Yes Virginia There are LAWS of ECONOMICS

I am honored to be associated with The Economic Way of Thinking.  Independent of my involvement with the book, I consider the book the best book to teach the principles of economics.  In fact, prior to my involvement I taught from the book for 15 years.  Economics provides us with a set of tools for thinking.

But economics also has LAWS that hold across cultures and over time.  This is not popular to say anymore, but perhaps that is why it is more important than ever to say!

Last week we had a discussion sparked by Samuel Fleischacker's work on Adam Smith. My colleague Dan Klein wrote a response to Sam's work under the provocative title "Was Adam Smith a Leftist?"  Sam was giving a chance to respond to Dan's remarks and then it was opened up for discussion.

Sam's argument -- which is very reasonable on any particularly point and always well written -- does not in the end hold in my opinion.  Fleischacker makes an important contribution to Smith scholarship by contextualizing him in his time, and also countering politicized readings of Smith.  But in my opinion Sam misses certain key elements in Smith's economics which transcend time and place, and in fact are universal laws of economics.

Ludwig von Mises was the last really great economist to emphasize the laws of economics.  Since that time, it has become fashionable to question that there are laws of economics.  In fact, the insistence on the laws of economics is often taken as a sign of dogmaticism.  But I never really have understood this charge.  If I insisted that there was a law of gravity, would I be accused of dogmaticism?

Economic laws are always stated with the "holding other things constant" clause.  So they admit a certain flexibility that critics often forget to mention.  A classic example of this is the recent wave of critiques of the rational actor model.  Rationality is omnipresent, but its manifestation is institutionally contingent.  In other words, individuals choose means to obtain ends in the most effective way possible, but which means they choose and what ends they choose to pursue are a function of the institutional environment within which they choose.  Similarly, demand curves slope downward, but the interesting factor in any application is the context of choice --- the number of substitutes available, and the urgency of demand, and the constraints one faces in choosing.

In my mind the entire process in economics is pretty straightforward: good methodology leads to good analytical methods; good analytical methods aid the process of logical reasoning; good logical reasoning estabilishes certain basic laws of economic life that are enduring truths (dare I say inexorable!); and public policy analysis not based on the laws of economics results in unintended and undesirable consequences.   I would even state that philosophical arguments concerning justice will be revealed as intellectually bankrupt unless they recognize the laws of economics --- the rationality of actors, the importance of incentives, and the knowledge of time and place. Economics without an understanding of philosophy and political philosophy may be sterile and boring, but political philosophy without economics is little more than daydreaming.

Comments

[matthew mueller]

This is one of the most important topics in economics. D. Wade Hands' book, "Reflection without Rules", has a great discussion of the status of economic "laws". The most important thinkers on this problem have been John Stuart Mill, Daniel Hausmann, and Nancy Cartwright. Their arguments for the validity of economic laws are basically the same: Laws can be discerned through careful reasoning, but their physical (empirical) manifestation must remain "inexact and separate" due to disturbing (countervailing) forces. This seems to me problematic, if only because when pressed on the issue economists usually point to empirical "reality" in support of their case for market capitalism.

Also, the exercise of demand and rationality may be, as Dr. Boettke argues, historically contingent, but I would add that so are the very laws that posit these tendencies. Our understanding of complex phenomena occur and are arranged in historically contingent circumstances.

The real question is this. Why have we chosen to regard the contemporary teachings of economics as "laws"? What claim do they have to be considered as such? Is it due to our experience? Is it due to proper deduction and generalization? Will our commitment to this approach to economics preclude the development of new insights that naturally evolve in response to changing cirumstances? What is being left out, and what are we likely to gain?

[liberty]

"Rationality is omnipresent, but its manifestation is institutionally contingent. In other words, individuals choose means to obtain ends in the most effective way possible, but which means they choose and what ends they choose to pursue are a function of the institutional environment within which they choose. "

Well said. Something that annoys me to no end is Lange's accusation that Mises was a historicist because he said that private property institutions are necessary for the emergence of prices. Mises wasn't saying that the law of supply and demand didn't apply under socialism; rather the law applies - rationality and demand curves exist - but they don't allow the same benefits to emerge without the right institutions.

The context within which man acts allows the same laws of behavior to produce different outcomes. Hence the entrepreneur under socialism must pursue political ends or rent-seeking ends instead of profit maximizing ends; and the same demand behavior leads to shortages rather than information-laden prices.

It is precisely the fact that the same laws *do* exist under socialism that leads to the conclusion that socialism won't allow good outcomes. Either Lange knew Mises thought this and he simply took a witty jab, or he was a true fool.

[Jeffrey Friedman]

Let me second Matt's comment, but more pointedly, by adding Weber to his list.

The "law of gravity" is an empirical regularity, based on observation. It is not an "apodictic certainty."

