On 8/17/15, Mark, Seth, and Wes were joined by Boston University economics grad student and long-time PEL fan Seth Benzell to talk about two texts: “The Use of Knowledge in Society” by F.A. Hayek (1945) and On Ethics and Economics by Amartya Sen (1987).
Go listen to Seth Benzell's introduction for a straight-up summary of the two essays and how they relate.
Seth Paskin has long since wanted us to do an economics episode. He's a fan of Econtalk and like many of us, wants to understand phenomena like the housing crisis and how it's possible that the reasons for this that are given vary so widely and for the most part are predictably political. Economics as a science is supposed to be objective, yet on these very visible issues at least, there's such a partisan division that either economics (well, macro-economics, at least, as that's usually what we have in mind in these disputes: concerning the economy as a whole and not the workings of some particular price mechanism within a particular market) must itself be basically voodoo or else (as with climate change) one side of the "debate" is made up of obvious partisan hacks. Or, as has been argued to me, both sides of the visible political dialogue are partisan hacks, because all the really respectable economists are above the sort of showmanship involved in contributing to the public debate.
I got interested in this topic largely through my involvement with New Work. As recently as last winter I was helping Frithjof write the New Work FAQ, and the fact that I can't (and seemingly Frithjof can't) speak the jargon of economics means that we will not be taken seriously when covering a good chunk of what's involved in that program. So, last summer I worked my way through a couple of econ courses via iTunes U (which have so exited my head by now that I can't even easily figure out which ones, so I'll just link to this great list that I should return to), enough to feel justified in my initial opinion that libertarian objections to accomplishing anything like New Work (or otherwise intentionally interfering in the economy at all in any manner other than as buyer or seller) were more a matter of ideology than merely having one's eyes properly open to the harsh realities of economics.
It was always my plan and assumption that we would finally get around to talking about economics by going back to Adam Smith's The Wealth of Nations
However, Seth B. had come to my attention through helping me with (i.e., arguing with me about) the economic claims involved in New Work (which he's now written a paper on, that I have not yet read), and at some point I connected him up with Seth P., who was responsible for finally getting this on our calendar. Seth B. suggested a great swath of readings, which Seth P. culled to the current, quite breezy and manageable selection, which presents a seminal paper of Hayek's, which apparently everyone in economics reads despite their general contempt for history (they're doing a science, not the history of science!), and this short book by Sen based on some of his lectures to a partly lay audience, which avoids whatever it is about Sen's style that Wes doesn't generally like.
So, the good news is that these articles are very readable. The bad news from a philosophical perspective is that we're walking in right in the middle of a dialogue, and weren't so familiar with the positions that these fellows were arguing against. Now, this of course happens in philosophy all the time; we seldom read those contemporaries that were the targets of scorn for our favorite philosophers (e.g., have you actually read any F.H. Bradley or the other British Hegelians that Russell dumped on so much?). Still, in this case, I couldn't shake the feeling that both of these guys were arguing against straw men, though I'm sure that they of course had their real contemporaries' views in mind, and even name them on occasion.
Hayek's objection is to central economic planning. He claims (I think) that the economists of his day talk as if using theory, they can develop the most efficient, rational economic order, the best way of using all of the available resources. But realistically, one can't just sit down and plan a whole economy, figuring out what resources are in the country (much less the world) and what people need, because that's just way too much information, and even if you could store it all, you can't collect it, because people's needs are changing, and supplies more so, and every new advance in a way of doing something changes the equation re: how easy it is to produce something and/or perhaps creates a new demand.
While I have no doubt that in the 1940s, with Communism still a global force, this central planning was a real political option, Hayek properly points out this epistemological problem that makes the whole idea seem ridiculous. But note that the only option it makes seem this way is the idea of total planning of the whole economy. The concern of socialists and anyone else who wants to address poverty is with needs that are basically fixed, like hunger, like the need for an education, for fire and police service, etc. (A novel one among these claims that I think is contributed by New Work is our need for meaningful activity that I think is in most cases only possible outside of the economy, which comes down to a need for a lot of free time and a need for specific and ongoing guidance in figuring out what you really want to do with that time.)
