Blackboard economics

I’ve been recently reading J-B. Say’s Treatise on Political Economy and stumbled up this passage:

It would, however, be idle to imagine that greater precision, or a more steady direction could be given to this study, by the application of mathematics to the solution of its problems. The values with which political economy is concerned, admitting of the application to them of the terms plus and minus, are indeed within the range of mathematical inquiry; but being at the same time subject to the influence of the faculties, the wants and the desires of mankind, they are not susceptible of any rigorous appreciation, and cannot, therefore, furnish any data for absolute calculations. In political as well as in physical science, all that is essential is a knowledge of the connexion between causes and their consequences. Neither the phenomena of the moral or material world are subject to strict arithmetical computation.” 

Many supporters of this thought followed Say, starting most notably by de Tracy, who claimed that the fundamental true axiom is that ‘man is a sensitive being’, therefore truth can only stem from observation and deduction, not mathematics. More importantly though, it reminded me of Ronald Coase’s Nobel Prize lecture in 1991:

This neglect of other aspects of the system has been made easier by another feature of modern economic theory – the growing abstraction of the analysis, which does not seem to call for a detailed knowledge of the actual economic system or, at any rate, has managed to proceed without it. Holmstrom and Tirole, writing on The Theory of the Firm in the recently published Handbook of Industrial Organization, conclude at the end of their article of 63 pages that “the evidence/theory ratio… is currently very low in this field”. Peltzman has written a scathing review of the Handbook in which he points out how much of the discussion in it is theory without any empirical basis. What is studied is a system which lives in the minds of economists but not on earth. I have called the result “blackboard economics”. The firm and the market appear by name but they lack any substance.

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2 Responses to Blackboard economics

  1. dwpandme says:

    I generally find my political economic views are most closely aligned with libertarian principles. Language is quite important here though as I am from the UK and I sometimes find myself talking with US proponents of free market capitalism who don’t seem to see a distinction between the theoretical model and the implementation in practise. I see that free market capitalism as an ideology appeals because it seems to resemble a scientific theory of a natural phenomenon rather than a social construct like the legal system for example. There is always the desire to reduce the system to just one or two fundamental principles from which the entire theory can be derived. Then if you can show that it is only necessary that individual liberty be recognised along with the observance of private property rights in order for a theory of free market capitalism to exist it seems to suggest that it rests on something as fundamental as newton’s laws of motion.

    In trying to do this people end up with a very idealised, unrealistic model that is probably as unworkable as the communism espoused by Marx. I do understand the desire to simplify the world in this way, if nothing else because the maths works so much better and the whole thing is more elegant. I also think that comparisons can be drawn between such theoretical systems and models within physics such as statistical or many body physics where the macroscopic principles manifest in the gas laws emerge from and can be recovered by consideration of individual particles interacting and obeying the laws of motion. However, I don’t really understand why, in your first quote above, the author compares the moral to the physical world in their both being irreducible to arithmetic. Isn’t the distinction at the level of determinism rather than arithmetic?

    • orb75 says:

      Thank you for the comment. I think what Say might be referring to is what we call today complex systems (be that of the physical world or of human behaviour).
      Well, talking about language – I’m Hungarian, who actually first read Say in French but now does everything in English 🙂
      On your comment about US free market economists. I’m not sure about the link between free market thinking and the need to apply simplified mathematical models, i.e. what Hayek would have called scientism, if anything, it is the opposite (I think Coase’s line sums it up very nicely). But that’s just my experience.

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