The ‘laws of economics’ don’t exist

By Zachary Karabell
April 11, 2013

In a world increasingly framed by economic debates, the phrase “the laws of economics” has become ever more prevalent. As the U.S. Senate prepares to unveil a new immigration bill, much of the discussion centers on the economics of illegal immigration and the incentives for employers to hire undocumented workers. Said a recent Barron’s article: “Immigration policy is a game governed by classic economic rules, especially by Say’s Law, which says supply creates its own demand … Whether the new applicants are seeking stoop-labor jobs in California’s Central Valley or high-tech jobs in Silicon Valley, the laws of economics dictate the outcome: more immigration.”

How about the war on drugs? Said one recent analysis: “We’re losing the war on drugs because it’s a war that defies the laws of economics. We might as well be fighting a war on gravity.”

And how about what history can tell us about our current policies? Said one recent review of Amity Shlaes’ biography of Calvin Coolidge, which makes the case for Coolidge as an exemplar of responsible economic policy:  “Our current political leadership ‑ and we who elect them ‑ are spending the country into ruin. The laws of man can be bent and broken; the laws of economics can not.”

This is just a smattering of examples over the past few weeks. Increasingly, our debates about – and our solutions to – pressing issues such as immigration, budgets and debt are framed in the context of all-powerful economic laws that dictate what is and is not possible. There’s just one slight problem: There are no laws of economics.

For sure, many economists and large parts of society believe there are. The high levels of anxiety about deficits and government debt, not just in the United States but throughout the euro zone and much of the world, stem from the belief that if central banks create too much money, it will inevitably lead to inflation. Why? Because the “laws of economics” say the supply of money will cause inflation if overall output stays the same. In the developed world, clearly, there has been an increase in money supply via the Federal Reserve, the Japanese Central Bank and to a lesser extent the European Central Bank, yet growth is minimal everywhere. While there is no statistically discernible inflation as of yet, the “laws” strongly indicate that there soon will be.

Unless, of course, those laws are wrong or simply not “laws.”. Some, such as Paul Krugman or other equally strong (but less vociferous) believers in the precepts of John Meynard Keynes would say inflation isn’t increasing because that’s what happens in recessions. When demand is depressed, more money only closes that gap between demand and supply. That, too, depends on a basic “laws of economics,” that of supply and demand, which is one of the first precepts students of economics learn and one of the most widely disseminated – if often misunderstood – principles of economics.

Yet even here, the idea that these are ironclad laws breaks down. So much of economics depends on the theory that we are all “rational actors.” Yet as behavioral economists such as Daniel Kahneman have shown, we are rarely rational actors. Patterns of individual behavior are very different from what economic laws assume. People sell when prices are falling, and buy when prices are rising, even though their interests would be served by doing the opposite.

Institutions and states are not much different; they make decisions all the time that do not “maximize their utility.” To put it more plainly, they often make decisions based on fear and hope rather than on a rational calculus of what will best serve their interests over the long run. Governments cut spending when they should increase it (austerity in difficult times) and expand spending when they should cut it. Companies often don’t invest when they are unclear about the future and business is soft, which is precisely when they should be investing if the goal is to maximize long-term profitability and viability.

The notion that economics is a science with irrefutable laws appeals to economists (who have long tried to elevate the profession out of the realm of observation and description and into the realm of science) and to the widespread human desire for certainty. But even science isn’t quite so set, as any good scientist knows. The laws of gravity may be set, until the laws of quantum mechanics throw a wrench. Our ability to measure the world increases, and our understanding of laws evolves.

Economics is based on a limited amount of information compiled over the past hundred or so years. We have no way of knowing with any exactitude the gross domestic product of imperial Rome, of Spain in its 16th century golden age or of the United States in 1820s. We can try to fill in the blanks retrospectively, but that’s all. We don’t know because those numbers didn’t exist. All these economic laws are based on what a few cogent thinkers such as Adam Smith and David Ricardo observed at the end of the 18th century and what a new set of 20th century statistics (GDP, unemployment, inflation) suggest.

In short, even if there are laws of economics, we haven’t been observing them for long enough to know what they actually are. And given the vagaries of human behavior and the mercurial nature of states, people and institutions, the notion that there’s some grand mechanistic, master system that explains all and predicts everything is at best a comforting fiction and at worst a straitjacket that precludes creativity, forestalls innovation and destroys dynamism.

