Ceteris Paribus for Dummies

The economist’s analysis based on ceteris paribus (lat. “all other things being equal”) can, at least in certain contexts, seem almost laughable. After all, isn’t it pretty obvious that any economic system is a web of interdependent relations and interactions dependent on signaling through for instance the price system?

Even so, certain so-called scientific models may require the ceteris paribus statement simply because we do not have powerful enough tools and lack sufficient knowledge of the interrelationships. It could make sense, in a scientific setting where some progress is the best possible (since aiming too high simply means no progress), to use simplified models of simplified relationships and interdependencies and conduct experiments with simple tools to try to increase our understanding of our complex social world.

This does not, however, offer an excuse for all those experiments claiming to provide models that can make very exact forecasts. All such claims, when the models on which these forecasts are made are ceteris paribus models, are at best ignorant if not consciously deceiving. An economic model accepting exact values and providing exact forecasts based on ceteris paribus reasoning is fraudulent.

But this should not be interpreted as if economics needs to be abolished or disregarded. Rather, what I am trying to say is that we should know that interdependencies and relationships in the social world are complex and often mutually constituting. The result from a model where one variable is changed while all other variables remain constant can tell us something, but it does not tell us much about the effect of changing that specific variable in the real world. We should anticipate that one change in a delicate system or social web of relationship as an economic market effectuates other changes. The outcome of the system as a whole is therefore not fully foreseeable.

Most people would agree with this statement, and at this point many might even smile haughtily when thinking of the economist with the simplified models. But that would be a rash reaction: most people seem to rely on ceteris paribus reasoning.

The economist, forced by the complexity of social systems, sometimes needs to rely on ceteris paribus reasoning in order to make progress at all. Perhaps this is the reason people in general, “dummies” in the title, reason this way; it should be easier and thus a lot faster to come to a conclusion if one does not consider all variables and parameters – even better if only one or two variables are considered.

Now, let me explain what I mean by saying people in general use ceteris paribus reasoning. Most people reading this blog are radicals of some sort, the majority likely consists of libertarians and anarchists. Being radicals, I assume most of you have approached a non-radical with your ideas only to get a seemingly “stupid” question back such as (if the argument is for less state): “but who will build the roads?”

Another “radical” thought would be to allow everybody to control their bodies and therefore decide what substances are inserted into the body. In other words, abolishing the repressive drug laws, a suggestion that usually rebuffed with something like: “but then everybody would become drug addicts and the drug lords would seize all power.”

These reactions are examples of ceteris paribus reasoning. Abolishing government does not mean roads disappear and it certainly doesn’t mean nobody would be willing to build roads. But roads are generally built and maintained by government or possibly by government contractors. A ceteris paribus effect of abolishing the state or drastically reduce its size could be that none of the government services would be supplied and thus that their infrastructure would dilapidate.

A more likely outcome of abolishing the state would be that people would acquire whatever infrastructure and services they need and find efficient ways to provide for these services on the market. But this requires a dynamic view and the analyst would necessarily have to consider multiple variables simultaneously and have at least a basic understanding for how people act and why they choose to act.

The same would be true for the drug example, where the abolishment of drug laws would likely strip the mafia of its powers while making quality on the drug market much more reliable. In other words: drug related crimes would eventually drop drastically, if not fully disappear.

But, again, to come to this conclusion one would have to consider a number of variable. In the drug example one would first need to identify the problems today through asking what are the real effects of the repressive laws. The laws create a black market that drives up prices while the civilized behavior required by suppliers in an open market would not be rewarded. In other words: the most brutal suppliers are able to create monopolies through terminating competition and buying off people representing the “authorities.” The artificially high prices for drugs provide artificially high profits and also enough funds to cover costs for violent behavior (which would not be the case in an open, competitive market).

The arguments supplied against deregulation disregard likely effects for the sake of fast and simple rejections. There are obvious advantages to be able to offer fast and simple arguments: most people would consider a fast response more credible than a response delivered after thinking about it, and simple arguments are much easier understood than more complex such. Also, time is an important factor: most people do not have the patience nor the interest to invest the time it takes to explain how e.g. drug prohibition causes problems and why the laws should be abolished – especially if the issue is not one of their great interests. Most people would accept the simple answer because of its simplicity, not because of its realism (a high degree of consistency with the complex social reality).

It is easy to see how a ruling elite could take advantage of this. Whether this tells us anything about economics is another matter.