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We've heard a lot of economics-bashing and a lot of bashing of the social sciences in general. They are supposedly useless.

Are they? Studying one, I admit they certainly have their pitfalls. But are they useless? Far from it, as long as we know their limitations. So I thought it would be useful to examine the social sciences, their succeses, and failures, and the reasons for them.

1. Universalia ante res an post rebus?

Let me tell you a story. Once upon a time a man called Immanuel Kant asked himself how man can reach eternally valid conclusions. To make a long story short, he concluded that, because of the limits of human ontology, any universal conclusion must be formal in nature: Mathematical. Any science is eternal as long as it's mathematically based. Once you start adding the material in, you use a posteriori data and necessarily relativise your conclusion.

This was groundbreaking for law, since Kant destroyed the position of rationalistic natural lawyers (and all proponents of natural law): They used a set of axioms, from which they tried to deduce an eternal legal order; those axioms were a posteriori, deduced from specific societies and of course not eternal: The limits of culture were the limits of universality. In fact, the error was the same the scholastics made: They, too, used axioms from which they tried to deduce an eternal legal order. The source of the axioms was different, religious, the presumption identical (In fact, most rationalists up to Leibniz were scholastically trained, which explains their method.).

In short, in society the best we can do with regard to eternal truths is a formal relation - and even those conclusions are often dependent on culture and social relations. For example, criminology tells us that poverty is one of the genrators of criminality. That claim may well be universal. However, all this means is that a = - bx +/- z, and all data which fleshes this out is transitory (a is the level of crime, b is the level of poverty, z is a dummy variable representing free will, missed data, and chaos in general). How much and how poverty influences criminality varies.

In short, while I may be able to deduce correlation and even causation, I won't be able to foretell exactly how crime will increase when poverty increases.

Granted, the situation isn't as relative as this makes it seem. Humans, free will aside, are bound by the structures in which they find themselves. For example, let's say I live in Oregon, want to get to Washington in, at most, a week, and have $1000 in my pocket. My choices are: Car, bus, train, plane. Despite all that free will, my behavour is predictable; if I am in a hurry, I will choose the plane. Therefore, free will aside, my behaviour will be predictable, while allowing room for irrationality, and creativity, of course. That makes temporary conclusions more accurate.

And this bring us to economics, the "dismal science." Sociology deals with society and its social groups as a whole, as one might observe a coral reef, law structures society and both reduces the chance of and resolves conflicts, and economics, primarily concerned with the allocation of scarce resources, focusses mostly on individual activity (which is why macro is a late newcomer to the science).

The problem with any social science, as I've pointed out above, with the example of the person who wants to get from Oregon to Washington, is that any model, any prediction, simple or sophisticated, depends on certain assumptions, which allow us to collapse complex phenomena into a model or a conclusion. The catch is that no assumption is true.

For example, the assumptions of current state of the art economic models are [Frey, 1992]:

(1) Methodological individualism
(2) Consistent responses to incentives
(3) Self-seeking (egotism)
(4) Definable sets of preferences and constraints
(5) Bounded rationality, largely constraint by institutions

Each and every one of these assumptions is false. Humans don't consistently react to incentives. Not all people are egotists and people aren't always egotists. People may not have completely definable set of preferences, and they might not always be rational. Clearly, the models are worthless! Right?

Wrong. While I didn't say the assumptions are completely true I didn't say they are completly untrue, either. People don't respond consistently to incentives - but how consistent are they, in general? People are sometimes altruistic - how often and at what cost? How irrational can people become under some conditions?

The point is that no model is perfectly accurate. It may be true enough. Despite its failings, it might suffice for prediction. Simply put, if enough people chiefly act like egotists, the few who are altruists won't substantially alter predictions. This also shows how models can be improved, by refining assumptions. Note that the complexity of the model also depends on the task you need it for.

For example, older economic models assume substantive rationality. That means that an individual maximises his subjective utility tout court. And, if you're analysing the market dynamics of a town fair, that is accurate enough.

