is reasonable, but it is the kind of 'deep' reason that, if you haven't already mastered before you've gone into business, you won't be in business for long. It is as simplistic as the alternative Marxist definition of pricing determined by "PRICE = COST + PROFIT"

When overcome with the 'science' in that qualitative banality, folks can go in one of two directions: they can get busy, and go into business, or they can stare at the lint in their naval and ponder the endless ramifications of that qualitative banality. If 'small business' represents 80% of business activity, then I want to hear of examples of small businesses that hire economists to quantitatively guide their policy, or who daily crack open Samuelson to guide their policy. A 'large' business might very well -- large businesses, like large governments, might inefficiently spend money on no end of complete nonsense, but that isn't typically how they got from A to B. I don't run into many practicing economists in business, I assume they are working mostly for governments and think tanks and universities and non-profits. Which probably explains why 'large' business is 20% of business activity. If we just look hard enough, there is evidence all over the place of the universe's suggestion that distributed power is preferable over concentrated power as a paradigm for long term success. All our eggs in one basket, single point of failure, one size fits all, suspension bridge cable design, ...

Now, economists might argue that all businessmen are acting primarily as economists and guided by purely qualitative economic analysis when they quantitatively conduct business, but I dont' hear many businessmen claiming that. Samuelson has been collecting dust on my bookcase for decades, the banalities have long exhausted their service to me.

The qualifier 'acts as if' is not 'acts,' and the always necessary 'ceteris paribus' never is, but don't let that stop us from plowing on anyway "as if" ceteris paribus. The concept of partial derivatives is very useful, for example, in uncertainty analysis, but only if you have a correct underlying model/equation, and 'correct' requires calibration, verification, reproducibility. Not simply 'we did the math right' ... as if our theoretical and proposed equations of human behavior were complete and valid, which is the prevailing model in economics. The (too many for anyone to even comprehensively simply list) un-modelable terms are simply ignored as if they had no consequences, because they are not model-able. The desire to plow ahead with the math anyway based on our shallow banalities is what defines state of the art in economic modeling. It's what much of physics would be, if it had never much gotten past F=M dV/dt + V dM/dt )

As in, MIT pinheads LTCM fiasco, the bamboozling in the Connecticut burbs, easily confused with the movie '21' because it was the exact same process and culture that sprung LTCM and '21' on the world. Was there any fundamental difference between those two events? (We'll leave an examination of Richard Stallman's political motives for another time...) But, MIT is yet another data point on the 'reason was attacked' landscape.

There are convincingly sound economic arguments, firmly based in reason, well sound enough that even if they aren't calibratable, verifiable, repeatable quantitative 'science', they are yet thoroughly disciplined intellectual arguments.

These would be, in any field governed by reason and not politics, widely accepted as objective truths.

And, there is the rub. The field is not and has not been governed by reason, but has precisely been over-run with politics uber alles. When the advocates of reason enter into that arena, they are currently not entering into an arena governed by reason, but by politics. Glaring hint at my Alma Mater: "The Dept of Political Economy" ... a place of 'science' not based on Economics, but on 'the understanding of economics.' Where a Paul Krugman -- Paul Krugman, for christ sakes -- politically deconstructs impressionable victims for their own good. Paul Krugman, who won a Nobel Prize for the following scientific banality: "More than one country can manufacture automobiles." (Has anyone reread Fountainhead recently? She wrote that 70 years ago; it is crystal clear why banalities like 'More than one country can manufacture autromobiles' are heralded as the zenith of modern economic thought.)

Here is the point I've been trying to make: by entering into that arena on the prevailing terms, the advocates of reason are sanctioning those terms, including, the prevailing terms of art. The terms in that arena are pre-rigged in favor of the totalitarians, this is a political ploy, and the advocates of reason run headlong into it, pre-surrendering the debate.

Advocates of reason, I would think, would not be so accepting of religion/politics so thoroughly polluting science and reason. Not even for a really, really good cause. But lets face it; it was largely permitted to do so on religious/political grounds.

regards,
Fred

Post 30

Thursday, July 8, 2010 - 11:06am

A concrete example: The Laffer Curve.

A totally sound bit of purely qualitative reasoning based on objective reality, the tyranny of mathematics.

At a 0% tax rate, no revenue because no tax.

At a 100% tax revenue, no revenue because humans will not work as slaves willingly.

In between, positive revenue, implying that, as tax rates are increased from 0 to 100%, total tax revenues will rise and then fall _at some point_ -- a point that is not constant nor governed by any hard physical constant, but an amalgam of choices made by a changing population responding to the politics and economies of the times, because ceteris is never paribus.

