Yes, Virginia—There is an Economic Science

May 19, 2022
 
I’m not usually one for meta-economics.
But it’s become fashionable, and increasingly so, to deny the existence of laws which regulate human action. Of course, very few deny the reality of physical laws, probably few deny statistical laws, a few more deny the laws of logic, while many more deny objective moral law.
Yet, for as many that deny transcendent moral law, many more deny (implicitly or explicitly) anything like praxeological— economic—law that governs people and their interactions.
Indeed, I recently heard a notable social theorist, in a public lecture, reject the idea that “supply and demand or comparative advantage” are universal laws. For him, they are mere artifacts of a capitalist system. In making this move, he embraces the historicism that characterized one side of the momentous Methodenstreit.
Similar sentiments grace the pages of The Atlantic where an author opines that “the ‘laws of economics’ don’t exist,” but then later that “…even if there are laws of economics, we haven’t been observing them long enough to know what they are”—a sort of economic agnosticism.
This attitude also animates the recent scorn that folks like James Kwak heap on “economics 101,” examples of which The Atlantic once again amply supplies. For more piling on ECON 101, see here, here, here, here, here, and here.
More sophisticated variants are also popular. Neil Postman, media ecologist and social commentator, eloquently expresses a refined economic law denialism.
He writes:
As to the first question, I must tell you at the start that I reject the implications of the phrase "social science"; that is to say, I do not believe psychologists, sociologists, anthropologists, or media ecologists do science (emphasis mine).”
Postman doesn’t include economics here, but one wonders if it’s only because he doesn’t deem it worthy of a mention.
notion image
Moving on:
Oakeshott means by processes those events that occur in nature, such as the orbiting of planets or the melting of ice or the production of chlorophyll in a leaf. Such processes have nothing to do with human intelligence, are governed by immutable laws, and are, so to say, determined by the structure of nature. If one is so inclined, one might even say that processes are the creation of God. By practices, on the other hand, Oakeshott means the creations of people—those events that result from human decisions and actions, such as my writing this paper or the formation of a new government or our conversations or falling in love, these events are a function of human intelligence interacting with environment, and although, to be sure, there is a measure of regularity in human affairs, such affairs are not determined by immutable laws. Now, I have been told by my colleagues that this last statement, namely, that human actions are not determined by immutable and universal laws, cannot be proved, and that to assert it is in the nature of a metaphysical speculation. Fair enough. You may consider it then to be part of my ideology that I believe in free will and in choice; that human beings are fundamentally different from orbiting planets and melting ice.” (emphasis mine)
For Postman, acknowledging economic law is tantamount to asserting some form of determinism. He is correct to identify an important difference between planets and people, rocks and men; when tossed into water, only the latter must choose whether to sink or swim.
But Postman is wrong to conclude that this difference eliminates laws for the social order, laws within which human beings can still freely choose. Humans are constrained by the laws of nature, but they still choose within those constraints. The same is true for (say) the law of marginal utility.
In fact, that humans choose and that their choice is constrained by economic law is a key theme that runs through the history of economic thought. If someone isn’t thinking in terms of choices and constraints, they’re simply not an economist.
As Sowell puts it in his classic Knowledge and Decisions:
“Smith had no faith whatever in the intentions of businessmen, whom he characterized as mean and rapacious, but argued that the characteristics of a market economic system would lead to beneficial results which were no part of the intention of those acting within the system. Karl Marx, of course, had a far less benign view of the results of the capitalist system, but he—like Smith—analyzed the results in terms of the presumed characteristics of the system, not the apparent intentions of individual capitalists.”
Shades of Alchian (1950). Institutional filters do the heavy lifting. Indeed, reasoning in terms of “invisible hand explanations” comprises the lion’s share of what it means to “think like an economist.”
Professional thinkers, ala Postman, aren’t the only economic law skeptics. For beginning students, denial of economic law usually arises from a sense that the social world is chaotic and therefore unregulated by anything approaching the status of an immutable law.
As Kirzner puts it:
“To the casual observer, market activity seems to be a bewildering and uncoordinated mass of transactions. Each individual in the market society is free to buy what and when he pleases, to sell what and when he pleases, to produce or to consume what he pleases, or to refrain altogether from any or all of these activities. Transactions may involve any of innumerable commodities or services, they may involve any of a wide range of quantities and qualities, and they may be concluded at any of a wide variety of prices.”
Having stopped the analysis here, some students make the leap that economics is little more than ideology.
Contemporary Christian theologians are rarely fans of economic law, either. For instance, William Cavanaugh (influenced by the social-science-hating John Milbank) rails against scarcity and other features of reality:
“The standard assumption of economics that we live in a world of scarce resources is not based simply on an empirical observation of the state of the world, but is based on the assumption that human desire is limitless. In a consumer culture, we are conditioned to believe that human desires have no end and are therefore endless. The result is a tragic view of the world, a view in which there is simply never enough to go around, which in turn produces a kind of resignation to the plight of the world’s hungry people.”