Referencing “the laws of economics” as a way to refute arguments or criticize ideas has the patina of clarity and certainty. The reality is that referencing such laws is simply another way to justify beliefs and inclinations. I may agree that the war on drugs is flawed, but not because it violates “laws of economics” but rather because it fails in most of its basic goals. The test of whether government spending or central bank easing is good policy should be whether they succeed in ameliorating the problems of stagnant growth and high unemployment, not on what the “laws of economics” erroneously say about certain future outcomes.

Liberating ourselves from the fictional cage of these laws will not suddenly reveal hidden answers. But it will allow for more pragmatic examination of what is working and what is failing and why. Economic theories are guides, ones that have substantial utility. But once elevated to the realm of laws, they fall short and do us no good.

PHOTO: Adam Smith etching in the public domain. 

27 comments

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Your analysis is as myopic as Adam Smith’s incorrect views of how the industrial identification of economics.
First of all, immigration is not in any way a comparative with immigration. Anyone who has even the slightest idea of what Say’s said should understand that. If immigration was required, then why would we have a negative balance of payments worldwide when we import goods exponentially into this nation—while watching our exports become smaller and smaller?
Immigration is not advanced in this nation, or any other nation for any economic reasoning. This reality is just now starting to become evident, but many identified the true purpose of immigration, as our ridiculous immigration policy of 1964 was not for this nation’s benefit in any way except one; to destroy the culture of America—allowing the advancement of this nation—the nihilism of not only our economic system, but our social society.
While there are no examples to support the ridiculous claim of economic functions—the examples of social destruction are so obvious, that we can find daily examples even in a journalistic press core that is as un-American as the worst propaganda ever initiated against any nation. i

Posted by DanShort | Report as abusive

Congratulations. This is one of the most thoughtful op-ed pieces that I’ve had the pleasure of reading over the past few years.

Years ago I earned a Bachelor of Science in Economics. I was fortunate to have had some astute instructors. A concept that was drummed into us was that Economics is a social science, not engineering. Psychology and sociology are central to economy theory just as physics and mathematics are central to the engineering disciplines.

Sure, we learned our share of math and grappled with those differential equations, but that was necessary in the attempt to build a mathematical model that quantified human behavior. You see, we’re back to the social science again!

What is fascinating about our current debate is that we seem to have two schools of rather simplistic thought.

A. Stimulus bad.
b. Stimulus good.

The author is correct about there being no “laws”, therefore there is no right or wrong. It would serve the reader well to consider that what is right today (what ever that means) could be considered wrong tomorrow as conditions change.

I believe what frightens people and frames the debate is the perceived loss of control of the worlds finances. Central Bankers, for better or worse, call all the shots. Politicians are mainly on the sidelines as are the citizens.

Right now the Fed and the BOJ seem successful, the ECB less so. Uncertainty reigns supreme. Will the ECB look better next year? No one knows. The uncertainty is what’s driving those people who pay attention crazy.

Want my opinion? I’m not saying. Why should I? I don’t know any more than anyone else. That’s the problem. We all want some answers, certainty.

There is none.

Posted by Missinginaction | Report as abusive

I think you’re forgetting that all “laws of economics” are considered only ceteris paribus. They hold unequivocally under those circumstances but do not hold outside of their models because in the real world, obviously, we can’t ask everything else to just please stay constant. This is not to say that the “laws of economics” do not exist or are fallacious but rather that we have to be more discerning in their application.

Posted by NewsAddict | Report as abusive

Your apparent lack of education is truly astounding.

In a very real sense, which you allude to in this statement “The laws of gravity may be set, until the laws of quantum mechanics throw a wrench. Our ability to measure the world increases, and our understanding of laws evolves” there are indeed no LAWS for ANYTHING.

Taken as a whole, your article is both disingenuous and worthless because it falsely claims a general lack of sufficient knowledge to apply appropriate mathematical methods to anything but “hard science”. Not only that, but we DO, in fact, have more than enough information to mathematically measure economics, AND to draw reasonable conclusions from those measurements.

For example (from Wikipedia, solely for ease of access), we KNOW the US “free market” economy is HIGHLY UNSTABLE, having crashed at least 47 times since 1790. I would argue that 223 years of the severe failure of our economic system, mostly due to wealthy greed and excess, is statistically valid to use.

http://en.wikipedia.org/wiki/Us_recessio ns

For example, we KNOW that Adam Smith (whose picture you display prominently above) said this about a free market economy his book the Wealth of Nations (1776). HOWEVER, what the wealthy class NEVER reveals beyond their (neocon) version of free trade is what Adam Smith said about people like those who are running this nation right now (including you, apparently).