Is Pete's *dogmatic* claim that "the rationality of actors" is a universal law based on empirical observation? I doubt it. Pete is too good an observer for that.

Weber pointed out that sometimes we empirically observe people acting out of a sense of duty, regardless of the consequences: they consider certain actions as mandatory, regardless of the costs and benefits. The actions are ends in themselves.

Moreover, sometimes people act "traditionally," or "emotionally," without weighing the costs and benefits.

Mises's answer to Weber (in his Epistemological Problems of Economics) is to reduce "economic" behavior (in Weber's terminology, "instrumentally rational" behavior) to a tautology. It is "universal" only because its definition is broad enough to encompass any and every behavior.

Thus, dutiful, traditional, and emotional behavior can be seen as *implicitly* containing a weighing of costs and benefits--even though nobody actually weighs them. (So it turns out that holding to universal "economic laws" *violates* the Verstehende principles Mises held dear.)

Now we are left with "laws" of economics that are empirically empty. Anything that people might do counts. So economics can't predict or retrodict any behavior at all--or rather, economics boils down to saying that "people will do whatever they feel like doing, or whatever they think they have a duty to do." Does this add one iota to our understanding of their behavior? No.

If someone is educated in a madrassah to believe that killing infidels is just, regardless of the consequences, an economist might want to redescribe this by saying that in the future terrorist's "institutional context," the "costs" of killing infidels are seen as zero, and the benefits as infinite. But I don't see how that teaches us anything more about the behavior in question.

In short, the benefit of redescribing all behavior in economic terms is zero, and the cost is a massive increase in jargon, and in disciplinary pretensions to universal relevance.

It would be nice if economists could tell us about, say, financial crises. Instead, they think they are licensed to tell us about everything else under the sun. But what they tell us about non-"economic" affairs, such as politics, tends to be either false or vacuous. This needlessly reduces their credibility when they talk about the things that they actually understand.

Jeff

[Brian Pitt]

I think that Jeffrey's point is well put, although a bit over-stated.

To follow-up on Jeffrey, I do not think that Mises in Human Action nor in Epistemological Problems gets Weber quite right. Not all human behavior can be reduced to marginalist thinking--as Jefferey noted. We certainly cannot apply "costs" and "loss" to every human behavior. For example, people have, do, and always will, co-ordinate their plans through language.

Nevertheless, alot of behavior can be reduced to marginalist thinking. To use Jeffrey's example, I believe that Public Choice is a remarkable contribution to the social sciences. While I certainly do not believe that the institutional setting of a voting booth can be likened to the supermarket, I do believe that people deliberate on which candidate is the best. Perhaps not which candidate is the best according to their pocketbook(s), but which candidate is the closest to their ideology.

[Jeffrey Friedman]

Brian--I agree that, for example, the public-choice idea of "concentrated benefits, dispersed costs" is a contribution to our understanding of politics.

But what is its scope of applicability? It explains the traditional targets of democratic ire since at least the 1890s--"lobbying" and "corruption." But it doesn't explain things like ideology and simple human ignorance and mistakenness, which are far more prominent facets of politics (I think).

Regarding how people "deliberate" in the voting both and elsewhere in politics, both psychologists and political scientists have studied that for years, and have come up with remarkable findings. Start with Philip E. Converse, "The Nature of Belief Systems in Mass Publics" (1964).

These studies have not been helped at all either by public choice theory (looking for selfish motives) nor by rational-choice theory (looking for instrumentally rational behavior, regardless of whether or not it's self-interested).

There are also at least two dangers in public-choice theory.

First, there's the temptation to universalize it so that it can explain everything political.

Thus, ideology (always, of course, the other side's ideology!) can be seen as a product of self-interest, and can thereby be explained away rather than being explained. And for libertarians, it can be tempting to assume that the secret hand behind all government actions is "special interests"--a handy stick with which to beat the government, regardless of whether it happens to be true in a given case.

Second, there is the Chicagoite public-choice assumption that political actors *know,* and can therefore weigh, the costs and benefits of government actions.

This assumption is a positive hindrance to understanding why people might be politically *ignorant* (including the ideological forms of ignorance). (No, "rational ignorance" does not do the trick.)

It's on that point that I think Austrian economics has a contribution to make to political science: not in setting forth "universal laws," but in pointing out, as Mises did in the calculation debate, the difficulty of being well informed about a complex world, and therefore the role played by fallible human interpretations of "the data" (interpretations learned in places like madrassas, and universities).

The notion that complexity requires interpretation, and that interpretations can be erroneous or dogmatic, is what I take to be a fundamental Austrian "insight," like those contained in modest (vs. universalist) forms of public- and rational-choice theory. The applicability of a given "insight" to any particular case is a hypothesis, however, to be tested against whatever evidence can be found. The initial conditions of a hypothesis may not be present in a given case, or may be offset by "countervailing factors," as Mill, Hausman, and Matt point out.

