McCloskey's Archive.

[Kephalos]

Today, somewhat fortuituously, I began to peruse Deridre McCloskey's article archive at:

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There you can find much of her work in economic history, drafts of forthcoming books, and smaller pieces; but what interested me the most were her writings on what can be loosely called "methodology of economics" or "economics and philosophy".

She seems to criticize Economic Science, Two Sins that in her view impede "intelligent inquiry into the world". In particular she criticizes the way economists use mathematics. That is, economists use mathematics to formalize qualitative verbal reasoning, not aid the answer questions about what she calls "How Much". She also criticizes the use of the concept of statistical significance.

I have been thinking about this lately. There are many "flavors", so to speak, of economic theory: some theories prefer more intervention and less markets, other like more markets and less intervetion, still others are more extreme and want nothing but intervention or markets. Some like omniscient and perfectly prudent agents that populate the pages of undergraduate textbooks, and others like better simple nice aggregated entities. As a professor mine says, the individual economist follows the one he likes, very much as one listens to the music one likes.

Perhaps it is unreasonable to assume that only one view or one theory can capture the complexities of the real economy, and one, as an economist, should use what perspective seems appropriate for each problem. But is there no alternative to pragmatism and perspectivism? Or is there only good economics and bad economics? How is it possible to make such a distinction? Based on what?

[maxpot46]

I have been thinking about this lately. There are many "flavors", so to speak, of economic theory: some theories prefer more intervention and less markets, other like more markets and less intervetion, still others are more extreme and want nothing but intervention or markets. Some like omniscient and perfectly prudent agents that populate the pages of undergraduate textbooks, and others like better simple nice aggregated entities. As a professor mine says, the individual economist follows the one he likes, very much as one listens to the music one likes.

Perhaps it is unreasonable to assume that only one view or one theory can capture the complexities of the real economy, and one, as an economist, should use what perspective seems appropriate for each problem. But is there no alternative to pragmatism and perspectivism? Or is there only good economics and bad economics? How is it possible to make such a distinction? Based on what?Austrians make the distinction based on epistemology, and like McCloskey are critics of mathematical and statistical approaches to economics (referring to such as "econometrics" and not economics proper). Mises discusses the epistemological issues in both his magnum opus Human Action (e-book here (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.) and relevant chapter here (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.)) and also in an earlier book Epistemological Problems of Economics (e-book here (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.)).

To summarize these views, Austrians don't hold econometrics to be valid because economics, as a social science, is not really subject to the scientific method as it lacks certain necessary characteristics. For one, the subject matter (human beings) do not exhibit regular and unchanging behavior, which is necessary to be able to make hypotheses predicting future behavior by inferring patterns from past behavior. For another, in economics you cannot create laboratory conditions which controls the behavior of all variables save the one of interest -- all economic phenomena are unique and complex. For another, human values are subjective and ordinal, meaning you cannot measure them and you cannot perform calculations with them (there is no meaning to "first divided by second").

For all these reasons, Austrians hold that the inductive method (aka the scientific method) is inappropriate for discovering knowledge about economics (though it is, of course, extremely powerful in the hard natural sciences). Fortunately, the deductive method is available -- if one can determine axioms about human behavior, then one can apply logical inferences to them and come up with apodictic laws. Austrians hold that introspection in fact reveals a certain axiom useful for that purpose, specifically that "human action is self-directed". From this axiom, Austrians construct the entirety of economics (most notably in Human Action, referenced above), including such apodictic laws as the law of supply and demand or the law of marginal utility.

By this standard, "good" economics is that economics which can be logically derived from the Action Axiom, and "bad" economics is that economics which attempts to use mathematics and the inductive method. Because Austrians derive their views deductively, we tend to make sweeping statements that are looked upon unfavorably by modern economists (as well as laymen) who are overly influenced by positivism and unaccustomed to deductive argumentation.

[Kephalos]

I don't see clearly the connection between mathematics and the "inductive" method, and its separation from the "deductive" method. Indeed, it seems to me that a purely deductive economic theory would be carried on more effectively if it were formalized (and there have been to my knowledge attempts to do just this.)

