Comments on: Is economics an empirical science ?

By: Frans Groenendijk

Frans Groenendijk — Sun, 18 Jul 2004 02:04:03 +0000

Since trackbacking does not seem to work I humbly invite you manually to read my followup on my own site. ( http://www.fransgroenendijk.nl/comments.php?id=P379_0_1_0 )

By: Bob

Bob — Sat, 17 Jul 2004 10:41:25 +0000

Another thought. It is often proclaimed by critics of economics that the subject isn’t and will never be an exact science like physics. If so, how come this? “After nearly 30 years of arguing that a black hole destroys everything that falls into it, Stephen Hawking is saying he was wrong. It seems that black holes may after all allow information within them to escape. Hawking will present his latest finding at a conference in Ireland next week. “The about-turn might cost Hawking, a physicist at the University of Cambridge, an encyclopaedia because of a bet he made in 1997. More importantly, it might solve one of the long-standing puzzles in modern physics, known as the black hole information paradox. “It was Hawking’s own work that created the paradox. In 1976, he calculated that once a black hole forms, it starts losing mass by radiating energy. This ‘Hawking radiation’ contains no information about the matter inside the black hole and once the black hole evaporates, all information is lost. “But this conflicts with the laws of quantum physics, which say that such information can never be completely wiped out. Hawking’s argument was that the intense gravitational fields of black holes somehow unravel the laws of quantum physics.” – from: http://www.newscientist.com/news/news.jsp?id=ns99996151

By: Bob

Bob — Fri, 16 Jul 2004 14:19:35 +0000

“Is there a such a [something] that economics builds on? If not, why not?” Historically, economics evolved out of philosophy, especially political philosophy, and from the exigencies of government, conspicuously in making laws and regulations. As mentioned before, most, if not all, early manifestations reflect prescriptive – or proscriptive – intent from which the implict analytical or modelling content has to be inferred [1]. This becomes evident from notions of “the just price” in medieval Christian theology, prohibitions on usury in several leading religions, and from ascendant mercantilist doctrines, in the 16th through 18th centuries, as recipes for enhancing national affluence. Much of Adam Smith’s Wealth of Nations (1776), regarded by many as the starting point of political economy as a distinctive discipline, is focused on unpicking the justifications for mercantilism. It also staked out the explicit claim that private pursuit of private interests, within a framework of law and the (minimalist) functions of government, conduces to maximising social welfare through “the invisible hand” of the market. However, the central notions of mercantilism still have resonance – hence recurring advocacy of protestionism – and the claim made on behalf of the optimal outcome from the private pursuit of private interests remains an area of active controversy – hence the continuing arguments about the superior social benefits ensuing from state ownership of business, planning, intervention and regulation. Someone relatively famous once suggested to me the best prior disciplines from which to embark on studying economics are history and mathematics: history because to understand where we are we need to know how we got here; and maths as a tool for modelling, testing hypotheses and for decision-making, especially in situations of risk and uncertainty. [1] Illuminating and retrospectively amusing insights can be gleaned from early economic legislation in England. The ravages of the Black Death (plague) 1348-51 created a shortage of labour relative to demand at going wage rates and thereby changed the bargaining power in markets of peasants and craftsmen. Real wages increased in consequence so the state intervened in an attempt to restore wage rates to pre-plague levels: http://www.historyguide.org/ancient/statute.html The dissolution of monasteries by Henry VIII, in pursuit of conflicts with the Catholic church about his divorce arrangements, removed an institution which had charitably provided for poverty abatement. As a result, his daughter, Elizabeth I, found it expedient to introduce legislation empowering local justices and then overseers to raise local taxes to provide care for the poor and needy, thereby establishing the foundations of what eventually became the welfare state: http://www.victorianweb.org/history/poorlaw/elizpl.html In the official categorisation of the poor in 1563 legislation between the deserving poor, the infirm and the idle, the Elizabethans appear to have grasped at least a basic understanding of moral hazard.