I apologize for the sharp tone of my earlier post. Since I see Austrians as potential allies in pushing the study of politics to focus even more on ignorance and related phenomena like ideology (Austrian "insights" are responsible for my going in that direction), it pains me to hear Pete, my old friend and comrade, portraying Austrian economics as rational-choice theory alone--and with universalistic pretensions, at that.

Is this what Austrian economics boils down to: insisting on the universal applicability of mainstream economic insights about "incentives" and "rationality"? (Or, Pete, am I misinterpreting you?)

Jeff

[liberty]

Jeff, Brian, etc:

I may be wrong, but I read this not to be about universality as in "these laws also apply the politics, religion, language, and every other sphere not normally considered within the realm of economics" but universality as in "these laws apply [in the economic realm] even if you restrain markets, impose socialism, or have a religious dictatorship, etc"

Supply and demand applies wherever it applies, even if you try to get rid of it by imposing common ownership of the means of production (or regulating the market to death, or imposing price controls).

The laws apply anyway, but institutions change the outcomes observed. People are the same, their preferences are the same, but institutions direct where their energies go as entrepreneurs and institutions change the information available, etc.

[Daniel J. D'Amico]

So Jensen's gonna come up empty handed?

http://freakonomics.blogs.nytimes.com/2008/05/05/the-indiana-jones-of-economics-part-i/

[Grant]

I'm not understanding the hostility to apodictic laws.

The natural sciences use mathematics to apodictically derive laws from existing truths. Its true that these truths are based on empirical testing, but the natural sciences have the luxury of being able to use repeatable experiments. Economics does not have this luxury, so it only seems fitting to me that it derive laws from truths that are simply more obviously true, such as the assertion that humans act purposefully to achieve subjective ends.

Laws themselves of course make no assertions about reality. They simply state "If X, then Y". If the precondition X is the existence of Misean-rational economic actors, then we'd rightly say such a precondition is a special case out of all the possible conditions under which economic action occurs. We might even call the law useless for that reason. But all science seems to progress by subsuming older theories as special cases of new ones. Newtonian physics is a special case of relativity, and Popper's theories are seen by some as a special case of Bayes' Theorem.

[Brian Pitt]

Liberty and Grant,

I certainly agree. Laws cannot make assertions about reality. (But reality can call into question that any human action requires the concepts of marginal analysis.) I was simply responding to the shrewd comments made by Jeffrey.

Nevertheless, I believe Jeffrey to be right on the mark by accepting that human action is not all of the calculative or non-calculative variety, and must be interpreted marginally. In fact, many Austrians, and this is no insignificant list, methinks, would agree with this: Peter Boettke, Don Lavoie, Virgil Storr, David Prychitko, etc.

[Rafe]

Pete's case for laws is not undermined by Weber or Friedman, as Jack Birner explained in a paper on Menger and subsequent developments.

Menger wanted to explicate the methodological rules that would permit economics to qualify as a theoretical science (with universal laws) and Birner suggests that he should have been more clear about this by stating that "the exact theoretical sciences are about certain sides of all phenonmena in abstraction from disturbing factors". Birner wrote "Most methodological precepts have their roots in ontological considerations, and Menger's are no exception. He believes in the existence, in reality, of several fundamental motives for human behavior, which he calls alternatively 'influences', 'goals', 'forces', 'drives', and 'fundamental tendencies of human nature'."

These are the economic drive, moral sentiments, altruism and justice. The influences of these drives are (respectively) the subject matter of economics, social philosophy, ethics and jurisprudence.

Each of these influences can be subject to disturbing influences, among them error, ignorance, force and neglect. So any particular action can have mixed motivation and it can also be diverted from (or be inappropriate to) its prima facie object due to the influence of one or more of the disturbing factors.

This means that the laws of supply and demand are not falsified by charitable acts or by paying a high price for bread that is cheaper in the next shop (because we are in a hurry), any more than the law of gravitational attraction is falsified by an apple that is firmly attached to the tree. Every science has to develop methods to take account of alternative influences and disturbing factors.

http://www.the-rathouse.com/2008/Birner-Menger-Popper.html

Working through the basic text by Alchian and Allen (which sat beside Heyne on the shelf until some one borrowed Heyne) it occurred that they are teaching praxeology in action. They list a nunber of simple lawlike postulates and then show how events in the marketplace can be explained by these laws, plus situational factors. There has to be allowance for time lags, misperceptions, mistakes and action undertaken for non-economic reasons, but that does not detract from the truth of the laws or their value.

The problem with the laws as expounded by the strong Miseans is that the laws are presented as a package with the a priori method of discovery and validation. That is a hard package to sell!

