HT: env-econ.net
Scientific misconduct by economists
07 Aug 2014 Leave a comment
in economics, personnel economics Tags: methodology of economics, scientific misconduct
HT: env-econ.net
George Stigler on mistaken decisions as an explanation of social phenomena
06 Aug 2014 Leave a comment
The power and self-discipline of parsimonious analysis
30 Jul 2014 Leave a comment
in Alfred Marshall, David Friedman, economics, George Stigler, Karl Popper Tags: methodology of economics
Some bristle over the small size of the basic analytical tool kit of economists and the leanness of the behavioural assumptions therein (Stigler 1987).
Simpler explanations and more parsimonious abstractions are better ‘engines for the discovery of concrete truth’ about how people will respond to changes in their economic and social environments.
A limited set of causes or postulates in a theory reduces the chances that one or more of the assumptions on a more extensive list inadvertently explains away in an ad hoc manner every possible anomaly, or allows for a deft reinterpretation and/or adaptation to temporise and escape refutation. An every growing number of auxiliary hypotheses and ah hoc assumptions to co-op inconvenient facts may forever immunise the basic theory under scrutiny against testing and falsification (Olson 1982; Popper 1963). More parsimonious abstractions are less likely to found theories that seem to have successfully explained a particular social phenomenon spuriously by chance.
Complex human objectives are not assumed in economic analysis because everything could be explained and nothing could be falsified. Every empirical anomaly could be covered in advance by assuming human objectives that are sufficiently complex and large enough in number that are pursued with a high frequency of error and inertia (Friedman 1990; Popper 1963).
Subsequent ad hoc reinterpretations that add new objectives or additional sources of human frailty can finesse major anomalies to make the basic theory compatible with the facts to side-step refutation. Heavily qualified theories and intricate explanations of narrow application rarely come in the open for long enough to be found wanting.
A good theory is a prohibition: the theory forbids certain things to happen. The more that a theory forbids, the better the theory is. Bold, novel and chancy predictions are even better still.
These predictions are less likely to explain social and economic behaviour spuriously by chance. If incorrect or incomplete, bold and novel predictions are more likely to be quickly found at odds with experience and the basic theory is either revised or is discarded (Popper 1963).
It’s just a theory!
21 Jul 2014 Leave a comment
in economics Tags: anti-intellectualism, methodology of economics, The Age of Enlightenment
One of the most frustrating thing when having arguments with supposedly university educated people is when they retort: it’s just a theory. Escaping this rancid anti-intellectualism should be the least of which you learn in a university education but I found this not to be so so many times. I would fear for the continuity of the Age of Enlightenment every time I heard these words uttered.
A scientific theory is not just an idea that lives in someone’s head, rather than an explanation rooted in experiment and testing. Scientific theories are central to the growth of knowledge which itself grows through criticism and discussion:
If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories.
In this way it is only too easy to obtain what appears to be overwhelming evidence in favour of a theory which, if approached critically, would have been refuted – Karl Popper
A theory is an explanation or model based on observation, experimentation, and reasoning, especially one that has been tested and confirmed as a general principle helping to explain and predict natural phenomena.
When I speak of reason or rationalism, all I mean is the conviction that we can learn through criticism of our mistakes and errors, especially through criticism by others, and eventually also through self-criticism.
A rationalist is simply someone for whom it is more important to learn than to be proved right; someone who is willing to learn from others — not by simply taking over another’s opinions, but by gladly allowing others to criticize his ideas and by gladly criticizing the ideas of others. The emphasis here is on the idea of criticism or, to be more precise, critical discussion – Karl Popper
Any scientific theory must be based on a careful and rational examination of the facts.
George Stigler on Thomas Malthus – with relevance to his modern day successors
18 Jul 2014 Leave a comment
Measurement and theory – can the facts just speak for themselves?