By: q

Fri, 16 Jul 2004 13:07:52 +0000

Association for Information Systems- Discussion of Design Research in IS including March and Smith (1995)... "constructs, models, methods, and instantiations" would have an applicability across many disciplines, including economics, and I suspect psychology. March and Smith "Design and Natural Science Research on Information Technology." Decision Support Systems 15 (1995)

By: dan

dan — Thu, 15 Jul 2004 23:47:33 +0000

re q: I dunno about Feyerabend, but I’d agree that Kuhn was a big improvement over Popper or Lakatos. I work in math psych, and I find myself doing more-or-less exactly what he describes in Scientific Revolutions. You start with a basic framework of assumptions which you use to design experiments and build models. After a few successes (this is psych, not physics, so we have frequent revolutions) the framework starts to collapse under its own weight, and you build up a new one that can handle the new data. Is economics much different to that?

By: HP

HP — Thu, 15 Jul 2004 22:18:14 +0000

As a disinterested layperson, I’ve always gotten the impression that economics is a branch of some larger, unnnamed and undescribed science. Just as mechanics is a branch of physics, it seems that economics is a branch of [something], with that [something] dealing with large-scale theories of production and distribution across not only market economies but feudal serfdoms and moieties and termite mounds and the builders of Stonehenge and prides of lions and household chores when there are teenagers in the house and …. Is there a such a [something] that economics builds on? If not, why not?

By: Jonathan Goldberg

Jonathan Goldberg — Thu, 15 Jul 2004 17:25:56 +0000

I suggest that this discussion stop turning on Popper and start using a better philosopher of science, namely Quine. “The Web of Belief,” Quine and Ullian, is a good place to start. As a member of the Quine or Kitchen Chemistry school, I attempt to clarify some points. One: falseificationism is at best an interesting partial view. The reason for this is that is simply transfers the question to when something is falsified. With enough special purpose assumptions and escape clauses any single belief can be preserved. The question is when do you quit. (Lakatose tried to capture this with his noting of healthy and declining research programs). It’s easy to come up with historical examples of things that were thought to be falsified but turned out true; for instance, the Gordon-Kline equation. On the other hand, in a famous paper on the weak nuclear force Gell-Mann and Feymann cited about a half dozen experimental results which disagreed with their theory and must therefore be wrong. And indeed they were. Francis Crick has gone so far as to elevate this into a principle: he holds that no theory that explains all the facts can be correct, because at any time some of (what are thought to be the) facts are wrong. Two: Kitchen Chemistry. Quine’s view (and mine, FWIW) is that there is no essential difference between the thought processes or logical principles used in the kitchen and in the science of chemistry. The latter is simply more careful and more successful. Three: what is really being argued over is not whether economics is a science (as Richard Rudner, my revered philosophy teacher, once remarked, if snience works and science dosen’t I’ll do snience), but whether it can produce strong results. This is not dependent on a procedure such as “make only falsifiabile statements.” Ask yourself whether anyone, however scientific and intelligent, could have produced quantum theory in Aristotle’s time. Sometimes the background is simply not there. Then, we grope around trying to produce it, or abandon that field of study altogether. If you don’t want to do that, you work with what you have, as well as you can. And that is science. It’s true that this leaves one without a clear criterion by which to seperate science from non-science. That is because no such criterion exists. Sorry about that.