A logic that is roundly 'laughed at' by totalitarian leaning politicians who endlessly seek only to press for that 100%, one way or the other, driven inexorably by the following insatiable logic: those that have more should pay more, those that have some should pay some. How much more? Only ever 'more.' Endless tension towards 100%, until all have little and are ruled by the some.

The purpose of presenting the logic behind that curve is simply to point out, irrefutably, "You know, there is a point at which increasing tax rates will constrict the economies and reduce total tax revenues." Unfortunately, there are only 'ceteris paribus' examples to try and calibrate where the nations economies actually are at any given time, to convert that logic into something that could actually guide and inform current policy. And so, even that logic remains merely part of the political wrestling landscape.

But, how can the logic of the Laffer curve be laughed at? It can't be disputed that, at 0% tax rates, there is no tax revenue. That leaves the assertion that, at 100% tax rates, revenues would also be 0, and the implication that, at rates between, there are positive tax revenues. Tax revenues are bounded by two minimums, and are positive in between, which means there must be at least one maximum in between the two minimums; endlessly increasing tax rates cannot be assumed to increase tax revenues, once a maximum is reached.

I guess if it is reasonable to assume that businesses act 'as if' they were maximizing total profits when setting price policy, then it is also reasonable to assume that governments act 'as if' they were maximizing total tax revenues when setting tax rate policy.

Really? Please laugh at that one with me. For one, why should that be a proper function of government? "To maximize tax revenue taken from the economies." That is, in fact, a built in assumption of the bee colony builders, because the list of The Good We Could Do If Only We Had Enough OPM is bottomless and endless. Should it be? Separate policy issue, especially if it impacts other factors, like capital available for Return at Risk private investment in the economies, private job creation, etc. But, independent of that lofty goal is the neutral argument of the Laffer Curve.

Not a bit of logic that can serve any policymaker, nor even, qualitatively serve the policymakers in informing what their goals should be, but logic just the same. And yet, one of the most 'laughed at' examples of economic logic. That laughing is an admission of the abdication of reason/logic, because the example is reasonable, unless one believes that humans will yet strive to labor under 100% tax rates, or as bad, should, anywhere near 100% tax rates. That laughing is an admission, to me, that the arena is a political arena, not an arena of science or logic or intellectual debate.

It is currently an arena of pure what-some-want-political wrestling, obtained via whatever means is necessary to obtain it.

We can admire the logic of The Laffer Curve, but where is its ability -- in the arena, as it is -- to influence policy?

The Laffer Curve assumes that the Government will collect no tax at a 100% tax rate because there would be no incentive to earn income. However some question whether this assumption is correct. They argue, for example, that in the Soviet Union there was an effective 100% tax rate and yet, while the Soviets were not known for their efficiency, the government still managed to fund a very large and highly dispersed military while at the same time creating a highly advanced space program.[4] In contrast, Wanniski used the outcome of changes in the effective tax rate on farmers in the Soviet Union in support of the Laffer curve theory.[3]

And, let's not forget: the trains in the Soviet Union ran to the Gulags, as well, where the odd complaining bees were culled from that mankind-as-beecolony social experiment.

They should feel free to do so, in the former Soviet Union, in Cuba, in Zimbabwe, or some other tribal boot licking pisshole on earth.

regards,
Fred

Post 31

Thursday, July 8, 2010 - 11:25am

Here is a question for the defenders of economics as informative science:

If there is a Laffer curve that models the impact of tax rates on the economies, then is there an analogous analytical model that informs policymakers on the 'optimum' distribution of the following:

1] Private equity at risk investment vs. public equity at risk investment. Does it matter in any sense if investment is disciplined by 'your own skin at risk' vs' OPM at risk' investment decisions? By 'for profit' motivations vs. selfless 'for no profit' motivations? Unless, of course, we include 'power over others' as a profit motive.

If there is a theoretical set of economies with 100% private investment, and 0% public investment, and a second theoretical set of economies with 0% private investment and 100% public investment, is there any Laffer-like conclusions that can be drawn about anything, without deciding on what 'the' goal of the nation should be? After all, policymakers could (and do) tax private investment out of existence, to fund public investment.

Give pause before conducting the analysis, because the real freedom eating assertion is not the economic analsysis, but the assumption that the nation should have 'a' the goal that we are all subservient to achieving.

