Economists with Physics Envy Are Harmful
Two questions: is it good or bad that professional athletes earn 400 times what nurses do, and is string theory a dead end? Each question goes to the heart of its discipline. Yet while you probably answered the first, you’d hold an opinion on the prospects of string theory only if you’ve studied physics.
That annoys economists, who wonder why everyone feels free to join economic debates instead of leaving them to the experts, as they do with physics or medicine. What economists don’t usually admit is that, on a range of topics they examine, they often had an answer to the question before they began their studies. Scientists are supposed to reach their conclusions after doing research and weighing the evidence but, in economics, conclusions can come first, with economists gravitating towards a thesis that fits their moral worldview.
Scientists are supposed to reach their conclusions after doing research and weighing the evidence but, in economics, conclusions can come first, with economists gravitating towards a thesis that fits their moral worldview.
That shouldn’t surprise us. Economics has always been an ethical and social exercise, its purpose being to produce the rules by which a community organizes its production. It’s not accidental that Adam Smith, whose work The Wealth of Nations (1776) is often seen as the founding text of economics, was a moral philosopher. Yet ever after, it was the holy grail of economists to make their art into a science, using it to uncover the codes supposedly buried in their heart of human existence. They experimented with mathematics and pondered Charles Darwin’s revolution in biology, but it would be the late 19th century before economics finally found a model for itself. It found it in physics.
Alfred Marshall, one of the architects of the “marginal revolution” that gave birth to modern economics, no doubt had the predisposition that inclined him towards a physical view of the world. A former seminarian who enjoyed unwinding with long walks in the Scottish highlands, he was undoubtedly attracted to the view of a universe that was inherently orderly. Yet the marginalists had another reason to adopt the physical view of the world. Physics was then emerging as the most canonical of the sciences. As a model, it had no rival. Besides, with a few basic assumptions, the physical model seemed to transfer rather neatly to human behavior.
Think, for example, of that high-school lesson on energy transfer. You stick a piece of hot iron into a bucket of cold water, steam rises, the rod cools, and the water warms until the two eventually reach the same temperature: equilibrium. Well, you can similarly think of the hot iron as a shopkeeper, the bucket of water as a customer, and energy as money. The item the shopkeeper has to sell is hot—everyone wants it—but, as a customer, your empty purse makes you a bucket of cold water. Either the shopkeeper drops the price to reach equilibrium with you, or waits until a hotter customer, one with a full wallet, enters the shop. That way, the handbag will sell at an equilibrium-price more pleasing to the shopkeeper.
That’s sort of how the marginalists conceived of market transactions. Some of the early marginalists went so far as to explicitly liken pleasure, or what they would call utility, to energy. From there, it was a short leap to say market transactions revealed the laws of nature. In the 1930s, Lionel Robbins laid down the basic commandments of the discipline when he said that the premises on which economics was founded followed from “deduction from simple assumptions reflecting very elementary facts of general experience,” and as such were “as universal as the laws of mathematics or mechanics, and as little capable of ‘suspension.'”
Ah yes, general experience. What did Albert Einstein allegedly say about common sense? A funny thing happened on its way to becoming a science: economics seldom tested its premises empirically. Only in recent years has there been serious investigation of its core assumptions and, all too often, they’ve been found wanting.
Unlike in physics, there are no universal and immutable laws of economics. You can’t will gravity out of existence. But as the recurrence of speculative bubbles shows, you can unleash “animal spirits” so that human behavior and prices themselves defy economic gravity. Change the social context—in economic parlance, change the incentive structure—and people will alter their behavior to adapt to the new framework.
That’s something that “physics envy” can’t capture—that the social nature of human beings makes any laws of behavior tentative and contextual. In fact, the very term “social science” is probably best seen as an oxymoron. In the early years of the neoclassical revival, in the 1970s, the Nobel laureate Wassily Leontief warned against the drift that had begun in economics towards what was subsequently called “physics envy.” Noting that human data differed from that in the natural sciences by its fluid nature, Leontief said that economists would do better to spend less time perfecting their mathematics, and more time getting down and dirty with their data.
That’s something that ‘physics envy’ can’t capture—that the social nature of human beings makes any laws of behavior tentative and contextual. In fact, the very term ‘social science’ is probably best seen as an oxymoron.
However, he also acknowledged his warning would likely fall on deaf ears. The apogee of economic “scientism” came in the 1990s, a decade in which economists such as Alan Greenspan were lionised as gurus, Bill Clinton was describing globalization as a force of nature to which governments had to submit, and whizzkid experts such as Jeffrey Sachs were jetting into one country after another advising former communists how to re-align their countries with this presumed natural order.
Hindsight has revealed the misplaced hubris of that decade, one during which Greenspan helped to fuel a speculative bubble that nearly destroyed the world economy, and the Soviet Union’s failed reform knocked seven years off its life expectancy. Many economists, Sachs included, defend themselves on the grounds that their advice was not actually taken: bad politics got in the way of good economics.
But that only vindicates Leontief’s point. Economies are social constructs. That necessarily entails politics. Precisely because economic policies affect them so profoundly, people take much more interest in them than they do in physics debates. The method of economists at the turn of the century was to go through data-sets looking for patterns—economics at 30,000 feet (sometimes, literally). Had they instead taken Leontief’s advice, and spent more time on the ground getting to know their subjects, they might have been able to anticipate the ways that politics would affect their models.
Given this willful blindness, the current reaction against economists is understandable. In response, a “data revolution” has prompted many economists to do more grunt work with their data, while engaging in public debates about the practicality of their work. Less science, more social. That is a recipe for an economics that might yet redeem the experts.
This article was originally published at Aeon and has been republished under Creative Commons.
