How to build a narrative linking the various heterodoxies: Part 4 — Evidence Based Economics
Below is a comment that Merijn Knibbe offered in Part 2 that deserves further consideration. The discussion so far includes Part 1, Part 2, Part 3 and also complexity theory and building a narrative, 5 suggested common themes, cogent discussion of, and Lawson yes, Lawsonism no
We will need some catchy phrases, as well as precise definitions.
A. One catchy phrase might be: ‘evidence based economics’ (EBE).
– evidence based economics does not make use of fuzzy or even immeasurable concepts, like ‘usability’s of ‘General Equilibrium’ or ‘Pareto optimality’.
– students have to learn how to construct evidence (existing statistics, new statistics, interviews, observation of behaviour etc.). To be clear: in for instance business economics and marketing this has been done for quite some time. Many of you won’t like Taylorism, but Taylor did measure things – and his methods are still widely used in business. It does work. And Engel’s ‘Die lage der arbeitende klasse” is still palatable today as it is grounded in observation. If more economists would have had a better grasp of accounting, Enron like scandals would have been less common.
– evidence based economics teaches students how to scrutinize data as well as concepts: what do the data actually measure? What kind of anomalies or patterns are, inductively, visible in the data? Are there any cross checks possible? Economists can learn how to do this from historians, and physicians, and biologists, sociologists, engineers, people studying Sanskrit, Polar Bears and, well, almost all other scientists. A nice example for students might be the constructing and discussion on the size of economies. Economists still often state that the Chinese economy is about as large as the Japanese – while it’s size is, in reality, about two thirds of that of the USA economy. This difference of opinion is of course grounded in differences in observation. The former economists use exchange rates to compare economies, the latter (based in the IMF, by the way) use the flawed and still imperfect but much better yardstick of Purchasing Power Parity measurements (the CIA, which of course does not need neo classical but accurate knowledge, also uses the PPP measurements, see: http://www.CIA. gov). My stance will be clear, but for students it is a real nice example of how different kinds of measurement as well as the quality of data can influence our view of the world (who is in doubt of the size of the Chinese economy: just check the use of coal, oil, concrete and the production and sales of cars in Chine relative to Japan and the USA).
– evidence based economics teaches students that, sometimes, it is good to look at data first and at theory later: in a real science, there is continuous feed back between theory and data (do the high prices of oil, grain, metals indicate that, while the (USA)labor market is clearly depressed, the global market for oil etc. is in a state of overspending? Does that mean that the classical business cycle is going to the ropes?)
B. All of us (scientific economists as well as neo classical economists) are in dire need of a good definition of ‘the market’ (and, I fully agree with Geoff Davies, of money).
- As there are no historical examples of barter economies (in non-monetary economies, barter is a small sideshow at best), any definition of ‘the market’ has to contain a definition of money, and vice versa. Also (again I agree with Davies), without people, there are no markets. As any human interaction always contains at least some social aspects (including (perceived) knowledge of the other or others), no market transaction is without social aspect, the commercial side of it might sometimes be overriding, but sometimes the social aspect might be overriding. A common phrase among Dutch tradesman is: “Handel is gunnen”, or, to make a precise translation, “In the always small world of BtB trade, you only buy something from somebody when you ‘accept, trust, look favourably upon’ that somebody”. A non optimizing topological description of the commercial as well as the social aspect of trade which describes a space with more or less social aspects can be found in: Stobbe, P.S., ‘The room for commerce’ (Rotterdam, 1988). Amazingly, this heterodox mathematical economist urgently favours the same thing which I consider to be highly important, independent professors of scientific economic data gathering – which is completely in line with this discussion. Maybe there is more rock bottom agreement between heterodox economists than we assume.
- Let’s use some Hayek (an explicit opponent of the concept of rational man, by the way): the outcome of market processes is decidedly influenced by rules and institutions, there is no ‘ideal’ or ‘perfect’ market. This (institutionalist) idea has to be incorporated by any definition of the market. The commercial behaviour of man is decidedly influenced by his or her surroundings – and even by his or her knowledge of these surroundings and others. This is of course rather obvious and even banal – but neo-classical economists do suppose rationality as well as perfect information and the insignificance of history – just read some DSGE articles (I’ve stated this before – it’s not the scientific economics, but the ‘sillynomics’ of Lucas and his disciples which are extreme. Intellectually, this does not make you proud to be an economist. More important is that this state of affairs is ‘outright dangerous’, to quote Keen. A severe slump of an economy of the size of Japan might be manageable. A severe slump of an economy of the size of China is not manageable anymore. We do have to know how large this Chinese economy is. In fact, we do now this. The CIA knows this. Mercedes, Volksagen and Audu now this very well. Dutch banks and other companies now this, it seems, when I read the Dutch newspapers. Sadly, many economists are, thanks to their own flawed concepts, not aware of this.
That’s why we need ‘Evidence Based Economics’
P.S. a comparison of economies based upon exchange rates can of course be useful – but not to compare the relative sizes of these economies.