Archive for May, 2009

The Scary World of Self-Proclaimed Scholars

Friday, May 29th, 2009

As someone who is aiming for a career in academia and, hence, with academics or scholars, I get to see quite a bit of what is going on “behind the scenes” in university departments. I also get to know quite a few people who claim to be scholars (and they are truly not) as well as people who use only the dirtiest tricks they can find to belittle, denigrate, and smear fellow scholars that they don’t like.

Some people are truly narrow-minded jerks, and quite a few of them seem to have taken refuge to academic departments at publicly financed universities. Most of them, it seems, are simply not interested in creating knowledge, finding the truth, and all the other things most of us would probably expect from researchers and professors.

Whereas I could write this blog post on all the little things that I have discovered and that have annoyed me, I will only discuss something that I find particularly annoying and unworthy anyone working with science: conscious and purposeful smearing for the sake of … smearing.

The art of undermining somebody’s authority and reputation through spreading rumors and attacking them behind their backs is practiced in most trades, and so too in academia. One should not assume that scientists, supposedly fact-oriented and logically stringent seekers of The Truth, do not play dirty tricks on each other and spend enormous amounts of time and energy waging and fighting petty faction wars in departments or even within offices. Politics seems to be a “natural” part of most organized  bodies of people in which they do not naturally and solely share a specific aim.

In any case, academia is just like any other such body but perhaps more puerile. The hierarchy is very fixed while often informal and it is a highly held custom to kick on anyone who’s on a lower level. Also, if there is something you do not like – do not hesitate to attack their person rather than their research, and do whatever you can to make straw-man arguments with as sarcastic tone as possible.

There are plenty of examples of such behavior, but perhaps Brad DeLong‘s treatment of Austrian Economics is the best recent example. Not only do comments correcting Dr. DeLong’s assertions mysteriously disappear from his blog or are as mysteriously shortened, but he does not give people disagreeing with him a chance. He is simply not interested in other views. Scholarly? Not very.

Steve Horwitz comments on DeLong (all the necessary links to comments back and forth are provided by Horwitz; Mellon was President Hoover’s Treasury Secretary):

First, DeLong cuts off the part of Murphy’s post where he provides the evidence that Hoover rejected that view and that it did not dominate his administration.  Brutally dishonest.  Bob replies in the comments, and I follow up.  DeLong then truncates the part of MY comment where I point to Larry White’s JMCB paper that demonstrated that even MELLON was not a “liquidationist” and neither were the Austrians.

This is not a very unusual or extreme behavior and Brad DeLong is hardly an extremist (extremely ignorant and puerile, maybe – but not an extremist). Rather, this is quite common behavior in the land of academia, where everybody’s constantly guarding their turf and aren’t interested in any arguments or facts unless they strengthen their own view.

The fact is that most academics are hardly sholars; they are mostly people who are too smart for politics but too lazy to do the work necessary to be successful in any other trade. And many professors have never even tried any other line of work. In fact, some even look down upon people with experience outside of academia as if that would be something despicable.

Academia and science simply doesn’t work the way it theoretically should, i.e. the way John Stuart Mill defended free speech: only through allowing everybody to speak their opinion can we have sufficient ground to weed out the obviously bad and false. If academia would work this way, it would be eagerly receptive to new ideas and not only accept but even long for new perspectives and challenging ways of explaining real phenomena. Embracing the ideas of the one who challenges you and what you believe in is the way towards scientific progress.

The fact is that academia works in a way that is quite the opposite. New ideas are not embraced; rather, they are fought, silenced, and ridiculed – and editors of scientific journals even refuse to publish papers that are too “controversial.” To be published, new scientific results need to be “scientifically correct” rather than true to the facts.

I guess the question that pops up in your mind now, dear reader, is why the heck I so badly want to be part of this? My answer is that there are a number of exceptions to this rule and that working with but one true scholar and a hundred nitwits is a privilege – it is very rewarding to be around and work with a true genious. Also, I love doing what professors do: I love research and I love teaching – I could even spend ours on committees without necessarily being bored to death.

