Tuesday, December 16, 2014
Should Economics Emulate Natural Sciences?
Economists have always been envious of the practitioners of the natural and exact sciences. They have thought that introducing the methods of natural sciences such as a laboratory where experiments could be conducted could lead to a major breakthrough in our understanding of the world of economics.
But while a laboratory is a valid way of doing things in the natural sciences, it is not so in economics. Why is that so?
A laboratory is a must in physics, for there a scientist can isolate various factors relating to the object of inquiry.
Although the scientist can isolate various factors he doesn’t, however, know the laws that govern these factors.
Hypotheses and Logical Certainty
All that he can do is hypothesize regarding the “true law” that governs the behavior of the various particles identified.
He can never be certain regarding the “true” laws of nature. On this Murray Rothbard wrote,
Contrary to the natural sciences, the factors pertaining to human action cannot be isolated and broken into their simple elements.
However, in economics we have certain knowledge about certain things, which in turn could help us to understand the world of economics.
For instance, we know that an increase in money supply results in an exchange of nothing for something. It leads to a diversion of wealth from wealth generators to non-wealth generating activities. This is certain knowledge and doesn’t need to be verified.
We also know that for a given amount of goods an increase in money supply all other things being equal must lead to more money paid for a unit of a good — an increase in the prices of goods. (Remember a price is the amount of money per unit of a good.)
We also know that if in country A, money supply grows at a faster pace than money supply in the country B, then over time, all other things being equal, the currency of A must depreciate versus the currency of B. This knowledge emanates from the law of scarcity.
Hence for something that is certain knowledge, there is no requirement for any empirical testing.
How Can This Knowledge Be Applied?
For instance, if we observe a central-bank-engineered increase in the money supply — we can conclude that this resulted in a diversion of real wealth from wealth generators to non-wealth generating activities. It has resulted in the weakening of the wealth generating process.
This knowledge, however, cannot tell us about the state of the pool of real wealth and when the so-called economy is going to crumble.
Whilst we can derive certain conclusions from some factors, the complex interaction of various factors means that there is no way for us to know the importance of each factor at any given point in time.
Some factors such as money supply — because it operates with a time lag — could provide us with useful information about the future events such as boom-bust cycles and price inflation. But a change in money supply doesn’t affect all the markets instantly or equally. It goes from one individual to another individual — from one market to another market. (It is this that causes the time lag from changes in money and its effect on various markets.)
Contrary to the natural sciences, in economics — by means of the knowledge that every effect must have a cause and by understanding that (ceteris paribus) the more we have of something, the less valuable it becomes, we can logically derive the entire body of economics knowledge.
This knowledge, which should not be confused with knowledge gained from related fields such as history, economic history, and statistics, is certain and is not verified through laboratory experiments.
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