However, with more complex relations that assumption is shown to be too inaccurate to be upheld. One reason are transaction costs: The cost of the effort required to find a better choice is greater than the gain from it (I won't drive 50 miles to WalMart to save 50 cents on a salad). So they have to be included (in a fair, where everything is close, transaction costs are largely irrelevant). Then we see that people don't search for objectively optimal solutions, but ones which are good enough: An individual ends his search when he finds a solution that satisfies his aspiration level (bounded rationality). These assumptions are already far closer to reality than our original model. Not perfect, of course - no model can be perfect - but with better predictive capacity.

Sometimes a model purposely constructs an ideal situation which cannot be found in reality. An example is Telser's [1980] work on self-executing contracts. Telser is a neoliberal economist and a formalist, which means he focusses on models. In his work he defines circumstances in which a long-term contract would enforce itself without outside intervention, without courts - law without laws, law without judges. We know that his assumptions aren't true. We know that such a situation is not found in reality. But his study isn't worthless.

The reason is that by reference to that ethereal optimum we can create incentive structures which lessen the chance of conflict and litigation and ensure the actors act as they are supposed to within the limits of the legal order. Telser's work is also interesting because it is irrelevant for practical purposes if one of his assumptions is false: That men are good and adhere to contracts only when the perceived advantage of doing so is greater than the advantage of not doing so - in short, as long as it is useful to follow the contract. Now, this assumption is useful in creating incentive structure because, if true of the other party, you will need it. If it isn't, then the incentive structure will be redundant since the other party will do the right thing for virtue instead of incentive. You've lost nothing (and people are a sorry lot so it's better to plan for a bastard).

In conclusion, all models are necessarily flawed, be they legal, sociological, or economic - or models in natural sciences. They are not true in the sense of being perfectly precise - but they may be true enough. And when a model fails it simply means you have to look or reasons why. But we know that doesn't happen. Why?

2. The Difference between Positive and Normative

A persistent problem of the social sciences is the difference between the objective and subjective. The problem can be illustrated with an example: We know that the gap between the rich and the poor is widening. Is that a social problem?

Objectivists would argue tout court that it is or that it isn't. This is the ordinary lay reference towards reality: Certain phenomena are (un)desirable in and of themselves and should be resolved.

Such a view empirically doesn't hold. Certain objectively harmful phenomena never attract the public's attention (smog), while other, objectively less harmful or even harmless phenomena become the crux of the public's obsession (texting while driving, paedophilia, the purported autism-vaccine link...). More frustratingly still, even when people agree that something is a social problem, solutions differ, and may be completely contrary.

As an example, the AIDS pandemic is a social problem. At least, most people agree it is so. Most people agree that AIDS is a problem of prevention and securing treatment for the infected.

However, not all do. A Camorra clan in Italy is famous for the fact that it keeps its brothels AIDS free to such an extent that clients do not need condoms. It does not do it by charity. Unlike most Camorra clans, which ensure their members have access to the bes doctors and state-of-the-art treatment if they get infected (it can be a 1caring profession at times) that clan does not. If they found out that someone, anyone in their territory is HIV-positive, they kill him, based on the logic that the only way to stop an epidemic is to cull the herd (If you are HIV-positive, consider yourself warned if travelling in that Camorra clan's territory).

This cruel example illustrates the difference between the objective and the subjective: We can agree on objective reality with a greater or lesser degree of certainty. But solutions are different. Solutions have different effects, and we can study them with a greater or lesser degree of certainty. However, the choice of solutions is a matter of goals, of taste, as is the question what a problem is. All phenomena need to go through a definitial process to become social problems.

In short, what is does not necessarily imply what ought.

This is something that economics often forgets: It creates optimums, mathematical or otherwise, and states which are supposely desirable, when what ought to be is inexorably relative.

An example is regulation. Regulation often increases prices. For example, European-style regulation of residential leases can in fact lower investment in real estate and contribute to a housing shortage. By increasing costs (an example are consumer loans) it can also price some out of the market.

