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.
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Real-World Economics Review Blog 
You might want to read a bit more about Taylor; apparently he just invented his evidence. e.g. see http://www.jstor.org/pss/254767 —
“””
Frederick Taylor is cited as the father of scientific
management. His account of the loading of pig-iron has
been accepted virtually without question. An investiga-
tion of that story reveals it to be more fiction than fact.
The authors suggest that management history may require
reevaluation based on careful research and analysis.
“””
There is an old adage in business that you can’t manage what you don’t measure. In economic theorizing the same problem exists. We appear to choose the regularities we then deem important because we have data on them, and we collect that data in order to measure the regularities within it. Taylor invented “scientific management” and thereupon eliminated much humanity from industrial production. By the time I was taught management at business school we were already being warned that the over reliance on Taylor’s techniques produced an alienated and ineffective workforce. “Efficient” yes. Productive, not so much.
As we continue our discussion I am impressed by the amount of rediscovery involved. For instance, Merijn Knibbe asks us to go back and take a look at Taylor and Hayek. Two very dissimilar approaches. Previously we have talked about complexity and emergence, which have echoes in Menger and Hayek’s “spontaneous order”. The list goes on.
It seems that our heterodox narrative requires a solid grounding not only in a philosophical discussion of the regularities and artifacts under discussion in economics – as the Lawson thread on this site indicates – but also an effort to recapture from the past some very serviceable ideas discarded as the discipline narrowed itself into the current neoclassical orthodoxy.
So far my list of key aspects of the emerging narrative has the following possible candidates:
Evidence/empirical based: i.e. reality counts. Theory must relate to real world objects and not simply be self-referential.
Uncertainty is a basic fact of economic reality. It must thus be accounted for.
Processes matter: we have to account for how things occur. Production is not spontaneous it happens through time.
Thus, time is an ingredient that cannot be elided by artifice e.g. a future’s market.
An economy is more than a market.
A market comprises of people, with all the limitations that humanity imposes on us.
Economies are socially and institutionally contingent, and vice versa.
I realize this list is subjective and incomplete, but I want simply to highlight that nothing on that list is necessarily new. The history of economic ideas has references to them all.
Mainstream economics is the result of a massive and deliberate effort to forget any contributions that failed to conform to its highly reduced notion of what economics is. That reduction gives it an illusory coherence, since it has a unitary methodology and simple focus on explicating market ‘magic’. As we expand the notion of economics our coherence may appear to be threatened by its necessarily messy acceptance of broader themes that sometimes seem forced upon heterodoxy merely to conjure up an over-arching narrative. We are running the risk of forcing into being something that is simply not there.
I think the risk is worth the potential result. So far the discussion supports that view.
Dear Itamar and Paul,
Thank you for your comments. I do agree with you (certainly after reading the 1974 article Itamar suggested) that Taylor was highly selective in his use of data, distorted the ‘real’ story and sometimes even made up the facts. I also do agree with peter that economic measurements always have to be understood within a certain culture and power structure – one can consult Robert Lock’s ‘Managerialism and the demise of the Big Three’ in issue 51 of the Real-World economics Review on this. Measurements on productivity of individual workers can however also be put to good use – and I do know what to tell our students on this:
http://www.youtube.com/user/theRSAorg#p/a/u/0/u6XAPnuFjJc
But the 1974 article is right – even these data have to be checked. Also, the 1974 article showed, to my surprise, that it was possible to track down at least some of the ‘Taylor’ workers: we do know where they lived and died, while we for instance also know that Hungarian workers at the still mill threatened Irish and Pensylvanian Dutch workers who agreed to take part in Taylors piece work experiment. In the end, it was about real people working in a real factory – a lot more than can be said fo the Samuelsonian ‘assume max(U) from here to eternity’ agents in the textbooks and DSGE models. There are quite some established traditions of observing (economic) behavior – and it’s my hope that teaching students how to observe will at least soften the stranglehold of these ‘sillynomics’. At best, it (even Taylorism) might give them an open mind towards society – you can observe what’s going on, instead of hiding yourself behind assumptions.
I learned about that article, by the way, from “The Management Myth”, by Mathew Stewart (http://www.amazon.com/Management-Myth-Experts-Getting-Wrong/dp/0393065537) which is an entertaining critique of management consulting in general.
Back to evidence-based economics, my attempt to summarize what you’re saying:
Evidence is always based on *some* theory, however simplistic (e.g. household income is an abstraction, albeit a fairly obvious one). Evidence should be gathered in order to evaluate theory, not just on the level of variables (“did raising the minimum wage increase or decrease unemployment?”) but also on the level of social and organizational structures and processes. For example, one might investigate “how do firms price their products?” based on interviews and observations of various companies in various industries.
Understanding of structures and processes can then point to ways in which theories are incorrect or insufficient. For example, investigation might discover the non-existence of actual mechanisms to implement some theorized causal relationship, or discover impediments that invalidate it in some situations.
Here’s a challenge to the behavioural economics strand of heterodoxy.
David Sloan Wilson says “it is necessary to take the Evolution Challenge for the field of behavioral economics, no less than for neoclassical economics.” See http://www.bigquestionsonline.com/columns/david-sloan-wilson/take-the-evolution-challenge.
Wilson says “As it happens, Homo economicus is a patently false description of our species”. No argument here I presume. He continues “Rational choice theory is inspired by Newtonian physics and is devoid of such flesh-and-blood attributes as sympathy, a sense of fairness, and norms.”
However he then notes several recent books on behavioural economics that make little or no mention of evolution. He continues
“What is going on here? Behavioral economists are inspired by psychology, not by evolutionary theory, and not even psychology writ large, but a particular sub-discipline called cognitive heuristics and biases, which shows how often people depart from the expectations of rational choice theory. The result is a long list of “anomalies” and “paradoxes” but no positive account of our psychological mechanisms as a product of genetic and cultural evolution. I wish that I could report otherwise, but it is necessary to take the Evolution Challenge for the field of behavioral economics, no less than for neoclassical economics.”
I presume by a “positive account” he means, for example, “sympathy, a sense of fairness, and norms”, not just funny biases.
A final quote: “Some scholars are attempting to ground economics in modern evolutionary science, including the study of proximate mechanisms (psychology and neurobiology) and ultimate causation (natural selection). They number in the dozens, which is large enough to make progress but a minuscule proportion compared with neoclassical and behavioral economists. ”
Any reaction? Any evolutionary economists reading this?