I made the observation a few days ago on this blog that economics is not a science. Some from the right have, predictably, argued to the contrary.
Unfortunately, their arguments do not hold water. The fact is that most people now think economics is the subject that is taught under that heading at universities. This activity emerged from the more appropriately named moral philosophy that Adam Smith, for example, considered he taught. In the process it was corrupted.
When the likes of Keynes were teaching economics the involvement of mathematics was, to be polite, limited. And that was appropriate. After the Second World War the likes of Samuelson debased the subject in my opinion, reducing its to a quasi mathematical analysis were an argument had either to be resolved through the resolution of formulae or by statistical regression.
There were two problems. The first was the illusion of spurious accuracy. The second was the exceedingly poor mathematical ability of the economics profession.
To take an example of the first, and to highlight an issue which underpins the whole of neoliberal economics which is based entirely upon this mistaken philosophy and methodology, it is assumed that markets, and markets alone, allocate resources efficiently within society. Of course, as some of my critics have noted, some very eminent economists have since tried to relax this assumption, and I do not dispute that they have made progress in doing so, but what that proves is that they are the exceptions to the rule, and that the rule remains intact, as the whole of the drive for deregulation, low tax, and the undermining of government has proven.
This logic that well-being is maximised when profit is maximised is, however, entirely untrue. First of all, the profit which is referred to as the sum total of the future value derived from current economic activity. It is assumed that this is known. As a matter of fact it is not. Accountants even make the rather odd assumption that historical data approximates to this sum of the future well-being. Second, the model only works on the basis of revealed preferences i.e. that if I prefer A to B and B to C I will prefer A to C. Everything that I know about human behaviour suggests that this is an entirely inappropriate conclusion. It shows how far removed from the real world economic theory is. Third on the basis of this idea it presumes that there is always a downward sloping demand curve for any product and always an upward sloping supply curve meaning that a single, discreet and permanent equilibrium state for the economy can be achieved. Unfortunately, if revealed preference does not work, and as a matter of fact it does not, then it is relatively simple to prove that demand curves can be upward sloping and supply curve downward sloping for the same product at different points, so creating the possibility of multiple equilibria, none of which can necessarily be considered optimal. At that point a choice has to be made between them, and all pretence that science has been foregone.
But let's also look at just one of the numerous mathematical errors upon which economic theory as most on the right now teach it is based. It again refers to that absolutely fundamental model of perfect resource allocation by the market when perfect competition is in operation. To achieve this optimal outcome it is assumed that there are so many sellers in the market that none of them have any control on the price at which the goods they sell are priced: they are all price takers and the addition of one further supplier in the markets, or the loss of one supplier in the market, makes no difference to this situation.
This assumption is absurd. If it were true that they would be infinite people joining the market, and yet it is assumed that a marginal operator exists: the one for whom marginal revenue equals marginal cost. For that person to decide whether they are, or are not in the market it is necessary for the price to convey meaningful information. It cannot be argued that this is just with regard to revenue because each of the operators within the market will also have a cost base and their demand for the materials they require to supply the needs of the market must have implication for price through a market feedback mechanism or no one would ever equate a marginal revenue with marginal cost because neither will ever change. In fact, the addition or loss of another supplier will change the marginal cost for all supplies if the assumptions used in this model work, and neither costs nor revenue are therefore independent variables of the number of suppliers in the marketplace. In that case it is unrealistic to assume that any number of additional supplies can be added to the market without having implication for revenue just as it is unreasonable to assume that any number of suppliers can be added without having implication for marginal cost.
I accept the difference in price may be very small, but that does not matter. In fact it is critical because this is the fundamental error of economists. When using this model they assume that a very small change in price, which is what the last producer will in fact induce, approximates for all practical purposes to zero, and can therefore be ignored. Unfortunately, chaos theory shows that even the smallest of numbers behaves completely differently from zero. That is the whole basis on which chaos is based. The neoliberal economic model has never noticed this. That is because it is based upon poor mathematics which creates a lousy approximation to science which is used for political purposes to advance a particular philosophy which requires the believer to accept leaps of faith that any rational, observing human being would consider quite ludicrous if they were aware of them.
One of the things that will be swept aside as a consequence of the current financial crisis is neo-liberal economics. Much of what is taught as economic theory will have to go with it. We will be better off for its demise.
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“To take an example of the first, and to highlight an issue which underpins the whole of neoliberal economics which is based entirely upon this mistaken philosophy and methodology, it is assumed that markets, and markets alone, allocate resources efficiently within society.”
No it isn’t, don’t be so absurd! There are vast areas where we know (and insist quite vehemently) that markets will not produce an optimal resource allocation. Public Goods for example. The fact that markets will not produce such an optimal allocation is why “neo-liberals” (in the main) support things like copyrights and patents, because for non-rivalrous and non-excludable goods (ie, Public ones) we agree that market allocations are non-optimal.
The difference here between neo-liberal and US style liberals is only over which areas markets do or do not provide that optimal allocation. We all agree that sometimes they do and sometimes they don’t, the trick is in knowing which is which.
“This logic that well-being is maximised when profit is maximised is, however, entirely untrue. ”
Entirely a straw man. Monopolies maximise profits yet we rail against monopolies from the neo-liberal pulpit. We rail against them because we can prove that those maximised profits come at the expense of the well being of the consumer (and or labour force in some circumstances). We are clearly therefore not arguing that well-being is maximised by profit maximisation.
“Second, the model only works on the basis of revealed preferences i.e. that if I prefer A to B and B to C I will prefer A to C. Everything that I know about human behaviour suggests that this is an entirely inappropriate conclusion.”
This is not revealed preferences. It is consistent preferences. Revealed preferences is something quite different: don’t listen to what people say they want, watch what they actually do. This will reveal their preferences to you much better than what they might say out of politeness or social or political conformity.
“Third on the basis of this idea it presumes that there is always a downward sloping demand curve for any product and always an upward sloping supply curve meaning that a single, discreet and permanent equilibrium state for the economy can be achieved.”
We most certainly do not think that a permanent equilibrium state can be reached. We are the people who insist that because technology continually changes no permanent equilibrium can be reached. As to supply and demand curves we say that in general they slope those ways and acknowledge that sometimes they do not (as in the case of Giffen Goods and to some extent for Veblen Goods as well).