But that aside, I don't think that the criterion based on the Action Axiom, or any set of axioms, would solve the problem. It does not solve the problem because that axiom is not the only possibility that you could postulate that could also yield consistent, but different theory. The very problem is how to distinguish between theory and theory.

Now, here I could invoke "empirical evidence" as the solution to the problem, but in all honesty I share some of that skepticism of statistical models. Would you agree, that in general -- that is, without a specific reference to statistical models -- "looking at the world" would decide the question? Or, economists could say that economics shares a border with mathematics in that it is a "hypothetical" science -- this is a reference to Plato, anyone could elucidate or correct it? --, but that, I think, would drain economics of all reference to what actually happens. Perhaps I am missing something.

[maxpot46]

I don't see clearly the connection between mathematics and the "inductive" method, and its separation from the "deductive" method.I guess I didn't communicate it clearly enough. Try this paper from Rothbard (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.), which is much more rigorous and (hopefully) explanatory.Indeed, it seems to me that a purely deductive economic theory would be carried on more effectively if it were formalized (and there have been to my knowledge attempts to do just this.)Can you give me an example? I'm not sure what you mean by this, or how one can mathematically formalize a system in which there are no measurable or cardinal numbers.
But that aside, I don't think that the criterion based on the Action Axiom, or any set of axioms, would solve the problem. It does not solve the problem because that axiom is not the only possibility that you could postulate that could also yield consistent, but different theory. The very problem is how to distinguish between theory and theory.I'm unfamiliar with any other attempts to build an economic system via the deductive method -- aside from the Austrian school, all major schools of economics are inductive and mathematical.

In any case, whatever other systems exist does not invalidate the truth of other axioms, so it would have to exist in accordance with Austrian economics and not in opposition. To attack a chain of deductive logic, it does not suffice to provide alternative systems (if you are in fact able to do so) but the actual axiom and inferences themselves must be discredited.
Now, here I could invoke "empirical evidence" as the solution to the problem, but in all honesty I share some of that skepticism of statistical models. Would you agree, that in general -- that is, without a specific reference to statistical models -- "looking at the world" would decide the question? Or, economists could say that economics shares a border with mathematics in that it is a "hypothetical" science -- this is a reference to Plato, anyone could elucidate or correct it? --, but that, I think, would drain economics of all reference to what actually happens. Perhaps I am missing something.I don't agree that looking at the world would decide the question. The reason is that human history is always complex and unique, the result of many causal factors. One cannot create economic events in a laboratory where variables can be controlled, one can only observe economic events as complex phenomena. In such cases, one must have axiomatic deductive theories in order to even make sense of the data.

For example, the law of supply and demand is an axiomatic deductive understanding, therefore, we are able to apply it to historical instances to explain the behavior of prices. It would be nearly impossible to derive the law of supply and demand empirically, simply because you cannot measure demand -- all that can be observed are supply and price. So the first time one observes price and supply rising in unison (possible because demand might rise more, though this cannot be observed), one has "falsified" the law of supply and demand (if it were an inductive hypothesis inferred from past data sets). I hope we can agree that is an absurd conclusion, yet an inescapable one if using the inductive method. Given such observations (i.e. a rising supply and a rising price) it is only the (axiomatic, deductive) law of supply and demand that allows us to understand that demand must be rising to an even greater extent than supply. This cannot be inferred inductively, precisely because of the inconsistency, complexity and unmeasurability of the subject matter .


maxpot46 added to this post, 82 minutes and 40 seconds later...

As I was tooling around, I found this (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.) very good explanation that may be helpful. The pertinent excerpt follows:

While Kantian and Aristotelian/Objectivist Austrians will argue over whether the origin of the praxeological axioms can be viewed as empirical or not, they are certainly empirical in the sense that we do meet them in applied form in our daily experience. I for example act daily, face a scarcity of time and other resources, and face a uncertain future, and thus face opportunity costs in every action I take, but ultimately choose one action based on my assessment of what will be most beneficial for me, and so on.