—————————-

In The Wealth of Nations[77] (1776) … the statement about “an invisible hand” has been interpreted in numerous ways. It is therefore important to read the original:

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

Those who regard that statement as Smith’s central message also quote frequently Smith’s dictum:[78]

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Smith’s statement about the benefits of “an invisible hand” … shows Smith’s belief that when an individual pursues his self-interest, he indirectly promotes the good of society. Self-interested competition in the free market, he argued, would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services.

==========================

Nevertheless, he was wary of businessmen and warned of their “conspiracy against the public or in some other contrivance to raise prices”.[80]

Again and again, Smith warned of the collusive nature of business interests, which may form cabals or monopolies, fixing the highest price “which can be squeezed out of the buyers”.[81]

Smith also warned that a business-dominated political system would allow a conspiracy of businesses and industry against consumers, with the former scheming to influence politics and legislation.

Smith states that the interest of manufacturers and merchants “…in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public…

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”[82]

http://en.wikipedia.org/wiki/Adam_Smith

==============================

Notice the comments between the double lines above, which the wealthy class NEVER include in any of their quotations of the free market philosophy.

Notice also this comment in preceding paragraph “As every individual, therefore, endeavours as much as he can TO EMPLOY HIS CAPITAL IN SUPPORT OF THE DOMESTIC INDUSTRY, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can.

Basically, what we have today is a neocon wealthy class that has in effect overthrown this nation’s government, are busily dismantling it and selling it overseas for their own profits, and who care nothing about what happens to this country as a result.

THAT is the problem.

In terms of economics, I think have sufficient data to measure HUMAN GREED and its negative effects on society.

At best, you are nothing but a shill for the wealthy class.

At worst you are a liar who is complicit in destroying this country for your own benefit.

Posted by PseudoTurtle | Report as abusive

It is a tendency of most people to reference as proof some historical document regarding a particular issue. It is much easier to fall back on what we accepted as real in the past than to think originally about an issue in real time. All ideology and philosophy is a simplification of reality and they are convenient for those that struggle with complexity. Followers are also more easily cowed by simple constructs rather than being convince with complex and difficult information. Indeed, those with a propensity to follow are looking for leaders with easy answers, whether they be right or wrong.

Posted by brotherkenny4 | Report as abusive

@ Missinginaction –

You prove my point.

You state, “The author is correct about there being no “laws”, therefore there is no right or wrong … We all want some answers, certainty. There is none.”, which is EXACTLY the impression the author wants to create.

Arguing there is no right or wrong — a Hayakian argument, the substance of which is contained in the author’s article — will lead the US economy and our society to a place we don’t want to go if we want it to survive.

Prior to the 1929 Crash and the Great Depression, this nation’s “economics” were based on one simple premise — Social Darwinism (survival of the fittest) — and THAT is where the wealthy class is taking us again.

Underneath the glib argument of the author that there are no laws of economics, THAT is the “reasoning” which carefully hides.

As I said, I agree there are no laws of economics — anymore than there are real laws in science (merely mankind’s interpretation of reality) — BUT that certainly does NOT mean we cannot learn from our past economic mistakes. And part of that learning process is to use the appropriate mathematics to quantify what is happening. Only then will we have a basis for taking rational action.

Posted by PseudoTurtle | Report as abusive

currently, the laws of economics do not exist because the
books are all cooked. and an economy running on doctored numbers will not follow precedents. make up your own rules..everyone else is.

Posted by rikfre | Report as abusive

@ brotherkenny4 –

You state, “It is a tendency of most people to reference as proof some historical document regarding a particular issue. It is much easier to fall back on what we accepted as real in the past than to think originally about an issue in real time.

All ideology and philosophy is a simplification of reality and they are convenient for those that struggle with complexity. Followers are also more easily cowed by simple constructs rather than being convince with complex and difficult information. Indeed, those with a propensity to follow are looking for leaders with easy answers, whether they be right or wrong.”

————————————–

I am not sure what the point is that you are trying to make. “Historical documents”, as you put it, are useful to measure the effects of things over the passage of time, a repository of information from those who have experienced the same or similar issues — the alternative being to “recreate the wheel” every day, which is stupid beyond belief, and the practical effects of that would be mankind still living in caves — but what you do not seem to understand is the value of that knowledge applied to current events.

Too often people ignore history, which is a main reason why the rest of what you say makes sense. Reality is indeed complex, yet most people would prefer not to deal with that reality.