“relatively simple to prove that demand curves can be upward sloping and supply curve downward sloping for the same product at different points”
Indeed, so simple that it’s used as a demonstration. When you’re limited to half a litre of water a day your demand curve for it is almost vertical. When you’re drowning in it you’ll happily pay someone to take it away, making your demand curve slope upwards. This is a triviality….the insistence is that almost all of the time with economic goods then curves do indeed go the way we say they do.
As before, your critique fails because you don’t in fact understand what it is that you’re trying to critique. You quite literally do not know what you are talking about.
Tim
Good to see we’re back to ridicule again
You note the exceptions, maybe
The trouble is we’ve had almost thirty years based on the first semester stuff which does, despite all you say, underpin neo-liberal economics
But of course, as two economists we disagree. That’s inevitable. If it really were a science that might be harder, except of course scientists have reached the point where they realise they are just looking at models and the choice between them is subjective. Economists of your ilk simply argue you’re right. and condemn all those who disagree as not knowing what they’re talking about. Which is, of course subjective judgement, not science, which is I think where we came in.
Richard
A couple of things: I do not even pretend to be an economist. The most I ever describe myself as is an interested amateur. An undergraduate degree 25 years ago qualifies me as nothing more than that.
The second: “The trouble is we’ve had almost thirty years based on the first semester stuff”
No, we haven’t at all. We’ve had decades where the exceptions to the first semester stuff have become public policy. Think of the London Congestion Charge. That started out with (now Sir) Alan Walters in the 1950s (yes, really, Maggie’s economic advisor). We at the ASI (before my time there admittedly) were vociferous cheerleaders for it. Precisely because we saw that congestion was an externality and that we need some method of either creating a market in it or taxing it so as to bring it into the more general market economy.
I would repeat Dani Rodrik’s point that I made on the last post. Neo-classical economics is best thought of as a toolbox with which you can attempt tp make sense of the world around us. In this sense it is like calculus, or statistical methods, a series of routines and tests that you apply to see if what you’re proposing either makes sense or is viable.
As was done with that congestion charge, amongst a huge number of other things greatly to our benefit over recent decades.
Richard is right about the faux scientific status of mathematical economics. To quote Keynes: ‘It is possible, under the cover of a careful formalism, to make statements which, if expressed in plain language, the mind would immediately repudiate’; Keynes, CW VIII, p. 20.
Holy Cow, you think economists have never heard of model uncertainty? . Stop embarrasing yourself!
Couple of good articles
http://www.sciam.com/article.cfm?id=after-the-crash
http://www.sciam.com/article.cfm?id=fix … ial-crisis
The first issue is that economics assumes humans are molecules.
Big mistake.
Second issue
That humans decide rationally
Bigger mistake.
Third issue
That money is the only currency of decision
HUGE mistake.
[…] train together last week, but he’s hitting a parallel theme to one addressed here. I’ve argued economics is not a science. He is arguing accountancy isn’t either, arguing that we should reject claims that accounting […]
Luis
As Keynes rightly said, you can’t model uncertainty. You can only model risk.
Uncertainty is an ‘unknown unknown’ to quote Mr Rumsfeld and therefore unmodelable
It was people making your mistake (based on all the assumptions I have noted) who created the models that have brought the world economy to its knees
Richard
Tim
I do not deny people have tried to overcome the faults in the model. Some such attempts have helped us make some progress.
None of which changes the fact that the fundamental model is flawed and needs to be replaced. The simple fact is only the wilfully blind (let’s call them fundamentalists) could think neo-liberal economics models the world we see all around us.
What it does do is describe a world you’d like. That’s subjective politics, I accept. It is not science.
You have not addressed that issue.
Richard
Again, Holy Cow! Clearly you did not actually look at the links I provided. Model uncertainty isn’t about trying to model uncertainty, it’s about handling the problem that many models may fit the data equally well, making the choice of model somewhat subjective. In relation to your observation: “Of course scientists have reached the point where they realise they are just looking at models and the choice between them is subjective.” Your suggesting being that economists don’t know this, mine point being that, in fact and of course, they do.
Please try to consider the possibility that economists are a bit smarter than you paint them to be and that your perception of economics might be innaccurate. Just roll it around your head, see how it feels.
Luis
I did just that as an undergraduate
I remain convinced I was right then
And I am sure I’m right now
Have you noticed the mess economists have gotten us into? And you still think the model is useful? Pull the other one
Richard
“I did just that as an undergraduate
I remain convinced I was right then
And I am sure I’m right now”
Extremely amusing Richard.
It turns out that we both did the same degree. Economics and Accounting, you at Southampton, me at the LSE. Yet we seem to have learnt entirely different things from the economics part of said degree.
You rail against the simplicity of first semester economics and thus appear to reject the entire subject. I seem to have paid attention in the later semesters and understood that the simple caricature is just that, a simple caricature. It is when we start to look at why and when that caricature does not hold, when we look at what happens with, say, imperfect information, that we can start to design programmes that benefit the real world.
I’ve already mentioned the congestion charge, I’ve pointed to the treatment of externalities implicit in the cap and trade/carbon tax debate, I could go and point to the way in which the entirety of the IPCC process and the Stern Review are based on the neo-classical toolbox and methods of reasoning and analysis. Why, we could even mention such things as welfare reform. Based, as it is, on the work of Richard Layard and his analysis of the Phillips Curve (more specifically, his point that while there may be no stable relationship between inflation and unemployment in moving along the curve (as Friedman used to empahsise) it is still possible to shift the curve).
As you say, you’ve rejected the entire subject on the basis of that first semester encounter with it. You’ve entirely missed the point that the interesting and useful stuff comes later.
Please note that Richard Layard is now a Labour peer, very definitely not some uber-neo-liberal as you would no doubt like to describe me.
But to return to hte main point. If you cling to such an absurdly reductionist caricature of what economics is, what it isbased upon and how it can be used you will end up eternally bamboozled by what serious economists are trying to tell you about how the world can be made a better place. And yes, that does include such things as Layard’s prescriptions for welfare reform, the relative merits of cap and trade or carbon taxes, how to deal with the Commons Tragedy of overfishing and so on.
