People have a strange habit of ridiculing economics for its assumptions and [benchmark] models of optimality. While modern mathematical economics (i.e., professional mathturbation) admittedly rely on sometimes outrageous assumptions that make most of the resulting predictions irrelevant, there is nothing ridiculous or unscientific about economic reasoning. In order to study the social world we need to consider and analyze what’s observed empirically from the point of view of the theory-derived counterfactual. Economic science necessarily begins with theory.
As Mises noted, in the social world there are no constant relations. Consequently, inductive number crunching based on (the seemingly irrefutable phenomenon) data cannot tell us much about the world. So we must rely on what we logically find to be necessarily true, and from it derive specific truths that help us understand observed phenomena in the real world. We thus create counterfactuals that help us assess and perceive what is actually going on, rather than blindly observe.
Interestingly, while economic reasoning is laughed at and ridiculed, people tend to place great faith in applied fields such as medicine as though it were a real science. So perhaps if economics were more like medicine, it would earn the respect as a science (side-effects aside)?
While simplified, what is considered “normal” in medicine are simple averages* or mode values arrived at by inductive (though sometimes voluminous) data sifting. Recommendations are hence based on what is rather than what should be (should, by the way, is considered unscientific). Granted, present average values may eventually be balanced (perhaps even corrected) by what has been learned about the functions of specific organs and the body as a whole, and about the impact of disease, malfunctions, etc. Yet these pieces of knowledge are also ultimately arrived at inductively, which means medicine suffers from a fundamental inability to identify e.g. harmful imbalances throughout populations (such that are due to long-lasting suboptimal cultural or eating habits, for instance).
The present revolution in how we view carbohydrates and fats is a case in point: medicine is of course able to measure the improved health values due to e.g. a “primal” diet (as one example), but is utterly unable to envision this result and, even less, make such predictions before the empirical observation has already been made. Instead, and based on the “normal” (average/mode) values of the population, we’ve been recommended to indulge in harmful sugars and grains and stay away from healthy fats. This is the problem of relying on induction, and while it might work well in the natural sciences, and is less reliable but likely more beneficial than not in applied natural science (such as medicine), it is impossible in the social sciences.
Imagine an economics relying on this type of approach. This field would have recognized poverty, starvation, and perhaps even slavery as the average state or mode of people in society, both at the inception of economic analysis and throughout history. We would then call this miserable state “equilibrium,” and base our explanations and policy recommendations on this empirically sound identification. Strange, uncommon, and “disequilibrating” phenomena such as prosperity, health, etc. would be statistical anomalies that could ultimately cause disruption of the established equilibrium; we might even choose to exclude them from our statistical analyses.
Economic models would show how societies successfully maximizing such misery (the mode, remember?) have little entrepreneurship, no property rights, and a despotic monarch (among other things). We would therefore conclude that a despot appears necessary to ensure the optimal state of misery, since the lack of a misery-enabling monarch would set radical processes of entrepreneurship, decentralization, and order in motion. These processes could undermine the state of misery and create pockets of prosperity, and perhaps – if no countermeasure is taken – overtake society and subject everyone to this disease.
Our policy recommendations would then be for a society to grant a single monarch absolute power, with the task and duty to stifle entrepreneurship and undermine property rights.
Had economics relied on similar methods as those employed in medicine, it would have been a worthless and dismal science indeed. Fortunately, economics is nothing of the kind. Instead, based on the undeniable truth that people want what they value and that getting more of it therefore makes them better off, we can construct theoretical counterfactuals to serve as “optimal” benchmarks when analyzing society. This is why economists can say that “yes, we are well of – but could be better off if…” This is also why economists can identify where and how suggested policies can or will go wrong. We can identify that waste, destruction, and suboptimalities will ensue, but not exactly when or exactly how much.
This is hardly ridiculous.
*For more on the fundamental problem of averages, see Louis Spadaro’s very enlightening essay “Averages and Aggregates.”
