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Economic Method

January 23, 1999

What follows is a rare example of a piece of journalism that deals directly with the topic of economic method, a subject that has been central to the development of Austrian theory from Carl Menger's time until our own. As informative as this piece is, it also illustrates the confusions that have long animated the debate.

Mises contended that economics is a deductive science of human action-- not a speculative moral theory, not a branch of mere history or engineering, and not a different application of the methods of the natural sciences. And yet the debates on method have tended to continually shift from one exaggerated emphasis to another.

January 23, 1999, Saturday
New York Times
Arts and Ideas

A Challenge to Scientific Economics


Ask economists in the baby boom generation why they became
economists, and any number will give some credit to Robert L.
Heilbroner. His 1953 book, ''The Worldly Philosophers,'' which has sold
nearly four million copies, is a ''Profiles in Courage'' of the great
thinkers who shaped modern economics. So it is somewhat surprising to
find Mr. Heilbroner increasingly critical of the economists he helped
inspire. They have missed the point, he says.

Mr. Heilbroner, 79, is at one end of a growing debate over
whether economics, as practiced today, is effective. Sure, economists do
a lot of good research, Mr. Heilbroner acknowledges. Some of it yields
important insights. But their models are too simplistic. They overlook
factors that shape the economic and social system and in doing so
forfeit the deep understanding achieved by an Adam Smith or a John
Maynard Keynes, two of his worldly philosophers.

''The worldly philosophers thought their task was to model all
the complexities of an economic system -- the political, the
sociological, the psychological, the moral, the historical,'' Mr.
Heilbroner said. ''And modern economists, au contraire, do not want so
complex a vision. They favor two-dimensional models that in trying to be
scientific leave out too much and leave modern economists without a true
understanding of how the system works.''

The worldly philosophers would have agreed.

''Noneconomic motives are an essential element of economic
theory,'' Joseph A. Schumpeter wrote in 1942, two years after Mr.
Heilbroner graduated from Harvard, where he had heard Schumpeter
lecture. A few years earlier, Keynes had said that ''no part of man's
nature or his institutions must lie entirely outside an economist's
regard.'' And Alfred Marshall, the 19th-century British economist,
warned that ''economics cannot be compared with the exact physical
sciences, for it deals with the ever changing and subtle forces of human

The shift from this way of thinking came after World War II,
when economics gradually ceased to be a social science and took on the
techniques of a natural science. Mathematics became the language of
economics, and computer models of the economy became the chief research
tool. These models require assumptions about the way markets and people
behave, assumptions that are often unrealistic, although in recent years
economists have fed more and more actual data into their equations in an
attempt to approximate the real world.

''If math is correctly used, then it can incorporate all kinds
of things that really make the analysis very much broader,'' said George
Akerlof, an economist at the University of California at Berkeley. ''The
best of this new work pays attention to psychology and sociology.''20

That still falls short of what Mr. Heilbroner has in mind. The
modern economists separated out the subjective, often intuitive
judgments that earlier economists had considered so important. These
were considered not susceptible to scientific inquiry, not measurable.

In the process, economists also squeezed out the word
capitalism, the once traditional name for the market system, with its
subjective connotation of class struggle between owners or managers and
workers and with its suggestion of the privileges that go with various
levels of wealth. The word capitalism rarely appears in popular
textbooks for Economics 101.

Explaining why, N. Gregory Mankiw, 40, a Harvard economist and
author of a popular new textbook, ''Principles of Economics,'' said:
''We make a distinction now between positive or descriptive statements
that are scientifically verifiable and normative statements that reflect
values and judgments. The question is, can you do positive economics
without normative economics. I think so.''

The science of economics, for example, has found that the causes
of extreme income inequality, a relatively new phenomenon, can be
objectively measured.

Those who are well educated are well paid in the American
high-tech service economy, and those who have not gone beyond high
school are not well paid. For Mr. Mankiw, that is a ''positive''
statement in that it is verifiable.

But left out of this finding are factors like job insecurity,
which tends to make wages more unequal -- whatever the education level -- and labor union bargaining power, which helped to equalize wages
until union power declined. These are subjective observations that Mr.
Mankiw or Paul Romer, a 43-year-old Stanford University economist, would
classify as political or public policy issues but not part of a
scientific explanation of the workings of the economic system.

''There was a kind of a hubris among earlier generations of
economists who thought they themselves could make the scientific
statements and then the value judgments,'' Mr. Romer said.

He likens an economist's role to that of a doctor who explains
what will happen if a cancer patient is taken off an aggressive program
of chemotherapy and radiation. ''You can let the pastor, the legislator,
the family and the philosopher struggle with the moral question of
whether to actually stop the treatment,'' Mr. Romer said, ''but what you
want from a doctor is correct scientific statements about what will
happen if.''