Tim
You make a number of incorrect assumptions.
First, I did not ignore the later stuff. Indeed, I note that you entirely ignored my own more complex criticism.
Second, I did not give up on economics. I realised it is no more than a faith system – call that a model if you will – and that this one was fundamentally harmful for a number of reasons: the assumption that greed was good and consumption is limitless are just two examples. I also appreciated these are hard wired into the system. You can’t get rid of them.
Third, let me be clear: carbon trading will not solve the Green issue. It is part of the problem now, not the solution. It shows why the toolbox is inappropriate.
As for Layard, so what he’s a Labout perr. Let’s look at what he proposes. It is payment for cognitive behavioural therapy. A quick course of getting oneself used to the predicament you’re in might be a good way of describing it. Of accepting you have to buckle down and accept the appalling lot life has afforded you.
NO!!!!! Most people who he would give CBT to should be very very angry, which is what causes depression. They should be angry with a system of which Layard is a part which says it’s OK to treat them as the bottom of the pile, pay them insufficient, provide them sith appaling housing and then say ‘put up with it’.
So I’m sorry: you just keep reiterating your theme, that there is a market to get us out of everything. You’re wrong. Very, very wrong, but it’s the only club your model has got at the end of the day. Not a good way to play golf so I’m told. Not a good way to do economics either. It guarantees we all lose. That’s why the model has to go. That’s not the end of economics: it’s the end of your economics. Not at all the same thing.
But have a happy Christmas all the same
Richard
Richard, you are rather confusing two different areas of Layard’s research. His ideas on welfare reform come from the early to mid 80s. They are what provided the intellectual underpinning for the US reform of the welfare system under Clinton, then the Wisconsin method, “Welfare to Work” here in the UK and so on. That’s entirely different from his work on happiness which has led to his recommendation of an extension of CBT. Separated actually by some two decades in time, if nothing else.
You also make two appalling mistakes. “the assumption that greed was good and consumption is limitless”
Greed is good is a line from a movie, not something from the considered thoughts of an economist. I know of none that claim that greed is in fact good. I know of many who point out that it appears to be an immutable part of the human psyche and that it thus needs to be channelled to productive, rather than destructive ends, but that is a very different matter indeed.
Similarly, the thought that consumption is limitless is a rejection of the central stricture of all economics. That we have unlimited desires but limited means of satisfying them. Thus we must choose. If consumption possibilities were limitless then there would be no economics at all. Indeed, those items which can be consumed without limit are often refered to as not being economic goods.
We do say that consumption can increase from current levels….but only if production also increases to allow that increased consumption. That is usually taken to imply some combination of increased technology and increased resource use. But it’s a gross error to assume that increased resource use is necessary to provide increased consumption. Even Hermann Daly, high priest of sustainable economics, doesn’t make that mistake. He points out that a more productive (ie, a higher technology) use of the available resources can provide room for more consumption.
Every time you try to provide some zinger to show that I’m, “wrong. Very, very wrong” you provide further evidence that you don’t in fact understand the subject under discussion.
We’re not talking about first term economics, we’re also not talking about whatever idiocies infect the minds of politicians. We are, or at least I am trying to, talk about a science, a toolbox, which can enlighten us about how to make the world a better place.
Which is, I assume, the goal of both of us and on that note, a Merry Christmas and a Happy New Year to you and yours.
Tim
Briefly:
1) I accept, I do not know much of that work by Layard
2) No mistake. Just look at the endless open graph to the north east that typifies the thinking of your school of economics where ‘more is always better’. your so called science never got over this maistaken assumption. I accurately describe it. Gekko neatly summarised it. We wouldn’t have the mess we have now if we had realised long ago that the free gifts of nature are not free – but your economics still treats them as such, and amkes a few corrections at the margin at best.
3) Sorry: I don’t accept your criticism. What you’re trying to avoid is the fact that your economics is a simple political manifestation of your belief (no more) in a particular form of political structure that I dislike. It has not made the world a better place: many of us think it is destroying it. But at least we’re honest enough to say that is opinion, albeit there is strong evidence to support it. Unlike you we do not claim objectivity. Those who allow for the possibility of error (as I do, but you don’t) are usually on the side of moderation, sense and the rational realisation that a model is not reality, and therefore always flawed. You’re not giving much sense of that Tim. It doesn’t help your case.
But no doubt we can continue later…..
Richard
“if we had realised long ago that the free gifts of nature are not free ”
Sigh.
I’ve already mentioned the economics of this. Garrett Hardin’s “Tragedy of the Commons”. First articulated under this name in the late 1960s it is now part of the mainstream thought of economics. As Hardin himself put it, when demand for a resource is lower than the renewable supply then we can indeed have Marxian (ie, open to all) access. As and when (if?) demand rises above that renewable supply then we need to limit access in some manner. We might do this by the allocation of property rights (or as Hardin calls it, “capitalist” or “private” ways) or we might do it by regulation (“social” or “socialist” ways, again in Hardin’s description). As Hardin goes on to point out which will work best depends upon the specifics of the particular resource in question plus the social structure that surrounds them.
There have been, for example, successful limitations placed upon Common Land both by enclosure (ie, a private solution) and by agreement amongst the commoners (a social one). The Commons of the ozone layer was protected socially, by making illegal the use of chlorofluorocarbons. The Commons was protected, at least in the US, from acid rain by a private solution, the creation of a property right to emit them, one which rose in price over time (very much the model for the current cap and trade efforts over CO2).
Various fisheries have been experimenting with both private and social solutions. The CFP is very much a social one and doesn’t seem to work very well. A number of solutions based upon private property rights to fish (with adjustments, to be sure) like those in Iceland, Norway, The Faroes and certain other fisheries (Alaskan halibut is a poster child here) seem to work very well.
You are again running with an entirely outmoded idea of what economics has to say about the matter under discussion. Nobody is running around saying that natural gifts (or, in the more technical phrase, “ecosystem services”) are free because everyone has absorbed Hardin’s point. That once demand for them exceeds supply when they are free (one way of describing this is once they become economic goods) we have to bring them into some form of regulation (which, as above, might be private or social) otherwise we will indeed end up with a Commons Tragedy.
