Economics Will Not Be Mocked

by Mario Rizzo

A few years ago I read and studied in great detail Pope Benedict XVI’s encyclical on globalization “Caritas in Veritate” or “Charity in Truth.” I posted a three-part analysis on the doubtful economics contained therein at ThinkMarkets. The first part is about the destructive influence of the encyclical. The second part is about globalization. The third part is about the attack on classical liberalism.

Shortly thereafter, I went to a conference that included discussion by economists of the encyclical. There were almost no defenders of the pope’s economics. In fact, I was told by one participant not to waste my time in a detailed examination of papal ideas relating to economics. No one in places of intellectual or policy influence much cares what the pope says. I was told that I care only because of my sixteen years of Catholic education. Perhaps this is all true; I do not know.  Nevertheless, the pope is worth listening to and reacting to because, in the modern world, there are few attempts by prominent public figures to address moral issues honestly.

The current statement of the “social gospel” by Pope Francis in “Evangelii Gaudium” or “The Joy of the Gospel” is less authoritative than the previous encyclical by Benedict insofar as it is considered simply an “apostolic exhortation” or pastoral letter. However, the ideas expressed are in keeping with the recent Church teaching. (Nevertheless, one cannot help thinking that Pope John-Paul II’s economics in the encyclical “Centesimus Annus” was much better than that expressed by the two most recent popes.)

I will not go into the details of the current letter because I think my previous comments on Pope Benedict at ThinkMarkets effectively cover most of these. I want now simply to make a “meta-critique” of Pope Francis’s letter only insofar as it deals with issues that have economic content.

Top Young Economists Consider Their Future

by Roger Koppl

Ali Wyne of the big think  blog “Power Games”  recently posted an interesting set of comments on the theme “Empirics and Psychology: Eight of the World’s Top Young Economists Discuss Where Their Field Is Going.”  George Mason’s own Peter Leeson  was among the eight “top young economists” sharing their views.

Over at New APPS, the philosopher Eric Schliesser  summarizes the eight comments. “Bottom line: due to low cost computing and a data rich environment the future of economics is data-mining (this was clear from at least four of the comments). This is especially so because the young stars have lost faith in homo economicus (due to behavioral work and the crisis).”

Eric’s summary seems about right to me. There were eight fine minds sharing eight different visions, but two related themes dominated the comments. 1) The old rationality assumption is in trouble and we don’t quite know what to do about it. 2) Economics should be more data-driven now that we have what William Brock has labeled “dirt-cheap computing.”

In Defense of the Koch Brothers and Academic Freedom

by Mario Rizzo

Recently, there has been a ruckus, as discussed in today’s Wall Street Journal,  over some grants to Florida State University from  Charles and David Koch to support professorships in economics. The objections seem to be that the Koch money will be used to support right-wing ideologues who, presumably, will indoctrinate the students. Furthermore, this would seem to be a violation of academic freedom – or so the critics argue – because the Kochs like to promote free-market ideas and not pro state-control ideas.

More Scholarship, Less “Science”

by Mario Rizzo

Once upon a time, in a land far away from New York civilization, a famous economist told a good friend of mine that “we” need more scientists and fewer scholars in the economics profession. He was serious.

This is the time of year that many Ph.D. dissertations are being defended in graduate departments of economcs. We have many would-be scientists and almost no scholars. I think we need more scholars and fewer scientists.

Generalizations in the Social Sciences

by Gene Callahan

On his blog, Daniel Kuehn notes that “relations in economies are not stable.” In fact, we can go further:  Relations in the social sciences are not stable. As an illustration, consider Zipf’s Law as applied to city size.

In 1700, London had about 575,000 people. According to Zipf’s Law, the next-sized city should have had about 280,000 or 290,000 thousand. What was the actual size of the second largest city? As far as I can determine, it was Norwich, with a population of about 30,000. (My source for the population figures is 1688: The First Modern Revolution.) Zipf’s “Law” is off by a factor of about ten in this instance.

What I suspect is that there is some historical circumstance that leads to Zipf’s Law applying to city size in recent centuries, which was not present in 1700. As political scientist Terry Nardin put it: “Generalizations about how people usually behave are not scientific generalizations about a truly time-independent class of phenomena; they are more or less well-disguised descriptions of customs specific to a particular historical situation.”

