Why economists are always right… or wrong

Oliver Woods has used Matt’s post on the trade off between equity and efficiency to launch an attack on the separation between normative and positive economics. Matt’s busy with real economics today so it falls to me to defend his honour. Oliver claims that

…any ‘rational’ observer would see that economics and politics/society/morality are fundamentally intertwined. They’re really more or less the same thing…

There’s a very good reason why economics and politics are entirely different beasts: economists can be right (or wrong), but politicians can never be right. Economists seek to describe the world with positive economics. This is the subject often referred to as economic science. The questions asked have answers. We may not yet know the answers, or our answers may be wrong, but there is a Truth out there. For example, do people buy less of a good when the price goes up? That question has a right or wrong answer. It doesn’t depend on your morals, your politics or your creed; your answer can be judged as correct or not by examination of the facts.

Political economists seek answers to normative, prescriptive questions. They aren’t asking how the world is, but how it should be. How high should the tax rate be? How redistributive should our welfare system be? These questions do not have a right or wrong answer. The answer depends on your morals and your politics. the science of economics has nothing to say about these questions. If you asked what the consequences of an increase in taxes would be then you’d be asking a descriptive, positive question that the science could answer. But when you ask what it SHOULD be then you’re asking a normative question outside the realm of science. Here there are NO right or wrong answers.

Woods appears to both criticise economists for not addressing the questions of political science, and attack economists for “…legitimis[ing] right-wing politics and economics”. I’m not sure how much clearer we can be about this. Economics takes no moral stance. It has no politics. It does not tell us what policies we should enact any more than physics tells us that we should build nuclear weapons and use them against civilian targets. WE may care about people, but the worldd we describe does not and so nor should our description of it.

  • Just to note, I did attack Matt’s ‘honour’. If you had read my post fully, you would’ve seen that I personally saluted Matt for talking about integrating equity into economics.

    Yet again, let me point out I (along with Adam Smith and virtually every political economist whose works I’ve read) does not separate morality and politics from economics.

    Indeed, these days when the term political economist is virtually out of fashion and a lot of economists really should be described with the term, you’d really have to wonder how assertions that economics takes no moral stance can be held up.

    In itself, you are actually political for ‘removing’ politics/morality from economics. It’s a stance that I see all too often from economists, particularly those of the neo-classical/neo-liberal persuasion.

    “WE may care about people, but the worldd we describe does not and so nor should our description of it.”

    Those are two normative assumptions.

    Finally, I’d like to ask you (and Matt) two questions.

    1) Do you personally view the market as a human institution or one innate to humans?
    2) Do you view Government involvement in the economy as interference in the natural order of the economy?

    And one thing, you guys should start posting who posts messages. It gets a bit confusing trying to work out who you’re responding to!

  • It was a turn of phrase, sorry if it bothered you. I did read your whole post.

    First, economics as a science is a recent development, so it’s hardly surprising that most political economists from history don’t separate the two. These days it may well be that the distinction between the practitioners of each is gone, but that doesn’t mean that the disciplines have merged. It would be sad for both if they had: if we don’t really understand the different techniques that need to be applied to different sorts of questions then we’re hardly likely to answer them well.

    Secondly, unless you believe that the world has an innate normative preference for what it wants to become, then I made no normative judgment in the statement you quote. If the world already knew what it wanted to become then most of the social sciences would be a waste of time anyway because describing the present would be a very bad forecast of the future. I prefer not to imbue the world with some sort of collective hive mind.

    Finally, in answer to your questions, I’m not sure what you mean by ‘the market’ but I do think that prices are a natural consequence of the scarcity of resources and that trade is likely to arise in most such situations. Whether the prices are explicit or not and what the nature of that trade would be are separate questions. I find your second question quite ambiguous, too. Government involvement may be termed interference in the ‘natural order’ whatever that is, but that interference may have beneficial consequences. Whether intervention is ‘good’ is a normative judgment that we economists prefer to leave to you political economists 😉

  • “Yet again, let me point out I (along with Adam Smith and virtually every political economist whose works I’ve read) does not separate morality and politics from economics.”

    That is because they were economists before the ‘positivist’ revolution which led to us cleaning up our methodology. There is a huge difference between economic science and political economics – economic science is not meant to come up with any conclusions on what should happen, political economics definitely has to.