That, in fact, is actually what is happening now, and the whole point of my comment above.

Simply put, “opinions” are worth nothing, unless they can be backed up with fact. The trouble with today’s media is that it allows people to express “opinions” as “facts”, when in reality they are not the same at all.

THIS is what the author is doing, and doing quite a good job of it in terms of misdirection. He actually does not have a valid point, but is merely presenting an emotional argument based on whatever his hidden motives are.

He is attempting (as I said quite successfully) to reach the inner prejudices of the masses against education and history. His effort is but a small part of the great “dumbing-down” of this nation to make them more pliable. The ugly reality is that, if you repeat a lie often enough, most people will come to regard it as the truth.

I think you have fallen into this common error that you ascribe to most other people. You apparently believe in your own deeply held opinions that he is correct, but without any real basis in fact.

What is worse is that you add the weight of your opinion to that of his, thus reinforcing the trend, instead of questioning what he is saying.

Posted by PseudoTurtle | Report as abusive

@PseudoTurtle:

“Basically, what we have today is a neocon wealthy class that has in effect overthrown this nation’s government, are busily dismantling it and selling it overseas for their own profits, and who care nothing about what happens to this country as a result.”

OR…

What we have today is a ruling elite that has basically disregarded the laws of the nation to enrich their special interest friends and cronies by creating non-market driven incentives and disincentives which waste resources and create an increasingly larger dependency class.

Posted by hallsway | Report as abusive

Funny thing about laws … they can be broken. Just because laws can be broken doesn’t mean they don’t exist, but rather that I choose to ignore (break) them. I can substitute the words “rules”, “precepts” and “guidelines” for the word “laws” in this article, and it still reads the same to me. Mr. Karabell does a fine job positing we should discount basic mathematical economic theory because he does not believe the theories accurately calculate what is actually happening financially in the world around us. However, Mr. Karabell can’t say to the economic mathematicians, “You’re completely wrong because your theoretically-calculated result isn’t what happened” any more than the economic mathematicians can say to Mr. Karabell, “Years of statistically-correlated data proves that our mathematical models will correctly predict the economic future.” Economic theory is a great place to start to develop a prediction of future financial conditions (and thus shouldn’t be summarily dismissed as worthless or inaccurate) as long as the mathematicians remember that statistical correlation is not the same as causation (so temper your use of historical data accordingly when proclaiming, “This causes that”).

Posted by VirtualThumb | Report as abusive

Whoa @PseudoTurtle! You wrote:

“Simply put, “opinions” are worth nothing, unless they can be backed up with fact. The trouble with today’s media is that it allows people to express “opinions” as “facts”, when in reality they are not the same at all.

THIS is what the author is doing, and doing quite a good job of it in terms of misdirection. He actually does not have a valid point, but is merely presenting an emotional argument based on whatever his hidden motives are.”
__________

OK. I would politely suggest that, in the absence of 100%-verifiably-accurate-wihtout-a-doubt numerical data that accurately demonstrates a cause-and-effect relationship, opinions are worth a little something becuase they at least offer up possible results for consideration and debate. Opinions, therefore, don’t need facts in order to be offered up for consideration (and the hear-er of the opinion may assign whatever value they see fit to such a statement). I therefore believe the author’s “opinion” could be a reasonable one (perhaps not an opinion I personally share, but now we’re spitting hairs).

My favorite thing about opinions is that they invariably capture some amount of human emotion, the one aspect of our humble existance as humans that statistical economic theories will never be able to accurately assess.

Posted by VirtualThumb | Report as abusive

Pseudo, don’t take this criticism the wrong way, as I think we are in complete agreement about the avarice of the business owners of the world. BUT you are wrong about science. The world is not relative, and we can call the “Laws” of science what they are: scientific Laws, as distinct from so-called economic laws. The thing about this technical term is that it is self-referential. THey are called Laws because they work. This is something that economics cannot do, despite your roundabout argument that we “have enough data to predict.” we have enough data from pyschology and history to predict that people will attempt to exploit one another, but economics cannot make any accurate predictions at all. Only within closed models that shift with the fashions of politics can economics make predictions.

This is exactly the reverse of science, which uses laws for predictions that uniformly (by now, after centuries of effort) DO produce accurate predictions in the real world. Until economics can make some useful predictions they are rightly NOT called a science. Because they are not.

Posted by Benny27 | Report as abusive

@ Benny27 –

No offense taken. It is a legitimate question, but necessarily goes far beyond the realm of this venue as to what is “reality”, or what constitutes a “law” in this context. However, I am not asking you to take my word for it.

