The Dismal Mind - Economics as a Pretension to Science - Part IIWritten by Sam Vaknin
III. The Scientific Method
To qualify as science, an economic theory must satisfy following conditions:
All-inclusive (anamnetic) – It must encompass, integrate and incorporate all facts known. Coherent – It must be chronological, structured and causal. Consistent – Self-consistent (its sub-"narratives" cannot contradict one another or go against grain of main "narrative") and consistent with observed phenomena (both those related to subject and those pertaining to rest of universe). Logically compatible – It must not violate laws of logic both internally (the narrative must abide by some internally imposed logic) and externally (the Aristotelian logic which is applicable to observable macro world). Insightful – It must inspire a sense of awe and astonishment, which is result of seeing something familiar in a new light or result of seeing a pattern emerging out of a big body of data ("data mining"). The insights must be inevitable conclusion of logic, language and of development of narrative. Aesthetic – The narrative must be both plausible and "right", beautiful (aesthetic), not cumbersome, not awkward, not discontinuous, smooth and so on. Parsimonious – The narrative must employ minimum number of assumptions and entities in order to satisfy all above conditions. Explanatory – The narrative must explain behaviour of economic actors, their decisions, why events develop way they do. Predictive (prognostic) – The narrative must possess ability to predict future events, future behaviour of economic actors and of other meaningful figures and inner emotional and cognitive dynamics of said actors. Prescriptive – With power to induce change (whether it is for better, is a matter of contemporary value judgements and fashions). Imposing – The narrative must be regarded by society as preferable and guiding organizing principle. Elastic – The narrative must possess intrinsic abilities to self organize, reorganize, give room to emerging order, accommodate new data comfortably, avoid rigidity in its modes of reaction to attacks from within and from without. In some of these respects, current economic narratives are usually theories in disguise. But scientific theories must satisfy not only most of above conditions. They must also pass crucial hurdles of testability, verifiability, refutability, falsifiability, and repeatability – all failed by economic theories. Many economists argue that no experiments can be designed to test statements of economic narratives, to establish their truth-value and, thus, to convert them to theorems.
There are five reasons to account for this shortcoming - inability to test hypotheses in economics:
Ethical – Experiments would have to involve humans. To achieve necessary result, subjects will have to be ignorant of reasons for experiments and their aims. Sometimes even very performance of an experiment will have to remain a secret (double blind experiments). Some experiments may involve unpleasant experiences. This is ethically unacceptable. Design Problems - The design of experiments in economics is awkward and difficult. Mistakes are often inevitable, however careful and meticulous designer of experiment is. The Psychological Uncertainty Principle – The current position of a human subject can be (theoretically) fully known. But passage of time and experiment itself influence subject and void this knowledge ("time inconsistencies"). The very processes of measurement and observation influence subject and change him. Uniqueness – Experiments in economics, therefore, tend to be unique and cannot be replicated elsewhere and at other times even if they deal with SAME subjects. The subjects (the tested humans) are never same due to aforementioned psychological uncertainty principle. Repeating experiments with other subjects adversely affects scientific value of results. The undergeneration of testable hypotheses – Economics does not generate a sufficient number of hypotheses, which can be subjected to scientific testing. This has to do with fabulous (=storytelling) nature of discipline. In a way, Economics has affinity with some private languages. It is a form of art and, as such, is self-sufficient. If structural, internal constraints and requirements are met – a statement is deemed true even if it does not satisfy external (scientific) requirements. Thus, standard theory of utility is considered valid in economics despite empirical evidence to contrary - simply because it is aesthetic and mathematically convenient. So, what are economic narratives good for?
The Distributive Justice of the Market - Part IWritten by Sam Vaknin
The public outcry against executive pay and compensation followed disclosures of insider trading, double dealing, and outright fraud. But even honest and productive entrepreneurs often earn more money in one year than Albert Einstein did in his entire life. This strikes many - especially academics - as unfair. Surely Einstein's contributions to human knowledge and welfare far exceed anything ever accomplished by sundry businessmen? Fortunately, this discrepancy is cause for constructive jealousy, emulation, and imitation. It can, however, lead to an orgy of destructive and self-ruinous envy.
Entrepreneurs recombine natural and human resources in novel ways. They do so to respond to forecasts of future needs, or to observations of failures and shortcomings of current products or services. Entrepreneurs are professional - though usually intuitive - futurologists. This is a valuable service and it is financed by systematic risk takers, such as venture capitalists. Surely they all deserve compensation for their efforts and hazards they assume?
Exclusive ownership is most ancient type of such remuneration. First movers, entrepreneurs, risk takers, owners of wealth they generated, exploiters of resources - are allowed to exclude others from owning or exploiting same things. Mineral concessions, patents, copyright, trademarks - are all forms of monopoly ownership. What moral right to exclude others is gained from being first?
Nozick advanced Locke's Proviso. An exclusive ownership of property is just only if "enough and as good is left in common for others". If it does not worsen other people's lot, exclusivity is morally permissible. It can be argued, though, that all modes of exclusive ownership aggravate other people's situation. As far as everyone, bar entrepreneur, are concerned, exclusivity also prevents a more advantageous distribution of income and wealth.
Exclusive ownership reflects real-life irreversibility. A first mover has advantage of excess information and of irreversibly invested work, time, and effort. Economic enterprise is subject to information asymmetry: we know nothing about future and everything about past. This asymmetry is known as "investment risk". Society compensates entrepreneur with one type of asymmetry - exclusive ownership - for assuming another, investment risk.
One way of looking at it is that all others are worse off by amount of profits and rents accruing to owner-entrepreneurs. Profits and rents reflect an intrinsic inefficiency. Another is to recall that ownership is result of adding value to world. It is only reasonable to expect it to yield to entrepreneur at least this value added now and in future.