Update on Government and Science

by Bill Butos

The New York Times of January 22 reports that the Obama administration has created a “billion-dollar government drug development center to help create medicines”  as part of the federally funded National Institutes of Health.

According to the article, its rationale is to undertake research leading to the commercial development of drugs that has mysteriously lagged in the U.S. The article makes no mention of the regulatory costs drug firms face.

Predictably Rational: A Brilliant Book by Richard B. McKenzie

by Mario Rizzo 

This is the time of the year that various publications recommend Christmas books or the best books of 2010. (I have never known what a Christmas — or summer — book is. Are they supposed to be light reading? I don’t believe in reading “light.” When I am in the mood for that, I watch TV.)  In any event, I have a serious book to recommend.

Every so often a brilliant book comes out on a topic of great academic importance that is in danger of not getting the attention it deserves. I am thinking about Predictably Rational: In Search of Defenses for Rational Behavior in Economics by Richard B. McKenzie.

What is Truth in Science?

by Jerry O’Driscoll

In the “Annals of Science,” Jonah Lehrer asks “is there something wrong with the scientific method?” He poses the question in an article entitled “The Truth Wears Off” in the December 13, 2010 issue of The New Yorker (pp. 52-57). The problem is that across disciplines “claims that have been enshrined in textbooks are suddenly unprovable.”

It is a problem of being unable to reproduce results in subsequent experiments.  Even scientists who perform the original experiment cannot reproduce their own results.  The pattern is that, over time, results become less strong or even disappear.

Further Thoughts on The Sensory Order

by Roger Koppl

Over at Austrian Addiction, Dan D’Amico responds to my recent post on The Sensory Order.  Dan wants to know “what Hayek’s theory of neuorscience is really adding here that a more basic understanding of subjective preferences does not already imply?”  Dan is not the only one with this question.  I think enthusiasts for The Sensory Order have given pretty good answers to Dan’s question, but it seems clear that we need to do a better job.

Scientism in the Way of Science

by Gene Callahan

I repeatedly find attacks on positions in the social sciences made based on extremely limited and, frankly, antiquated views of how the physical sciences proceed. I will give one example from a rightist criticism of a leftist view, and one that is a leftist criticism of a rightist view, to illustrate that my point has nothing to do with ideology — or perhaps, that it has to do with the way ideology can lead one to embrace flimsy criticisms of other’s positions.

The first excerpt is from Hunter Lewis’s book, Where Keynes Went Wrong:

“In chapter 15, we saw how Keynes wrote N = F(D), which means that employment, denoted N, is a function of demand. Demand however is defined as expected sales, not actual sales. We noted that expectations are not a measurable quantity and thus do not belong in an equation.”

Well, one way to measure these expectations would be to walk around and ask the entrepreneurs “How much do you expect to sell this year?” then total up those amounts. Why in the world this would not be a fine measurable quantity is unclear.

Just the “Basic Facts,” Mam

by Gene Callahan

I was recently in a conversation with a very bright economist who declared “We are in agreement about the basic historical facts here; we are just interpreting them differently.”

This is a common but very damaging misunderstanding of historical knowledge: that there are a set of “basic facts” that historians are “given” to start with, and what historians then do is apply a “theory” to fit an interpretive scheme over those facts. That this view cannot be correct becomes obvious once one realizes that no such thing as the “basic facts” this views relies upon can exist in history.

Evolutionary Epistemology

by Gene Callahan

“This [is] an objection to evolutionary epistemology in all of its forms—that there is no reason whatever for supposing that the web of belief which has emerged via natural and cultural evolution mirrors nature or tracks reality. It will do so, according to evolutionary theory itself, only in so far as such mirroring or tracking enhances survival chances. There is, in fact, nothing a priori to tell against the possibility that false belief systems may sometimes give their holders a competitive edge in survival stakes, if unreasonable optimism, or false religious or other hopes are useful in sustaining them in adversity.” – John Gray, Liberalisms, 248.

It seems to me that Gray’s point is indisputable: the mere fact that, say, our brains or our scientific enterprises evolved as “spontaneous orders” gives them, contra Hayek, no warrant of epistemological reliability whatsoever. (Gray, in fact, specifically notes Hayek as someone committing the error he is criticizing.) In any case, while thinking about Gray’s passage above, I was struck by an amusing illustration of the principle in question, which I thought I’d share.