No one dismisses or ignores this point. The only argument is over *how* to limit access to ecosystem services to what is sustainable, not *whether*.
You are once again showing your ignorance of what economics and economists are actually saying about the subject under discussion. Might I recommend you read what the UN’s “Millennium Ecosystems Assessment” says on the subject? Paying special attention to the part where they discuss how markets can and should be created so as to allocate such services? It’s an excellent example of how economics works I think. How an insight in the 60s leads to decent public policy being formulated some 30 years later.
Tim
You may sigh. Indeed, you need to sigh. Because no one believes you.
Even if some know this stuff, and they do, of course, your side of the debate ignore it. Most deny global warming. Most say it is not man made. Most deny it has anything to do with markets. And they do that for simple reason: they base their beliefs on the economic assumptions I have outlined.
Your claim that ‘everyone has absorbed Hardin’s point’ is so absurd that I am presuming you have lost touch with reality. Have you noticed growth remains an obsession? Have you noticed how markets are entirely dependent upon the creation of artificial wants to promote unhappiness through advertising to promote the consumption of yet more of the earth’s limited resources in pursuit of that growth. Haven’t you noticed that command of the resources to keep doing this underpins your chosen economic system? Haven’t you noticed it is that growth, pursued on the basis of the belief that consumption is king is and has no environmental cost that is destroying us? And what validates this? Neo-liberal economics.
You can argue for all you like Tim. The fact is this. Your model does not work. Worse, it is harmful, and that’s because it is built on the foundations I have described. You can try to engineer them out all you want – but it’s like trying to say a car should run on rails, not a road – at which point it becomes a train, of course. You’re doing that with neo-liberal economics – saying that it is not what it is and yet remains neo-liberal economics. No it isn’t. Either you’ve left market economics behind (and I find no evidence of that) or you’re plain denying the fact that it’s prescriptions are built on the basis of a goal for equilibrium based on mathematical models whose assumptions I have noted – and which can be relaxed, in part, but without ever altering their pernicious influence
But let’s get back to the main point: whichever way you look at it – this is not science. It’s subjective analysis based on human assumption – and that was the point I made at the outset.
And I stand by it.
Richard
“Have you noticed how markets are entirely dependent upon the creation of artificial wants to promote unhappiness through advertising to promote the consumption of yet more of the earth’s limited resources in pursuit of that growth.”
They are? Entirely dependent? You might want to write that up formally, no doubt a Nobel awaits. You may have noticed that we have a housing market in the UK. Not a very pretty one at present to be sure, but you’re saying that it is entirely driven by advertising? That there is no innate desire in human beings to have shelter? That the entirety of the worldwide clothing market is driven by coke fuelled fiends in Soho? Even where there is no advertising for clothing? None of this comes at all from the desire to clothe our nakedness? That a food market in Somalia, or Niger, or Vanuatu is driven by advertising? And not by the desire of people to feed themselves?
You’ve missed that bit of Adam Smith where he talks about the innate desire of human beings to truck and barter? The recent research that shows that trade, specialisation and the division of labour predate the very existence of Homo sapiens? (This should be evident to anyone who looks at the evidence we have of millions of years of flint knapping.) Trade, specialisation and the division of labour all, of course, imply the existence of markets.
You’re falling off the edge from slightly odd views to the near insane. We’ve had markets since before there were human beings so to insist that they are dependent upon advertising and the creation of wants thereby is real loonie tunes time.
“or you’re plain denying the fact that it’s prescriptions are built on the basis of a goal for equilibrium based on mathematical models whose assumptions I have noted”
I’ve already dealt with this. I’m from the side that denies equilibrium will ever be reached because technology is always changing, remember?
Tim
Respectfully, it is getting somewhat difficult to argue with someone like you.
To ask me to compare the madness of present day consumerism with Somalisa is somewhat insulting to Somalia and the plight that exists there – a plight in part fuelled by the market you promote.
What is quite clear from this debate are three things:
1) You have not sought to answer the question
2) You have ducked the difficult points (like the one on maths)
3) You argue as if there is a world of black and white. Patently this is not true and to extrapolate a comment made about a Western consumer driven market (where most clothing is not bought for warmth or decency because the purchaser clearly has sufficient already to meet that objective) to a totally different circumstance suggests it is not me who is arguing in absurdum.
I do not suggest markets do not exist without advertising. They do. I actually have no problem with markets. I do with the way they have been used to promote the abuse of the earth I live on and the people I share it with. That abuse has been promoted by a political creed, driven by a group in society who claim their opinion is objective when that is untrue because it is based on a set of assumptions which may have been acceptable when they were first created but which are wholly unsustainable now and who argue (as you do) that those who oppose them are insane.
At which point I note you are back to Schopenhauer’s point on ridicule again. Which probably suggests you’re on the losing side.
I can live with that. I think you are.
And I admit that I’m bored by debating this with you. I prefer to deal with those who seem to at least relate their arguments to the real world. Galbraith was such a man. He of course did notice the pernicious impact of advertising and became the greatest economist to never get a Nobel prize. That’s because your side blocked him out. Which was a loss to the rest of humankind.
Debate over Tim, simply because you’ve failed to make your case despite having had ample opportunity to do so.
Richard
[…] Does Ritchie know his economics or not? […]
Richard:
In comment 16, you wrote: “Have you noticed how markets are entirely dependent upon the creation of artificial wants to promote unhappiness through advertising to promote the consumption of yet more of the earth’s limited resources in pursuit of that growth.”
In comment 18, you wrote: “I do not suggest markets do not exist without advertising. They do.”
Which is it to be?
Also, Tim did not ask you to “compare the madness of present day consumerism with Somalisa is somewhat insulting to Somalia and the plight that exists there”. He was making an example as to why your statement in comment 16 (that you appear to have backtracked on) was so daft.
This: “I prefer to deal with those who seem to at least relate their arguments to the real world.” is just silly, too. You don’t appear to handle disagreement with someone who does not share your worldview very well.
Ding dong! as they say. It is such a pity that the substantive arguments are left unanswered. As a non-economist interested in the social outcomes, it seems to me that Tim has lost an opportunity to engage with the more substantive social points in Richard’s argument.