Keynes made no such distinctions. Drawing on intuition,
observation and his own broad experience, he concluded that the United
States and other nations found themselves stuck in the 1930's Depression
in large part because business refused to invest, although the nation
offered plenty of savings to finance investment. Keynes's sweeping
insight forever changed the way economists think about the way a
capitalist system functions. And Keynes, having found the problem, saw
no reason to be shy about solutions, calling for enormous Government
spending to offset the decline in business investment.

''Keynes certainly had a view of what was a good society,'' said
Robert M. Solow, a Nobel laureate in economics at the Massachusetts
Institute of Technology. ''And he tried to save society from itself.''

Leaving Politics To the Politicians

Modern economists reject such a role. Mr. Romer's father, Roy
Romer, the former Governor of Colorado, had to decide while in office
whether to cut taxes or spend more on education, a value judgment
properly left to politicians, in the son's view. ''I saw my father as
someone very skilled at what he does,'' the son said. ''I have sought to
be as skilled on the scientific side.''

The father chose more education, partly on the advice of his
son, who told him of the scientific finding of economists that income
inequality is a result of unequal education.

But in this sort of a case, science does not take you far
enough, says Mr. Heilbroner, an economics historian at the New School
for Social Research. ''You have to ask, what is the correlation between
high levels of education and high levels of wealth,'' he said. ''Is
education in our system a privilege of wealth and a function of the
class structure?''

These are questions that science cannot address but economics
must, says Mark Blaug, an economics historian. Otherwise, the findings
are skewed. ''There are so many things going on in the economics world
at the same time,'' he said. ''Not just standard economic forces, but
all the other elements that shape an economy -- politics, morals,
psychology, sociology -- and therefore economics will always be vague
and imprecise, more like history than math.''

Going beyond science sits easier with older economists like Mr.
Heilbroner or Mr. Blaug, who is 71, or Mr. Solow, who is 74 and, like
Mr. Heilbroner and Mr. Blaug, came of age as an economist in the 1950's,
while Keynesianism was still in its heyday and the cold war had not yet
helped squeeze value judgments out of economics.

Mr. Solow, however, is a pillar of mainstream economics. His
economic growth theory, in which he explained the interactions of
capital, labor and technology in generating economic expansion, is a
model of economics practiced as a science. He would never, he said,
''advise a student to go to work on the nature of the class structure.''

''You are condemning him to failure,'' he continued. ''We do not
know if there are applicable rules.''

And yet in an autobiographical sketch, he argued against
thinking of economics as science with a capital S. ''That is perfectly
consistent,'' he wrote, ''with a strong belief that economics should try
very hard to be scientific with a small s. By that I mean only that we
should think logically and respect fact.'' Fact, he said, should be
enlarged ''to include, say, the opinions and casual generalizations of
experts and market participants, attitudinal surveys, institutional
regularities, even our judgments of plausibility. My preferred image is
the vacuum cleaner, not the microscope.''

And gradually economics is moving this way. The younger
generation, while holding tight to its scientific approach, is
nevertheless opening up its equations, feeding into them all sorts of
new data from other disciplines, then trying, more than in the past, to
make the hypotheses fit the data. Surveys are increasingly being used,
and old assumptions -- that supply and demand, for example, balance at a
healthy level -- are being amended or put aside.

The new approach was on display at the recent annual meeting of
the American Economics Association, where economists at one session
reviewed their research into today's unusual spectacle of an
unemployment rate and an inflation rate falling together instead of
moving in opposite directions, as economic theory dictates and as they
once did. Drawing on psychology, the researchers have even tried to
quantify how people actually behave or feel about work. ''Our modeling
now is much more flexible,'' said Lawrence Katz, a Harvard labor
economist. ''I really think we are seeing a blossoming of a broader
social science field, where the core research techniques are maintained
but are supplemented with findings from other fields that were once
quite separate.''

Judging Numbers, Not Just Calculating

And Mr. Heilbroner applauds. But it is not, in his view, enough.
The questions that absorb the younger economists are too narrow, he
says. From Adam Smith's day, economics has always been an inquiry into
the nature of capitalism in its various forms, an inquiry that requires
as much history, sociology and ethics as it does science, Mr. Heilbroner

Economists, for example, cannot just chronicle the rise of
output as an economy grows. There must also be a judgment about the
quality of that output: Does it show up as more school construction or
warmer clothing in winter or as more channels of bad television programs
and higher pay for chief executives. That is how the worldly
philosophers would have thought, Mr. Heilbroner suggests in a new
chapter added to the seventh edition of ''The Worldly Philosophers,'' to
be published in the spring by Simon & Schuster.

''Economics will not, and should not, become a political torch
that lights our way into the future,'' he writes, ''but it can and
should become the source of an awareness of ways by which a capitalist
structure can broaden its motivations, increase its flexibility and
develop its social morale.''

* * * * *

For more information on economic method, see the Austrian Study Guide

For an excellent summary of the Austrian position, see Michael Prowse on methodology.

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