Let me back up my “opinion” with fact (again, using Wikipedia solely for convenience).

——————-

“Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

[1] Political economy was the earlier name for the subject, but economists in the late 19th century suggested “economics” as a shorter term for “economic science” that also avoided a narrow political-interest connotation and as similar in form to “mathematics”, “ethics”, and so forth. [2] A focus of the subject is how economic agents behave or interact and how economies work.”

———————-

“Social science refers to the academic disciplines concerned with society and human nature. “Social science” is commonly used as an umbrella term to refer to anthropology, archaeology, criminology, economics, education, linguistics, law, communication studies, history, political science, sociology, human geography and psychology.”

——————————

“Science” (from Latin scientia, meaning “knowledge”) is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe.

[1] In an older and closely related meaning (found, for example, in Aristotle), “science” refers to the body of reliable knowledge itself, of the type that can be logically and rationally explained (see History and philosophy below).

[2] Since classical antiquity science as a type of knowledge was closely linked to philosophy. In the early modern era the words “science” and “philosophy” were sometimes used interchangeably in the English language.

[3] By the 17th century, natural philosophy (which is today called “natural science”) was considered a separate branch of philosophy.

[4] However, “science” continued to be used in a broad sense denoting reliable knowledge about a topic, in the same way it is still used in modern terms such as library science or political science.

In modern use, “science” more often refers to a way of pursuing knowledge, not only the knowledge itself.

It is “often treated as synonymous with ‘natural and physical science’, and thus restricted to those branches of study that relate to the phenomena of the material universe and their laws, sometimes with implied exclusion of pure mathematics. This is now the dominant sense in ordinary use.”

[5] This narrower sense of “science” developed as scientists such as Johannes Kepler, Galileo Galilei and Isaac Newton began formulating laws of nature such as Newton’s laws of motion. In this period it became more common to refer to natural philosophy as “natural science”. Over the course of the 19th century, the word “science” became increasingly associated with the scientific method, a disciplined way to study the natural world, including physics, chemistry, geology and biology.

This sometimes left the study of human thought and society in a linguistic limbo, which was resolved by classifying these areas of academic study as social science.

Similarly, several other major areas of disciplined study and knowledge exist today under the general rubric of “science”, such as formal science and applied science.

———————–

Clearly, your “question” to me represents your “opinion” about economics and science in general, which does not quite square with reality.

Again, “opinion” does not equal “truth”, nor “reality”. You are on a slippery slope in condemning economics for not “working”.

It reminds me of the old saying “it is a poor workman who blames his tools”.

Your question also raises an interesting point as to whether a law is still a law if it does not “work”. Is the fact that a law works a necessary criteria, or simply that we do not understand it fully.

For example, Newtonian gravity “works”, but only in the macro world, not in the world described by Relativity Theory. Does that mean it is not a law on the quantum level — or indeed on any level to any degree of reliability, simply because we have found an instance where it has failed — or is the real explanation that man’s knowledge of nature has not yet progressed to the point that we can explain why it does not work?

For that matter, what is “reality”? Is it what we can see, feel and measure, or does it extend far beyond our capabilities to understand the universe. It is a question that matters in this context because you claim science is provable because it works.

I submit that we cannot know “reality” because everything we “know” about the world is filtered through the human brain. Therefore, objective reality cannot exist for us, only subjective reality.

I suggest you look at Quantum Theory, especially at electromagnetism (Quantum Electrodymanics) and Quantum Chromodynamics to get some idea of what “reality” consists of.

It certainly ain’t what you think it is, especially for cutting-edge science, as opposed to Classical Mechanics, which is what people normally think of when they think of science being a hard and fast set of rules and laws.

Sorry for waxing enthusiastic about the question of reality, but it is a private passion of mine, and a real mind blower.

Posted by PseudoTurtle | Report as abusive

@ Benny27 –

If we are “in complete agreement about the avarice of the business owners of the world”, why are we arguing whether economics is science or not, instead of doing something about the reality of the economic damage they are doing?

That is their game, to distract people from the truth of what they are doing.

That is a zero sum game, and we are losing badly.

Posted by PseudoTurtle | Report as abusive

Pseudo, good summary of the history of Natural Philosophy, now called Naturalistic Science. To me, Science can only refer to the science practiced by the likes of galilei/newton/einstein.