If that 'the' goal is not 'defend freedom', where freedom is defined as freedom from the tribe(Roark's speech at end of Fountanhead), then screw the bitch and let it burn.

The assertion that the tribe has a singular economic goal is exactly Totalitariansim. Entering into debates about what that 'the' goal should be -- or, giving credence to a 'science' based on the optimim analysis of "S"ociety's 'the' goal -- if other than 'freedom from the tribe' -- is a de facto abdication to collectivism/totalitarianism.

regards,
Fred

(Edited by Fred Bartlett on 7/08, 11:26am)

Post 32

Thursday, July 8, 2010 - 2:07pm

Fred:

The purpose of presenting the logic behind that curve is simply to point out, irrefutably, "You know, there is a point at which increasing tax rates will constrict the economies and reduce total tax revenues." Unfortunately, there are only 'ceteris paribus' examples to try and calibrate where the nations economies actually are at any given time, to convert that logic into something that could actually guide and inform current policy. And so, even that logic remains merely part of the political wrestling landscape.

But, how can the logic of the Laffer curve be laughed at? It can't be disputed that, at 0% tax rates, there is no tax revenue. That leaves the assertion that, at 100% tax rates, revenues would also be 0, and the implication that, at rates between, there are positive tax revenues. Tax revenues are bounded by two minimums, and are positive in between, which means there must be at least one maximum in between the two minimums; endlessly increasing tax rates cannot be assumed to increase tax revenues, once a maximum is reached.

I guess if it is reasonable to assume that businesses act 'as if' they were maximizing total profits when setting price policy, then it is also reasonable to assume that governments act 'as if' they were maximizing total tax revenues when setting tax rate policy.

Really? Please laugh at that one with me. For one, why should that be a proper function of government?

Wow Fred, it's as if you completely ignored everything Joe said.

The Laffer Curve DOES NOT presume collecting taxes is a proper function of government. Where did you even come up with that? It's simply a recognition of taxable income elasticity. That there is a point where charging higher tax rates yields lower tax revenue. It is not a moral argument for abolishing or keeping taxes. It does not presume to say it knows exactly what this optimum tax rate should be for maximizing tax revenues. Nor does it say charging that optimal tax rate, or any tax rate for that matter, doesn't have deleterious effects on people's standard of living. It's simply an application of the idea of elasticity to taxable income.

If you were to run a business Fred, I suppose you'd say charging the optimal price for your goods is really just political wrestling. No one knows exactly what you ought to charge so who cares about figuring it out. If you wanted more profit, you'd think well I could just keep raising the price, as if there is no reaction to such a price change by your customers. Would you know the exact optimal price to charge to the penny? Probably not, but you should know that while raising your price may lead to a smaller quantity sold, it still may give you more profit. But at some point, that continual rise in price may mean profit goes down. You may not exactly know when that occurs before hand, since the preferences of your customers can change throughout time, nor would you know exactly at that given moment what those preferences are, but like a good businessman, you continually monitor your figures, and make changes as needed. If you don't think so, then please tell me without laughing that you can run my hotel business better than I can with the notion that none of this knowledge is needed to run a successful business.

Post 33

Thursday, July 8, 2010 - 2:51pm

Fred,

There are many statements you've made that I could disagree with. And there are a lot more where I could point to how you are obviously treating economics as a science even though you attempting to dismiss it. But I don't think any of these concrete examples are important. The fundamental disagreement is on what kind of standards you are suggesting is necessary for economics to be a science. You have a few ideas, but one is more important than the others.

The standard you've expressed in post 29 is that economics, to be a science, must be able to "convincingly guide quantitative policy independent of the incompatible political struggle between freedom and totalitarianism." You think for it to be a science, it must somehow be able to override moral/political views. You go on to talk about the Laffer Curve in post 30 as an example of how it is unable to bend the political positions for those who desire ever increasing taxes.

Is this a proper standard for a science? Why would science, a systematic understanding of identity and causality, ever be able to override a political position? Say for a minute that there was universal agreement on economics (say the Austrian variety). We all know the consequences of taxing, spending, inflation, minimum wage, etc., etc. But why would you assume this knowledge would force people to act in a particular way? The welfare state wasn't created because it was thought to be an economic improvement. People know it is a burden on the economy, and they do it anyway. Even if we could magically calculate exactly what the burden was, it would still be desired by some people.

