I’m no Lord Kelvin, but I try

A long time ago I read a thoughtful critique on orthodox economics, and while I can’t do justice to the argument presented by the author (I can’t even remember who the author is!), what stuck with me was a line that criticised the tendency of policy makers (encouraged by economic advisers) to assume that certain economic phenomena were akin to physical laws in their inevitability, ubiquity, or predictability. As the years went past, I discovered that this is a common strand in arguments about economics, and while I feel it is often over-stated, there is plenty of truth in the general gist. Even the most sophisticated of economic models have to simplify many processes. This is inescapable, since to model something completely accurately would involve replicating it in full, which would be redundant and tell you nothing.

Economics is at the intersection of natural sciences and philosophy. If you spot a trend in some economic variable, because the subject matter is human interaction, there are innumerable unseen (and possibly unexaminable) factors driving it. You can make plausible ex post stories about events, but the nature of the problem means there can be several mutually contradictory stories, and each implies a different progression into the future. Economics is also not amenable to reductionism, unlike physics, because at every step one is faced with chicken-and-egg problems, circular and cumulative causation, positive and negative feedback loops of indeterminate force and scope. Then there’s the reliance on proxies, and proxies of proxies, that is made necessary by our inability to gather the requisite data (which is mostly inside people’s heads, and not even accessible in a neutral scientific manner by those people themselves).

At first glance, it doesn’t appear possible for economics to converge on the ‘right’ answer/explanation in the same way as the natural sciences seek to do.

And yet, we do see trends. We do see recurring patterns. There is a form of order, some givens. To borrow from physics terminology, there are boundary conditions.

Frustrated by the subjective nature of many socio-economic epistemology arguments, I have been slowly trying to informally assemble a list of these economic boundary conditions that all could agree on as indisputable. At least then we could have a common base that could anchor these discussions. The list isn’t long, and is very much a work in progress, so I welcome any constructive criticism, and particularly suggestions for additions or deletions.

Scarcity

Nothing is infinite. There is only so much to go around. (This is conceptually related, economically speaking, to the observation that human wants are effectively without end, which I believe there is good evidence for, but don’t think it is iron-clad enough to belong on this list.)

TANSTAAFL

There Ain’t No Such Thing As A Free Lunch. At the most basic level, any action consumes energy (well, it’s actually a conversion of energy that increases entropy, ie less usable energy, but for our purposes this will suffice) and time. Nothing is gained without the use of resources, no matter how hidden from view that usage is.

Opportunity cost

Quantum physics aside, it is impossible to do two things at once. Therefore there is always an opportunity cost to any action, at the very least in terms of energy and time.

Comparative advantage

Everyone has a different comparative advantage in production, because everyone has different skills and different levels of skill, and therefore different opportunity costs. Even for two or more people who are precisely identical in every single way, they still have to occupy different points in space, and so will have a different comparative advantage in producing goods and services (which after all have to go somewhere else to become commodities).

I think more entries belong on this list, but I am still pondering them. Candidates include the non-perfectibility of human systems, the limitations on information gathering and processing, stuff like that. There are many concepts that approximate the kind of certainty I’m aiming for, such as diminishing marginal utility, but I want to be strict about only accepting ones that no-one can disagree with under any circumstances. I’m wary of including things claimed as immutable ‘human nature’ – even though I believe there are strong currents in human behaviour that are linked to our genes – because there is too much variation to account for. I will still argue for public policy to take these currents into account, because we should structure society around the majority.

My purpose here is to establish certain Laws of Economics as on par with (and connected to) physical laws like the Laws of Thermodynamics. Luckily, despite the caricature of economics as “the dismal science”, these economic laws can generate a happier ending than those of thermodynamics, which are encapsulated in the observations 1) You can’t win 2) You can’t break even 3) You can’t even get out of the game.

UPDATE 15/2

Some comments have led me to reflect on the article that galvanised me to put my amorphous thoughts on the subject down in black and white, The Expanding Domain of Economics by Jack Hirshleifer. This quote in particular is, I believe, most apt:

[I]t is ultimately impossible to carve off a distinct territory for economics, bordering upon but separated from other social disciplines. Economics interpenetrates them all, and is reciprocally penetrated by them. There is only one social science. What gives economics its imperialist invasive power is that our analytical categories – scarcity cost, preferences, opportunities, etc. – are truly universal in applicability. Even more important is our structured organization of these concepts into the distinct yet intertwined processes of optimization on the individual decision level and equilibrium on the social level of analysis. Thus economics really does constitute the universal grammar of social science. But there is a flip side to this. While scientific work in anthropology and sociology and political science and the like will become increasingly indistinguishable from economics, economists will reciprocally have to become aware of how constraining has been their tunnel vision about the nature of man and social interactions. Ultimately, good economics will also have to be good anthropology and sociology and political science and psychology.