“it seems to me that Tim has lost an opportunity to engage”
Delighted to continue but Richard seems to have drawn a veil over my attempts to do so. “Debate over Tim” is something of a clue.
What “substantive social points” were they, Dennis?
[…] Tax Research UK / Is economics a science? […]
Richard, you seem to be very confused about lots of stuff. But the point about economics being a science is that it uses models to describe the world. It has lots of models in the toolbox. The point about models is that they describe something, but they are not what they describe. They are useful if what they describe is close to what happens – that makes them useful because they enable prediction.
Where you are at is not science. You are also not debating. The summary of your argument is simply “oh no it isn’t”. If you are bored with the “debate” then you only have yourself to blame.
Question That
I absolutely disagree
I accept that my statement in 16 might have benefited form the addition of the word ‘almost’ but only marginally so
The reality is that to compare the ‘market’ in the UK with the market in Somalia is absurd. It is the absurdity at the core of neo-liberal economics. It is the explanation for the massive harm that that dogma ha caused Africa. It is clear indication of the idea that ‘one size fits all’ and that whatever the evidence of the situation the dogma must be followed.
I entirely accept that in Somalia advertising does not have significant impact on the market. But let’s be clear: there is little in the way of a functioning market in Somalia either: there is little capital, there is no regulation on which a market depends and private property is defended with a gun. Are you really saying that this is comparable with a Western economy and the evidence of one can be translated to the other? The IMF and World Bank have. Africa weeps as a result. I will not share in that mistake even if you do.
So let’s ignore Somalia as a model of an economy for a moment (it’s not hard to do) and look at the UK, 2008. Try buying a product which is not influenced by advertising. Yes, I can think of what might be called examples – the fruit and veg on the market in my town, some bread sold there is unbranded (but isn’t it extraordinary that it is so hard to find an unbranded product?). But even that is not really a reflection of the absent power of advertising. Part of their appeal is the very fact that they are precisely that: unbranded, sold in a location where the quality of the product is enough to make it sell, or not. It’s an exception that proves the rule.
So there is nothing whatsoever inconsistent in my logic. I’m just suggesting I can see beyond the dogma to the evidence before my eyes. One of the great weaknesses of the economics that has underpinned neo-liberalism is that this is not done. The model rules economists, the evidence does not. You cannot job in a university unless you allow that to be the case. It is why we have economics of trade that ignores tax havens. It’s why we have Mike Devereux and his crew at Oxford University claiming that the one man band company and BP behave the same way for corporation tax purposes, and show their thinking to be irrelevant to the real world as a result, and it’s why we have people claiming they believe in the market when they refuse to see that the market is not made up of free agents making informed decisions from positions of equal standing.
Tell me time and again if you wish that all of these assumptions can be relaxed and I’ll (possibly) believe you. But the policy is based on the simple model that the market rules, that there is a stable equilibrium, that the gifts of nature are free (and should be free) and that profit maximising (or ‘greed is good’) is what business is all about.
It’s wrong. Which is why I’ll begin to publish an alternative soon.
Richard
“But the policy is based on the simple model that the market rules, that there is a stable equilibrium, that the gifts of nature are free (and should be free) and that profit maximising (or ‘greed is good’) is what business is all about.”
Only one out of four there correct Richard.
1 “The market rules”…..except when it doesn’t. Any and every economist accepts, even insists, that markets do not provide the optimal outcome in all cases. As I’ve pointed out above this is true for public goods: even the most viciously right wing (or “neo-liberal” if you prefer) would include defence, the criminal justice system and almost all (Larry Lessig perhaps excluded) would accept copyright and patents as at least one valid way to correct what would be a pure free market and non-optimal outcome (others like Dean Baker have different ideas of how to do this but almost all agree that the pure free market outcome is non-optimal).
The argument is not that all markets all the time produces an optimal outcome. It is not over whether interventions can improve upon market outcomes. It is only over *when* do interventions improve upon market outcomes. Again, as I mention above, the existence of externalities leads to “neo-liberals” not only accepting but actually campaigning for certain interventions: as with the London Congestion Charge.
2) “Stable equlibrium”. No, we do not argue that there is a stable equilibrium. Technology changes, desires change, thus there is not and will not be a stable equilibrium.
3) “Gifts of nature are free (and should be free)”. No, we do not argue so. See above. Certainly, when demand for a gift of nature is below the sustainable supply we argue that there is no problem with it being treated as free. But we are the very people who argue that a price has to be put on those gifts when demand exceeds sustainable supply. Again, see above.
4) “Profit maximising is what business is all about”. Yes, this is the one you’ve got correct. But there are provisos of course. For example, only profit maximising where one is indeed taking account of externalities (again, see above). For a business maximises profit in the long term by servicing the desires of consumers. And that is what it really is all about, how best to organise the various resources available to as to maximally (to the extent which is possible at current levels of technology) satisfy the desires of, to maximise the utility of, the population.
It is in the field of international trade that the economists have done the most damage: by forcing poor countries into totally unequal relationships, denying them the protection they need (and which no developed country has succeeded without). This stems from simplistic classical economics.
Glad to hear that Chavez is now seeking to reclaim another part of the commonwealth of Venezuela for the people – the gold mines.
All land (and natural resources) should be treated as belonging to the whole community, with rights to exclusive use paid for on an annual basis, to account for the varying value of such resources (i.e. rent), otherwise the land market is all externalities and it is entirely dysfunctional. This is particularly true of Africa but we here are suffering as result of a land price bubble.
The classicists understood about land but the neo-liberals have succeeded in conflating land and capital. However, even Keynes did not understand the importance of controlling the land market as well as money.
“with rights to exclusive use paid for on an annual basis”
Carol, again, you’re falling into the trap that Richard does. You’re assuming that this isn’t well known. You’re talking about Land Value Tax there and as horrendous (to you Iimagine) classisist as Milton Friedman supported it. As to ownership of the national resources, there’s more than one way of doing this. There’s direct ownership which, as with other industries directly owned by Government, seems not to work very well. Or one can tax the Ricardian rents: which is what most countries do. We in the UK for example impose an oil royalty upon North Sea oil. The Treasury gets the money without having to actually run the rigs, something they might not be all that good at. British Gas pays 75% profits tax on gas from the North Sea, another way of doing the same thing.
