Symposium: Economics and Public Policy

A word on economic method

Paulo Pinto, University of Sydney

Detractors like to say that Economics is the only field of human knowledge where two researchers may win the Nobel Prize by saying exactly opposite things. With this half-joke they aim to address the common situation of dissent amongst economists in their assertions of what may trigger a certain economic phenomenon, or alternatively, what may be the cure for a given economic malaise.

Naturally, when criticized with respect to its feuds, disagreements, and (according to some) ambiguity, economic science is being compared in an underlying way to its “better behaving” cousins, namely physics, chemistry, mathematics and others. Here, the presence of feuds and disagreements is still a fact but these seem to be more sporadic and speedily solved if compared to the same events in economic science.

Perhaps the most incommodious aspect of the referred half-joke is that it cannot be entirely dismissed as nonsense. Economics does produce some long lasting disagreements, some torrid opinion disputes and policy divergences. However, far from disavowing the methodology of Economic Science, these discrepancies and apparent lack of cohesion, reflect the intrinsic nature of the field economists took up to study. The idiosyncrasies of the economic field of study are numerous but we can have a glimpse of some of the most important ones.

When criticized with respect to its feuds, Economics is being compared to its ‘better behaving’ cousins.

Firstly, economic science deals with social issues as opposed to the natural world. The crucial distinction between social and natural phenomena is that the former present a higher degree of unpredictability than the latter. Society is composed of individuals and these are not always rational. Therefore, the aggregate behavior of individuals, which is reflected by the behavior of society, is beyond the reach of deterministic analysis and it is as yet unclear whether the use of tools such as chaos theory (so proper to natural phenomena) would provide anything more than another approximation. Theoretical models, at times, produce results diverging from real observations because the erratic microeconomic behavior of agents is difficult to model and is often assumed to be irrelevant. That is to say, when studying economic phenomena, theorists assume that the individual agents act in a rational and consistent manner. By overlooking irrationality and inconsistency—that might typify the actions of a significant proportion of the economic agents—theorists simplify their models but diverge from real world facts.

Second, economics is a non-experimental science. In the natural sciences, most theoretical divergences between researchers are settled by means of experiments when definite conclusions are out of reach of pure theory or mathematics. Consider the case of two physicists examining the problem of free-fall. The first might say that an object subject to a gravitational field falls down to earth at an increasing velocity. The second might say that the drag force of the atmosphere would keep the velocity constant and reduced. The first scientist uses the example of a free falling rock to support his conclusion. The second uses the example of a free falling feather to uphold his. The feud is established. No conclusion will be reached until they perform the experiment of dropping a rock and a feather to the ground inside a vacuum container. It will be concluded that none of the scientists were exactly wrong. Rather, certain circumstances make the air drag assumption especially strong in the case of the feather and not as much in the case of the rock. Therefore, none of the scientists were incorrect despite their conflicting conclusions. Disagreement hinged on what effects were particularly stronger (outweighing the others) in a specific situation. If not for the experimental evidence the divergence would not have been solved and the feud would have remained indefinitely.

Two disagreeing economists may be in an odd situation where neither is exactly wrong.

The fact that there is almost no experimental analysis possible in economics offers an explanation for the persistent disagreements between theorists; thence, the so-called “Schools of Thought” which are also a phenomenon common in Political Science, Philosophy and Sociology. Being a non-experimental science is not the isolated “privilege” of Economics. Gregory Mankiw [1] reminds us that natural sciences such as Astronomy and Biology (when studying the evolution of species) are also non-experimental and this also gives rise to discussions, disagreements, disputes and incongruities.