Facts about the world inform us of the consequences of our choices. Science allows us to understand what the results of our actions will be. But morality is how we decide whether a result is preferable to an alternative. Even if we had some magical economic science that provided infinitely accurate and reliable details of the consequences of a particular policy, there would still be fundamental disagreements on which choice was "better". When a socialist friend of mine read Economics in One Lesson (at my request), he said it had convinced him that these policies had unexpected consequences. But then he went on to say that he still thinks these policies are worth doing.

Sure, having a welfare state may incentivize people to not work. We may all end up somewhat poorer because people are merely consuming without any production at all. But if you believe that it is our moral duty to help the poor, regardless of how they got their, those unexpected costs don't really matter very much.

You are demanding the impossible. Your complaint is not really a complaint about economics. You're really complaining about the nature of morality/politics, and wishing that those disagreements could simply be brushed aside if we had enough science.

In your hopes for a science that could somehow overrule political views, you think that a more quantitative science might do the trick. This is a second standard you apply to economics, but it is grounded in the first. But as I said, even perfect knowledge of the results would not override political views. Especially when the morality of altruism focuses on proving your moral worth by sacrificing. It's hard to override those moral views by pointing to any costs. Costs are expected! The larger the costs, the more moral you are!

Along the same lines, you think a science needs to have strong agreement among people. This would be necessary if economics was to override any political view. As long as "economists" are in such disagreement, you can't expect it to override political concerns. But even if there was universal agreement on what the results would be, it wouldn't end there. Just as even if an altruist and Objectivist agree on the results of a particular sacrificial action, they wouldn't agree on the moral worth.

I could spend time pointing out some of your mistaken views about economics, but I understand that those mistakes are not the reason why you are rejecting it, and clarifying them would make no difference. As long as you are judging economics by impossible and faulty standards, no amount of concrete information could convince you.

Let me end by saying that these faulty standards create serious problems of their own. If you try to make economics fit those standards, you'll end up with a bigger problem. Economics can provide qualitative information about the results of various policies. But if you try to make it quantitative in the hopes of overriding the political views, you have to destroy the rigor of the theory. You have to allow for assumptions that are not true so you can simplify the problem. The objectivity of the science would be discarded. And that means you'll have more significant and impossible to resolve disagreements because everyone will be rejecting reality in some way or another and there will be no final arbiter.

Similarly, to override political concerns, the science would have to incorporate these political views. Instead of being a strict system that deals with identity and causality, it would have to have certain political goals and values in mind. And since people don't agree on those, you'll get more fracturing and less science.

It would be nice if moral debates could be decided by taking measurements, showing reproducible experiments, peer-reviewed journals, etc. Instead of having to deal with these fundamentally different worldviews, we could all agree on a general approach and the facts would sort themselves out. But that's not how it works. Philosophy is fundamental. It isn't overridden by science. If you want to deal with moral/political debates, you have to recognize when it is the moral standards that are the source of the disagreement. It may be that if we had universal agreement on economic theory, many political debates would go away because people agree on the moral standards, and simply don't understand the likely consequences. But many of the debates would continue because it's not a debate about what the effects will be, but on what is the most moral alternative.

Post 34

Thursday, July 8, 2010 - 5:27pm

A potentially-dangerous subtlety I see is that there can be a false distinction made between economics as an 'identity-causality' science; and philosophical morality.

The potential danger is the moral system: utilitarianism -- which is a moral 'consequentialism' which focuses on identifying the causation of results. Like the problem of identifying altruism with morality in general, making a complete distinction between economics and morality can be troublesome (because of the existence of the utilitarian school of morality; which is about identifying the causation of effects). In short, economics (as a science) doesn't seem to be completely distinct from utilitarianism (a moral theory).

Though I could be wrong ...

Ed

Post 35

Thursday, July 8, 2010 - 6:14pm

I'm thinking of terms like "utility" and "marginal utility" when I bring this up ...

Post 36

Thursday, July 8, 2010 - 9:23pm

Ed,

Economists would say that economics as a science uses concepts like "utility" and "marginal utility" to identify people's actions economically not morally. They would say that economics is a "value-free" science, which simply observes the consequences of people's actions and of the policies governing them within a market context -- that it simply describes but does not prescribe conduct based on the conclusions. In other words, they would say that economics is a descriptive science, not a prescriptive one like ethics.

For example, economics can show that minimum-wage laws create unemployment, but doing so is not equivalent to saying that minimum-wage laws are bad. To say that, one needs the further premise that unemployment itself is bad and that policies which increase it should be abandoned. To be sure, economists can and often do hold the latter view, but, according to them, it is not part of their science.