16 Jul 2014 Leave a comment
in Karl Popper, Ludwig von Mises Tags: Koopmans, Kyle Popper, methodology of economics, Thomas Kuhn
Measurement without theory is a futile and self-deceiving exercise. Our observations of the world are always selective and theory-laden (Popper 1963).
The number of factors which predate and lead to any event, past, present, or future, is indefinitely large, and knowledge of all of these factors is impossible, even in principle (Popper 1963).
In the social sciences, there is no laboratory where facts can be isolated and controlled and manipulated one-by-one. The facts of history are complex – the result of many causes including changing human motives and ideas, changes in relative prices and expanding technological possibilities. This rich tapestry of causes can be only isolated by theory, theory that is necessarily developed prior to these historical (including statistical) facts.
Every analyst must come prepared with a theory to tell them ‘what to look for’ (Koopmans 1947).
Our experiences and past knowledge selects, shapes, influences, organised, classifies and measures any phenomena we seek to understand (Popper 1963).
A theory allows us to think deeply and to figure out how to attain and verify knowledge about the world. The purpose of theory is to aid in the interpretation of experience and history. A scientific community cannot practice its trade without some set of received beliefs about what the world is like. These beliefs create avenues of inquiry, formulate questions, select methods to examine questions and define areas of relevance (Kuhn 1962).
The questions asked in any research and which data is to be reviewed or reconsidered are not random choices. The variables to be defined, and the specific data to be collated and interrogated are all chosen in light of past research findings. Empirical and theoretical anomalies and prior theoretical beliefs also decide what is relevant or not, where to start and when to stop, and how new findings are to be melded with and even justify overturning existing understandings (Koopmans 1947; Popper 1963).
Empiricists are able to believe that facts can be understood without any theory only because they failed to recognise a theory is already contained in the very linguistic terms involved in every act of thought.
To apply language, with its words and concepts to anything is at the same time to approach it with a theory. The choice is never between theory and no theory. The choice is between articulated and defended theory and unarticulated and non-defended theory.
Coase, Boulding and Marshall on mathematical economics
02 Jul 2014 Leave a comment
in Ronald Coase Tags: Alfred Marshall, Kenneth Boulding, mathematical economics, methodology of economics
Can anyone think of a mathematical economics proposition that was accepted that was not consistent with what Kenneth Boulding called the literary vagueness of classical economics and economic sociology:
Conventions of generality and mathematical elegance may be just as much barriers to the attainment and diffusion of knowledge as may contentment with particularity and literary vagueness…
It may well be that the slovenly and literary borderland between economics and sociology will be the most fruitful building ground during the years to come and that mathematical economics will remain too flawless in its perfection to be very fruitful.
If mathematical economics came up with a result that was not reproducible through economic intuition, did the result become popular or were they ignored? Until this barrier is passed, mathematics will be a shorthand language rather than an engine of enquiry, as Alfred Marshall argued long ago:
[I had] a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules –
(1) Use mathematics as a shorthand language, rather than an engine of inquiry.
(2) Keep to them till you have done.
(3) Translate into English.
(4) Then illustrate by examples that are important in real life.
(5) Burn the mathematics.
(6) If you can’t succeed in (4), burn (3). This last I did often.
Marshall also
saw that excessive reliance on this instrument [mathematics] might lead us astray in pursuit of intellectual toys, imaginary problems not conforming to the conditions of real life.
Gary Becker and George Stigler on continuity in economic thinking
17 Jun 2014 Leave a comment
in Gary Becker, George Stigler, history of economic thought Tags: methodology of economics
this recession had got a lot worse, we would have seen two major changes: much more government intervention in the economy, and a lot more concentration in economics in trying to understand what went wrong.
Assuming I’m right and, fundamentally, the recession is over—a severe recession but maybe not much greater than the 1981 recession, or those in the nineteen-seventies—I think you are not going to see a huge increase in the role of government in the economy.…
Economists will be struggling to understand how this crisis happened and what you can do to head another one off in the future, but it will be nothing like the revolution in the role of government and in thinking that dominated the economics profession for decades after the Great Depression.
