Quote of the Day: Economics is a Policy Science

Nevertheless, from the standpoint of influencing future policy, the elementary teacher is more important than I. I hope that my work will trickle down to the elementary teacher and through him to the large number of potential voters, potential Congressman, and potential newspapermen in his class. This is however merely hope. I don't actually do anything to make that more probable. It is true that my writings are, generally speaking, much more accessible to the ordinary person than most economic writings. This may help somewhat.

Nevertheless, the present situation is in my opinion very undesirable. Economics is a policy science and we should be trying to influence policy.

This is from law and economics Professor Gordon Tullock known for his work with Professor James Buchanan on the Public Choice Theory, as quoted by Professor Peter Boettke at the Coordination Problem Blog.

For the Austrian school, economics is basically value free (Wertfreiheit) or neutral with regards to all value judgments.

However this does not take away analysis through the provision of “praxeological critique of inconsistent and meaningless ethical programs” and the analytical exposition of “all the myriad consequences of different political systems and different methods of government intervention” (Rothbard). This implies that economic education is the principal way to influence public opinion on politics, as well as, on social policies.

Why the Austrian Business Cycle is Not a Tarot Card

Many, if not most people, tend to look for a one-size-fits-all solution or supposed elixirs to the world’s problem. That’s one of the key reason why many are seduced by analysis or reasoning premised on mathematical or statistical models or on pattern seeking formulas.

Readers of this blog recognize that I use much of the Austrian Business Cycle Theory (ABCT), but not as a standalone way to evaluate markets and events. It is important to know of the limitations of every theory, and this applies to the ABCT as well.

Professor Steve Horwitz explains, (italics original, bold emphasis mine)

Both critics and adherents of the ABCT misunderstand it if they think it is some sort of comprehensive theory of the boom, breaking point, and length/depth of the bust. It isn't. As Roger Garrison has long insisted, the theory by itself is a theory of the unsustainable boom. It is a theory that explains why driving the market rate of interest below the natural rate through expansionary monetary policy produces a boom that contains endogenous processes that will cause that boom to turn to a bust. Again, it's a theory of the unsustainable boom.

ABCT tells us nothing about exactly when the boom will break and the precise factors that will cause it. The theory claims that eventually costs will rise in such a way that make it clear that the longer-term production processes falsely induced by the boom will not be profitable, leading to their abandonment. But it says nothing about which projects will be undertaken in which markets and which costs (other than perhaps the loan rate) will rise, and it tells us nothing about the timing of those events. We know it has to happen, but the where and when are unique, not typical, features of business cycles.

Once the turning point is reached, ABCT tells us little to nothing about how the bust will play out. Yes, we know that further inflation and interventionist attempts to prevent the necessary reallocation of resources will make matters worse, but the theory by itself doesn't tell us a priori how this will play out in any given historical circumstance. The ABCT is not a theory of the causes of the length and depth of recessions/depressions, but a theory of the unsustainable boom.

In short, the ABCT explains the cause and effects of tampering with interest rates. Yet there are many other influences to people's incentives to act, which is not limited to interest rate signals.

And in looking for specifics or exactitudes, like ‘timing’ and which ‘particular projects or costs’ will be affected, would be similar to looking for answers from the tarot card. Obviously ABCT does not work that way.

Should Economics Be Left To The Economists? Is Economics Value Neutral?

At a recent assembly, I counselled a promising and youthful colleague, who had been rebuffed in trying to introduce classical liberalism to the economics departments of one of the elite schools in the Philippines, that since we eat, drink and sleep economics—where everyone engage in making and acting upon choices around the world of scarcity—that economics must not be left to the economists.

My point is since these elite schools have benefited from the current arrangement, there would be no incentive to assimilate changes that would only risk undermining their stature.

And I further added that politics is essentially economics, where politics signify no less than economics in morality’s clothing. Morality here, I am speaking of depends on whose sense of morality gets to be argued and or implemented; is it the minority, the majority, the despot, the King?

Thus, since economics is ubiquitous, it must be learned by everyone.

And for those in the know, it would be our civic duty to teach economics even in the non-traditional sense in our non-conventional way. In warfare, this is known guerrilla tactics.

As Ludwig von Mises once said,

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man's human existence.

Nevertheless the main aspect that differentiates the mainstream and classical liberalism would be the former’s emphasis on mathematical or empirical formalism vis-à-vis the latter whose analysis are based on logical deductions via praxelogical axioms or methodological individualism.

For instance, the mainstream would argue that their brand of math and statistical models based economics can be value neutral or value free when applied scientifically.

But this is would only be partly true because:

1. We are dealing with human action where every action involves subjective value preferences and ethical judgments.

As Murray N. Rothbard wrote, (bold emphasis mine)

I am not taking the position, now fashionable in many quarters, that there is no such thing as a value-free economics, that all economic analysis is inextricably shot through with value assumptions. On the contrary, I believe that the main body of economic analysis is scientific and value-free; what I am saying is that any time that economists impinge on political or policy conclusions, value-judgments have entered into their discussion. My conclusion, then, is that economists must either make their value judgments explicit and defend them with a coherent ethical system, or strictly refrain from entering, directly, or indirectly into the public policy realm.

In short, it would be inescapable for economists to fall for the value trap once they incorporate analysis based on the socio-political spectrum.

For instance, opportunity costs may not all be quantified in monetary terms as there would psychic and disutility costs. Thus, value free or value neutral can hardly be realizable except under classroom environment.

2. Economics is not the same as natural science.

Economics, as Jörg Guido Hülsmann wrote in MISES: The Last Knight of Liberalism, is a science with clear political implications, not a mere intellectual exercise.

Bottom line: Economics is human action.