By: Barry

Barry — Thu, 15 Jul 2004 16:01:48 +0000

Luis: “Barry, ‘what do the engineers think’ is the legacy of engineers having to actually prove things or risk having people die when things collapse, whereas the soft sciences tend not to have to prove anything in any kind of rigorous way (at least by comparison.)” Well, when surgeons screw up, people die or are injured. However, the idea that surgeons should be the judges of econometrics is ludicrous. And the (auto) engineers I worked with generally couldn’t prove much with ‘rigor’, because there wasn’t that much really good data which was available. They tended to make incremental modifications to what had worked, or to run things through test rigs. They could run surprisingly complex calculations, but the models all depended on poor environmental/manufacturing data. “Trying to do any kind of engineering calculations with the large tolerance for error and ludicrous base assumptions that are very common in the social sciences would, in most applied engineering disciplines, at best get you laughed out of the field and at worst leave you in danger of being put in jail.” I’d put it that the engineers that I worked with did have to work with large tolerance for error and ludicrous base assumptions. Another way to say what you said above is that economics (and the rest of the social sciences, and business) have to work with bad data on a regular basis. It’s not surprising that things which are more lab-simulatable can be engineered better. “Economics is better than, say, political psychology in this regard, but not so much so that most engineers wouldn’t laugh at the so-called ‘standards of proof’ employed.” Actually, most of the experienced engineers I’ve worked with wouldn’t have laughed. They’d think that the data s*cked, and might be glad that they didn’t have to deal with that stuff.

By: Bob

Bob — Thu, 15 Jul 2004 13:47:20 +0000

The extent to which parts of economics are “scientific” in a Popperian sense is doubtless a fascinating topic but governments are continually pressured into making a huge variety of decisions on macro stabilization, monetary systems, competition policy, regulation and trade restrictions. Regiments of lobbyists are out there championing a wide variety of causes on behalf of contending vested interests. Does anyone seriously suppose lobbyists or their clients worry about the niceties of whether the beguiling rationales for the causes they hawk are “scientific”? What matters to them is whether the rationales are sufficiently plausible to start a bandwagon rolling. What unites them is discrediting nit-picking economists who find fault with their touted nostrums. As Adam Smith put it: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.” [Wealth of Nations (1776), Bk.1 chp.10] Markets and governments existed long before economics emerged as a separate discipline. Much, if not all, early writing about markets and associated policy for their control was avowedly prescriptive – such as the “just” price, prohibition of usury, mercantilism and the rest of dirigisme. Indeed, the early title of Political Economy aptly described the battlefield. The parading of policy issues in government is relentless and inescapable. The challenge for economists is how to sharpen up their discipline. Alan Blinder has proposed the illuminating Murphy’s Law: “Economists have the least influence on policy where they know the most and are most agreed; they have the most influence where they know the least and disagree most vehemently.” [Hard Heads, Soft Hearts (1987)] Keynes, again: ” . . the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to quite exempt from any intellectual influences, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But soon or late, it is ideas, not vested interests, which are dangerous for good or ill.” – from: http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm

By: q

Thu, 15 Jul 2004 04:17:24 +0000

Whether economics is a science hinges on a key property: falsifiability. Falsifiability is necessary for something to be a science. Yes this is one interpretation. I recommend that you read Gellner, Kuhn and Feyerabend on scientific processes to expand the framework of your debate.

