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CataLiNNNDate: Joi, 14-Apr-2011, 10:54 | Message # 1
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5. Scientific method and economics
Economics is called a .social science., and despite its lack of experimentation, the
discipline has made more confident claims than the other social sciences to
scientific accuracy, and even scientific method. Its apparent numerical precision
contributes much to the beguiling power of its attempts to explain non-economic
phenomena.
It is not hard to find the origins of such attitudes among economists. Isaac Newton
(probably the greatest person ever to walk the streets of Cambridge) had a colossal
impact on the intellectual life of succeeding generations. From the complexities of
the physical world, not just in our everyday lives but across the universe, he
abstracted three simple Laws of Motion. As a Christian, Newton was convinced
that the set of relations uncovered in these laws was so complex that it must be
guided by a supreme being. Later, Charles Darwin (another great Cambridge man)
discovered principles which explained the relationships between all organisms. In
this context of scientific discoveries, which abstracted simple, orderly relationships
from the bewildering complexity of the world around us, it is hardly surprising that
others should have looked for the same thing in the workings of society . starting
with the economy because of the mathematical character of quantities produced,
distributed and consumed, and prices. Adam Smith, a professor of moral
philosophy, therefore conceived of a comparable basis for human relations to the
mathematical principles of Newton.s .natural. philosophy. Some 89 years after
Newton.s Philosophiae Naturalis Principia Mathematica was published, Smith
32 Robinson (1979), p. 164.
33 Hahn (1982), p. 6.
34 Ibid., p. 14.
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described in The Wealth of Nations in 1776 what he considered to be .natural.
price relationships between all products, guided by an invisible hand:
The natural price . is, as it were, the central price, to which the prices of all
commodities are continually gravitating. Different accidents may sometimes
keep them suspended a good deal above it, and sometimes force them down
even somewhat below it. But whatever may be the obstacles which hinder
them from settling in this centre of repose and continuance, they are
constantly tending towards it.35
A century later, during the Railway Age, a series of men educated in such subjects
as physics, chemistry, mathematics and engineering systematised this idea
according to the Newtonian principles which still governed those disciplines. The
simplified abstractions of these creators of neo-classical theory (especially Pareto
and Walras, but also to a degree Jevons and Marshall) deliberately took the human
and organic out of market relations, although they had been present in the writings
of Smith and the other classical economists. They devised instead an equilibrating
system, at the centre of which lies the price .mechanism.. It is not these 19thcentury
thinkers, but Marx, whose theories have been compared with the more
dynamic contemporary science of Darwin.s The Origin of Species.
The market economy in neo-classical eyes is therefore like an elaborate piece of
clockwork, which merely has to be wound up by Smith.s Invisible Hand (or perhaps
Coase.s teacher at the blackboard) to set it going. Since that time, market power
has been either ignored in mainstream economics (by assuming it away via the
concept of the perfect market36) or else accommodated in special theories of
monopoly and oligopoly. But as Joseph Schumpeter put it, .perfect competition is
the exception and . even if it were the rule there would be much less reason for
congratulation than one might think..37 Even imperfect competition has now been
more or less absorbed within the equilibrium framework in William Baumol.s theory
of .contestable markets..38 He held that restrictions to market entry and exit are
more important barriers to competition than market concentration, and advanced
the concept of a .perfectly contestable market.. Although he admitted it to be
just as rare, or just as unrealistic, as perfect competition, Baumol was at pains to
demonstrate that equilibrium could exist in a perfectly contestable market too.
However, Schumpeter argued in the 1940s that even the monopoly industrialist
could feel . indeed, did feel - constantly under threat from the competitive
process; even such a market was always in some way contestable, in Baumol.s later
word. Schumpeter explicitly rejected the notion of market equilibrium in favour of
.an indefinite state of warfare between firms..39 He argued vehemently that
capitalism is evolutionary and .never can be stationary.. Its essential feature was
what he called the .process of Creative Destruction., which .incessantly
revolutionizes the economic structure from within, incessantly destroying the old
one, incessantly creating a new one.. 40 He went on:
In capitalist reality as distinguished from its textbook picture, [what] counts
[is] the competition from the new commodity, the new technology, the new
source of supply, the new type of organization (the largest-scale unit of
35 Smith (1970), Book I, Ch. VII, pp. 160-61.
36 It has been pointed out that Buchanan.s Public Choice school even manages to evade the issue of
power while applying economic theory to the state. See Baland and Platteau (1993), p. 18.