What if the laws were taught like the laws of physics, which are found in all sorts of ways and are tested by their capacity to deliver the goods (in scientific terms). Newton once claimed that his biggest theory was obtained by the positivist/empiricst method of induction (I feign no hypothesis). That was boloney and fortunately physicists who followed him just got on with physics and left the defence of induction to the positivists. What if Newton and the others had spent half their lives teaching inductive logic, as though that had to be a package with physics?

http://www.the-rathouse.com/shortreviews/Mises-Epistemological-Problems.html

[Vedran]

A side note/random thought,

Pete Leeson on this blog suggested once that Austrians should stop trying to quote and talk about Mises all the time. I feel similarly about Adam Smith for all types of economists. I just don't see much of a point in still talking about what he meant or didn't mean or quoting him in academic papers as if his words had Biblical value.

[matthew mueller]

Vedran,

The Leeson post you are referring to is the famous "thou shalt not" list for young Austrian scholars. I feel that Leeson was wrong in basically everything, and strict adherence to his dictates would, I believe, put an end to the intellectually productive Austrian research program.

There is great value and insight to be found in the works of older scholars who wrote many years ago. A friend of mine who is studying philosophy, for example, has recently mentioned to me that the great scholars in that discipline have been involved in readings of the medieval scholastics, in particular John Duns Scotus. Metaphysics, my friend argues, has been immensely enriched by these recent studies of the ancients.

We don't have to accord "biblical value" to older economists in order to take their arguments seriously. In fact, readings of older works are typically done with a certain critical attitude that is seldom seen in contemporary debate, since the theoretical platform on which scholars argue is simply taken for granted, or passed over haughtily and hastily.

I would caution you against underestimating the importance of the evolution of ideas.

[Vedran]

Mathew,

There is a huge difference between learning from past economists and quoting past economists all the time.

I agree and disagree with Pete Leeson on many different parts of his post. This specific part is something to be considered for stylistic writing purposes.

I have not suggested that one shouldn't learn from Mises or Smith. I'm just saying it's not necessary to quote them on everything. If you're exploring something Mises somewhat mentioned but didn't elaborate great. But if you're using a Mises quote to back something already known by most economists, then what's the point?

[Bogdan Enache]

Dear Jeffrey and everybody,

I do not believe that Mises misunderstood Weber and I don't believe that his praxeological project violates or hinders Verstehen. On the contrary and regardless of the curent application of economics to fiels such as politics, law and so on, Mises worked to provide a stronger grounding for Verstehen analysis in the spirit of the philosophical explorations of the time.

See for example Edmund Husserl's Second Meditation in "Cartesian Meditations" on why an abstract science of the universal structures of the ego cogito - which Mises turned into homo agens might - is need in order to pursue a meaningful inquire of empirical social reality and how can this might be achieved.

[Daniel J. D'Amico]

another nay sayer:

http://wizbangblog.com/content/2008/05/06/economics-is-not-a-pure-science.php

[Rafe]

Mises, Talcott Parsons and Karl Popper all agreed that Weber lost the plot on ideal types by drawing back from the level of universal generality. However Parsons, after The Structure of Social Action (1937), lost the plot himself and disappeared into a form of general systems theory. Popper was in favour of universal laws of economics and sociology in the 1940s while he wrote the articles that appeared later as The Poverty of Historicism (1957). However he gave up on universal laws because they all seemed to have exceptions and he settled for the analysis using models of social situations driven by the Rationality Principle.

The common elements in Mises, Parsons and Popper (at their best) include MI (with attention to plans and intentions), universal laws which impose constraints and exclude some possibilities (rising apples, wrong way sloping demand curves) without dictating the course of events in a deterministic manner, some principle of rationality to relate ends and means, a real time factor (things take time to happen), and attention to situational constraints of a normative kind (human laws, rules, mores, norms, folkways). At the individual level there needs to be attention to the capacity to learn and change plans and intentions.

[AbuHatem]

I don't know about the usefulness of "laws of economics."

Yes, Mises did discuss certain human laws. However he also discussed the follies of historicism in his Theory and History. Hayek also discusses the follies of treating economics like a natural science in his The Counter-Revolution of Science: Studies on the Abuse of Reason.

And Karl Popper, the great philosopher of science, discusses the follies of finding human laws in his work The Poverty of Historicism.

In economics, just as in international relations theory, people attempt to find "objective laws" in the positivist tradition of Comte and Weber and treat human beings (or in IR - states) like "pinballs," or "gas molecules" to use some terms political scientists have used.

Take for instance the law of international politics based upon the economic agency theory which states all states act in their self interest. This has been used to argue that free trade is in the detriment of states (because they simply increase the aggregate power of their trading partner since trade is a positive-sum game, and thus make themselves less secure). It has also been used to argue that states should pursue imperialist foreign policies (offensive realism).

These "laws" of economics - such as the law of demand, the law of diminishing returns, etc. - often carry a stench which can pollute the entire field of study. All things being equal of course ;).