What scares me, however, is that there are so many “great” self-proclaimed scholars out there that do not know what the word means. And that they fall to such low levels in ways of fighting their petty turf wars. I am scared about this fact, but I am not afraid of them nor what they do. My background in politics have prepared me for the worst, and the fact is that I too can play this game – and I have formal training through 15 years in politics, which most academics do not. They will not know what hit them.

So I say: let me do what I do best and do your worst in honest critiquing of my work. And if you cannot, but prefer to fight dirty, bring it on. It is not a threat, it is a promise.

Posted in General Comment | 1 Comment »

The Basis for Predictions

Monday, May 11th, 2009

In a previous post I discussed the well-known fact that economists’ predictions are always wrong, and why they always are. But one obvious problem with predictions was left out of the discussion, and I would like to discuss this problem in a separate post. In contrast to the previous post, which was quite general in tone and content, this issue is mainly methodological and somewhat philosophical.

The previous post discussed the problems of measurement and the very problematic assumption that “people are like rocks,” i.e. that individuals share a fixed and observable nature in the same way that rocks have common simple properties. I also stretched the discussion to cover the ever present tension between the Weberian concepts of erklären and verstehen.

The former kind of science strictly emphasizes explaining facts and establishing simple causal relationships that can be derived from the observable properties of the entity. The latter stresses the subjective understanding of what is going on, and finding a way of rationally establishing a way to “see” how things work and are related. Weber explicitly states that erklären is the purpose and method unique for the natural sciences whereas the social sciences need to have a verstehen-based perspective. Predictions, hence, are possible only in sciences based on the erklären methodology and this is the conflict in economics: a fundamentally social science attempting to make use of primarily (only?) the methods and methodology of the natural sciences.

But predictions are problematic in and of themselves even if we ignore the tension arising from using erklären methodology studying verstehen phenomena. The very nature of predictions imply the usage of historic data to say something about the future. As we know, and have known at least since the days of the Ancient Greeks, it does not follow from the fact that the sun has risen every morning for centuries that it will continue to do so. History and future are not the same and may even be very different. What makes the future so troublesome is that it is fundamentally uncertain and we cannot use the certain facts of history to create knowledge about it.

As was stressed in the previous post, extrapolating doesn’t necessarily make sense. Doing the same maneuver for predictions about the future from data about historical events makes even less sense. Tomorrow will not be exactly like yesterday, which is a fact everybody knows and should know. This fact is true for details as well. That a rock falls to the ground if dropped today does not mean it will do so tomorrow.

However, we can conclude that a rock will fall to the ground if dropped tomorrow if we can show what makes it drop and we can rely on the properties of these causes being the same tomorrow. A rock has a fixed nature with certain properties and these do not change. We have been able to establish that a rock is dead matter that responds to exogenous forces in a very reliable and predictable way – we know that a rock is a rock is a rock and that this means something in terms of its nature.

It may be the case that tomorrow does not have gravity or that all rocks have turned into lollipops, but that doesn’t change the fact that rocks, according to our defintion, are rocks and that they respond to different forces in certain ways. We cannot with complete certainty say that everything will be the same tomorrow, but we can make general statements that will hold true for the things, forces, and properties we have specified (if we have done a good job specifying them). 

Now try the same thing with a human being. An individual is an individual is an individual. If this is true in the same sense as a rock is a rock, then we should be able to establish if one and every individual likes ice cream, responds the same way to stimuli like heat and cold, reacts to a certain situation the same way with a high level of certainty. 

Try the latter and compare a rock with an individual. Expose the rock to exogenous forces and observe its “behavior” and what happens to it. Then expose an individual to some stimuli and observe the behavior. Repeat it and observe the behavior – is it exactly the same? You will find that different individuals react in different ways to stimuli – and that one individual’s reactions will change over time as he or she learns. The rock never learns.

So even if the way a rock is affected by certain experiments is not purely certain for the future, it is very much predictable. The way John Doe reacts to, e.g., a speeding car about to hit him is different every time – and may not [ever] be the same as how Jane Doe reacts. It is not predictable; we cannot know what will happen (i.e. how the individual will react). 