So, deregulate! Err... why? We can discuss the objective parts of these problems: How much is investment reduced? How many people are priced out? However, deregulation always makes sense only if you accept that the lowest possible price is always desirable, no matter the positive effects such regulation has. In reality, it's a trade-off between security and other desirable social ends and price and the level of investment. Whether that tradeoff is worth it (and to what extent it is worth it) is a matter of debate, not an eternal truth.

Another illustration is the Pareto optimum. It is the closest economics comes to a truly objective optimum. What it means is that the productive capacity of the economy is fully utilised.

However, if someone advocates against change simply because "we are near the Pareto optimum," he is either ill-educated or has an agenda. The Pareto optimum is not a point, it is a function. All combinations of the production of goods and services which fully utilise the economy's productive capacity satisfy the Pareto optimum. The question of which combination should be chosen is a matter of preference. More healthcare or more real estate? More guns or more wind plants?

3. In conclusion

To conclude, economics and other social sciences make use of models, conclusions, studies, observations, experiments, discourse and other means by which they analyse social phenomena and make predictions. Their tools may be more or less sophisticated, and closer or further from reality.

Here we have the first pitfall of the social sciences: Pride. Every epistemology has its limits, and every model has its flaws. When a social scientist ignores these truths, he runs the risk of error through pride. "My models are perfect!" Certainly, until social circumstances change or a wild variable enters play.

The second pitfall of social sciences is mixing the positive and the normative. We can analyse what is, we can analyse actions, their possible effects, advantages and disadvantages, but the choiice of action, the choice of policy is a matter of preference, not an eternal truth ingrained within a fact. Presenting a possible solution as inevitability, consciously or not, is a failing of the social sciences, although, of course, everyone has his or her opinion on what ought, and of course any social scientist will offer recommendations.

This brings us to a problem which has been hinted at, but which constantly dogs social sciences: Politics. I know of many studies which propose solutions which would create a society that would be far better, according to the views of the majority of the population - or propose actions regarding ignored problems.

But they are ignored.

The reason is simple. In the natural sciences, any direct interest is practically non-existent. Aside from egoes and academic reputation, nothing is at stake regarding the question of quantum spin (or whatever) of some particles. When a study shows that political parties (and the general populace) don't know shit from shinola regarding how to solve the crime problem, then the study runs contrary to innumerable vested interests. What will a politician do? Say, "sorry, guys, I screwed up, let's do what the study suggests?" Sure, it may happen, but the chances are precisely the same as my being hit by a meteorite. And so such studies will languish in forgotten drawers.

Conversely, social scientists who, consciously or not, in good faith or not, accurately or not, ideologically or not, reinforce popular ideologies and prejudices will be heard, honoured, and deferred to. The left will not listen to Telser, even when he is right - he is, after all, a neoliberal. The right will not listen to Krugman, even when he is right. He is, after all, a Keynesian. And anyone who dares suggest that our strategy with regard to paedophiles might be counterproductive will be publicly crucified, although probably not literally, no matter his arguments.

In short, social sciences are enormously useful, as long as they know their limitations and stay true to themselves. When they don't, disasters happen.

5. Bibliography

A. Kaufmann, Uvod v filozofijo prava (Introduction to the Philosophy of Law),
Goode and Ben-Yehuda, Moral Panics: A Social Construction of Deviance (2009),
L.G. Telser, A Theory of Self-Enforcing Agreements (1980)
Erich Schanze, Notes on Models of Choice, Incomplete Contracting, and the Agency Framework (1990),
Erich Schanze, Economism, Legalism, and Professional Attitudes Toward Institutional Design (1993)
Roberto Saviano, Gomorrah

Originally posted to Dauphin on Wed Feb 10, 2010 at 12:45 PM PST.

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Comment Preferences

  •  Tips for epistemology. n/t (12+ / 0-)

    Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

    by Dauphin on Wed Feb 10, 2010 at 12:45:30 PM PST

  •  economists are valued (3+ / 0-)
    Recommended by:
    Dauphin, bluegrass50, slowbutsure

    only to the degree that they can be used to promote a chosen political narrative.