The Amazing Brad DeLong

by Mario Rizzo  

I don’t know where Brad DeLong acquired his philosophy of economics. DeLong responded to an article by Jean-Claude Trichet, president of the European Central Bank, on “austerity.” The following is part of what the Financial Times edited out of the published version. DeLong posted it on his blog. He says there are two types of economists:  

“One type chooses, for non-economic and non-scientific reasons, a political stance and a political set of allies, and twiddles and tunes their assumptions until they come out with conclusions that please their allies and their stance. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones and the skeleton that emerge will teach lessons and suggest principles that will be useful to voters, bureaucrats, and politicians as they try to guide our civilization as it slouches toward utopia. (You will not be surprised to learn that I think that only this second kind of economist has any use at all.)”  

Understanding Markets: Point/Counter-Point

by Thomas McQuade and Chidem Kurdas

Though it should be obvious to all that markets are of immense benefit to humanity, any appreciation of these institutions is almost always hedged with a perceived need to constrain and regulate—in short, to subject them to conscious outside control.  The reasoning is understandable: the unconstrained pursuit of self-interest can only lead to chaos.

But the preference for constraint through centralized direction betrays a profound misunderstanding of the way markets work.   

Can we explain that claim any better than the volumes already written on the topic?  We find that, when we discuss the issue, we agree on the basics, but differ in emphasis and details—and details matter.  Here is part of our discussion, in point/counter-point format.

Paying for Participation in Placebo-Controlled Clinical Trials?

by Mario Rizzo  

A couple of weeks ago I received a letter from the Harvard Medical School inviting me, among many others, to participate in a placebo-controlled trial of the efficacy of omega-3 (fish oil) supplements and high dose Vitamin D in preventing disease. The trial would last for five years.  

I thought about it for a few minutes. But it seemed very risky. Why?  

All Decisionmaking is Doomed to Failure: Questions for the Bias Industry

by Mario Rizzo  

Behavioral economists have an embarrassment of biases. They have discovered many cognitive and behavioral biases which plague human decisionmaking. By one count there are nearly a hundred of them.  

A cognitive bias is a systematic departure from rational decisionmaking. For example, a person may react differently if he is told that a drug has a 90% cure rate or that it has a 10% failure rate. A behavioral bias is the systematic inability to act in accordance with one’s true preferences. For example, I resolve to stop drinking but I don’t have the willpower.  

But what does all of this add up to?

The Abstract and the Concrete Part II

by Gene Callahan

I fear I was insufficiently clear in expressing my view of the relationship between abstract and concrete thought in my previous post on the topic; although I intended, right at the outset, to make obvious that my intention was not to dismiss the value of the abstractions offered to us by science, it is apparent that some commentators, nevertheless, read my post as just such a dismissal. Therefore, it might prove worthwhile for me to explicate further the view expressed in that earlier post, as well as to offer an example of the sort of concrete thought I suggested to be superior to its more abstract brethren.

In regards to the first matter, let me assure readers that I regard abstract thought as being of tremendous value, and that I recognize the monumental achievements of those abstract realms of theory, mathematics and science, in the last several centuries.

The Abstract and the Concrete

by Gene Callahan

Abstraction can be an entertaining and useful activity. But every abstraction falsifies reality simply because it is an abstraction – it is a one-sided emphasis on certain aspects of the real at the expense of neglecting or even denying others. That is not necessarily harmful as long as we remember what we have done. But the abstraction, being simpler and more manageable than the real world, is a seductive fantasy, and the temptation to ignore messy reality and attempt to replace it with a clean and neat dreamworld.

Let me offer a few examples to illustrate what I am on about. For instance, Jared Diamond, in Guns, Germs, and Steel, wants to replace the history of the individual with what he seems to think he has founded, namely, “scientific” history. The end result is that he often winds up botching his history.

