On the nature and fallacies of Economics

Below are a few different articles on the shortcomings and false assumptions of modern economics. What’s central to each of these is the difference between the human sciences and the natural sciences and the consequences of mistaking one for the other. Economics is a social science and many problems arise when we treat it as if, because of its sophisticated mathematical models, that it is like a natural science. The last article is an interesting example of the important of models when trying to understand reality.

Old economics is based on false ‘laws of physics’ – new economics can save us

It is time to ditch the belief that economies obey rigid mechanical rules, which has widened inequality and polluted our planet. Economics is evolving

In the 1870s, a handful of aspiring economists hoped to make economics a science as reputable as physics. Awed by Newton’s insights on the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his legacy.

Their mechanical metaphor sounds authoritative, but it was ill-chosen from the start

Continue reading “On the nature and fallacies of Economics”

Why raising the minimum wage in Seattle did little to help workers, according to a new study

This is an interesting article on the effect of raising the minimum wage. What’s interesting about it is that it raises a lot of issues that speak to the challenge of proving things in the human sciences, particularly in Economics. Because we can’t create two perfectly identical situations in real life with which to test out variables, we are left with having to determine the effects of variables like changing the minimum wage in imperfect, real life, experiments. If you pay close attention to the language, the writer communicates the experimental conclusions which often times sounds equivocal, weakly worded, or uncertain and that is because those people who conduct the experiments or undertake the research understand that it is very difficult to come up with solid, definitive conclusions like you can in the natural sciences. For example, you can say definitively in the natural sciences that if you heat up a gas and keep volume constant, that you will increase pressure. This is a consistent finding, backed up by experiments. Can you come to the same type up of definitive conclusion in the human sciences? Can you definitively answer the question, “what is the effect of raising the minimum wage?” The answer to that question is probably no. You will get answers that have a lot of qualifiers and adjectives like “probably” and “sometimes” and “maybe.”

“Overall, there was almost no effect on workers’ average total earnings, but Vigdor pointed out that the average could be misleading. The consequences for many individual workers — both positive and negative — could have been more significant.”

https://www.washingtonpost.com/news/wonk/wp/2016/07/29/study-raising-the-minimum-wage-did-little-for-workers-earnings-in-seattle/

What Economics Can (and Can’t) Do

“In John Stuart Mill’s view, which I believe is basically correct, economics is a separate and inexact science. It is separate from the other social sciences, because it focuses on only a small number of the causal factors that influence social phenomena. It is inexact because the phenomena with which it deals are influenced by many other causes than the few it focuses on.”

http://opinionator.blogs.nytimes.com/2015/07/14/what-economics-can-and-cant-do/

Finally, an Answer to the Minimum Wage Question

How can we prove anything in the human sciences when it is virtually impossible to run reproduceable experiments the way you can in the natural sciences? Every so often a “natural experiment” presents itself and we can come to conclusions about truths in fields such as economics. The problems of economics are present in fields throughout the human sciences for the same reasons. Below is an article that discusses the issue the effects of raising the minimum wage.

“In statistics, ‘identification’ just means separating two groups in order to tell if a treatment works. You give Group A the pill and you give Group B a placebo, and you see if Group A does better than Group B. In laboratory experiments this is usually possible to do. In the real world, it’s a lot harder — you have to wait for a policy to bring about a difference between two areas that are roughly comparable.”

http://www.bloombergview.com/articles/2015-05-27/finally-an-answer-to-the-old-minimum-wage-question?cmpid=yhoo

‘By separating nature from economics, we have walked blindly into tragedy’

“We need a new way of thinking, one that tightly links the human-made world of economics and politics with the natural world of climate and biodiversity and with the designed world of 21st century technology. Consider my own home field of study, economics. Sometime in the 19th century, economics largely dropped its traditional attention to land, water and food, as industry replaced agriculture as the leading economic sector. Economists decided, by and large, that they could ignore nature – take it ‘as given’ – and instead focus on market-based finance, saving, and business investment. Mainstream economists derided the claims of ‘limits to growth.'”

http://www.theguardian.com/global-development-professionals-network/2015/mar/10/jeffrey-sachs-economic-policy-climate-change

What The IRS Could Learn From Mormons

How does a person’s notion of faith affect their charitable giving? How does it affect how honestly they donate their money? In an interesting Planet Money podcast and accompanying article, economists study how Mormons think about what they give to the church and what they don’t and principles the IRS could learn from them.

“I asked a Mormon bishop in Salt Lake City if a few more rules defining income might make tithing easier on Mormons or bring in more money for the church. He said all this soul-searching about what you owe God is kind of the point.”

http://www.npr.org/blogs/money/2012/03/02/147749784/what-the-irs-could-learn-from-mormons

Freakonomics Podcast: The Maddest Men of All. Episode about Behavioral Economics

Another interesting discussion on the field of behavioral economics (see a previous post on the topic). Some really interesting discussions on this podcast about the contrast between classical economics and behavioral economics. You get some insight into the different approaches to knowledge and assumptions between two related fields in the human sciences.

You also get some interesting insights about how we make decisions. To what degree are our decisions motivated by reason? And to what degree are they motivated by emotion? Is it ethical for someone to use their knowledge of our emotional decision making to push us to make a decision they want us to make (i.e. buy something we otherwise wouldn’t)?

“Let’s take an example where you go to an airline website and it … quotes you a price for your seat to Sacramento, whatever it may be, and it says only four seats left at that price. Now, that works on me. I’ve spent eight years studying this stuff, I know it’s an attempt to exploit my scarcity bias, but it still makes me click. That’s just the way I’m wired. Now implicit in that line is that subsequent seats will be more expensive. But actually the person in their weasel wording hasn’t exactly made that promise, have they? They’ve merely said at this price. At this price is not quite clear. It could be that the subsequent four seats are being sold actually at a lower price.”

http://freakonomics.com/2015/02/26/the-maddest-men-of-all-a-new-freakonomics-radio-podcast/