Economics is a social science which studies how humans
deal with scarcity. Economists wish to understand how people act in
response to having more wants than they have the faculty to satisfy.
They do this by analyzing the production, distribution, and
consumption of goods and services within an economy. Economists
attempt to understand how it is that people economize their resources
to satisfy their wants and needs. Some economists attempt to
understand behavior on a macro-economic level, using statistics of
aggregate data to explain the functioning of an economy. Other
economists employ a micro-economic approach, focused on understanding
and explaining the ways in which individuals make economic decisions.
Today, economists face very much the same fork in the road which anthropologists and
other social scientists have had to choose between in the past. The
question boils down to the very nature of the economic science and
the methodology which should accompany it. Is economics a hard or a
soft science? Does data reveal economic models or are economics laws
self evident? Is economics an inductive or deductive discipline? How
an economist answers these questions will inevitably reveal the style
of economics they prefer and how they interpret the dual roles of
knowledge and ignorance within the discipline.
According
to the Mises Institute:
"The economist should not mimic the behavior of the natural scientists, because the social sciences involve human beings. Human action is characterized by intentional behavior, which involves the rational use of means to achieve desired ends. The very subject matter of economics—capital goods, money, wage rates, etc.—is not defined by physical or chemical properties, but instead by the mental or subjective attitudes that human minds take toward these things. Consequently, the proper method for an economist is to start with self-evident axioms—such as that people try to achieve the highest satisfaction at the lowest cost—and logically deduce conclusions from them.”
This perspective contrast with the alternative presented by the Mises Institute:
"Like the physicist, the economist (if he wants to be scientific) should construct a precise model that yields quantitative predictions about economic variables, such as GDP and unemployment. Then the economist should test those predictions against the actual data as collected by statistical researchers. At any given time, the best explanation or "theory" of a certain economic phenomenon is that model which yields the best fit between predictions and actual data."
The
implications of these two different methodological approaches are
distinct and important. Within the first approach economics is bound
by certain self evident laws which cannot be proven or disproved by
empirical study, Immanuel Kant referred to such laws as Synthetic A Priori. By the second approach economic laws do exist but not in the
same way, rather theory and models which most closely resemble
reality are counted as valuable economic tools and used to explain
human behavior. The micro perspective of the first
approach contrasts with the macro approach of the second.
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| Ludwig Von Mises |
The
limits of economic calculation has been debated most notably by
Friedrich Hayek, the winner of the 1974 Nobel Memorial Prize in
Economics. Hayek's approach to the field of economics was radically
different from the one implemented by those which he so often
debated. Hayek's basic premise was that the economic policies
advocated by the 'scientistic' economists were an impossibility because
they did not and could not possess the necessary knowledge necessary
to implement their plans. According to Hayek, “The
curious task of economics, is to teach men how little they know about
that which they imagine they can design.” By Hayek's perspective,
his opponents were attempting things far beyond the limits of their
knowledge. The complexity of the economic system precludes complete
understanding and the planning which could accompany it.
If the economic system is so complex, how then are largely
ignorant individuals better equipped to make economic decisions? The simple answer is through price system. The issue
of the economic calculation problem was first addressed by Hayek's
mentor Ludwig Von Mises in 1920, in his article “Economic Calculation in the Socialist Commonwealth”. Mises points out that a
working price system is necessary for the efficient allocation of the
capital goods, and that when centrally planned a economy will lack
this necessary element. The economic calculation problem is that
those in charge do not and cannot possess the knowledge necessary to
produce and distribute goods efficiently. Only a decentralized price
system based on private property and free exchange can determine the
proper allocation of economic capital. Because economic value is
subjective to each actor in an economy there is no way of
anticipating what should be produced, at what cost, and in what
quantity. Economic
planners encounter the limits of the science of economics when they
attempt to control the production and distribution of goods and
services. This scientistic approach, according to Hayek, is The Pretence of Knowledge. The reality of the nature of
economic is that no statistical model even with the most advanced
mathematical calculus being ran by the most powerful super computer
can substitute for the knowledge produced by a functioning price
system.
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| Figure 1.0 |
More recently, Thomas
Sowell has illustrated the historical reality of the economic calculation
problem in his book Basic Economics.
He gives the specific example of the how in 1913 Russia was an exporter of produce, but once the economy became
centrally planned was forced to import large amounts of food to prevent starvation. This happened despite lands which were so fertile that Hitler wanted to
bring the raw soil all the way to Germany during World War II. Sowell
also critiques the results of central planning in his book Vision of the Anointed.
Sowell makes the case that the effect of central economic policies is
impossible to predict and often contradicts the intended
consequences. Leaders who believe themselves anointed to solve the
worlds problems suffer from a fatal ignorance of what the
actual effect of their policies will be. This reality was recently
illustrated in regards to the American Recovery and Reinvestment Act,
passed in 2009, and the claimed unemployment figures with and without
the plan compared to reality (Figure 1.0).
Continued in Part 2...
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