Our libertarian fans have been waiting for us to get to Hayek after our episode last year on Robert Nozick, and I'm afraid they'll be disappointed here, in that we didn't read Hayek's The Road to Serfdom
Now, Hayek does praise the price system as (along with division of labor, another thing that New Work, in this respect following Marx, does not much cotton to) having provided a historical foundation for modern society, seeing how it serves to, in effect, communicate all this information about supplies and demands that the central planner can't get his giant visible hand on. I think one can accept that without thinking that prices adequately reflect human values, that prices are in general (much less in all cases) fair, or that the price system is a good way to control who gets what necessities of life. We spent a little time on this point, but not much, because Hayek doesn't actually make much out of it in this short essay: Prices are miraculous, and serve at least to make it possible for a distributed network of individuals to run a somewhat efficient economy, whereas a central planner would have no such hope.
Shifting to Sen, we get into a more current, more apparently live dispute than Hayek's disagreement with central planning. Sen objects to the total dominance of the "engineering" approach to economics that vastly oversimplifies human nature to try to make mass human economic behavior predictable. The appeal of such an approach is obvious, in that it works very well in easy-to-understand circumstances à la the law of supply and demand: If an item is plentiful, then people won't pay much for it. If demand goes up, prices go up, and more suppliers want to get in on that, and the current suppliers want to make more because their profit per item has gone up. We assume in these cases that buyers always want to pay as little as possible and sellers want to make as much money as possible: This assumption is often called self-interest or rational self-interest, in that in deciding to buy something, we're weighing that against all the other things we could buy, or all the other things we could do other than to go buy something, and in general, in the aggregate at least, will pursue whatever we take to be valuable.
As with all claims that "everyone is selfish" (that we've derided since early in our podcast's history), supporters of this view tend to interpret people's actions to support their view: If it seems that someone is acting selflessly, then he's really just doing what gives him his jollies, i.e., he gets off on being kind, so he's still being selfish. We might identify whatever it is we value as in essence being the self, or if behavior can't be feasibly interpreted as selfish we might à la Rand deride the person as acting irrationally. Homo economicus is the basic playing piece in making economic predictions.
Sen isn't happy about this, and thinks that even where capitalism has been successful, as in Japan (in the time he was writing this), there are ethical and not merely selfish common motivations. After all (and the following is my interpretation, not Sen's), to be selfish would require cheating whenver possible, but maximal economic success for a society is not helped if everyone has to cautiously look out for being cheated all the time. Just as the need to constantly bribe people would be tantamount to a levy that slows economic activity, so the assumption that others will keep their promises (if well justified by people's actual behavior) smooths the way for fruitful activity. One can argue that cheaters get punished by losing business, but common experience as a consumer should tell you that no, maybe you can't stay in business indefinitely by screwing over everyone all the time, but you can definitely screw most of the people some of the time or some of the people most of the time and last a long goddamn time (in my case, the first one that comes to mind is Jiffy Lube, where I feel I have to fend off a lot predatory upselling on every visit, yet I continue to go there because it's at least a known quantity and character of screwage).
So Sen makes a series of ever-finer distinctions re: what's really going on when economists treat people as personal-welfare-maximizers and (as was emphasized in our episodes on utilitarianism and happiness, among others) describes how problematic it is to really characterize "the good" for people, and how (as Sandel argued) we can't just remain neutral and say (à la Rawls's liberalism if applied to economics) that the good for people must just be what they are seen actually pursuing as evidenced by how they spend their time and money. Sen thinks that thinking about ethics will enrich our economics and likewise thinking about economics can even enrich our ethics, i.e., to pursue the good, you have to understand how, as a mass society, to bring about desirable outcomes, and this brings in economics, politics, and sociology at least.
I'll give away my verdict here, which is that these supposed benefits are presented as a challenge, as a research program, as an exciting possibility that scholars should be looking into. These supposed benefits of interconnection are not actually delivered on in that particular Sen book; like a lot of fine philosophy, we just get the outlines of a solution, and I suppose I'd need to become much more immersed in that tradition to say to what extent his concerns were listened to and effective in bringing about further sophistication in economic thinking. This would at the very least require us to get a hold of one his more current books (perhaps invite him on the show? Hmmm? Nobel prize winners all over our podcast, oh yeah, after Lucy Lawless wins the peace prize and Danny Lobell wins the Nobel consolation prize for the annual pizza eating contest).