    The cold passion for truth hunts in no pack. -Robinson Jeffers

    by Laurence Lewis on Wed Feb 10, 2010 at 12:49:33 PM PST

    •  That's not true. (3+ / 0-)
      Recommended by:
      Fabienne, Turkana, slowbutsure

      If you mean economists, especially macroeconomists who appear in the media, yes. But far from the public's eyes quite a lot is written, debated, and used, often to great effect.

      For example, you don't hear anything about incentive structures and screening. But these two issues are extremely important both in general and in relation to the current crisis. And they are being studied, especially screening, which has been a neglected part of the agency framework (if you hire an idiot, the most elaborate incentive structures won't help you, since he won't have a clue what he's doing.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Wed Feb 10, 2010 at 12:53:38 PM PST

      [ Parent ]

  •  As an aside, (3+ / 0-)

    certain economic assumptions are very useful when judging others: If an investment advisor assures you that an investment is enormously profitable, ask him why he isn't investing himself - after all, the profit from such an investment would be far greater than his fee. If he doesn't have a good reason, perhaps you shouldn't trust him (self-seeking/substantive rationality).

    Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

    by Dauphin on Wed Feb 10, 2010 at 12:58:28 PM PST

  •  A decreasing marginal propensity to consume... (6+ / 0-)

    ...as people grow richer is a basic tenet of economic theory. Only ten percent of our population now possess over 80% of our wealth which means that 90% of us do not have the economic resources to maintain our consumer based economy. Thus the rich WON'T consume and the rest of us CAN'T consume. This lack of consumer demand guarantees a double dip recession that could well slip into a 30's type depression. Unemployment will probably rise well into the teens and stay there. Following California’s lead, state after state government will go bankrupt as well. The answer is to recycle some of the stagnant pool of wealth (it currently is not going into productive investment) back into the economy through a more progressive tax structure on those with annual incomes over $250,000. Spend the increased revenue on free universal health care, and education for qualified students through college. This action would stimulate consumer spending, jump start the economy and surprisingly not even hurt the super rich who would benefit from the resulting economic growth. The Obama administration will not confront the super rich to make it happen, and if the Republicans are returned to power the problem will only get worse. The result will be (and is) a return to a near permanent type of recession and one in which government at all levels will not have the resources to prevent the shredding of an already woefully inadequate social safety net.

    _____________________________________________________________________________________________________

    If you read anything today read Juan Cole‘s  recent  analysis of the super rich.

      INEQUALITY OF WEALTH
    Photobucket
    To see the data go to UCSC.

    Where we are headed if we don‘t change course and begin to fairly tax the super rich.

    Photobucket

    Photographer: Tuca Vieira, Paraisópolis Favela in Sāo Paulo, Brazil 2005

                                           

    •  If - and I stress the if - (3+ / 0-)
      Recommended by:
      side pocket, wishbone, slowbutsure

      those savings were to go to productive uses, Reaganomics would work and there wouldn't be a problem with it (GDP = C + I + nE, and it doesn't matter to which use added value is put). Unfortunately, empirical analysis shows it isn't so. J.P. Morgan himself thought that the maximal tenable ratio was 1:80.

      However, the main question today is how to ensure it; capital is mobile, people are mobile (especially the wealthy), but regulation isn't. It's a simple matter to become a citizen of, say, the Caymans so that you don't have to pay income tax in the US (you renounce your citizenship). If you tax profits, capital will disinvest until it becomes scarce enough that its profits equal profits in countries with a lower tax rate.

      And that is the damnable thing about globalisation: You need a similar regulatory framework for it.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Wed Feb 10, 2010 at 01:20:24 PM PST

      [ Parent ]

    •  Worth a thousand words n/t (3+ / 0-)
      Recommended by:
      Dauphin, wishbone, slowbutsure
  •  most mainstream economics is built (1+ / 0-)
    Recommended by:
    fizziks

    on ridiculous assumptions that cannot possibly be true to any extent. Therefore their conclusions are invalid from the get go.

    I studied this stuff for 4 long years.