By: Nicholas Gruen

Nicholas Gruen — Thu, 15 Jul 2004 02:58:52 +0000

Here is an extract from a paper of mine which addresses the question Alex R raised. It and my original paper on the issue are posted at http://www.lateraleconomics.com/outputs.html Democracy and an independent fiscal stance It might be argued that the arrangements for more independent fiscal policy would be less democratic than existing arrangements. However, as we have seen there is little in the ideas being explored in this paper for which there are not precedents elsewhere within the OECD. A wide range of government bodies and authorities in our society are distanced from – but still ultimately accountable to – representative democratic institutions. The ideas explored here would be incapable of implementation – and nor should they be capable of implementation – without the democratic sanction of legislation. The degree of independence given to any government policy-making body is itself ultimately legislated by Parliament and so accountable to the people. In this sense, Governor Ian Macfarlane of Australia’s Central Bank, has argued, the issue of ‘independence’ is best seen as ‘a discussion about the optimal degree of delegation, including the circumstances in which the delegation could be withdrawn’ (1996). In this context it must be remembered that the kind of power to be delegated is of a precise and closely circumscribed kind. An independent fiscal authority would have none of the kinds of power of the legislature to do any favours or impose specific costs on any section of the community. It could not introduce any new taxes or tax concessions. Politicians would continue to perform their democratic duty in deciding who pays what rate of tax, what concessions there are, how much money is spent and on what. But an independent body would have an important role in influencing the management of the total tax take. It would take the entire tax system from existing legislation and, by calibrating that system across the board, have influence over one economic variable which is critical to both long and short run economic performance – the relationship between outlays and revenue. Beyond the fact that that it could deliver better performance, fewer and milder recessions, and lower unemployment, the philosophical justification for fiscal policy independence is analogous to the philosophical justification for monetary policy independence. The fact that we have an intermediary in the area of monetary policy and do not have one in the area of fiscal policy is a product of the different history of the relevant institutions rather than differing principles. But its not hard to appreciate a very sound political philosophical justification for some independence in monetary policy management. One political generation’s undermining of the value of the currency to underwrite an unsustainably high rate of economic growth for itself is not only unfair. It is undemocratic. It represents oppression of the minority. And protecting the minority from oppression does on occasion require departures from strict representative democracy – most obviously concerning the independence of the judiciary for instance. But such protections from oppression of the minority are, in many senses, things which are necessary to the checks and balances which constitute and protect democracy. They are building blocks of democracy rather than derogations from it. Clearly if the government of the day set short-term interest rates it would be more democratic in the simple sense but so too would electing the Auditor General or the judges of superior appellate courts. In that light, it does not seem entirely foolish to say that current protections against debasing the currency in democratic countries are, like property rights, part of the apparatus of checks and balances that underpins democracy and makes it more rather than less secure. Precisely the same could be said of checks and balances against one generation running up government liabilities for the next generation to pay in higher taxes.

By: Ian Montgomerie

Ian Montgomerie — Thu, 15 Jul 2004 02:56:54 +0000

“Whether economics is a science hinges on a key property: falsifiability.” I think as I was mentioning, the problem here is specific propositions vs. the broad underlying theories used to produce them. Whenever economics actually predicts something specific about the economy, it can be falsified. However, the predictions are usually generated using theoretical approaches that are effectively not falsifiable. If you ask the question “is general equilibrium theory falsifiable?”, the answer is clearly “in practice, no”. The thing is, general equilibrium theory has been known to be wrong for some time – the actual economy is simply not in equilibrium. So very quickly, economists using equilibrium theory (which is still the great majority) took the approach that it should be treated sort of like a heuristic or approximation. So long as general equilibrium theory produces useful results in general, it’s a good tool despite being, strictly speaking, wrong. Once economists took this approach, they had the ultimate defense of equilibrium analysis – there can be no such thing as a clear falsification of it. Any one problem with it may simply be one of a minority of circumstances in which it isn’t a good approximation. So economists are free to continue assuming that equilibrium analysis is accurate for any specific case unless proven otherwise – exactly as one would do with a falsifiable but as-yet-unsalsified theory – even if many cases have been found where it doesn’t apply. The practical reality that this creates is that no matter how many errors equilibrium analysis has, it can never be falsified, it could only be replaced by some theory that was able to so thoroughly beat it at its own game that it could be shown a priori to likely make a better prediction in any given situation. Disproving any specific prediction of equilibrium analysis isn’t treated as disproving the technique. And of course, it’s even worse because of a massive sampling bias. There are two ways to properly analyze how useful a heuristic is. One way is with a proof, if you know enough about the real system being modeled to prove that the heuristic is accurate to within certain limits. This doesn’t work in economics because we don’t know enough about the underlying real systems. The other way is to get a decent, representative sample of problems, and test the heuristic’s predictions on them. If the sample is decent, you get a decent test of the heuristic’s usefulness. This also doesn’t apply to economics – economists don’t work by taking a representative sample of questions one might want to ask about economic issues, applying equilibrium analysis to them, and then reporting whether it succeeded or failed. Instead they naturally start with the theoretical tools they have, apply them preferentially to those problems where they seem likely to yield decent results, and preferentially report positive results that can be interpreted as supporting an equilibrium analysis. But then, perhaps some economist disagrees with me. If so, perhaps they can explain how one would in practice falsify general equilibrium theory, the “homo economicus” rational agent model, etc?