You can purchase Hayek's essay in his collection, Individualism and Economic Order
Buy Sen's On Ethics and Economics
-Mark Linsenmayer
Is economics a pseudoscience as some contemporary philosophers claim? I admit I’m partial to the view and easily find data to confirm this bias.
I certainly hope not. But in any case, if you want to talk about optimal financial regulation, or how to get the most bang for your buck with social policies, or think about relationships between different prices, or talk about best strategies in games, then we’re the only game in town.
What would convince you that economics isn’t a psuedo-science? Certainly infallibility can’t be a criteria.
“The only game in town?” This is my principle problem with Economics– the field as a whole doesn’t seem aware of its own considerable limitations, not to mention what other people are doing elsewhere.
Optimal financial regulation: Finance, Management, Marketing, Political Science, Public Policy– all fields with something to say.
Bang for your buck on social policies (a particularly laughable example): Sociology, Anthropology, Marketing, Management, Public Policy, Political Science, Philosophy
Relationships between prices: Finance, Sociology, Anthropology, Marketing
Strategies in games: Sociology, Social Psychology, Psychology, Philosophy
The notion that Economists invented any of the idea in “Behavioral Economics” is just a riot. I was talking with a colleague who is at HBS about some real cutting edge BE (term itself is absurd) and you’d think they’d reinvented the wheel on nearly every topic. “Yada yada risk preferences across roles.” Holy moly, that’s Goffman from over half a century ago.
The greatest coup of the Economists is convincing the world at large (and themselves) that they’re the foremost experts on a variety of topics, many of which have been covered in more detail, long ago, and more effectively in other disciplines. As a point of fact, I’d argue that Economists’ ideas of optimal regulation for the finance industry (umm) and bang/buck on social policies (ouch) are largely responsible for this mess. Your run-of-the-mill Anthropologist that studies markets has a hell of a lot to say that challenges the conventional wisdom.
Sorry if this was a tad on the ranty side, but it just strikes me as amazingly myopic to claim to be “the only game in town” on some of the largest issues in social and business academia, especially when we’re way past Peak Economist.
Alex,
Sorry to be a bit too blunt. Obviously other fields have stuff to say about these issues. But, to paraphrase, I do think that if you are a policy maker looking for advice on any of these issues, an economist would be the worst person to ask – except for anyone else.
Let me begin by saying that when I say ‘economics’, I also have in mind much of Finance. Most of the most important results of Finance were derived by economists. The Modigliani-Miller theorem (on when equity and debt are equivalent) is by two economists, The Black-Scholes Model of derivative pricing was originally published in an economics journal, and Scholes is an economist. CAPM owes its existence in part to economists as well. All of these results won people Nobel Prizes in Economics. While finance and economics have different emphases, if you take a financial economics class in any economics department, you will be learning the same asset pricing theories you would lean in a Finance department.
I could quibble with the details on your list. I’m really not sure what marketing majors have to say about whether the Fed’s discount window rate should be raised, or whether a financial transaction tax would be a good idea. But point taken – yes other people have things to say.
I have to say I am not very familiar with any theories of economic anthropology, so I can’t comment directly. Perhaps you could suggest a specific economic anthropologistic theory, and I could compare and contrast the economic and anthropological approaches to the issue?
I hope Alex’s tone didn’t discourage you from responding because there are some quite important and interesting issues when it comes to the social authority of economics as a “social science”.
The one that concerns me the most is the possible irrational exuberance behind the power of quantification. Obviously, the history of science as a successful project is inextricably tied to the ability to represent phenomena quantifiably. There can be no doubt about the importance of measurement in a predictive science.
However, there seems to be mass confusion in the public between the mere presence of numbers in a claim or statement and that claim or statement having some sort of scientific validity. Having worked a labs conducting neuroscience and social psychology studies (different labs) and currently working in education – I have to say that, among the people who are using data to make decisions, the general understanding of the assumptions underlying those data and statistics is generally atrocious. Every data meeting I go to where we discuss the test scores of middle school students is a homecoming parade of construct and external validity violations with apparently ZERO awareness of the possibility that numbers may not be 100% perfect representations of real-world phenomena. Minor fluctuations in scores from year to year are treated as if the they are occuring in hermetically sealed environments where all causal variables are known and statistical noise doesn’t exist.
