Saturday, July 16, 2011

Modern Physiocrats, Witch-Doctors and Their Pretensions

From ‘Quotation of the Day’ (July 14) at DON BOUDREAUX’s invaluable Café Hayek Blog (‘where orders emerge’) HERE:

From Hayek’s 1974 Nobel Prize lecture, “The Pretense of Knowledge“:

This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world. This view, which is often quite naively accepted as required by scientific procedure, has some rather paradoxical consequences. We know, of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information. And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.

The correlation between aggregate demand and total employment, for instance, may only be approximate, but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard there may thus well exist better “scientific” evidence for a false theory, which will be accepted because it is more “scientific”, than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it

This extract is well worth reading and considering, as we have come to expect from Don Boudreaux’s daily Blog (but I wish I could say the same about some of the comments he attracts from some of his readers) (follow the link to the Blog -but give the comments a miss).

Hayek puts his point so well and it is so relevant to the current cul de sac into which economic has driven itself under the influence of the ‘scientific’ mathematicians who drain it of much of its relevance as a guide to both policy and understanding, and are usually – nearly always – wrong in their predictions for the future, allowing for a minority, sometimes of only one, occasionally being right when ignored, because unquantifiable, events intervene.

Adam Smith is regularly criticized by many of today’s ‘scientific’ economists for his Wealth Of Nations being ‘obscure’ and difficult to read (apparently they do not appreciate 18th century literacy standards).

He was also given to drawing on empirical evidence (the quarterly prices of silver for example) that are no longer regarded as relevant, and for quoting from the statements of figures in Classical times, or, example, ancient interest rates in Cyprus and such like. That he was a competent mathematician for his times but chose not to use it to explain social phenomena is disregarded (mainly, I suppose, because facts about him are not widely known).

He sharply criticized the French Physiocrats for constructing a model of an economy that concluded that manufacturing labour was ‘sterile’ and erected an explanatory theory about this imagined fact, burdened with the handicap of it being utterly wrong.
Some modern economists (Jevons, Schumpeter, Rothard, etc.,) see Dr Quesnay’s ‘model’, and ignore the wrong policy prescriptions that Physiocrats claimed follow from it – but they praise its historic ‘scientific’ originality and denigrate Smith , as being ‘unscientific’, even a plagiarist, in some imagined race to be the ‘founder’ of economics.

Smith praised and respected Dr Quesnay; he didn’t agree with his theory of ‘sterile’ labour, a theory today that re-appears in the absurd idea that ‘services’ are less important – even parasitic – than 'proper jobs' in manufacturing; ironically, almost the reverse error of the Physiocrats disregard for manufacturing labour, who would have had society still dependent on agricultural toil.

Today their heirs would have us toiling in the ‘dark’ mills of heavy industry, still supplying the output of the Western ‘workshops to the world’, rather than supplying the world’s high-tech design and development, and all that goes with it in consumerism, entertainment, finance, medicine, life sciences, IT, and creativity.

There are serious threats looming, particularly in funding growth without unsustainable debts, and for as long as economists are bound by their obsessions with ‘scientific’ models that try to confine into 'thin' equations the complexities of high GNP economies, with large welfare policies, always worthy, but often unfunded, then the best brains of the profession are wasted in competing ‘witch-doctorism’, rather than enlightenment.

I think Hayek is worth a second look.

Labels: , , ,


Post a Comment

<< Home