    Models are useful to the extent they explain reality and help make predictions.  Micro and macro models do neither. They are based on dogma and they are used to reinforce that dogma to protect the wealthy class.

    People always talk about free trade and comparitive advantage and "market forces".  Look at the ludicrous assumptions of those models.  None of them pertain in the real world.
    What I realized after studying econ for 4 years was that it is crap. What is really needed is a fully integrated Political Economy discipline which recognizes and takes into account reality.

    •  I agree with this 100% (0+ / 0-)
    •  Well, I can't speak for you, (2+ / 0-)
      Recommended by:
      side pocket, slowbutsure

      but the economic training I've received, which mostly pertains to issues connected with law, has been enormously useful.

      Then again, our economic subjects have been extremely even-handed. They didn't exactly push an economic ideology (although most of my professors were Keynesians), and we learnt the pitfalls and heresies as well as orthodoxy. In predictive terms it has been an extremely good education (our professor in fact predicted the financial crisis and everyone mocked him for it; now he's the one laughing sadly).

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Wed Feb 10, 2010 at 01:34:44 PM PST

      [ Parent ]

      •  when they teach you about (0+ / 0-)

        free trade and "competition" and "price equilibrium" do they stipulate all the assumptions on which the models are based?  What are those assmptions?  What do you think of those assumptions?

        On topics like pollution do they take into account what they used to euphamistically call "externalities" which they typically proceed to ignore?  Granted my undergrad studies were a long time ago.

        •  Yes, they did. (1+ / 0-)
          Recommended by:
          slowbutsure

          We spent quite a lot of time on externalities and on the fact that no market actually has pure, let alone perfect competition.

          One of the most memorable quips was when the professor said that the only example of free trade is our locak farmers' market. Then next week after arriving he acidly remarked that it turned out they have a cartel agreement (and the competition protection office is actually on their case).

          Free trade? Yes, they explained the assumptions - and destroyed some of them (our prof actually advocates tariffs against China), emphasised the relative advantages of specialisation and diversification, and the fact that most trade takes place intra-sector, trading the same categories of goods between advanced countries.

          Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

          by Dauphin on Wed Feb 10, 2010 at 01:57:37 PM PST

          [ Parent ]

        •  I'm actually more worried that you (1+ / 0-)
          Recommended by:
          slowbutsure

          implied that your professors skipped over the issue of externalities. We noted that positive externalities are usually internalised but that companies try to keep negative ones external - so that society as a whole pays. The cost may not be measured - may not even be measurable (how do you measure the value of a clean environment?) but it is there.

          Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

          by Dauphin on Wed Feb 10, 2010 at 02:00:50 PM PST

          [ Parent ]

  •  I would like to propose an additional (2+ / 0-)
    Recommended by:
    Dauphin, slowbutsure

    assumption that is present in every current economic model:

    (6) Economic systems tend toward some stable equilibrium point, absent outside intervention.

    I am fascinated by the work in Econophysics on the statistical mechanics of money by V. Yakovenko and others, who cast doubt on this implicit assumption.  See for ex: http://www2.physics.umd.edu/...

    •  Well, most do, (2+ / 0-)
      Recommended by:
      Sparhawk, slowbutsure

      but that depends on the relative elasticity of supply and demand. The cobweb theorem shows that in some cases an exogenous shock will produce ever-increasing oscillations. Fortunately, crucial markets, such as the market for food products, tend towards equilibrium in face of shocks.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Wed Feb 10, 2010 at 01:28:01 PM PST

      [ Parent ]

  •  Big, big quibble... (1+ / 0-)
    Recommended by:
    Dauphin

    The word "science" should not be used in conjunction with economics.

    Economics does not follow the scientific method, so it cannot be a science. That doesn't make it worthless, but it is not a science. It's an academic discipline, but not all academic disciplines are sciences.

    Macroeconomics performs no experiments, has little in the way of a formal peer-review process, and does not correct its hypotheses by the application of experimental data.

    If chemistry conducted itself the way economics does, we'd have entire university chemistry departments dedicated to the study of phlogiston, alchemy, and the aether. Nobody studies those things anymore because they have been conclusively demonstrated not to exist. I am aware of no equivalently disproven ideas in economics.