The influence of economic thinking in social science and social policy, especially education policy, is massive – and because the economic-style models have numbers in them they are treated as hard science truths from the mountain-top. The possibility that some attempts at quantification can fail as representations of the world seems to be a fact that is lost on the general public – or at least that fact is conveniently forgotten when decisions are made. One can always defend their decisions more easily with “concrete” numbers in their back pocket, I suppose (“The data said X, so we had to do Y.”) The desire to abdicate decision responsibility seems to be irresistibly alluring, and to many econometric models seem the perfect tools for rescuing us from actually making decisions.
While economics proper at least has a semi-natural property that it can directly measure (money as value), many institutions that use economectric models do not have such a property – so they just make one up.
Let us contrast a business with a school in this respect. The business has two things that a school does not, even though many think a school does have the two things. First, the business has a direct measure of success in money. Second, they also have a clear purpose – again, this is money. Money is naturally quantified, easily measured, and the clear and undisputed purpose of the existence of the company is to make more money.
A school is in a different situation. To take the second point first, the purpose of school is disputed. Is it to prepare students of employment? Is it to enable students to achieve their ends? Is it to enable them to reflect on what ends they should have? Is it to ensure they are good and cooperative members of a pluralistic society? Obviously, schools are used to do all these things, but the balance between these different possible purposes for schooling is an issue of perpetual political disagreement. Additionally, these different goals suggest different attitudes towards the measurement of progress and achievement. Some seem more open to quantification than others. Some are less compatible to traditional or even new models of human beings as economic agents than others.
My long-winded comments above are why I am excited about the choices of Hayek and Sen for this discussion. They are clearly aware of the fact that economic models of human society have practical limits. I look forward to listening to this episode with the MacIntyre, Sandel, and recent Nietzsche Birth of Tragedy episodes in mind – specifically the tendency for simple economistic thinking to crowd-out other forms of evaluation and wreak havoc in society.
The deep and unquestioned implicit economism in nearly every aspect of my (American) society is so disturbing that it makes me want to go full Edmund Burke / return to tribalism. I look forward to hopefully hearing that young people working in economics have learned from the past and have a more realistic, less reductionist viewpoint on their subject.
Cheers!
Cannon,
Great post. I completely agree that there are social phenomena that are right in economics’ wheelhouse (e.g. how does a firm act to maximize its profits), ones where we should have a place at the table (e.g. how can money best be spent to improve education), and ones where we’re going to have little to say (e.g. how do individuals decide whether they are for or against abortion).
I should mention that one point of pride economists have is in our statistical tools. Econometrics, the field of economics devoted to analyzing real world data, is a major subfield. We really do work extraordinarily hard to deal with the problems of outside factors and noise that you mention. Papers published in top journals often show extreme cleverness in finding true natural experiments. There is a running joke in economics presentations about ‘the endogeneity taliban’ who tell you about the 5 reasons your statistical results can’t be trusted before you make it past your first slide.
Oh, and on MacIntyre- I LOVED After Virtue. But I don’t think he really gets economics. Efficiency isn’t a psuedo-concept — It’s a pretty well defined one. I think the market is a field for virtue: the virtues of conscientiousness, cleverness, sensitivity to the desires of others etc. And the market itself has a clear telos – mutually beneficial exchange – which is served by these virtues.
It may well indeed be that economists are the only social scientists who understand statistical method…. At least I often have this impression. That said, they are not always very up front in spelling out their assumptions, and discussions on statistical robustness can often obfuscate more fundamental modeling choices which are subject to strategic misrepresentation. Nevertheless, econometrics is not really a subdiscipline of economics, but of statistics, and it has been developed by mathematicians, not by economists.
Also, what would pull economics (or indeed most social sciences) from the abyss of pseudoscience? I would say predictive ability. However, I think this is an impossible task because of the massive complexity of the phenomena and the central role radical innovation plays in society. Soooooo, I don’t believe social SCIENCE is really possible…but whatev. We still need smart people to study this element of social and political life that we call economics, so PhD on!
