Economics as a positive science

August 14, 2012 at 3:33 am (Biology, Economics)

There are plenty of people these days acclaiming that economics (and more recently political science) has a physics envy.  The idea is that economics is preoccupied with mathematics, with optimization, and other concepts crudely adopted from the perfection of the physical world into the complexities of the social world.

In practice, the belief usually stems from some immature and naive aversion to mathematics rather than a genuine understanding of either physics or economics. But let’s take the idea seriously for a moment. The association is logically problematic because just because one set of methodology works better in one field, does not mean it isn’t the best methodology in another field. The complexities of the social world is not a strong argument (without a basis of comparison) against the usefulness and convenience of using demand curves, optimization, and dynamic programming to understand economic phenomena.

So what is really implicit in the argument here? The reason it seems so powerful is that it caricatures economists as a homogeneous collection of nerds who mistakenly adopted the language of physics when they really shouldn’t have; the story of “physics envy” is more persuasive than “they were simply all wrong”. The point of the argument is not to argue that economics methodology is flawed, but to open up the possibility that economics methodology is flawed by casting doubt on the credibility of economists. It is, for all intents and purposes, an ad hominem argument – not that there are any problems with that.

So is there really evidence that economists adopted the methodology of physics wholesale without considering its relevance? The historical evidence is weighed against that interpretation. The formalization of economics was an incredibly long progress that met heavy resistance on every milestone. Almost 40 years after the Econometric Society (the first society dedicated to mathematical economics) was established, the Cowles Foundation was expelled from the University of Chicago for what was perceived as excessively mathematical research. It wasn’t until the beginnings of the 1990s that economics students were expected to have basic mathematical training upon entering graduate school. The idea that “some economists just took physics and put it in economics” is ludicrous; the mathematical revolution was a gradual, and thus much more controversial and debated process.

More importantly, critics overstate the similarity between physics and economics. Physicists, for the most part, are not concerned with empirical phenomena; whereas over 80% of economists work with empirical phenomena and at least half of them make use of empirical evidence of some sort. Noam Chomsky once noted that the field that really has physics envy is postmodernist theory; they adopted both the incomprehensible terminology and the complete isolation from the human world.

The natural science that is most similar to economics is, in fact, evolutionary biology. Paul Krugman had given a series of talks arguing for this point in the past; here is a transcript. The crux of his argument is that both fields are founded on the basic idea that models can be incredibly useful, even if unrealistic. Like economics, evolution makes use of the concepts of optimization, equilibrium, and self-interest and competition (at the level of genes) as well as the lens of methodological individualism. It is interesting to note that no critic of economics has risen up in indignation to protest the use of these concepts in biology – even though they are far more widespread, entrenched, and superficially unrealistic. It is perhaps an unfortunate reflection of the mindset of academics that countless scholars have less faith in humans’ capacity for consistent behavior than that of sea cucumbers.

It is even more remarkable that the formalization of both disciplines have been incredibly successful, such that tools developed in these fields are rapidly being transplanted in other fields. The idea that voters can be rationally ignorant, or that all organizations are designed to economize on transaction costs, are far less plausible than the idea that a worker rationally responds to wage incentives or makes intertemporal decisions. And yet the former ideas have been developed into testable claims that are beginning to be widely accepted in the scholars of their respective fields. If we take the simplistic view that the ideas market is based on competition where the best ideas survive, it seems that many disciplines are far more susceptible to “mathematical” analysis than we had previously thought.

 

 

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