Economic Science was so-called by an unwarranted desire to associate with the precision of physics. But physics was able to make predictions. Quantum mechanics are an interesting example, primarily because they do not invalidate Newton’s critique of the prevailing theory of his day: mechanistic materialism. He proved action at a distance. Einstein does not invalidate, but rather enriches this view. The reality that you refer to is on such a micro level that it may as well not exist for everyday purposes. None of this invalidates classical physics.

Laws in science do work. Science is a malleable tool that bends when challenged by strong evidence, such as the newer quantum theory experiments. So new information is usually incorporated into theories rather than replacing them, and very little is overturned now. There is no more obviously useful concept that I can think to offer than the Law of Gravity. Economics has no such justifiable claims to make, just models which assume too much, and never get it right when used in the real world.

The word Law is clunky in this context, because it has three or more meanings: from science, from law, from theology (I don’t much care for that at all), etc.

But a Law of science is so-called for the fact that it does have explanatory as well as predictive power. There is nothing magical about it, we just use the term Law as an honorific to denote that it has never yet been replaced with a better theory (and may never, for all we know).

Economics works very well, for the designed purpose of justifying the power of the privileged. Yes that is my opinion, but I fail to see how revealing my biased opinion on economics makes the field any more credible? My opinion of science is irrelevant: the laws that we have settled on work well enough to have invented all the things we use every day (or at least to have borrowed them from Nature).

My only beef with economics is that, like history un-wedded to science and archeology, it finds whatever conclusions the researcher is looking for. like other social”sciences” (humanities), it is permanently in danger of researcher bias, because it is easy to find confirming evidence for a topic and it is human nature to ignore counter evidence. Not that it is useless, but we reserve the word science for the scientific method because of it’s effectiveness in practical use. the humanities are in general awash with confounding variables, mostly unexamined by those researchers who draw large conclusions from them.

Science provides a clear enough picture of what we call reality that we can use it to great effect. Economics has no such confirmed higher laws… or perhaps you would like to share your thoughts on which rules are iron-clad: I fear you perhaps have an affinity to economics that you haven’t let on about yet? Again, not that making models of human economic behaviour is inherently useless: I don’t mean that. I mean that some of these economic “just-so stories” are contradictory, and all of them are based on highly questionable assumptions (man is rational? since when?)

Adam smith never imagined a world where someone would want to invest outside of his home country: he was a patriot of the British empire at heart. his principles still stand, but they must be deformed to fit the prevailing view of economics….

Posted by Benny27 | Report as abusive

@ Benny27 –

You prove my point that someone who has a strongly held opinion, and who is not ready or willing to understand the truth, cannot be convinced otherwise.

As to the definition of economics as a science, it is as I quoted. There is no point in arguing about something which has been long-settled and moot for our purposes.

As you your statement, “Quantum mechanics are an interesting example, primarily because they do not invalidate Newton’s critique of the prevailing theory of his day: mechanistic materialism. He proved action at a distance. Einstein does not invalidate, but rather enriches this view. The reality that you refer to is on such a micro level that it may as well not exist for everyday purposes. None of this invalidates classical physics.”

I doubt you will find many physicists today who would be willing to agree with you that Newtonian Mechanics is still valid theory, since Einstein (much to the chagrin of the British) proved his Theory of Relativity about 100 years ago.

Action at a distance has been displaced by field theory and quantum entanglement.

“Electricity and magnetism

Efforts to account for action at a distance in the theory of electromagnetism led to the development of the concept of a field which mediated interactions between currents and charges across empty space. According to field theory we account for the Coulomb (electrostatic) interaction between charged particles through the fact that charges produce around themselves an electric field, which can be felt by other charges as a force. The concept of the field was elevated to fundamental importance in Maxwell’s equations, which used the field to elegantly account for all electromagnetic interactions, as well as light (which, until then, had been a completely unrelated phenomenon). In Maxwell’s theory, the field is its own physical entity, carrying momenta and energy across space, and action at a distance is only the apparent effect of local interactions of charges with their surrounding field.”

Action at a distance is the nonlocal interaction of objects that are separated in space.

Action at a distance was used most often in the context of early theories of gravity and electromagnetism to describe how an object responds to the influence of distant objects. More generally “action at a distance” describes the failure of early atomistic and mechanistic theories which sought to reduce all physical interaction to collision. The exploration and resolution of this problematic phenomenon led to significant developments in physics, from the concept of a field, to descriptions of quantum entanglement and the mediator particles of the standard model.