    “In itself, you are actually political for ‘removing’ politics/morality from economics. It’s a stance that I see all too often from economists, particularly those of the neo-classical/neo-liberal persuasion.”

    Again, we aren’t removing it from the final decision, we are just looking a objective facts first – that is why we don’t have a bunch of economists deciding what policy should be.

    Finally, I’d like to ask you (and Matt) two questions.

    1) Do you personally view the market as a human institution or one innate to humans?
    2) Do you view Government involvement in the economy as interference in the natural order of the economy?

    1) The market is an institution, to survive it needs property rights etc. But prices are natural – even with a weak market the price exists in some implicit form.

    2) The government is just part of society – its something that is formed by implicit agreement between individuals (or possibly coercion in the case of a dictatorship etc). The government is like a firm, its an institutional factor. I think most economists would agree with that.

    “And one thing, you guys should start posting who posts messages. It gets a bit confusing trying to work out who you’re responding to!”

    We are the only two who don’t put our names – so you’ll know when its one of us 😉 . Generally we want to appear united by appearing under the same name (no-name), if we disagree we will start debating with each other 😉

  • Fair enough about the anonymity! I apologise for the length of the post as I am writing this on borrowed time at work so I shan’t be able to cover all the points brought up by you guys.

    That is healthy that you both do not view the market as a force of nature, a view doubtlessly held by neo-classical economists and monetarists like Milton Friedman, Alan Greenspan and such like.

    What interests me, however, is what I seem to note as something of a paradox in your explanation Matt of the Government/the state. You said:

    “The government is like a firm, its an institutional factor.”

    Aren’t firms separate to institutions? I mean, this is where I think neo-Marxist theory does have some serious power in economics when it defines the market as being entirely reliant on the Government (as you noted that property rights must exist) but even more than that, as the market in it’s present form is a construction. I guess this is where our analytical models clash fundamentally: I see the State as the upholder of much of the system of ‘free market’ capitalism and think that it is disingenuous to try and compare it’s role to a player in the game when it really is the referee :P.

    I do agree with you both that prices in a weak form are inherent in many economic systems (all though not all) and likewise that trade is relatively important to human society.

    Any serious look at economic history (a sad ‘normative’ ‘value-ridden’ casualty of the neo-liberal/neo-classical revolution amongst economic academics in recent decades) shows that some of the most fundamental aspects of the modern market, like the commodification of capital and international trade involving large scale currency transferral and consistent inflows and outflows of services, capital and even goods to a large extent, are very recent phenomena.

  • “monetarists like Milton Friedman”

    I’m not so sure. People oversimplify his ideas in order to fit them into their own frame. He was a logical positivist, implying that if the data told him something was a fact he would stick with it. In a sense I’m not sure if this is what other economists practiced when they said they were being logical positivists, but thats a story for another day.

    “Aren’t firms separate to institutions?”

    The way I see it an institution is the name for a holistic object that involves a number of individual agents. Economists tend not to analyse things institutionally as they are methodological individualists. In modern times economists have become more interested in institutions as bodies that are formed through the action of individual agents.

    A firm is a web of contracts between individual people, this web of contracts appears to be an institution to me.

    “I see the State as the upholder of much of the system of ‘free market’ capitalism and think that it is disingenuous to try and compare it’s role to a player in the game when it really is the referee :P.”

    From my methodological individualistic point of view, the government acts in the same way as a firm – its power comes from a web of social contracts with people in society. In this way, the government appeared in order to solve issues that evolve in society (eg the prisoners dilemma), however just like any other institution it can be subject to problems. Fundamentally, individuals are what makes up society, but it is the relationship between individuals that forms institutions such as government.

    “some of the most fundamental aspects of the modern market, like the commodification of capital and international trade involving large scale currency transferral and consistent inflows and outflows of services, capital and even goods to a large extent, are very recent phenomena.”

    I don’t know, there have been large inflows and outflow of capital and services for many centuries now. Even ignoring that – the population and technology of current times has reduced the transaction cost of alot of this type of activity – thereby it has increased. Just because something doesn’t exist in one set of circumstances does not mean it should not exist now.

  • Pingback: The value of value « The visible hand in economics()