By contrast, neoclassical micro economic theory is to a large extent completely disconnected from the empirical reality that real people face. Instead, it ludicrously asserts that economic action can be described as functions of differential equations and various other advanced mathematical functions such as Lagrange multipliers and matrix algebra.

These advanced mathematical functions have absolutely nothing to do with the actual economic reality we see, and so will at best once they've been translated again into English (or other verbal languages, such as Swedish) simply come to the same conclusions that we already knew before we performed these equations. Often however, these mathematical equations are worse than useless in enhancing economic understanding, they in fact necessitate the adoption of a false description of reality. One example of this is the focus on equilibrium (a focus necessitated by the fact that the first order condition of a Lagrange multiplier is that the partial derivative is zero, which in this context translated into English means that no further economic gains can be made, or in other words that equilibrium is reached), which in turn means that there are no room for one of the key elements of economic reality, namely entrepreneurship.

Thus, while the praxeology of Austrian economics means a aprioristic understanding of actual economic laws, the mathematics of neoclassical economics means a aprioristic understanding of....well, advanced mathematics. But it does not in any way help you gain a deeper understanding of the subject matter economics is supposed to be about, namely the causal relations of real world economic life.

More or less the same thing is true for New Classical macro economics (including Real Business Cycle models) and to a only somewhat lesser extent also New Keynesian macro models.
Note that many Austrians use the term "a priori" in an ideosyncratic way that would probably be better served by using the term "axiomatic".

[Kephalos]

Sorry for the delayed and short reply, but I have been quite busy studying for some exams.

I read Rothbard's paper, and some things caught my attention: What is Rothbard's concept of the mathematics used in economics? He seems to think that the mathematics used in physics and the mathematics used in economics are the same. This seems wrong to me. For one, I have not seen the models of mathematical economics used to make predictions the way I have seen models used in physics are.

Also, on the more philosophical side, supposing that the "categories of action" are comparable to Kant's categories, they are then the forms that all action takes. When then do they acquire content? This conception of praxeology suggests that it may benefit from formalization.

Again, sorry of the delayed and short reply, I hope to be able to sit down and consider this at greater length later in the week.

[maxpot46]

I read Rothbard's paper, and some things caught my attention: What is Rothbard's concept of the mathematics used in economics? He seems to think that the mathematics used in physics and the mathematics used in economics are the same. This seems wrong to me. For one, I have not seen the models of mathematical economics used to make predictions the way I have seen models used in physics are. Economics is riddled with equations, and uses advanced mathematical concepts like calculus (differential equations, linear regressions and control of variables play a large role), statistics (the Central Limit Theorem plays a large role), LaGrange multipliers and matrix algebra. Also, simple concepts like supply and demand (as applied to the money supply) are plugged into equations to determine such unmeasurable quantities as price level (e.g. P=Ms/Md, where P is price level, Ms is money supply and Md is money demand; or MV=PT, where M is money supply, V is velocity, P is price level, and T is # of transactions). Note how none of the variables (save money supply) can be measured (which has never stopped a mathematical economist from trying).

Also, modern advanced financial instruments (which are used to forecast or predict investment values) are extremely equation intensive, such as the CAPM model or VAR modelling.
Also, on the more philosophical side, supposing that the "categories of action" are comparable to Kant's categories, they are then the forms that all action takes. When then do they acquire content? This conception of praxeology suggests that it may benefit from formalization.Praxeology has been verbally formalized in both Human Action (by Mises) and Man, Economy & State (by Rothbard). Mathematically formalizing it would offer no benefit and would in fact make it much more difficult to understand (for most, some math geeks prefer otherwise).

It's worth noting that Mises and Rothbard disagree as to whether the Kantian categories should be applied (which is Mises' position, as he asserts that the action axiom is an a priori concept and not at all subject to empirical experience, while Rothbard takes a more Aristotelian view that says the action axiom is just an axiom made self-evident by our empirical understanding, thus grounding it in the real world).