Leave economics alone. Already many people dislike studying economics because they’re not used to reasoning, debating and Socratic schooling. Thanks to jargons and “economists” for displaying the subject as a matter of “rocket science”.
In the age of so-called interdisciplinary learning, academicians, researchers, and economists are more obsessed with studying econometrics than economics. Their introductory sessions consist mainly of learning the law of demand, supply, and other macroeconomic chapters, with special obeisance given to “useful idiots” like Karl Marx, Alfred Marshall, John Maynard Keynes, and Arthur Pigou. Half of them consider Joseph Stiglitz, Thomas Piketty, Amartya Sen, and Paul Krugman as their “ideal” role model without realizing that their obsession is turning economics into “idle” role model.
Before I refute the necessity of econometrics in this blog, I wish to make it clear that I adore mathematics and statistics but I do not believe on empirical grounds to prelude these two areas in the field of economics. Yes, mathematics and statistics have inherent values which are unique and exclusive but it does not make sense to pollute the whole subject of economics from the angle of maths and stats. Consider this blog as a catharsis to diminish the growth of econometrics at the cost of economics.
In the natural sciences, a laboratory experiment can isolate various elements and their movements. There is no equivalent in the discipline of economics. The employment of econometrics and econometric model-building is an attempt to produce a laboratory where controlled experiments can be conducted. The idea of having such a laboratory is very appealing to economists and politicians. Once the model is built and endorsed as a good replica of the economy, politicians can evaluate the outcomes of various policies. This, it is argued, enhances the efficiency of government policies and thus leads to a better and more prosperous economy. It is also suggested that the model can serve as a referee in assessing the validity of various economic ideas. The other purpose of a model is to provide an indication regarding the future.
By means of mathematical and statistical methods, an econometrician establishes functional relationships between various economic variables. For example, personal consumer outlays are related to personal disposable income and interest rates, while fixed capital spending is explained by the past stock of capital, interest rates, and economic activity. A collection of such various estimated relations—i.e., equations—constitute an econometric model.
By applying mathematics, mainstream economics is attempting to follow in the footsteps of natural sciences. In the natural sciences, the employment of mathematics enables scientists to formulate the essential nature of objects. In short, by means of a mathematical formula, the response of objects to a particular stimulus in a given condition is captured. Consequently, within these given conditions, the same response will be obtained time and again. The same approach, however, is not valid in economics. For economics is supposed to deal with human beings and not objects.
Like other forms of statistical analysis, badly specified econometric models may show a spurious correlation where two variables are correlated but causally unrelated. Economist Ronald Coase is widely reported to have said: “If you torture the data long enough, it will confess the way you like”. Thus, econometricians tend to believe “Data must be wrong if I do not get what I want to conclude.”
Mathematics can sometimes make smart people “dumb”. Let me explain what I mean by this. I don’t mean that it is dumb not to be good at mathematics. After all, mathematics is a highly abstract and challenging discipline requiring many years (decades even) of study, and there are plenty of very smart people who have little understanding of it, and little ability to use it. What I mean is that mathematics quite often bamboozles people into accepting very silly arguments — arguments that are so silly that if you stated them without draping them in a mathematical negligee, you would instantly become an object of ridicule to all those people who flunked out at basic algebra back in high school.
The danger of mathematical arguments is that a person can sometimes follow an absurd path of reasoning without being alerted to its absurdity, due to the fact that their mind is so lost in the verbiage of mathematical equations that their common sense fails to penetrate it. As an economics teacher, I have to guard against this problem constantly in my students. One of the main difficulties in teaching applied mathematics is that students can become bamboozled by the mathematical machinery they are using, to the detriment of their ability to reason sensibly about the nature of the problem that the mathematics is designed to describe. Mathematics is meant to augment logical argument, by providing the ability to clearly define a problem and to ensure that all necessary assumptions are made explicit in the analysis. Its advantage over “literary” argumentative methods (when used properly) is that it ensures that the analyst is not making assumptions that he is unaware of, and is not making leaps in the argument that are illogical. However, when mathematical arguments are used to obscure, rather than enlighten, the result is that they tend to hide assumptions that are being made.
Economist Robert Lucas criticised the use of overly simplistic econometric models of the macroeconomy to predict the implications of economic policy, arguing that the structural relationships observed in historical models break down if decision makers adjust their preferences to reflect policy changes. He also argued that policy conclusions drawn from contemporary large-scale macroeconometric models were invalid as economic actors would change their expectations of the future and adjust their behavior accordingly.
The problems of prices and costs have been treated also with mathematical methods. There have even been economists who held that the only appropriate method of dealing with economic problems is the mathematical method and who derided the logical economists as “literary” economists. If this antagonism between the logical and the mathematical economists were merely a disagreement concerning the most adequate procedure to be applied in the study of economics, it would be superfluous to pay attention to it. The better method would prove its pre-eminence by bringing about better results. It may also be that different varieties of procedure are necessary for the solution of different problems and that for some of them one method is more useful than the other.
In physics, we are faced with changes occurring in various sense phenomena. We discover regularity in the sequence of these changes and these observations lead us to the construction of a science of physics. We know nothing about the ultimate forces actuating these changes. They are, for the searching mind, ultimately given and defy any further analysis. What we know from observation is the regular concatenation of various observable entities and attributes. It is this mutual interdependence of data that the physicist describes in differential equations.
In praxeology, the first fact we know is that men are purposively intent upon bringing about some changes. It is this knowledge that integrates the subject matter of praxeology and differentiates it from the subject matter of the natural sciences. We know the forces behind the changes, and this aprioristic knowledge leads us to a cognition of the praxeological processes. The physicist does not know what electricity “is.” He knows only phenomena attributed to something called electricity. But the economist knows what actuates the market process. It is only thanks to this knowledge that he is in a position to distinguish market phenomena from other phenomena and to describe the market process. Now, the mathematical economist does not contribute anything to the elucidation of the market process. He merely describes an auxiliary makeshift employed by the logical economists as a limiting notion, the definition of a state of affairs in which there is no longer any action and the market process has come to a standstill. That is all he can say. What the logical economist sets forth in words when defining the imaginary constructions of the final state of rest and the evenly rotating economy and what the mathematical economist himself must describe in words before he embarks upon his mathematical work, is translated into algebraic symbols.
A superficial analogy is spun out too long, that is all. Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease. But the logical economist knows much more than that. He shows how the activities of enterprising men, the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss. He shows how this process would finally result in the establishment of the evenly rotating economy. This is the task of economic theory. The mathematical description of various states of equilibrium is mere play.
Using Ludwig von Mises school of thought, I too believe that economics is not about goods and services; it is about the actions of living men. Its goal is not to dwell upon imaginary constructions such as equilibrium. These constructions are only tools of reasoning. The sole task of economics is the analysis of the actions of men. Next time your economics prof. endeavors to teach you “econometrics” in class, kindly request him/her to refute this blog first.
Thank you
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About the Author
Prof. Jaimine Vaishnav is an anarcho-capitalist based in Mumbai, India. His hobbies are about defending the liberties of all his dissents without charging any fee at the cost of nobody.
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@meritocratic
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