Saturday, March 27, 2010

A Letter I Wrote to David Brooks

David Brooks recently wrote an op-ed in the New York Times entitled "The Return of Histroy," in which he argues that economics is, today, fundamentally flawed in its scientistic methodology (that of constructing abstract models that heavily rely on mathematics and believe themselves to be based on empirical evidence). However, his prediction for the future of economics is that economics will hopelessly fail as a science at all, and will become an "art." So I decided to write him this letter, explaining why both the method of "scientism" and simply dropping all scientific technique are both flawed. Here's that letter:


Dear Sir,

In reading your article "The Return of History," I have reason to believe that you are currently unaware of a glaring answer to your question about the future of economics. This answer I refer to is not a victim to the pitfalls of scientism that you mention in economics, namely the fallacy of analyzing "economic man," or the perfectly rational, calculating, utility-maximizing individual. There is an entire economic school of thought that not only recognized all of these errors, but also corrected the foundations of economics, proposing a sound basis for economics: that of the concept of human action. This school of thought also has predicted the Great Depression, the stagflation of the 70's, and other economic crises including the current one. This school of economic thought is the Austrian School.

In the analysis of the Austrian school, economics consists of the study of the fact that human beings have to make choices between various ends. In doing this, it is free from the failure of many economists to recognize that things like love, friendship, and having children are not "uneconomic," but simply choices that people make. People, when making decisions, compare all possible ends that they may desire on one scale of valuations. Choosing to have a child given the cost is not "irrational" to the person making the decision, and it is an error to say that the actor in this case is behaving irrationally, because the purpose of economic analysis is to analyze how people act, not how the economist thinks people should act. In other words, value is subjective.

Because Austrian economics starts with an objective analysis of human action, it does not fall into the hole of thinking that econometric and empirical studies of past data from the marketplace can either prove or disprove an economic theory, on the grounds that the data of the marketplace is a result of specific value judgments held by market participants at a previous point in time. Economics as a science has to look for universally valid laws and, fundamentally, causal relations between variables, and correlation (think: econometrics) does not imply causation. Using reason and the the principle of human action, real economic claims can be derived, not mere models that describe past market performance perfectly, but which fail when it comes to predicting what will come to pass.

Furthermore, psychology and economics are two entirely separate things: economics in the Austrian view studying the results of human action given their individual valuations and preferences, while psychology studies where those individual valuations come from, and currently psychology cannot make definite, universally valid statements about how a specific circumstance can cause all people, at all times, anywhere to make the same choice given their surroundings. Thus, a methodological dualism exists between these two fields, and psychology is not an aid to economics.

It might also be tempting to dismiss the idea of the ability to deduce universally valid laws about human action that would be applicable in any way to the real world. However, the proof that this is indeed possible is present in the results of Austrian economics, whose theories properly explain everything from the basic functioning of markets to the business cycle. Ludwig von Mises' book Human Action is the deduction of all of economics not from empirical studies, but from axioms and basic, realistic assumptions that hold in our economies (such as the valuation placed on leisure time, or the use of money).

With a proper methodology in place, Austrian economics is neither scientism nor an art: universal laws and principles can exist but not be quantifiable and testable. The future of economics relies, one could only hope, on the adoption of the proper, logical basis for the field of study. It would not be the end of the "development" of economics if all attempts at objective laws and causal relations were dropped in favor of an "art of economic." You mentioned F.A. Hayek in your article, and Russ Roberts, but please look more into Austrian economics, not merely for your sake but for the sake of your readers and the future of economics. And besides Human Action, which I recommend everyone to read, you would find another of his works, Epistemological Problems of Economics, interesting in that he defends the basis of Austrian economics in contrast to the competing schools.

Hoping that you have given this some thought,

Eric Perkerson

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