Epistemic monopoly is still a bad thing

by Roger Koppl

McClatchy-Tribune Information Services has been distributing my op ed with Dan Krane on “Science rules the FBI should obey.”  We discuss an example of epistemic monopoly in action, namely, the FBI’s failure so far to release anonymized data from its vast NDIS (National DNA Index System) data set.  The NDIS data set contains the genetic profiles of more than 7 million people, most of whom have been convicted of serious crimes, such as rape.  It contains information on whether the practice of forensic DNA profiling aligns with DNA facts, but that information can be extracted only if scientists are allowed to study the data.  Why isn’t the FBI playing by the usual science rules requiring openness and data sharing? 

How Mathematical Economists Overreach

by Mario Rizzo

In recent months there has been a discussion both in the traditional media and in the blogosphere about why orthodox macroeconomics failed to predict or explain the financial crisis and the subsequent Great Recession. Some of that discussion focused around Paul Krugman’s criticism that economics mistook  (mathematical) beauty for truth. Subsequently, there was a further discussion about the role of mathematics in economics.

Of course, this is a big topic. My task here is only to investigate, by means of a simple example, three claims made for the superiority of mathematics over ordinary (natural) language.

What is Science?

by Jerry O’Driscoll  

Some recent controversies move me to take up the topic within the limitations of a blog post.  Many years ago (1956), Fritz Machlup ably addressed the issue in an essay titled “The Inferiority Complex of the Social Sciences.”  He rejected limiting the term science to particular subject matters or methods.  He concluded that “there is no epistemologically defensible borderline short of the widest meaning of scientific method, defined in the Encyclopedia Brittanica as ‘any mode of investigations by which impartial and systematic knowledge is acquired.’”  

I endorse Machlup’s broad definition of science as any systematic study of a subject.  As he observed in a footnote, the German Wissenschaft is more inclusive: “the historians of literature, the philologists, the philosophers, the mathematicians, the sociologists, they are all scientists (Wissenschaftler).” In French, science is knowledge and one can speak of la science infuse, intuitive knowledge. La science de l’art is simply the systematic study of art.  

Mankiw And Meltzer Are Right! More Or Less

by Mario Rizzo  

As we have been saying here, the claims that the fiscal stimulus has saved or created X number of jobs is not a simple empirical question. It must be an inference from a model that tells us what would have happened in the absence of that stimulus. Collecting reports from various firms or local governments about their job situations will not do. At best these individual reports are based on pop-theories on the part of the reporters about what would have happened.

Against Magical Thinking

by Roger Koppl

The term “magical thinking” has different meanings, most of them involving something like extrasensory perception or the efficacy of spells.  Here I define it as an argument, one of whose steps requires something impossible.  (Larry White helped me with this definition, but gets no blame for it or anything I say here.)  It is not magic thinking if your argument has an unexplained piece.  Darwin knew didn’t have anything like Mendelevian genetics as a mechanism.  That was a hole in his theory, eventually filled by others.  No magic there.  Magical thinking exists when one fills the gap with something that is logically or physically impossible.

If you can show I have engaged in magical thinking, you have overturned my argument.  

Mises Was A Scientist

by Roger Koppl

Over at Division of Labor, Noel Campbell picks a fight with Austrian fans of Mises.  “I always conceived of Mises’ efforts as attempting to build a logically correct and (therefore) irrefutable description of human behavior. As such, I always viewed Human Action as a work of philosophy, not science.”   Noel hints that he doesn’t want to be answered with a lot of philosophy of science.  I might whine about how unfair it is to contrast Mises’ “philosophy” with “science” and then expect a response that doesn’t get into the philosophy of science.  But Noel seems to be a nice guy with a sincere question, so I’ll take a stab at it anyway.

The Failure of Macroeconomics

by Mario Rizzo  

The current issue of The Economist has a very interesting article on the turmoil among macroeconomists (“The Other-Wordly Philosophers”). Essentially, the article argues that although the dominant macro model, dynamic stochastic general equilibrium theory [DSGE], appears to be in a state of near-total breakdown, there is no agreement among economists as to what should replace it.

“Would economists be better off starting from somewhere else? Some think so. They draw inspiration from neglected prophets, like Minsky, who recognised that the “real” economy was inseparable from the financial. Such prophets were neglected not for what they said, but for the way they said it. Today’s economists tend to be open-minded about content, but doctrinaire about form. They are more wedded to their techniques than to their theories. They will believe something when they can model it.”