Post 37

Friday, July 9, 2010 - 7:29am

Joe:

I think you are extremely close to identifying, for me, my complaint with the political abuse of economics. As well, the danger inherent when that arena, with its present rules(or better said, lack of rules)is entered.

It is understood why those with nothing to lose enter that arena. It isn't as clear why those with something to lose do so. That is gambling with a slobbering beast in a rigged game, where the house rules guarantee a loss.

My complaint is not purely that it is lacking in quantifiable, verifiable, reproducible, calibratable science that could quantitatively guide policy.

My complaint extends to the fact that, even its qualitative science is subject to a set of house rules where anything goes, where even qualitative logic and reasoning is held hostage to the emperor of What We Want Anyway, where if your currency is truth and logic and reason, your money is ironically no good, because the only truth in that arena is a political truth: "S"ociety is God, and the state is its proper church, and we're here to collect."

There is a political struggle that must be won long before entering the arena of "how best to meet the needs of the tribe by allocating tribal resources and setting tribal goals," and that battle is -over- as soon as we all agree to consider -that- question, and accept -its- premises, and apply the 'science' of economics to the addressing of -that- question.

I understand why totalitarians/collectivists would like modern political debate to be waged only in that arena, because it is home field advantage.

Who is it these days that is yet asking the question, "Should there be such a thing as 'the' tribal goals to which all individuals goals are subservient, and such a thing as 'the' tribal resources, for which all individual resources are subject to taking?

A giant hint that the game in this arena is rigged is the name on some of the doors. "The Dept of Political Economy."

For me, a giant hint that the game is rigged is, never mind the inability to inform 'how much', the inability to inform 'should we or shouldn't we' is itself glaring Unemployment? Really? We are angsting over what 'the' optimum unemployment rate is in 'the' economy? Optimum for who or what? For sure not the unemployed. The down the rabbit hole insanity of that question is proof we've fallen into crazyville. Is here any evidence at all that we can control 'it'? To the contrary, there is evidence only that the state of the political class art does not have the first clue how to control it. "Here is what will happen if we do X, and here is what will happen if we don't do X" ... followed by, here is what actually happened when we did X, which far exceeded the predicted worse case scenario of what would happen if we didn't do X."

Reasonable scientific conclusion? The emperor has no clothes. Well, not exactly, because there were plenty of people in Las Vaega betting against, as well.

Any political fallout of that? Any consequences for being so utterly and demonstrably clueless? None whatsoever, there is a new race, new horses to bet on, and everyone shows up at the track with their favorite crib sheet, ready to bet on the next race.

In case after case, the qualitative logic of economics amounts to 'there is a model that, if folks acted as if they followed that model, would explain their behaviour....and, we don't what that curve/set of curves actually is, much less, where we presently are on that curve/those curves, but we can imagine that those curves actually exist.

Well, thanks for the useful information. Can it inform me what to actually do or not do next, except in the most trivial and banal of fashions? Look at the attempts to quantify the Laffer Curve; they are truly laffable, exercises in political argument dressed up as science.

Please. 'Supply siders' analysis will always show us that we are on the far side, and vice versa for whatever we are calling the religion that dare not ever speak its name in the light of day these days.

Meanwhile, we've let slip by the establishment that the concept 'maximum tax revenues extracted from the economies' is a meaningful concept or goal against which to weigh policy of any kind.

What should we maximize today? What should we minimize?

Unemployment?
GDP?
AWI?
'Average' Life Expectency?
Government tax revenues?
Quality of Life?
Coercion?
Totalitarianism?

Look, if there was anything resembling even a qualitative science at work here, where the coin of the realm was other than 'political truth', I'd be convinced we should let the carnival flail away. But there is not, there is only the graceless, clawing political mess, these days dedicated to anything but Freedom, and all at the cost of same; a justification for eating freedom in the name of our latest really, really good cause.

In the gooey fog of those qualitative banalities, anything goes, which I suspect is the usable point by those with an interest in abusing the field. Who has a political interest in abusing the field? Those who want something from someone else, and want to take a shortcut other than value for value as a means of obtaining what they want.

I'm not saying don't go into the FunHouse. I'm saying, when you go in there, watch your wallet, just like at real carnivals.

regards,
Fred

Post 38

Friday, July 9, 2010 - 8:32am

Bill,

Problems arise when you only say what people think, rather than how things are. In defending economics as a science, you told me what the economists think. Let us examine a concrete example to see how things are.

There is a concept called Pareto Efficiency (or Pareto Optimality). Is it moral or economic?

Ed

Post 39

Friday, July 9, 2010 - 9:53am