Einstein

According to Albert Einstein’s theory of special relativity, instantaneous action at a distance was seen to violate the relativistic upper limit on speed of propagation of information. If one of the interacting objects were to suddenly be displaced from its position, the other object would feel its influence instantaneously, meaning information had been transmitted faster than the speed of light.

One of the conditions that a relativistic theory of gravitation must meet is to be mediated with a speed that does not exceed c, the speed of light in a vacuum. It could be seen from the previous success of electrodynamics that the relativistic theory of gravitation would have to use the concept of a field or something similar.

This problem has been resolved by Einstein’s theory of general relativity in which gravitational interaction is mediated by deformation of space-time geometry. Matter warps the geometry of space-time and these effects are, as with electric and magnetic fields, propagated at the speed of light. Thus, in the presence of matter, space-time becomes non-Euclidean, resolving the apparent conflict between Newton’s proof of the conservation of angular momentum and Einstein’s theory of special relativity.

Posted by PseudoTurtle | Report as abusive

@ Benny27 –

A final thought. You state, “Adam smith never imagined a world where someone would want to invest outside of his home country: he was a patriot of the British empire at heart. his principles still stand, but they must be deformed to fit the prevailing view of economics….”

Since you presume to know what Adam Smith would have thought about the present neocon perversion of his principles, how do you explain this statement?

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Nevertheless, he was wary of businessmen and warned of their “conspiracy against the public or in some other contrivance to raise prices”.[80]

Again and again, Smith warned of the collusive nature of business interests, which may form cabals or monopolies, fixing the highest price “which can be squeezed out of the buyers”.[81]

Smith also warned that a business-dominated political system would allow a conspiracy of businesses and industry against consumers, with the former scheming to influence politics and legislation.

Smith states that the interest of manufacturers and merchants “…in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public…

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”[82]

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Adam Smith was as much (if not more) concerned with moral principles as he was with his theory of free trade.

Adam Smith is best known for two classic works: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

As a moral philosopher, I think he would be more likely to condemn, not agree with the neocons who are twisting economics to fit their own greed.

I have nothing more to say.

It is a waste of my time to attempt to convince anyone of the truth who is not willing to understand what is happening to this economy and why.

Posted by PseudoTurtle | Report as abusive

Pseudo, Interesting take, I am not sure why you feel the need to be hostile, I am essentially agreeing with you. I say that Adam Smith is wrongly used to justify the neo-liberal (you say neo-con) positions of commenters and pundits today. Adam smith predicted that they would attempt to distort the market etc. And we see that they do. What does this have to do with the Efficient market hypothesis and other modern tropes of economics?

I am not aware of the details of Quantum Physics, so correct me if I am wrong. Newton first exploded the notion that things needed to touch to interact (as you also mention), but modern quantum theory refers to events that occur at the subatomic level, not the macro world of aeroplanes and humans. So in what way does the recent discoveries in physics invalidate the utility of Naturalistic Science? Otherwise stated, who cares about field theories, when we are trying to solve human problems such as economic policy changes?

So what exactly are you trying to teach me? My thesis is that economics is a field of political science, and the only truth to be found anywhere in human understanding will come from modern science, not from economics or speculative philosophy, for instance. Your condescension about Adam Smith is unnecessary, because you are telling me what I already know: businesses act in self interest, and tend to work toward conspiracies against the public. I just add the fact that his “toward the betterment of all” notion refers to his own nation, at the expense of others. That is why he spends long tracts of his work. explaining policies that England should adopt. He also said that division of labour would prove efficient, but it would also turn man into a low beast-like machine, robbing him of his human characteristics (a low fidelity paraphrase, of course).

So is he recommending division of labour or not?

Posted by Benny27 | Report as abusive

@ Benny27 –

I want to make one last point before I sign off for today.

Your ideas for both economics and physics are seriously outdated. I cannot make up for your lack of education. Only you can do that for yourself.

The proof of quantum mechanics lies in the medium we are both using to dispute our notions of science — it’s called electronics, and its all around you every day, not hidden at all.

The same is true for economics. Its impact is felt by nearly everyone in the global economy today. And that impact is not good, since it is destroying this planet we live on.

The same principle applies to both of your opinions — they are wrong, but only you can change them.

The question is will you? And before it is too late?

The global economy is on the verge of collapse again. The DOW, for example, closing at 14,865 today based solely on $3 trillion on its way to $4 trillion of “wealthy welfare” that is not getting through to the real economy and now hitting new highs as a result, which is proof there is something seriously wrong with the global economy.