    --Shannon

    "It is better to die on your feet than to live on your knees." -- Emiliano Zapata Salazar
    "Dissent is patriotic. Blind obedience is treason." --me

    by Leftie Gunner on Wed Feb 10, 2010 at 01:57:42 PM PST

    •  Well, (0+ / 0-)

      epistemology is a bit different in all the social sciences: We can collect empirical data, we can test our assumptions through policy (although testing anything in society poses large problems).

      So, while the scope for experiment may be limited, and is even more limited by considerations of human rights, I'd say that assumptions are practically testable and we can check them with enough empirical data that we can call social sciences sciences.

      For example, I cannot "test" an institution the way I could perform a chemical experiment. The only way to test it is to introduce it into the wild, so to speak.

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Wed Feb 10, 2010 at 02:14:29 PM PST

      [ Parent ]

      •  And that's fine. (1+ / 0-)
        Recommended by:
        Dauphin

        But the impossibility of testing social discipline ideas with rigorous, single-variable experiments does kind of rule out calling those activities "sciences".

        And really, the term "social sciences" was in some sense designed to be deceptive. As science gained prestige, due both to the confidence in its results that its methods allowed and to larger social changes, the "social academy" wanted to get some of that mojo, so they appropriated the word.

        That doesn't mean that there is, in any real sense, any such thing as a "social science". There may be in the future, but even psychology, which has gotten closest (by becoming more and more a branch of medicine,) has still got a long way to go. I mean, shit... there are still respected academics who describe themselves as "Freudians". Which is as silly as biologists describing themselves as "Lamarckians" would be, and for the exact same reason.

        Ans again, my insistence on denying these disciplines the use of the word "science" is not meant to denigrate what they do. It's not an insult to say that something isn't a science.

        --Shannon

        "It is better to die on your feet than to live on your knees." -- Emiliano Zapata Salazar
        "Dissent is patriotic. Blind obedience is treason." --me

        by Leftie Gunner on Wed Feb 10, 2010 at 04:16:32 PM PST

        [ Parent ]

        •  No problem. (0+ / 0-)

          We just have a bit different conception of what makes a science a science; you insist on single variable experiments, while I satisfy myself with a rational epistemology and the ability to track the validity of your ideas in practice.

          At any rate, the labelling is largely irrelevant. And, with humans having free will, social disciplines will never be able to conduct such experiments.

          Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

          by Dauphin on Wed Feb 10, 2010 at 04:23:05 PM PST

          [ Parent ]

  •  I very much enjoyed this diary (2+ / 0-)
    Recommended by:
    Dauphin, slowbutsure

    though I am not equipped to critique it in any sort of meaningful fashion, having never taking an Economics course in my life, but I came across something interesting in my reading last evening that relates to the subject, so I will quote it here:

    "Richard Day, a University of Southern California economics professor, has shown that many of the important equations in economics are subject to the kind of iteration that leads to chaos and undermines predictability.  Day says that economists usually assume that external shocks and unexpected events upset economic cycles.  But he has found that the cycles themselves are inherently chaotic.  'Periods of erratic cycling can be interspersed with periods of more or less stable growth.  Evidently the future behavior of a model solution cannot be anticipated from its patterns in the past.'  And what happens to the models is just what happens in reality:  Regular order is interspersed with chaotic order."

    Perhaps everything terrible is, in its deepest being, something helpless than wants help from us.

    by Fabienne on Wed Feb 10, 2010 at 02:17:14 PM PST

  •  Very interesting (1+ / 0-)
    Recommended by:
    Dauphin

    My own research focuses on some of these same issues.

    But I think you are trapped in the cage of constructive empiricism.

    IMO, the problems with the axioms of rational choice theory is that as defined, they are far too restrictive to be true outside of a very narrow range of behavior.

    But why look for a useful theory if it is possible to do better?

    What if instead of trying to build a theory of consumer behavior from 19th century utilitarianism you start from cognitive psychology?

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