Interestingly enough, resembling the case of the rock and the feather, two disagreeing economists may be in an odd situation where neither is exactly wrong. Take, for example, the current dissent between theorists concerning wealth inequality and economic growth. Certain economists say that—in the early stages of development—one inescapable spin-off of a rise in per capita income is that the rich get richer and the poor, poorer. Some go further and, perhaps backed by the work of Simon Kuznets in the 1950’s, posit that a rise in inequality is actually necessary for growth to take place. Alternatively, a set of theorists claims to have proven the absolute independence of growth and inequality. Thus, they argue, an array of tools and policy measures directed to promoting growth would be, as the jargon goes, inequality-neutral. [2] It is important for society and policymakers to heed these “battles of ideas” because by analyzing the reasoning and expositions of each side, some very practical questions concerning, for instance, the downgrading of the dole accompanied by tax cuts can be properly addressed.

A third point is that by dealing with how societies produce or distribute income or wealth, economics is inextricably entangled with social and political stances. One sees politicians without economic training talking freely about economic issues and invoking economic “truths” when they are actually expressing and defending their own political point of view or the interests of one social group. Alternatively, one sees economists delving into questions such as how society should be organized and how it should be governed. It is undeniable that Smith, Marx, Keynes and Friedman, among others, occupied themselves with such questions. With political points of view involved in the equation, it is not surprising at all that analytical disagreements emerge. Here, the policy debate amongst American economists during the 1980’s is illustrative: Defending its very own political stances, the Reagan Administration put forth policies that reduced progressive tax rates, stimulated the arms buildup and weakened support for the less affluent. The theoretical economic backing for these actions was provided by such names as Milton Friedman, Charles Murray and Arthur Laffer. On the other (weaker) end of the tug-of-war, John Kenneth Galbraith led the resistance to the ‘Reagan economists’ and singled out the detrimental impact of their theories upon American society. [3]

Economics reflects the social and political views of the epoch it tries to explain.

Economics reflects the social and political views of the epoch it tries to explain. It was so in Smith’s time when England was trying to have other countries’ markets opened to her industry; when Marx depicted the brutal oppression of the worker in the industrial society; when Veblen denounced the “robber barons”; and when Keynes corroborated government intervention during the Great Depression. It is not surprising at all that analyses and remedial measures proposed by economists should vary not only amongst the different “Schools of Thoughts” but also through time.

If in political science, the adage goes “the punishment for those people who don’t have interest in politics is that they are governed by the people who do”, then perhaps we could say something similar in economics. By ignoring certain economic dissentions, the individual is giving a permit for those involved in the discussion to overlook his or her interests. It is important for citizens to follow and have a say in some economic feuds and disputes if they are interested in their own economic welfare.

It is impossible to understand economics without mastering mathematics and logic. One must also understand human behavior and how people congregate to express and enforce their opinions. It is also necessary to understand how societies are governed and want to be governed. It is vital to somehow amalgamate mathematics, philosophy, sociology, history and politics in lines of thought that are profound, cohesive and meaningful. One needs to build philosophical nets of assumptions and chains of events without losing track of applicability and policy implications. One has to be theoretically and practically oriented at the same time; to be able to combine abstract philosophical reasoning, supported and expanded by a mathematical skeleton and still obtain concrete results and implications sometimes in the very same paragraph. This is not straightforward.

Under such circumstances, it is not surprising to learn that Max Planck—discoverer of Quantum Mechanics and one of the brightest minds of the twentieth century—once told John Maynard Keynes that he was thinking of switching to economics but at a certain point gave up deeming it to be too difficult a discipline. [4]


1. Gregory Mankiw (1999), Macroeconomics, 4th ed. page 3. [Back]

2. Many could be the sources of the conflicting opinions, from different theoretical assumptions to unavailability of reliable inequality data referring to developing countries. [Back]

3. J. K. Galbraith (1994). The world economy since the wars—a personal view. The fact that poverty has risen sharply in the US is attributed by many to the policy measures of the Reagan era. [Back]

4. Robert Heilbroner (1992), Worldly Philosophers. [Back]

Paulo Pinto is Associate Lecturer in Economics in the School of Economics and Political Science, The University of Sydney.

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