37 Schumpeter (1976), p. 78; the first edition of this book was published in Great Britain in 1943.
38 See Baumol et al. (1982).
39 Schumpeter (1976), pp. 79.
40 Ibid., pp. 82-83 (emphasis in the original); see Chap. VII, .The Process of Creative Destruction., in
general.
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control for instance) . competition which commands a decisive cost or quality
advantage and which strikes not at the margins of the profits and the outputs
of the existing firms but at their foundations and their very lives.41
But Newton.s own field of physics has gone far further than even Schumpeter did in
rejecting simple mechanical ideas, with Relativity Theory and Quantum Mechanics;
and in other ways, the other social sciences have largely rejected them too,
including those that Weber illuminated. More recently, Steve Keen has pointed out
how outdated is the linear mathematics that forms the basis of most econometrics
(well suited though it may be to a static, mechanistic understanding of markets).
As Keen comments, .The economic fixation upon equilibrium appears quaint to .
mathematically literate economists..42
Is the simplification and abstraction of mathematical .laws. in the .science. of
economics a mistake, or has it merely been done in the wrong way? We cannot tell
for sure; maybe economics will produce its own Newton figure, although I doubt it.
But I think we can be sure that the form of simplification adopted by the neoclassical
school is wrong. Perhaps the biggest fault in mainstream theory lies in its
very determination to find .safe and simple rules. (in Robinson.s words43), akin to
Newton.s Laws of Motion, rather than examine the complexities of the world for
what they are. The methods of related disciplines such as sociology, economic
history and political science may seem messy and imprecise, relying as they do on
intellectual judgment more than accurate measurement. But they can reveal the
complexity of market situations far more fully than conventional economics does.
The basic neo-classical propositions seem so far removed from reality that they
surely need to be replaced wholesale. However, this would risk creating a
theoretical void, where almost everything would have to be thought out again.
Neo-classical theory has taken more than 100 years to develop, and in that time it
has produced many branches as well as numerous insights into economic affairs.
These would have to be adapted to a different theoretical base, and a colossal
effort would be required. So one can understand the temptation to conclude,
.Better the devil we know than the devil we don.t know..
But for a proper understanding, actual markets and prices need to be empirically
studied, away from the lecture room or study with their blackboard, graph paper
and spreadsheets. Much of the teaching which deals with economic issues for
practical purposes is multi-disciplinary, using economics only in part. A salient
example is business or management studies, which uses branches of microeconomics
(for example, financial and industrial economics) alongside elements of
psychology, sociology and accountancy. Meanwhile, multi-disciplinary
development studies (as distinct from development economics) was founded by an
economist, Dudley Seers, who was convinced that economics alone could not
provide all the answers to development. He concluded it was essential to combine
it with insights derived from political science, economic history and sociology in a
bundle of development-related disciplines; not, in fact, all that unlike the political
economy of the classics from Smith to Marx. The question of market power, and
the strategies and stratagems required to deal with it, is a factor in both of these
departures from a .pure economics. model.
Like the classical economists, let us go back to observing what actually goes on in
markets and then work up theories that will explain it. In sociology and political
science, the processes of society and politics are observed and then an attempt is
41 Ibid., p. 84.
42 Keen (2001), p. 309.
43 Robinson (1979), p. 164.
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made to explain them; there is an acceptance of the probable complexity of these
processes. However, mainstream economics starts from a theory of supply and
demand, then defines a more elaborate theoretical concept (the .perfect market.)
and goes on from there. The view of many economists seems (perhaps
unconsciously) to be that the task of economics is to work out these theories first
and only apply them to real events later. But this is like determining the theories
of physics or chemistry before you examine their validity in a laboratory. As Seers
put it:
Instead of building up propositions from detailed observation of scores of
concrete cases, professional [economics] work goes mainly into the
construction, largely a priori, of models which are provided, after their
erection, with a very thin quantitative foundation., if indeed any numbers are
used at all. In all scientific subjects, progress has depended to a considerable
extent on systematic and comparative research.44
Seers ended the same paper with what he called a .modest but revolutionary
slogan: Economics is the study of Economies.. As a policy-oriented macroeconomist,
national economies were his object of study. But, I would argue,
markets are a more elementary concern than whole economies, and one could
equally well coin the slogan: Economics is the study of Markets. As we saw at the
beginning, even Nobel Prize-winning economists have admitted that the study of
markets is badly deficient. We suggest that a taxonomy of market types and price
formation systems is urgently needed as a starting point . the systematic
observation and analysis of what actually goes on in markets, including how power
on them operates.
 
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