Hey all,
I think Cannon hits the nail on the head with this last comment. The demarcation problem is quite a nasty one in regard to science/pseudoscience and one that is most likely unresolvable as it relates to Economics.. Furthermore, when Cannon mentions that “money as value” is only semi-natural he is quite right to hedge certainty in that governments can devalue their currency arbitrarily (i.e. for their own purposes) as China recently did…
Christopher,
Please don’t take this the wrong way, and I appreciate your comment, but the devaluation of the yuan is precisely the sort of thing economics is perfectly situated to talk about.
Like any other good, the ‘price’ of a unit of currency is determined by supply and demand. If lots of people want to trade dollars for yuan, this drives up the price of yuan in terms of dollars and vice versa.
For the last few years, China has used its foreign currency reserves to ‘peg’ the price of the yuan in terms of other currencies. If anyone wanted to trade dollars for yuan, they could go to the Chinese central bank and trade it at the official rate.
Here’s the sparknotes version of what happened. Details available upon request.
Recently, people have been wanting to trade lots of yuan for dollars as the American economy gets a bit stronger and the Chinese economy gets a bit weaker. China, for a variety of reasons, decided to drop the peg, and allow normal supply and demand to take its course. This drove down the price of the yuan. When Americans want to buy Chinese products, they have to trade their dollars for yuan at some point, so this means that Americans will be buying Chinese goods at cheaper prices.
What part of this invalidates economics?
Seth B. I am not convinced of anything! You bring up some good points and I totally agree. I just think in general, many conservative economists preach a lot of dangerous pseudoscience and there is so much disagreement among economists! I am a big fan of Kahneman and I like some of what Paul Krugman has to say. However, I really just do not know much about it so I hope these episodes will help teach me something! I really appreciate you and the Partially Examined Life! I subscribe and donate frequently because I love the show and the work Seth Paskin, Dylan Casey, Mark Linsenmeyer, and Wes Alwan do! Although guys, you have gotten pretty serious of late and I miss you wild digressions and colorful humor from the early episodes! Still love it and need it. This show is one of my favorite sources of pleasure!
Mark,
Nice summary. You should definitely try to get Sen on if you can.
Honestly, I’d be more impressed if they get Hayek on the Pod.
That would be a truly impressive achievement, of indeed Christlike proportions.
I think Sen is surely on the right tracks, but his analysis is a bit quixotic and lacks for me philosophical depth. Anyone able to bring the debate up to date?
PJ,
I’m replying here because the reply chain on the other discussion ended.
I completely agree that sometimes very technical arguments about whether the estimator being used is the correct one can sometimes distract from more important theoretical assumptions. But a lot of empirical economics now I think is robust to that criticism.
Let me give you an example. One of my professors here is looking to answer the question “what is the impact of unemployment benefits on unemployment duration”? Taking an empirical approach, he looked for a natural experiment. In Germany, it turns out that there are discrete jumps at certain ages in terms of how generous your benefits are. So, for example, if you are 29 and get fired you get unemployment benefits for a maximum of 10 months, and if you are 30 and get fired, you get a maximum of 15 months. There are a couple of these cutoffs.
After doing lots of work to show that the people getting fired immediately on either side of these cutoffs are functionally identical, we have a natural experiment. Some people, by virtue of being fired a few days earlier got a different term of benefits than others. Using a huge data-set provided by the German Social Securtiy department, you can then get a measure of the impact of longer benefits on unemployment. (FYI, the average treatment effect of getting a month of extra benefits is a week and a half of additional unemployment).
Then he makes some additional assumptions to do a welfare analysis. Assuming people have such and such types of preferences over work and labor, and holding all else constant, we can therefore say that unemployment benefits are too short from the perspective of a utility maximizing social planner.
Now you can totally quibble with this last analysis. The assumptions are aggressive. You can also feel free to argue that these results are only for Germany in the 90’s and 00’s and therefore impossible to extrapolate from. But I think you come away from this analysis with a pretty good understanding of the relationship of policy A to outcome B.
