The Curious Capitalist at Time Magazine posts: “Is economics ideological by nature?” by Barbara Kiviat

It’s easy to rag on economics as not being a “real” science, and I try not to do things that are too easy. But in recent weeks I’ve really started to wonder. It is fascinating, and frightening, to me that smart economists can disagree about whether what the economy needs right now is more government spending or less. The debate isn’t about how much stimulus, or how much austerity, or the way such stimulus/austerity should be applied, but rather about which one is called for in the first place. How is this possible? It’s like a group of doctors not being able to agree whether a patient’s blood should be thinned or coagulated. What am I supposed to make of that?

Let’s be technical for a moment:

No titleWhether we do better governing with econometrics than random guessing, or by asking the average man on the street, or than relying on traditional wisdom, or better than interpreting a deity, or even interpreting entrails, is yet to be proven. In fact, it appears from the data that asking a random person on the street is a better predictor than any economic model. — And anyone who tells you differently is not scientific but ideological. 1) Economics is a correlative mathematical discipline. Science is a methodology for incremental improvement of knowledge. Economists are attempting to act scientifically in their research. (Many of them anyway.)

However, unlike the physical world, reproduction and interpretation of economic data are very hard to accomplish. We are doomed to eternally vulnerable correlations. Our mathematics and our measurements are too simple for the problem we’re taking on. But we know that. Everyone in the field knows it.

As such, we’re acting scientifically, but our answers are not scientific, only our process of discovery is scientific. And our process of discovery is incomplete. People often equate scientific with ‘true’. But that’s an error. Science is a process of refinement whose purpose is to reduce human error. All scientific knowledge is tentative. It’s just the best we have to date.

Economics (econometrics) must, of necessity, require assumptions because of ‘causal density’. The number of causal factors is very, very high. Human economic activity includes shocks (shortages) and inventions, and as such it’s economics are not gaussian (normally distributed), so any one event in a myriad of causal hierarchies can radically alter the entire network of human behavior. Unfortunately our mathematics, even in economics, tends to be probabilistically gaussian (normally distributed), rather than probabilistically mandelbrotian (abnormally, or randomly distributed). Simply because we do not know what we do not know, and have not figure out yet, ‘where’ there is a likelihood that we may ‘know’ something in the future that will effect our economy, and how people may react to it.

2) Political Economy is a moral philosophy that makes use of economic data for the purpose of determining the investments and returns on a society’s investment portfolio. A society is best thought of as a joint stock company with larger and smaller shareholders with different classes of shares each trying to get the management team to work in their favor. These shareholders have different interests. They want different things. They all ‘invest’ in society if only by not undermining it, or engaging in theft, fraud and violence. Most pay taxes. Some risk their lives in military service. We all buy our shares differently, and are rewarded differently.

We do not understand the mathematics of human reasoning. It is largely the result of the properties of memory and of our cognitive biases. We are using correlative mathematics from the physical sciences to compensate for the fact that we do not understand the mathematics of human memory – probably because it is vastly more complex, and we do not have enough of the right kind of data. However, our use of current mathematics leads us to errors of aggregation and misunderstanding of causes. In fact, many have argued that all human knowledge is correlative, not causal. So we may always be working with insufficient information.

3) Politics is Decision Making: As a body politic, we disagree about the goals of political economy. We disagree about the purpose of government itself. This is because there are varying groups in our polity with different class, cultural, generational value systems, as well as different resources, and different biological capabilities.

Our entire body of human moral codes are based upon circumstantial values (farming societies), and we no longer live in a farming society but an urban one. We are not even sure what a ‘good economy’ looks like for a densely urban society, or even if our limited tools of laws, religion and credit are sufficient technologies for maintaining social order: respect for some form of property, political decision making, cooperation, and redistribution.

So, the problem is that we MUST use some sort of bias in resolving economic problems. We are using limited tools and a model of decision making in government that is probably antiquated for our circumstances. It was designed for city states. It seems inadequate for an empire. Society is changing very rapidly. We are open to many different unpredictable shocks. We have different preferences we apply when solving economic problems. And we must have those preferences in order to make some sort of decisions. And no matter what decision we make some faction of society will want another decision made instead.

No titleThis is because of the fundamental problem of human cooperation: while we can agree upon ends, we cannot agree upon means. And even when agreeing upon ends, it requires that we know and catalog ALL ends, and then sort among them. And given a multitude of ends, it becomes impossible for people to prioritize them, or even comprehend them. Our society is simply too large. This is because of the fundamental problem of human cooperation: while we can agree upon ends, we cannot agree upon means. And even when agreeing upon ends, it requires that we know and catalog ALL ends, and then sort among them. And given a multitude of ends, it becomes impossible for people to prioritize them, or even comprehend them. Our society is simply too large.

THE PROBLEM OF POLITICAL ECONOMY

As such, a large economy is better, but politically difficult to govern unless it is very homogenous with people sharing very similar values. A smaller economy is less strong, but easier to govern. The worst economy of all is a large strong one like that of an empire, with many, many factions – because there are too many choices and people are not gregarious in diversity, just the opposite. And that’s the political environment that we have to work with.

To make matters worse, our federal government can print money which makes it seem like we can either solve fewer more complicated ends, or we can solve a larger number of ends, than we actually can. Printing money as a means of redistribution or insurance are one thing. Printing money so that there isn’t any shortage of it is another. Printing money so that we just distort and confuse everyone, including economists, is something else. And we are doing too much ‘something else’.

We are not the blind leading the blind. But we are definitely expecting too much of our current level of understanding of economics, when economic reasoning has become the primary means of decision making in human political systems.

Whether we do better governing with econometrics than random guessing, or by asking the average man on the street, or than relying on traditional wisdom, or better than interpreting a deity, or even interpreting entrails, is yet to be proven. In fact, it appears from the data that asking a random person on the street is a better predictor than any economic model.

And anyone who tells you differently is not scientific but ideological.