I’ll admit that there are times and places when irect ownership has indeed worked: Chilean copper is a good example. But your seeming asumption that governments don’t benefit from the natural resources found on or under their soil is simply wrong. They just don’t always do it by direct ownership.
About international trade: my objection to your stance there stems from the way in which you inisist that “the nation” is the natural unit of trade. I simply don’t agree. Trade benefits the individual. By restricting trade those poor nations (as with any other restrictions upon trade) simply make their consumers poorer to the benefit of the local producers. That’s really not something I’m comfortable insisting upon, that the poor peasant should pay more for fertiliser, for farming tools, for clothes, so that the local, politically connected, capitalists can make higher profits.
Once you accept the benefits of voluntary exchange, whether for the individual or the household, I cannot see that there shouldbe citywide, regional, county or national restrictions upon it. The natural free trade area is the globe.
Richard – contrary to the opinion you have expressed I did not use the term “Marxist” to refer to you (or anyone else) in an abusive sense. I simply wanted to describe your way of seeing things and that description seems appropriate. Carol Wilcox put it very well in the opening of the third paragraph of posting no. 26.
Carol – I’m not sure how old you are or for how long you have been beguiled by Marx’s idealistic notions. Whilst Marxism certainly does provide some very powerful analytical methods to describe why things are as they are solutions based on Marxist/Leninist theory always lead to disaster. I think you will find that ultimately Venzuela suffers the same fate as all the other places where Marxism has been applied. Why this should be so I am not sure – possibly it is because it is contrary to human nature and always results in the Thought Police having to enforce the theory at the point of a bayonet.
I have to admit I’ve given up on this thread
I’ll quote Dennis Howlett, who I note has commented on Tim Worstall’s blog , saying:
“What’s the matter with many of the commenters here who seem satisfied with ridicule instead of engaging with the substance of the arguments Richard Murphy put forward? There is no requirement to agree but simply describing him as ‘unfit to opine’ without addressing the points seems undignified at best. At worst, den’t that expose such comments as arrogant fools? Seems that way to me.”
Tim added a comment to Dennis’ (somewhat arrogantly I thought) saying that I could not be argued with because I did not present an argument.
Actually, I did. I said economics was not a science, but is a subjective human construct. It’s a point no one seems to wish to engage with. Instead Tim and his cohort simply argue I’m wrong. No, I’m not is my response: I’m offering a different opinion, which is not the same thing at all, not if my argument that economics is a subjective human construct is right. Which brings me straight back to the fact that Tim and his cohort have not sought to address that point. And it is the arrogance of saying I am wrong while refusing to engage with the issue I have raised that I suspect Dennis is referring to.
There is, however, another reason for not engaging further. I note some of the rather offensive comments on Tim’s blog. I am quite sure neither Dennis or I would allow such ad hominem attacks, all unfounded. But Tim comes from a very different part of the political and, might I say it, social spectrum. Tim is a clever chap, I will not dispute it. There is, however, something very unpleasant about his methods. He tries to engage as a reasonable person on this blog, and then goes back to his own blog, hurls abuse and waits for his sycophants to come back with ad hominem, crude and sometimes blatantly inappropriate comments, all of which, I am sure, fuel his ego, but more sinisterly, fit into a pattern of political behaviour most commonly associated with the far right. The BNP work in this way, for example. I’m not suggesting Tim has anything to do with them, or their racist opinion, but Nick Griffin also seeks to appear reasonable in public debate, but relies upon working his audience of thugs behind-the-scenes and in his own domain to secure his support.
The object of the aggression ( and it is much worse on some other sites whose authors have chosen to comment here in the past) is simple. It is to frighten people away from the debate to secure the space for the far right. This is the work of extremists.
I seek to work in the mainstream. No one in the mainstream would allow the type of comment, attack, or abuse that Tim Worstall allows onto his blog. As a result I am satisfied that he is an extremist working outside the mainstream of UK politics, but who has intention to undermine it.
It is why I have decided to ignore his comments from now on. It is why the mainstream needs to eliminate this type of attack, which also seeks to suppress debate on sites such as the Guardian’s comment is free, if only by overwhelmingly out-posting these people, and it is why we need to name the likes of Tim Worstall for the extremists they are.
No doubt Tim will have a lot of fun abusing this. I can live with that. Someone has to name him (and his like) as a threat to democratic debate. I do.
Tim, I know that Milton Friedman considered land value tax to be the best of a bad bunch. If as you say the land question is well known, why don’t economists endorse the obvious solution? By the way, the LVT movement has many rightwing supporters – why don’t you join them?
So far as mineral resources are concerned I only say that there should be recognition that they belong to the ‘people’ and ways sought to ensure that the full rental value is paid to the many not the few directors and shareholders. In the case of Africa and S. America nationalisation seems the only way to wrest them from the multinationals which have appropriated them.
Clarke, I am not a Marxist, just against capitalism. I believe in a market economy based on common ownership (not nationalisation) of the means of production, along the lines of the Spanish Mondragons. Policies needed to achieve this have never been tried yet. But few economists are interested, they just seek to maintain the status quo.
Having read Tim for quite a while now, I am amused to hear him called an extremist.
I go with a former boss, who said “All economists and psychologists should be sent to two desert islands, the males to one and the females to the other, then the worlr would be a better place”.
Bye, Richard.
Alan Douglas (applying to become Tim Worsthall’s thug, next)
Carol, can you post some links. To me the terms “market economy” and “social ownership” are mutually exclusive, but I’m always interested in reading new ideas. and something that can encompass both could be very interesting.
Richard, I look forward to your publications of an alternative to “economics” you may have more luck in having a debate you like, if you have something to promote.
This is Jerry Jones’ paper – I am the world’s first Jonesist: http://www.l-r-c.org.uk/policy/discussionpapers/CommonOwnershipLEAP.pdf. Jerry is writing a book on economics from first principles – hoping it will be published next year. He is actually a scientist.
As a threat to democratic debate? As far as I can tell, Tim Worstall has never threatened anyone, and has always stood for democratic debate.
Please, show one instance where Tim has threatened you, or anyone else, and has shown a desire to close down debate.
All I have ever seen is him successfully demolishing your arguments. If you can’t take that, maybe you should stop posting or re-consider your positions.