Now, as for whether econometrics is a type of economics… I mean of course statistics, econometrics, and machine learning are fields that have grown up together and learned from each other. It’s kind of weird to say though that econometrics isn’t a subfield of economics when every economics department has several econometricians. One example of statistics learning from econometrics is a Professor of mine; Pierre Perron. He spent his career creating techniques for analyzing macroeconomic time series, but Perron and others are now using descendants of those techniques to understand Global Warming. http://www.nature.com/ngeo/journal/v6/n12/full/ngeo1999.html?WT.ec_id=NGEO-201312
All that is fair, of course a single example only shows what economics is capable of not what it typically achieves in real-life settings. Allow me a certain scepticism, being an economist myself. But if really the claims get mulled over and taken apart by peers, then I agree that finally we have a good idea of what has or has not been shown and potentially the ability to avoid wildly extrapolating on that basis 😉 You are also right about how econometrics has developed, which however is unfortunate in my opinion because it means that other social scientists often have a flimsy grasp of it. However, nothing about it is specific to economic problems (unless you define these extremely widely I guess), and whilst it has largely been developed for application to such problems, still it remains perfectly general statistical method.
Hi Seth B,
(For some reason there was no reply link in your post responding to my comment…)
I was just trying to point out that governments make up the rules of the Economic “game” as they go along. 10 years ago China had a fixed exchange rate for the Yuan. Now it’s market valuation is restricted to a plus or minus 2% daily spread. Of course, this just raises the question of “freedom” in markets, if there really is such a thing. I guess my point was to distinguish the Soft Science of Economics from the Hard Sciences as it doesn’t relate to “what’s really out there” as say Physics does (or purports to do) and is perhaps best approached hermeneutically.
I guess I’m not following exactly. Everyone always knew China might change or drop its peg. Economic actors can and did take their best guess of the likelihood of this into account. The true ‘game’ includes these considerations.
I agree that due to black swans the nature of human interactions might change in ways that economics would really struggle to deal with. But this isn’t a good example.
I think the problem is we are talking about Economics in different ways. The original question posed by xxx was whether or not it is fair to classify Economics as a “pseudoscience.” Cannon made some allusions to this and I just brought up the “demarcation problem” as it relates to Science as an epistemological project that is given privileged status. This in no way means that Economics, or any Social Science, is invalid the way you can argue astrology is invalid. The following language that you use raises this very issue:
“Everyone always knew China might change or drop its peg. Economic actors can and did take their best guess of the likelihood of this into account.”
Who is the ‘everyone?’ And saying that China “might change or drop its peg” seems problematic to me in that there are no real (realistic?) parameters as to what the change might be. While economic theories may be rational they are based on actors that are typically not rational leading to the “irrational exuberance” Greenspan so famously mentioned.
For me all of this becomes a question of ontology. What is the actual ‘object’ with which the Science of Economics is concerned? And as a Social Science much of the aim of economics as a discipline is inherently evaluative and prescriptive thereby leading to navigating the “Is/Ought” problem.
I’m not sure if the above makes any sense, but I think we were just talking about two different things. I look forward to the episode as I know very little about Economics if you couldn’t already tell!
Regards,
Fredbo
Clarification:
Sorry, but ” xxx” stood in for Skepticismisahumanism in my rough draft and I neglected to fix it before posting.
Fredbo,
I think I get what you’re saying now. I totally agree that there are some huge ontological/epistemelogical issues at the heart of the social sciences. I’ll just make two clarifying remarks:
1) By ‘everyone’, I mean a large enough percentage of currency traders such that the market is well approximated by assuming everyone knew about it. This concept can be refined further if necessary.
2) ‘no realistic parameters’: There actually are some pretty reasonable parameters. We have a pretty good idea of what the goals of the communist party are (promote growth, employment, and stability) and how different pegs might influence those goals. Insofar as they continue to have these goals, the actions of the Politburo are in a sense predictable. There are are also functional constraints on what the peg can be. If the peg is too far from what traditional supply and demand would require (e.g. China pegs one yuan to 1,000 dollars), the central bank would undergo a speculative attack similar to a traditional bank run. Animal spirits can and do matter, but economics isn’t completely unequipped to deal with these, even if they aren’t completely in our wheelhouse.
3) Finally, some of economics is normative, but surprisingly little. There’s lots on this in the podcast, so I hope you enjoy it!
Best,
Seth