So how will people react to lower prices in a certain good? We can attempt to predict that tomorrow, if the price for widgets is 10% lower, people will purchase 500,000 more widgets. But that doesn’t make sense. If the price is indeed lower it does not follow that the people who bought a widget yesterday at the higher price are more likely to buy a widget again. It also doesn’t follow that people in general value the widget in the same way. 

The only thing we can say is that ceteris paribus people will tend to purchase more of the cheaper good, at least for as long as they subjectively expect to be better off through purchasing one [more]. People want to be better off (which follows from the definition of better) and therefore make choices to improve their situation – to the best of their ability. But their preferences change and their ranking of those preferences change – as do their needs, perspectives, experience, knowledge, etc. An individual is not an individual is not an individual, at least not the same way a rock is a rock is a rock.

The problem of induction is problematic in natural science where dead matter is studied, even though the deathness of matter makes its properties reliable and effects predictable. Add life to the equation and the problem of induction becomes insurmountable and obviously so. 

Some things do seem to be repeated over time and the saying that “history repeats itself” may be thought to disprove the point I am making. But it doesn’t. It may be true that history tends to repeat itself if we do not learn from it, but the problem is that there is no “we” in the sense that there is a “rocks.” Individuals are different from each other and they change over time; humankind may not learn from the lessons of history, but it is equally true that situations do not repeat themselves – only man-made abstractions of them do. It is rational to learn from the essence of a situation not to repeat it or its negative consequences, but it is equally rational to say that things have changed and therefore the outcomes may do so too.

The lesson to be learned is that collectivism doesn’t work when we speak of human behavior simply because human behavior is not as tightly bound to the properties of “human” as the effects on a rock are to its properties. The reason is that human consciousness is not necessarily the same as the human body – one could possibly predict the effects of stimuli in medicine, but not in economics. Medicine works with the properties of the human body, i.e. its constitution and chemical and biological relationships (however complex); economics studies human behavior, where one individual’s choice to act is not based on the same facts as another’s, and a specific individual tends to learn – and change – from experience.

Posted in Economics, Philosophy | 2 Comments »

Why Economists’ Predictions are Always Wrong

Tuesday, May 5th, 2009

The general conclusion at the moment seems to be that there is a need for a new set of theories of the market and economics – “crisis economics.” The reason for this need is the fact that “no one” predicted the current downturn and crisis, and that the predictions made turned out as wrong as they could possibly be. In fact, many economists predicted increased growth and continued prosperity while the true future held an economy in freefall with a number of imploding industries and sectors. 

In an opinion piece in the National Post the obvious question is asked: Why Do We Have Economists? The question had to be asked, especially since there has been no real “blame game,” no real and public debate on why all predictions turned out wrong, and no consequences for the economics profession. After all, economists often stress the fact that action is taken under rational assumptions of consequences and that all actions have consequences of some form. The army predicting economists is obviously an exception to that rule.

As some sociology professors frequently joking: say what you will about economists, but you will always get a straight and precise answer – and you always know that it is wrong. So the question asked by the editor of the National Post should be well taken; it is an important one. Why do we have economists?

But there is a question that is more important, especially for the professional economists who make all these “always wrong” predictions, and that is what makes the predictions always turn out wrong? The answer to this question lies in the error of Milton Friedman in his now famous (should-be infamous) article “The Methodology of Positive Economics” and the people who followed him (and still do).

Economics prides itself of being a deductive science, i.e. that new knowledge is deduced directly and logically from true premises or assumptions. Friedman argued that it doesn’t matter if the assumptions are wrong as long as one can extract general rules from which one can make predictions that are somewhat reliable and come close to the truth. What he spelled out was a theory of economics aiming to be a natural science, where exactness is both important and possible. In economics, however, we should learn that exactness is neither important nor possible.