Tim
Of course you agree with Tim – so you will not see the threat
Dennis Howlett did. Is he also wrong?
Is allowing comments of the sort he publishes informed debate? I do not think so. Try putting them on blogs where informed debate is promoted and see how long they would last
Which is precisely my point about his style
Richard
Richard,
At risk of being ignored, but I shall try anyway…
“Is allowing comments of the sort he publishes informed debate? I do not think so.”
The point is not that of “informed debate” (something of a subjective term in any case) but of allowing all debate. This is a free speech issue.
Like myself, Tim does not edit or delete comments (other than outright spam) as a matter of principle. That you do not like the tone of his comments — and the fact that Tim lets those comments stand — should not lead you to dismiss Tim’s arguments.
It is simply a different way of engaging: he and I (for instance, but we are not alone) simply allow all comments, whatever the tone (and often the bile is directed at us too).
That you choose to censor your comments is fair enough here, in your place, but should not lead you to condemn the way in which others run their blogs (to many, censorship of comments is even more abhorrent than the language in which many are couched).
Simply because they choose to run their blogs in this way should not lead you to dismiss their opinions or arguments in any case.
Let us say that I intensely disliked Polly Toynbee, and she then quoted you; then I announced that, because you have allowed her to quote you, I will not listen to any of your arguments whatsoever: would you not feel that this was a little unfair?
DK
The difference between the distasteful comments on the two blogs is that in Richard’s case they are directed against him, whilst on Tim’s blog they support him.
Richard 29… “I said economics was not a science…”
I think that part of your troubles with this thread is a different level of expectation, Richard. Science never gets to be certain or true. And in science, one uses the degree of accuracy and effort appropriate to the task and one borrows tools from other sciences as they are needed. One might make an analogy – in the context of this thread, first semester engineering would be Newton’s Laws. These are fundamental and the basic building blocks of mechanical systems. While they’re not quite “true” (because nothing in science can ever be that), they are good enough for 99% of situations in the real world.
With Newton’s Laws, one could build this…
http://www.flickr.com/photos/ralph-dot/2171724380/
but one would need a lot more tools in the scientific kitbag to achieve, say, this…
http://news.bbc.co.uk/media/images/40628000/jpg/_40628935_millauclouds_ap220.jpg
And bridges sometimes, despite our best efforts, fall down. And so it is with economics – especially when you give politicians a hand in the game. And so I think it is perfectly reasonable to call economics a science – just as long as you don’t start thinking that it’s the finished article. It’s work in progress like all the other scinces and it always will be.
Carol, Tim is indeed an advocate of LVT.
I agree that Neo-classical economics is based on some slightly dubious assumptions that’s why God gas us the Austrian economists…
Also in relation to goods A, B and C what Murphy describes is in fact called revealed preference.
Richard
You said:
“I said economics was not a science, but is a subjective human construct. It’s a point no one seems to wish to engage with.”
Again in comment 16: “this [Economics] is not science. It’s subjective analysis based on human assumption”
I’ll try and engage with you Richard. That Economics is not a science is a big claim and deserves a serious discussion, however I don’t fully understand why you believe that Economics is not a science. In the above quote you state that Economics is “not a science, but is a subjective human construct.” Are you therefore claiming that science is not a subjective human construct? Do you believe that Science is not based on “human assumption”? More generally what quality is it that a science (Physics, Chemistry, Biology etc) has that Economics fails to have? I’m guessing its the “subjective” part that Economics falls downs on, is this correct? If this is correct, what in Economics is subjective? (If you’ve already mentioned this then sorry, but could you just refer me to where it is mentioned, the discussion has already got quite long and it is easy to miss things.)
In comment 2 you say:
“as two economists we disagree. That’s inevitable. If it really were a science that might be harder, except of course scientists have reached the point where they realise they are just looking at models and the choice between them is subjective.”
There is plenty of disagreement among scientists; its just a bit less visible than in Economics, mainly because Economics is in the news every day. I’m not sure that you can point to disagreement among Economists as evidence that it is not a Science. Unless you have some way of measuring the amount of disagreement and can show that harder Sciences (say Physics) have less disagreement than softer Sciences and that Economics has significantly more disagreement than any Science, so much more that it does not deserve to be called a Science. Is this basically what you are claiming?
I also disagree with your claim that scientists realise that “they are just looking at models and the choice between them is subjective.” Take the example of Einstein’s Theory of Special Relativity. The basic equations were derived by Lorentz before Einstein’s famous 1905 paper (see Wikipedia http://en.wikipedia.org/wiki/History_of_special_relativity and http://en.wikipedia.org/wiki/Lorentz_ether_theory). While Lorentz’s theory and Einstein’s theory cannot be distinguished experimentally, Einstein’s derivation of the equations is obviously superior; I would not describe this as a subjective choice but an obvious and natural one, even though the basis for the decision is not observation. Do you have an alternative example which shows Scientists making a purely subjective choice between models? Indeed, what would “subjective choice” mean?
I think you make some good points about the over-use of Mathematics in Economics; it is often used as a cover for weak ideas. People who are not highly trained in Mathematics seem to be easily impressed by some fancy looking equations, and similarly those who have not been trained in Statistics are often too easily impressed by facts, figures and “analysis” of data. However I do not understand the point you made in the final few paragraphs of the main post (from the paragraph which starts “But let’s also look at just one of the numerous mathematical errors”).
You start by recalling the assumption that no market actor has any market power; that none of them have the ability to affect the market price in any way. You then claim that this is absurd because “If it were true that they would be infinite people joining the market,…” – I don’t understand the point you are making here – “…and yet it is assumed that a marginal operator exists” I’m afraid I cannot follow the rest of the argument at all. I’m not even sure what the conclusion of the paragraph is saying. Could you please explain it more slowly for me?