By: Nicholas Gruen

Nicholas Gruen — Thu, 15 Jul 2004 02:51:03 +0000

I posted this on John’s blog, and then realised he’d posted on CT - where there is more action. So here’s my post. I’ll also respond to Alex R in the next comment. It is nice to see the proposal to try to develop independent fiscal policy institutions, along the lines of monetary policy institutions staying on the radar screen. Alan Blinder mentioned it a few weeks ago at a conference of the Federal Reserve in Boston (including mention of its Australian incarnation via the BCA Paper). It got a similar mention in a major think piece by CESifo commissioned by the OECD recently. This was reported by Alan Kay in the Financial Times at http://www.johnkay.com/political/311. (email me for either or both papers). The OECD also showed some interest in the BCA paper when it was first published and written up in The Economist. And the book ‘Imagining Australia’ which was only launched on the weekend mentions it as one of four proposals to “strengthen our institutions and the macro economy”. (I think an extract was in this Weekend’s Australian, but I don’t have the link). Pleased to see you like it John, I didn’t know if you would. Those who instinctively favour active fiscal policy often see constraints on fiscal policy (in the name of fiscal responsibility) as constraints on flexibility. The debate on fiscal flexibility itself is often seen as one between those arguing for fiscal responsibility and those arguing for fiscal flexibility – which is usually code for fiscal expansion. The dichotomy is silly of course, and the idea of developing our fiscal institutions along the lines of monetary policy is based on the idea that fiscal responsibility is a precondition for fiscal flexibility. Clearly party politics has difficulty delivering this, and so the idea is to build out institutions as we have with monetary policy – where we have improved our management of a very similar tradeoff. Ideally more independence in monetary policy improves monetary responsibility, and in purchasing credibility enhances flexibility.

By: Zizka

Zizka — Thu, 15 Jul 2004 02:49:28 +0000

Not to be too annoying, but to me the question of whether economics is a science or not is pretty empty. It’s like some kind of USDA seal of approval, giving economists license to strut around a little more arrogantly than before. To me the questions are, “How good is economics at what it does?” and “If you don’t like the way economics does things, what improvements do you suggest?” There seem to be apples-and-oranges comparisons being made between the results of two different kinds of study. Thus, maybe the reason historians and economists get “worse” results from a scientific point of view, is that the actualities studied by these disciplines are, for whatever reason, ontologically not susceptible of deterministic explanation (or whatever the criterion is). My guess is that economics is a lot more like history than physics, FWIW.

By: agm

agm — Thu, 15 Jul 2004 01:00:51 +0000

Whether economics is a science hinges on a key property: falsifiability. Falsifiability is necessary for something to be a science. Consider, as bob did, geology. Geology is alot more than observation, you can also test your explanations experimentally, you can apply chemistry (to get mineral X, you must have temperatures so high, with these substances around, under pressures so much, etc) and you can apply physics (density differences causing differences in behavior for land versus seafloor), you can create new tools and theories and test them. Not only that, but the tests are very common and very definite in determining the validity of your ideas—based on our understanding, we predicted an oilfield at a certain place at a certain depth; is it there? Thus geology has the element of falsifiability. The same concern exists in the hardest science. Most branches of physics can build an experiment to test a model or theory, the exceptions seem to be astro-, space, and atmospheric physics. Falsifiability is much more elusive since you can’t go out and build a universe or solar system to test your theories, the best you can do is create numerical and theoretical models and test them against observations and throw satellites up to gather data. Thus the old guard doesn’t really regard them as branches of physics, and these endeavors are often run in separate departments. Thus the issue is whether economics is falsifiable. If not, if you can’t say, “Under these circumstances my model says X will happen”, and then go and check whether that happens in those circumstances, then it cannot be science. Conversely, if you can tease out pre- or postdictions from your model and compare against what actually happened, even if your model did a horrible job it’s still science. That’s how, in the span of hundred years, cosmology progressed from “turtles all the way down” to become a very hard science indeed.