John is a political economist at the University of Cambridge, as well as a journalist and co-creator of the Caribbean Policy Research Institute in Jamaica. He is the author of Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong (2017).
there is no “data revolution,” because economics has *always* been highly data-oriented, not that its critics can be bothered to learn something about the field other than a handful of quotes from books from 100 years ago.
to take the physics analogy to its extreme, is physics responsible for Newton’s imperfections? a non-deranged person would say no. yet john rapley would have you say that all of economics is bogus because marshall found theoretical physics in high regard. just bizarre.
There is a causal inference revolution, which as an economist I highly welcome. See work by Guido Imbens or Judea Pearl.
IEconomics, meaning partial explanation how human preferences interrelate in a predictive fashion, has some practical tool of arithmetic, i.e. two plus two is 4, for example. beyond that, economic progression is part of evolution, throwing out any number of experiments; and those that work proceed for a while until the next experiment succeeds better – ad infinitum. Or rather until excesses develop that trigger corrections that prepare the ground for a new set of experiments of human progression, etc, Anywaysm, my attempt to explain it.,
Making Macroeconomics a Much More Exact Science
Today macroeconomics is treated inexactly within the humanities, because at a first look it appears to be a very complex and easily confused matter. But this does not give it fair justice, because we should be trying to find an approach to the topic and examine it in a better way that avoids these problems of complexity and confusion. Suppose we ask ourselves the question: “how many different KINDS of financial (business) transaction occur within our society?” Then the simple and direct answer shows that that only a limited number of them are possible or necessary.
Although our sociological system comprises of many millions of participants, to properly answer this question we should be ready to consider the averages of the various kinds of activities (no matter who performs them), and simultaneously to idealize these activities so that they fall into a number of commonly shared ones. This employs some general terms for expressing the various types of these transactions, into what becomes a relatively small number of operations. Here, each activity is found to apply between a particular pair of agents—each one having individual properties. Then to cover the whole sociological system of a country, the author finds that it requires only 19 kinds of exchanges of the goods, services, access rights, taxes, credit, investment, valuable legal documents, etc., verses the mutual opposing flows of money. Also these flows need to pass between only 6 different types of representative agents.
The analysis that led to this initially unexpected result was prepared by the author and it may be found in his working paper (on the internet) as SSRN 2865571 “Einstein’s Criterion Applied to Logical Macroeconomics Modeling”. In this model these 19 double flows of money verses goods, etc., are shown to pass between the 6 kinds of role-playing entities. Of course, there are a number of different configurations that are possible for this type of simplification, but if one tries to eliminate all the unnecessary complications and sticks to the more basic activities, then these particular quantities and flows provide the most concise result, which is presentable in a comprehensive and seamless manner, and one that is suitable for further analysis of the whole system.
Surprisingly, past representation of our sociological system by this kind of an interpretation model has neither been properly derived nor presented before. Previously, other partial versions have been modeled (using up to 4 agents, as by Professor Hudson), but they are inexact due to their being over-simplified. Alternatively, in the case of econometrics, the representations are far too complicated and almost impossible for students to follow. These two reasons of over-simplification and of over-complexity are why this non-scientific confusion is created by many economists and explains their failure to obtain a good understanding about how the whole system works.
The model being described here in this paper is unique, in being the first to include, along with some additional aspects, all the 3 factors of production, in Adam Smith’s “Wealth of Nations” book of 1776. These factors are Land, Labor and Capital, along with their returns of Ground-Rent, Wages and Interest/Dividends, respectively. All of them are all included in the model, as a diagram in the paper.
(Economics’ historians will recall, as originally explained by Adam Smith and David Ricardo, that there are prescribed independent functions of the land-owners and the capitalists. The land-owners speculate in the land-values and rent it to tenants, whilst the capitalists are actually the owners/managers of the durable capital goods used in industry. These items may be hired out for use. Regrettably, for political reasons, these 2 different functions were deliberately combined by John Bates Clark and company about 1900, resulting in the later neglect of their different influences on our sociological system– the terms landlord and capitalist becoming virtually synonymous along with the expression for property as real-estate.)
The diagram of this model is in my paper (noted above). A mention of the related teaching process is also provided in my short working paper SSRN 2600103 “A Mechanical Model for Teaching Macroeconomics”. With this model in its different forms, the various parts and activities of the Big Picture of our sociological system can be properly identified and defined. Subsequently by analysis, the way our sociological system works can then be properly seen, calculated and illustrated.
This analysis is introduced by the mathematics and logic that was devised by Nobel Laureate Wassiley W. Leontief, when he invented the important “Input-Output” matrix methodology (that he originally applied only to the production sector). This short-hand method of modeling the whole system replaces the above-mentioned block-and-flow diagram. It enables one to really get to grips with what is going-on within our sociological system. Subsequently it will be found that it is the topology of the matrix which actually provides the key to this. The logic and math are not hard and is suitable for high-school students, who have been shown the basic properties of square matrices.
By this technique it is comparatively easy to introduce a change to a preset sociological system that is theoretically in equilibrium (even though we know that this ideal is never actually attained–it simply being a convenient way to begin the study). This change creates an imbalance and we need to regain equilibrium again. Thus, sudden changes or policy decisions may be simulated and the effects of them determined, which will point the way to what policy is best. In my book about it, (see below) 3 changes associated with taxation are investigated in hand-worked numerical examples. In fact when I first worked it out, the irrefutable logical results were a surprise, even to me!
Developments of these ideas about making our subject more truly scientific (thereby avoiding the past pseudo-science being taught at universities), may be found in my recent book: “Consequential Macroeconomics—Rationalizing About How Our Social System Works”. Please write to me at chesterdh@hotmail.com for a free e-copy of this 310 page book and for additional information.