In the next paragraph you state that:
“I accept the difference in price may be very small, but that does not matter. In fact it is critical because this is the fundamental error of economists. When using this model they assume that a very small change in price, which is what the last producer will in fact induce, approximates for all practical purposes to zero, and can therefore be ignored. Unfortunately, chaos theory shows that even the smallest of numbers behaves completely differently from zero. That is the whole basis on which chaos is based. The neoliberal economic model has never noticed this. That is because it is based upon poor mathematics”
I’m not sure exactly what you are saying here, but what I think you are saying is that prices in markets do not change smoothly in response to changes in the behaviour of market actors, but that they behave chaotically in that we cannot predict how they will behave, as tiny fluctuations in the initial conditions will have a huge effect on prices in the near future. Is this correct? I think you are making the further claim that this is such a significant misrepresentation of reality that any model based on this assumption is utterly useless in all situations and should be discarded immediately. Is this also correct?
If this is the point you are making then the response would be: what you say is obviously true, but how relevant a criticism is it? Physics for example is full of utterly absurd assumptions and simplifications; the art is knowing when a simplification or assumption is significant, and when it is not. Chaos theory has shown that the solar system for example is not a stable system, and the Earth might spiral off into deep space (This observation was in fact the beginning of Chaos theory: see http://en.wikipedia.org/wiki/Chaos_Theory#History.) However if we make the (false) assumption that it is stable we can still use the model to help us understand the motion of the planets and other bodies in the solar system, and to make decisions about how to act. I think for the full strength of your criticism to be accepted you would have to demonstrate that the smoothness assumption held in so few situations that it was never a useful assumption. I don’t think that it is sufficient to point out situations in which it does not hold (we can all think of such situations), you need to show that the assumption rarely holds, even approximately.
Also I think it is worth pointing out that the Austrian School would accept much of what you say about the over-use of Mathematics, and the assumptions of orthodox economics, but they still accept that markets are the best way of organising economic life. You would need to say something about why their arguments in favour of markets are wrong.
There are too many comments here for me to deal with them all and have a life. I’ll opt for life.
Some however demand attention.
Menelaus and Robert Scarth make some appropriate points (although I admit I am not going to respond to Robert’s requests for clarification on some issues: I happen to think my original comments are self-explanatory, and appropriate comment on the mathematical absurdity of the model of perfect competition that is key to the promotion of the idea that markets efficiently allocate resources). The key point they fairly make is that science is also a human construct. And I agree. It is.
But let’s go back to the comment that started this whole debate. It was this:
“having studied it I feel justified in stating that economics is a science, and as such does not concern itself with politics. The fact that politicians might abuse economics does not change that – same goes for statistics.”
http://www.taxresearch.org.uk/Blog/2008/12/19/self-evident/#comment-528993
What I wrote developed from disagreement with that statement. Along the way we have lost that point: let’s revisit it. The author (Alastair) reflected a common misconception – that economics is a science, that science is factual and immutable and therefore economics is above politics and as such what he thinks it prescribes is right and all those who argue otherwise are wrong and so their politics can be dismissed as unscientific, irrational and harmful. It was this to which I was reacting.
Of course, it is true that science is just a human construct. The trouble is those who use economics to argue that they are the holders of absolute truth ignore this fact. Indeed, most economists do likewise, believing that neo-classical economics is the revealed truth of the only way in which the world order can work.
And my point was simply to rebut this. Maybe I over-complicated the rebuttal. But the point I was making was that economics is based on assumptions, and nothing more than that. As is very obvious we cannot agree on what those assumptions are, or whether they are right. That may be scientific. But what is abundantly clear as a result is that economics is not the ‘positive’, objective, value free study of facts that many economists claim. It is always, and without exception, a process of offering explanation based on the political pre-disposition of the economist.
That was my message. I think it abundantly clear that I am right in saying so. And if I am then the claim Alastair made, that ‘posiitve’ economists make, and which politcians of the Right who like to claim themselves profits of the revealed economic truth make, are all wrong.
I might say I rest my case. The dispute here seems to vindicate me.
Richard
Devil’s Kitchen
You’re quite right to wonder whether I’d allow your comment on here. I’ve read some of the vitriol and abuse that you obviously think it appropriate to write about me, and others, and your blog is another that deliberately encourages thuggish and aggressive behaviour in debate on the web on economic issues, with, I have no doubt, the intent of suppressing open and free discussion. Many would not wish to be treated by anyone in the foul-mouthed manner you use.
I make the simple point that your action is not reflection of a commitment on your part to freedom of speech. It is a deliberate attempt by you to exclude others from debate. You seek to deny reasonable, well mannered and civil people the opportunity to comment by making them fear abusive reaction.
This, as I have noted previously, is standard behaviour by right wing politicians working beyond the fringes of electoral credibility or possibility. The double speak that the likes of you and Tim Worstall use in your defense is likewise typical of that end of the political spectrum.
Thankfully you do at present remain beyond the fringes of political and social acceptability. I hope it will always remain so.
Richard
For those who wish to understand the point this may be illuminatinghttp://devilskitchen.me.uk/2008/12/murphys-law-tim-worstall-is-devil.html , as well as being a perfect example of what is considered rational debate by some of those taking issue here
We can only be grateful that you are available to let us know what is “political and social acceptability”. I would hate to have found myself engaging with the wrong sort of people.
I should however warn you that I have a very low sense of self esteem and any failure on your part to acknowledge this post with anything but the politest of language and appreciation may fatally undermine my willingness to ever comment again.
My freedom of speech lies in your hands.
“…the point I was making was that economics is based on assumptions, and nothing more than that. As is very obvious we cannot agree on what those assumptions are, or whether they are right. That may be scientific.”
We can all more or less agree with that sort of stuff. All science is a moving window on the world. As we learn more, we undermine previous assumptions and the model moves on.
But then you spoil it by saying this…
“But what is abundantly clear as a result is that economics is not the ‘positive’, objective, value free study of facts that many economists claim. It is always, and without exception, a process of offering explanation based on the political pre-disposition of the economist.”
That’s daft. A poor economist might very well allow his prejudice to cloud his understanding or to colour his presentation but that just makes him a poor economist and/or a dishonest scientist.
“I note some of the rather offensive comments on Tim’s blog. I am quite sure neither Dennis or I would allow such ad hominem attacks, all unfounded.
“There is, however, something very unpleasant about his methods …. sinisterly, fit into a pattern of political behaviour most commonly associated with the far right. The BNP work in this way … Nick Griffin also seeks to appear reasonable in public debate … This is the work of extremists.”
Interesting argument.