If the problems of economic life changed frequently and radically, and lacked a large measure of continuity in their essential nature, there could not be a science of economics.
An essential element of a science is the cumulative growth of knowledge, and that cumulative character could not arise if each generation of economists faced fundamentally new problems calling for entirely new methods of analysis…
[Economics] will continuously be confronted with new circumstances which call for more than a routine application of standard knowledge. Thus the energy crisis of the nineteen-seventies has provided much employment to economists, but it has not called for important changes in economic science…
The responsiveness of economics to environmental problems will naturally be more complete and more prompt, the more urgent the problems of the day. The response will also be more complete, the less developed the relevant body of economic analysis.
The responsiveness of macroeconomics to contemporary events is notorious. Keynes’s conquest in the nineteen-thirties was due to the fact that the neoclassical theory could not account for the persistent unemployment of that decade. A generation later, persistent inflation even with less than full employment was equally decisive in ending Keynes’s supremacy. If and when macroeconomics produces a good theory of the business cycle, its responsiveness to environmental changes will diminish sharply
Ronald Coase on blackboard economics
16 Jun 2014 Leave a comment
in history of economic thought, industrial organisation, law and economics, Ronald Coase Tags: blackboard economics, methodology of economics
This neglect of other aspects of the system has been made easier by another feature of modern economic theory – the growing abstraction of the analysis, which does not seem to call for a detailed knowledge of the actual economic system or, at any rate, has managed to proceed without it.
Holmstrom and Tirole, writing on The Theory of the Firm in the recently published Handbook of Industrial Organization, conclude at the end of their article of 63 pages that "the evidence/theory ratio… is currently very low in this field". Peltzman has written a scathing review of the Handbook in which he points out how much of the discussion in it is theory without any empirical basis.
What is studied is a system which lives in the minds of economists but not on earth.
I have called the result "blackboard economics". The firm and the market appear by name but they lack any substance. The firm in mainstream economic theory has often been described as a "black box". And so it is.
This is very extraordinary given that most resources in a modern economic system are employed within firms, with how these resources are used dependent on administrative decisions and not directly on the operation of a market.
Consequently, the efficiency of the economic system depends to a very considerable extent on how these organisations conduct their affairs, particularly, of course, the modern corporation.
Even more surprising, given their interest in the pricing system, is the neglect of the market or more specifically the institutional arrangements which govern the process of exchange.
As these institutional arrangements determine to a large extent what is produced, what we have is a very incomplete theory.
Four years before his Nobel lecture, Coase was more specific:
Marginal cost pricing is a policy is largely without merit.
How then can one explain the widespread support that it has enjoyed in the economics profession?
I believe it is the result of economists using an approach which I have termed “blackboard economics.”
The policy under consideration is one which is implemented on the blackboard. All the information needed is assumed to be available and the teacher plays all the parts. He fixes prices, imposes taxes, and distributes subsidies (on the blackboard) to promote the general welfare.
But there is no counterpart to the teacher within the real economic system. There is no one who is entrusted with the task that is performed on the black- board.
In the back of the teacher’s mind (and sometimes in the front of it) there is, no doubt, the thought that in the real world the government would fill the role he plays. But there is no single entity within the government which regulates economic activity in detail, carefully adjusting what is done in one place to accord with what is done elsewhere.
Coase argued that marginal cost pricing is not only inefficient, but even inferior to average cost pricing due to:
(i) the fact that under marginal cost pricing, consumers are not forced to pay the full costs of the goods they purchase, leading to potentially inefficient consumption choices;
(ii) the lack of information necessary for the government to determine whether consumers would be willing to pay an amount sufficient to cover the total cost of the goods produced, and costly nature of attempts to make such estimates; and
(iii) the fact that the governmental subsidy necessary to ensure firm survival under a marginal cost pricing scheme will likely be financed through distortionary taxes, thereby creating or exacerbating a distortion in one market at the same time that it corrects a distortion in another.
Utopia, you are standing in it! 
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