Some Things Never Change

I have really enjoyed studying economics. One aspect in particular which has drawn me to the science of economics is its permanence as a result of its causal-realist nature. Sound economic theory establishes truths that hold from generation to generation. It provides one with a timeless framework to evaluate market exchange between individuals as well as the consequences of policies which aim to disrupt such exchange.

Unfortunately, for as long as the science has existed, those ignorant of economic laws have groveled that economic laws are temporary. They claim that the economic theory that held true in the past was contingent upon the circumstances of the past. Whenever new conditions arise which they deem significant enough, they insist that economic theory must change to keep up with the times.

A recent article publish on The Atlantic website touted this fallacious approach to economics. The author, Bill Davidow, exhibits that he is a believer in historicism. On economic theory, Davidow writes “Theories that were once right are now wrong.” Due to the “overconnectedness” of today’s world, economic theory that held before in a less connected world is now invalidated. Davidow points out that with the development of technology and the internet in particular, exchange between people has become less familiar and less local. It’s less likely that the home loan officer and the mortgage holder know one another.

Davidow in turn claims that when interpersonal exchange was constrained within one’s local community, moral authority guided “the invisible hand” (Adam Smith’s term) of the market. But now that exchange has been delocalized, moral authority no longer guides the invisible hand. This leads him to conclude that the views of the Nobel Prize winning economists of the past “were right for a less connected world but are wrong now.”

Leaving aside some of the particular claims Davidow makes (I admittedly do not have enough knowledge of the particular theories he deems invalid to discuss them critically), I aim to put his approach to economics in perspective.

Firstly, Davidow does not understand the foundation for economic law. The scholars in the Austrian tradition accurately place economic law within the broader science of praxeology. Praxeology is the study of human action. Murray Rothbard summarizes the content of praxeology in writing,

“Praxeology consists of the logical implications of the universal formal fact that people act, that  they employ means to try to attain chosen ends.” (From Praxeology: The Methodology of Austrian Economics)

The logical framework deduced from the undeniable fact that all humans act is sufficient to ground true and permanent (at least as long as humans exist) economic laws. While a decrease in the morality of people will undoubtedly change the way humans engage with one another, it will not and cannot shake the fact that humans act. Therefore a decrease in morality, or any change for that matter, is unable to upheave sound economic theory.

Secondly, the historicism exhibited by Davidow was refuted by Ludwig von Mises in 1933 who presented an accurate way to approach economic history. Mises described historicism in his book Epistemological ProblemsIn it, he wrote:

“Historicism maintains that it is a waste of effort to search after universally valid regularities that would be independent of time, place, race, nationality, and culture. All that sociology and economic can tell us is the experience of a historical event, which can be invalidated by new experience. What was yesterday can be otherwise tomorrow.”

On the nature of historicism, Mises writes:

“Historicism by its very nature is not a system, but the rejection and denial in principle of the possibility of constructing a system.”

Mises proposes that all economic events should be studied by examining the particular, contingent facts of the event in the framework of economic theory grounded upon human action. In Mises conception, we are able to use economic laws (individuals use means to obtain ends, means are scarce, value is subjective, etc…) to evaluate economic history as well as the effects of public policy.

Davidow concludes his article by stating:

“It is time for the worldly philosophers who advise us give up their brick-and-mortar ideas and develop economic theory for an overconnected world. President Obama and the Republican presidential candidates alike would be well advised to demand a different way of thinking.”

Davidow exhibits ignorant bombast in calling for those of influence to discard sound economic theory and pursue “a different way of thinking” which he never even attempts to describe. Instead, political leaders should consider the effects of their decisions in light of the economic laws explained by those who have taken the time to construct a framework in which to analyze interpersonal exchange. It is certain to benefit society much more than being blown by the winds pushed by those committed to deconstructing economic theory on the mere basis of changing circumstances which come with an elapsing of time.

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One Response to Some Things Never Change

  1. adelie42 (@adelie42) March 5, 2012 at 5:44 pm #

    >political leaders should consider the effects of their decisions in light of the economic laws explained by those who have taken the time to construct a framework in which to analyze interpersonal exchange.

    I disagree, in a certain respect. Before this could ever take place, politicians must first accept Hayek’s Fatal Conceit, that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”.

    Given that it is the politicians to which we are trying to make this point, to believe that the problem could be solved merely by improving politicians understanding of economics, I think is a fallacy. It sounds great, but I see no evidence to support the belief that somehow knowledge of economic theory is the loophole in Hayek’s Knowledge Problem. All we will have done is replace one bunch of aristocrats for another.

    I would instead prefer the dumbest politicians possible that can fully comprehend the concept of private property, and the legislation they and their predecessors passed as necessary to express such concepts. Drawing on Kirzner and others, I would say that the world today is too complex to depend upon “elected authorities” to know anything. It is much the opposite of what we know from economic law under the division of labor. In a phrase, they need a clear job description, otherwise their minds will wander to grandeur in imagining what they are meant to be doing.

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