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20 Responses to I’m no Lord Kelvin, but I try

  1. Kat says:

    “to model something completely accurately would involve replicating it in full”

    YES! Why do so few people seem to acknowledge that all models must, by definition, be abstracted?

  2. JC says:

    Classes are going well I see. You can remember most things from lectures.

  3. Jarrah says:

    Actually, this has zero to do with my classes. It’s just stuff I think about in my spare time.

  4. JC says:

    Really, that’s what you think about?

    What class subjects are you currently doing and why?

  5. THR says:

    We’re at opposite ends of the spectrum politically, but here are couple of thoughts all the same.

    I don’t think that economics is at the intersection of philosophy and the natural sciences. Philosophy is always going to be a part of one’s methodological concerns, and to the extent that economics leans on psychology, for example, philosophy will be important. The other side is that economists, by and large, are philosophically naive nincompoops as far as I can tell. Rand is a laughing stock among philosophers, but apparently quite respected among right wing economists.

    As for the natural sciences – one distinction between them, that was impressed upon me, was that there are ‘historical’ sciences that take as their object historical entities (like biology, geology) and the relatively ahistorical sciences (like physics and chemistry). Economics is surely an historical enterprise, and in this regard, is probably closer to sociology or psychology than the ‘hard’ sciences (hence its epithet ‘dismal’). This isn’t to say that economists cannot formulate ‘laws’, merely that these laws make no sense unless they are historically grounded.

    Other than relentlessly and rigorously historicising everything within economics, I can only think of going back to logical first principles, and treating all received concepts with a good deal of scrutiny. Economics, perhaps more than most disciplines, has been infected with ideological stupidity.

    Hence, when we hear about ‘scarcity’, we should recall that this latter concept does not follow from the notion that resources are finite. If anything, ‘nature’ is wildly profligate every bit as much as scarce. ‘Scarcity’ is, to an extent, a ideological prop designed to justify emphasis on competition, etc. There’s nothing scientific about it, however. It’s true that human desire is, in a sense, infinite, but this observation belongs to psychology rather than economics.

    TANSTAAFL

    I think yo’re on to something with this one, but terms such as ‘free lunch’ conjure up images of fat, hypocritical neoclassicals lecturing others on austerity. It might be better to put this princple in less loaded terms. (You could even give it a nice Latin name, like Nihil est ex nihilo).

    Comparative advantage is dubious. It assumes that the best thing for developing countries is to stick to coffee farming or whatever. It’s another concept that should be treated with scepticism.

  6. john walker says:

    An isomorphism is useful and powerful exactly because it is not the thing represented. Because of this the process that created the representation of the economy is ; a theory of the reality ( represented by the isomorphism).
    The economy is in it self a complex & very recursive isomorphic representation of complex symbolic systems of exchange. And thus no isomorphism of it can be complete there never can be a final answer it will always be provisional.

  7. Peter Patton says:

    Jarrah I’m no economist either, but have also been thinking a lot about economics since the GFC. Some comments on your ‘boundary conditions.’

    1. Scarcity: Nothing is infinite. There is only so much to go around.

    I think this point is overblown as a truism. After all, a good imagination and improved technology can stretch what we already have. On the first point, modern management techniques have increased efficiency, whether measured by how much energy is needed to produce the same goods, to re-organizing labour forces both within the production space and across geographic space. Fordism, Taylorism, multinational corporations, just-in-time production, quality circles, hot-desking are all examples.

    But it is technology that is the real threat to the notion of finite resources. If we consider the number of element particles, molecules, vegetation, rocks, etc. plus our knowledge of how to harness myriad sources of energy, the ways that all these can be combined is limited only by our imagination and current knowledge. Consider the transformation from sail ships with cannons to the atomic bomb, from the gramophone to the I-pod, from slash-and-burn shifting cultivation to GM.

    2. There Ain’t No Such Thing As A Free Lunch. At the most basic level, any action consumes energy

    We human beings have shown an uncanny ability never to let the seeming scarcity of one natural product to prevent us from continuing to use the things we made from that finite product; we always find new natural sources and energies. The one thing that does bound us is the 1st Law of Thermodynamics – the conservation of energy. While the 1st Law does allow for energy transformations – such as the atomic bomb – and thus supports ‘not so scarce’ thesis, it denies the possibility of creating more energy in total. But of course, the 1st Law only applies to closed systems, and once more we humans are developing the know-how to harness energy systems outside our ‘closed’ earth system, such as from the sun.

    3. Opportunity cost

    This is one of the more exciting discoveries for the neophyte economist. But its full significance only really comes to light when you consider opportunity cost in the context of the time value of money

    4. Comparative Advantage

    Absolutely. And at to that at the micro level competitive advantage, which ties in nicely with not-so-finite resources.

    Another profound idea that really changed the way I think about so many things was

    5. Game Theory

    The idea that no action happens in a vacuum. Thus, whenever we think about acting ‘economically’ we need to keep in mind how others will react to our actions, and adjust our actions accordingly. Game theory also teaches us that economics need not be a zero-sum game. It is on this point where Marx makde one of his great boo-boos in seeing capital and labour, wages and profits as zero-sum games.