Not exactly channeling the Scholastics. Actually, the quote’s so bad I’m considering assigning it to my students as an exercise. (I can only assume Cavanaugh is incorporeal, as physical space has alternative uses, i.e. it’s scarce. Presumably, he donates 100% of his paycheck too).
It would be easy to supply a hundred more comments like these. It’s therefore unsurprising that Israel Kirzner characterizes the history of economics as being “…between those who understand the nature of economic ‘law’ and the deniers of economic law.”
Sometimes this conflict played out in larger-than-life ways. Vilfredo Pareto, for example, colorfully executed an elaborate prank on his intellectual rival, Gustav Schmoller. While at an academic conference in Geneva, Pareto dressed as a beggar and accosted Schmoller when he rounded the corner. “Do you know of a restaurant here where I can eat for nothing?” Pareto asked the unsuspecting Schmoller. Allegedly, Schmoller replied that no such establishments existed, but there were several where a cheap meal could be had. “Aha,” cried Pareto, “so there is such a thing as economic law!”
My purpose here is not to rehash the Methodenstreit, nor to offer a philosophical defense for the existence of economic law. Economic law skeptics tend to be more convinced, in my experience, by examples of social phenomena which can be explained by appeal to economic law, but which are difficult to account for if the social order is (economically) lawless.
Because there are economic laws, there is an economic science. And because there is an economic science, we can make pattern predictions. As Menger memorably opens his Principles:
“All things are subject to the law of cause and effect.”
And from his preface: “…the phenomena of economic life, like those in nature, are ordered strictly in accordance with definite laws.”
Bonus. In anticipating Postman, Menger even addresses himself to “those who question the existence of laws of economic behavior by referring to human free will…”
Read the whole thing.
I’ve found nothing with a 100% conversion rate, but, in my experience, the following examples give many an economic law denier pause.
4,000 Years of Price Controls
We’ve had over four millennia to observe and catalogue the consequences of price controls. Discoordination is the inevitable result. It’s ECON 101—you can read it write off the diagram.
Yet, good economists don’t squeeze human creativity or freedom from the 101 analysis. The open-endedness of human choice gives rise to the myriad margins of adjustment buyers and sellers find. There’s an entrepreneurial element here—see this paper for details.
But that binding price controls frustrate plans, setting in motion a series of (unintended) adjustments, is incontrovertible. Because price control edicts can’t stipulate every attribute of an exchange, it’s (sometimes) possible to make pattern predictions about which sellers benefit and which are harmed. For this, nothing beats Barzel’s analysis of the Nixon gasoline price ceilings. The price ceilings redistributed wealth from low-octane to high-octane sellers of gasoline.
Alchian Builds the Bomb
In a remarkable display of economic intuition, Armen Alchian reverse engineered an important ingredient in hydrogen bombs. In so doing, he pioneered the first event study. Read about it here.
The Cobra Effect
Rates of return equalize. George Stigler thought that the most important insight in economics. I’d probably go with the division of labor raising productivity, but internalizing the rate of return logic goes a long way toward seeing markets as fundamentally orderly, rather than chaotic.
Entrepreneurs are always driving us toward equality between rates of return—even when it’s government that creates the arbitrage opportunity, as is the case for bounties on pests. In one notable instance, government set a bounty on cobra tails, incentivizing the creation of cobra farms. This possibly apocryphal tale / tail has well-documented analogues. The bottom line: Profit and loss direct and redirect the allocation of resources. These forces put a hard stop on what gets produced, how much gets produced, how it gets produced, and who produces it. That’s economic law at work bringing order to seeming chaos.
DIY
When the price of something rises, people buy less of it, other things constant. At the same time, they opt for substitutes. It’s the simplest, yet analytically the most powerful insight in economics. How far can you get armed only with the law of demand? Very far.
When sin taxes raise the price of cigarettes, people substitute into alcohol.
When tariffs raise the price of rubber, people delay changing their tires, and there are more accidents.
Rent controlfreezes” people in their apartment units, reducing the natural mobility that tends to exist in cities.
In the U.S., sugar tariffs induced a shift to high fructose corn syrup, contributing to obesity in the process.
Wildest of all: Where occupational licensing of electricians is most stringent, people are more likely to forego hiring a professional, opting instead for DIY. The results can be tragic. (Room for application of the make-or-buy decision to household production here).
All of these are straightforward, ECON 101-level phenomena that the law of demand predicts.
It’s almost like there’s a systematic body of law governing social operations and giving rise to patterns.
The Scholastics knew it, Adam Smith knew it, Carl Menger knew it—and so should we.