May 2, 2010

In The 19th and 20th Centuries, we have greatly improved our understanding of the physical universe through the application of the scientific method. In the 20th century, Economists have devoted great efforts to the application of this method to improve our understanding of economics. The results have not been good.

The scientific method consists of 4 steps, constantly repeated:
1. Observe and measure things (the spectrum of colors in the light from various sources).
2. Form a hypothesis (a guess) as to the reason for what we observe. (The spectrum of the light is a function of the temperature of the light source.)
3. Devise a test of the hypothesis. (vary the voltage to the light bulb and measure how the spectrum changes)
4. Check the results of the test to see if they confirm the hypothesis. They do. The result enables us to determine the temperatures of the unreachable stars.

This is an experimental approach. We are free to control the conditions of the experiment. In Astronomy we cannot control what happens out among the stars, but we still apply the scientific method by constantly devising new ways to observe them.

In the study of other life forms (Bacteria, mice), we can apply the experimental approach to gain understanding of life processes. Some people have serious objections to this, objecting to the cruelty of some experiments, and some even feeling that we are violating the rights of other creatures.

In studying humans, however, there are much stronger reservations. People generally object to being used as “guinea pigs”. They may even object to being observed in what they do. So Economics employing the scientific method is at best an observational science, like astronomy.

There is, however, an even more serious problem with employing the scientific method in any of the life sciences. This is a matter of complexity. Arguably, the physical and chemical functions of a microbe form a more complex system than, say, our solar system, or perhaps even our Milky Way galaxy. This is because life forms direct a multitude of functions for a purpose: survival of self and species.

Obviously, Humans are much more complex and much more individual than microbes, and yet more social. Economics (Excepting the economics of Robinson Crusoe) is all about interactions between individuals, each with his own set of motivations or wants, changing from hour to hour and day to day. We can observe what a person does and infer that that is what he wants to do, but can only guess (badly) why he wants to do it. So when we try to detect a cause and effect relationship involving millions of people, we are looking at a very complex network of motives.

Did the price of oil rise because of a common reaction to something the chairman of the Federal Reserve Bank said, or the US President said, or a change in the weather, or a fall in housing prices, or the news of a hurricane approaching Texas?

The “scientific” and mathematical economists resort to statistics, sampling various measurable things and searching for correlations. The price rise of oil did coincide with the fall of house prices. So did housing prices affect oil prices or did oil prices affect housing prices, or were they both caused by the knowledge of the approaching hurricane? Or some other factor we never thought to consider

You can pick your favorite among those four explanations, which is what the mathematical economists do. The odds are that each explanation has some truth in it, but each one probably misses out on a hundred other factors equally important but not measured, and perhaps not measurable.

Anyway, each economist will pick the explanation which best suits what he believes (or wants to believe) about economics.

For myself, to understand something, I need to see a cause and effect relationship. Statistics generally fails completely to achieve this. So I turn to logic, as the Austrian economists have done. What would I do in this situation? Is that what most people would do? If yes, we’ll accept that conclusion as a safe starting point to logically derive a cause and effect relationship. All this tells us about the price of oil is that it is determined by supply and demand, by the choices and actions of all people to attain their most urgent wants.

I divide Economists into 4 groups. There are those who work for Government. Their job is to find justification and guidance for Government to intervene in the economy, to influence the economy by interfering with the freedom of the market.

The second group works for Industry. Their job is to analyze government interventions and advise their employers which way to jump to benefit, or at least reduce losses that might be caused by interventions.

The third and fourth groups are employed in higher education. Group number 3, the majority, teach and train undergraduates, primarily to prepare them to join groups 1 or 3.

Unfortunately, they are insulated from the real world outside, are greatly influenced by the teachings of Karl Marx, and believe that government intervention is the key to “fairness” and prosperity. They teach collectivist, “scientific” and mathematical tools to prepare their students to run the world economy.

Group 4 are the Austrian Economists. A hundred years ago their ideas were being formed in Austria. They survived World War 2 by emigrating to Switzerland, then to England, and finally to America in the person of Ludwig Von Mises. He died in the 1970s, but the Mises institute in Alabama now Trains teachers to go out and teach Austrian Economics at the college level.

There is no place for Austrian economists, with their insistence on the free market, in Government. Government isn’t interested in anything it can’t control.
Perhaps there is a place for the Austrians in industry, because The “Austrians” understand better than any the consequences of interventions.

But if we should ever achieve a truly free market, industry will not need economists to fend off the dire effects of government interventions.

Perhaps, though, Austrian economists will always be needed in our schools to teach the value of the free market, and squash over and over the fallacies that make people hope for “something for nothing”, and to foil the eternal pursuit of power by politicians.


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