In order to provide a positive, rigorous science that can produce exact predictions, one has to through out all understanding (in the Weberian verstehen-sense) and rely solely on cold data. One cannot make predictions unless that which is studied is perfectly observable and with clear boundaries. But what if we apply this line of thinking on human action, which is the core of what is studied in economics. Are the causes, nature, and consequences of human action perfectly observable and have clear boundaries? How do we measure the causes of an individual’s actions? His choice of action? The action itself? Its consequences?

The latter comes closer than the former, but it is still not even close to having the properties of the objects studied in the natural sciences. Mixing x grams of A with y grams of B may always create the substance C, and exposing D to E or F may always show exactly z – but doing m to one individual does not necessarily create the same effect as doing m to another. People are not simply responding perfectly and blindly to exogenous influences, there is a whole lot of other things going on that are at least as important as certain influences. Some call it “free will,” but you don’t have to go as far into metaphysical or religious pondering to realize that people are neither rocks nor [simpler] animals.

The problem of economic prediction is just that underlying assumption that we can “easily” predict the outcome of numerous people through meddling with some of the variables that affect people’s choices. It is simply not the case that different individuals choose to act the same way when exposed to (or influenced by) the same stimuli. Our bodies may – may – react in the same way, but our minds do not. 

To this some might retort: thanks to the law of large numbers we can generalize our conclusions despite individuals not being alike. When the law of large numbers is applicable, we can simply assume that if we just have a sample large enough all potentially skewed or unrepresentative data will even out and we will find The Truth about human beings. But this does not change the problem at hand – we are still generalizing in the same way, but only with more data and more individuals. 

Even if we accept the law of large numbers as a sufficient reason to use statistics to understand people, we will have to face the problem with their not being the same. That people, being boundedly rational, would always choose more over less (which necessarily follows from the definition of choice) does not mean they will choose a particular outcome over another in every situation. Each individual will make a subjective assessment of his preferences and rank them, then make a choice based on what he knows of his ranked preferences (this is the decision process, whether it is carried out consciously and reflectingly or not). But the ranking may change depending on circumstances as well as what the individual has learned.

Making perfect predictions the way Friedman proposed means we must take the quality of being human out of every individual, or at least “even it out” in order to calculate precise predictions. What do we learn by knowing that people without personalities and without “inner depth” (some call it soul) would necessarily act according to our the predictions? Probably not much.

Furthermore, the predictions are based on extrapolating well beyond what is reasonable. Establishing one person’ s assessment of everyday risk and the costs he accepts to take care to avoid this risk, and translating it into dollar amounts, does not necessarily give us monotonous knowledge of this individuals preferred choices. It does not follow that he would accept a high risk to lose his life if he was paid some muliple of the cost he was willing to take on for smaller risks.

Predictions simply do not cut it. So why do we have economists?

The answer to this question is that we do not need most economists, but we do, at the same time, need economists more than ever. The reason for this is that the economists working on predicting the exact outcome of hundreds or thousands (or millions or billions) of individuals’ simultaneous choices are worthless, their methodology is fundamentally flawed and they are nothing but frauds. And they should be treated accordingly.

While we think of what to do with the predicting economists we need to find the real economists, the people who understand the market and can tell us how it functions and what is required for it to function well. Very few economists understand what the market is about and how the emergent order arises, subsists, and what it effectuates. These economists were able to say a long time ago that we were heading towards a meltdown, and they did. They even published these warnings, but nobody listened or wanted to hear about it. “Nobody” here denotes the prediconomists and the political elite that [usually] hire them. 

Economists need to do what businesses did a long time ago: go back to basics. There is no need for armies of economists trying to predict the exact results of public policy, of interest rate changes, or monetary policy, etc. The use of prediconomists is not to learn about the future or politics, but as “useful idiots” disguising blind, naive, and ignorant attempts to regulate people’s choices through granting the commandeering of society an air of scientificity. And they serve well as scapegoats when their predictions turn out to be wrong and the people in charge can hide behind their “good intentions.”

What there is a need for is real economists who do not engage in futile attempts to “scientifically” make exact predictions of people’s future choices. We need people to tell us how the market works so that we can reap the full fruits of our hard work and profit from the risks we take.

Posted in Economics, Political Economy | 12 Comments »