    I look forward to your developing thoughts on this topic.

  8. Jarrah says:

    I want to thank you all for some of the best comments this blog has elicited so far. I’ve updated the post with a quote that catalysed it.

    THR, thanks for visiting, I hoped you would. For what it’s worth, I think Rand was crazy. And her political philosophy was bunk – but I also think that of Plato, so what would I know? Re scarcity, I would hope that we can agree that there really is only so much to go around, because if I can’t convince you of that then we’re not inhabiting the same universe and there’s no point discussing anything. And it’s not a ‘prop’ for competition, it’s a recognition that we must compete with ourselves – we are always having to make decisions about trade-offs. The first three boundary conditions are closely related in this way, and really are just re-statements of thermodynamic laws.

    I used TANSTAAFL because I’m a science fiction nerd, and Heinlein was a big influence in my political journey. Comparative advantage is the logical progression of the first three laws, it’s inescapable if you accept them. It is not an automatic prescription for non-industrialisation, for two reasons. One, economic efficiency is an important societal good, but not the only one, and we can make politic0-economic decisions about these that violate strict laissez-faire, ie by considering risk management (diversification reduces the risk of crop failure or similar having too great an effect on the larger economy). Two, sticking to coffee farming or whatever can in fact lead to industrialisation anyway, there isn’t an automatic need to force it.

    John Walker, very well put. Can I borrow that for my next essay?

    Peter Patton, I also have doubts about projected resource use and carrying capacity, I’ve said so previously on this blog and elsewhere – something along the lines of “As long as our technology is sufficient, humans won’t run out of resources until the heat death of the universe.” But on a pure theoretical level, the universe is not infinite, and on a practical level, scarcity is a real and permanent feature of human economies, most inescapably for our primary resource – time. You allude to this with your comment on opportunity cost.

    Game theory as such doesn’t belong on the list, but perhaps some other formulation of “no action happens in a vacuum” does, recognising that economies consist of more than one person almost by definition. I’m also not sure that game theory leads us to non-zero-sum, or if that’s imbedded in exchange. I almost put “willing exchange always increases wealth of exchangers” on the list (which is true with certain provisos), but I can imagine exceptions to this rule and I don’t want anything contestable on the list.

  9. john walker says:

    Representations of representations is what I do for a living. Have you read GEB?

  10. john walker says:

    http://www.smh.com.au/business/libertarians-silent-on-insulation-bungle-20100228-pb4m.html
    Ross Gittens got stuck into taxpayer-subsidised libertarians . The lack of response has been …… interesting, how about you Mr Job?

  11. Jarrah says:

    Sinclair Davidson responded, in the SMH and at Catallaxy. But my silence here is entirely uninteresting – my computer is on the blink, and I can only comment on blogs using my iPhone (bless!) and not log on as an admin. It means several topical posts that were forming never got put into ones and zeroes. With any luck, I’ll be back in business in a few days.

  12. john walker says:

    hope your computer gets well soon, the idea of actually typing on any sort of phone… well SASSYPERILLA; what new misery will they think of next!

  13. john walker says:

    Not that impressed by the response to Gittens.
    The point that Gittens made that most struck me was the amount of taxpayer subsidy that these think tanks get and thus the hypocrisy of their position on public intervention and distortions of the market. Would these think tanks actually be ‘competitive’ without tax deductible subsidy?

    Which of course gets into the bigger issue of the vast number of tax deductible ‘thingos’ that exist in australia these days, and the number of people who live in work in and drive around in their tax deductible thingo . There are a lot of lobbyists ( right , left and center )these days and a lot of them work for tax deductible ‘thingos’.

  14. john walker says:

    Hows the computer?

  15. john walker says:

    Did you see Mr Abbot on the ABC last night? I was very struck by the implications of the observations hinted at by the Father in charge of the seminary Mr Abbot attended. Priests who are not comfortable with the role of servant ( of God) are a well known problem in all faiths. Mr Abbot is perhaps not comfortable with the role of a servant of Australia (as it is), and whilst smart is perhaps more clever than wise. If he was to become prime minister we could be in for a radical ,wild ride.

  16. Jarrah says:

    Computer fine, but internetz broken. Will be at least two weeks – problems with the flat communications infrastructure.

  17. john walker says:

    Ah the joys of modern life,
    “there is always something cookin , but theres nothin in the pot”

  18. Jarrah says:

    Two weeks has turned into two months, and no permanent solution to my internet woes in sight. I’m keen to get back writing, but I’m afraid it might be a while yet, dear readers. Stay tuned.

  19. john walker says:

    What on earth has happened? Have you offended Mr Conroys dress code?
    GOOD LUCK

  20. Pingback: Open thread on capitalism | Jarrah Job

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