THAT is a truth which cannot be avoided, and will become all too obvious when it crashes again as it did in 2008.

In fact, it may already be far too late to do anything about it.

Meanwhile, we sit here arguing about how to rearrange the deck chairs as the US economy slides underwater.

It is all very sad and pointless, mainly because it was totally preventable, if we had paid attention to what the wealthy class was doing with taxes, free trade and the destruction of banking regulations.

What is even more sad and pointless is that most people simply don’t have a clue as to what is going on, nor do they care.

They will quite soon.

Posted by PseudoTurtle | Report as abusive

You tell me I am wrong while agreeing about the practice of economics. I admit to ignorance of physics, and I am still learning. You seem attached to classical economics, as if that is what is practiced today. perhaps you really do just prefer to shout about things, rather than deal with details. I don’t expect you to teach me anything in particular, but I am mystified as to what your problem is regarding economics. You say my view is wrong when I agree with you word for word….

Posted by Benny27 | Report as abusive

@ Benny27 –

I apologize if I have offended you. It was not my intent. Sometimes I become too forceful in making comments.

What I was trying to tell you is contained in my last comment above, about the markets being ready to crash again, mainly due to wealthy bailouts we cannot afford, and over 40 years of neocon taxes, free trade and the removal of banking regulations.

2008 was a redux of 1929, but the misguided attempts to rescue the wealthy class to avoid the “mistakes” of the Great Depression has simply made things much worse.

We have, in my estimation, reached the limits of the massive global bubble we are in before it bursts again.

That is my point, and the only point that really matters right now.

Regards.

Posted by PseudoTurtle | Report as abusive

Right now, we have no laws of economics. There are laws of accounting, and we mock them at our peril, but they are generally ignored by economists whose arguments often make no accounting sense.

Also, do economists actually argue that economic laws have moral weight? You’ll notice that physicists, biologists, chemists and accountants don’t. The laws may be right or wrong, but not good or evil. If economists are talking about morality and not money, goods and services, then they are promulgating religion, not science.

Posted by Kaleberg | Report as abusive

The author makes a good point -

There are no laws as in physics (you can’t break them), and no laws in the sense of state laws (you could get punished if you get caught breaking them).

There are observed patterns in the behavior of individuals, groups and organizations.
Such patterns can be circumstantial, transient, evolving, misinterpreted or misunderstood.

Posted by reality-again | Report as abusive

Mr. Karabell is concurrently right and wrong. The “laws of economics” are the intersection of the laws of physics, nature, and human behavior. They are not mathematically perfect or rigid, neither are they meer suguestions.
Nor do they depend on perfect rationality. They depend on the interaction of real immutable physical facts, as well as patterns of human behavior that whether rational or not, whether variable or not still remain within narrow ranges for the overwhelming majority of people.

It is theoretically possible that governments can act in ways that “violate the laws of economics” without experiencing the consequences those “laws” predict – but the probability is minuscule.

It is wrong – immoral even evil for government to act contrary to those laws while expecting, predicting and trying to persuade people that they will not apply.
It is possible that tomorow every single human could wake up and behave in the specific irrational manner required for the “laws of economics” not to work. But just as we can expect the sun to rise tomorow, it is likely that all of humanity will not suddenly behave entirely differently tomorow.

The “laws of economics” are not invariable and immutable. Nor do they presume perfect rationality. But they are based on human behavior and have an extremely high probability of proving true. They do not require rational or perfectly predictable human behavior, just not universally unpredictable irrational human behavior.

Posted by dhlii | Report as abusive

One issue the author raises when he says: “While there is no statistically discernible inflation as of yet…” is that we have not yet even agreed on the system of measurement. It seems that Mr. Karabell is referring to Core CPI inflation which excludes food and energy, costs which may be trivial to well off citizens but are along with housing the vital expenditures of most people in the US as well as across the world. By excluding those critical costs the measurement of impacts is fundamentally impaired and leads to a distorted view of current conditions. This prevents a real evaluation of the validity of economic ‘laws’ such as they may be.

See also http://www.shadowstats.com/alternate_dat a/inflation-charts for another way that the measurement of inflation has been gerrymandered to make the testing of economics scientifically invalid. While I am not proposing to say which economic ‘laws’ do exist I believe that a serious analysis of them cannot take place until the methods of their measurement are more accurate.

Fascinating discussion about science and whether economics can be included as such in the comments. I believe that economics someday may have the tools to make better models of macro events but will ultimately be limited in their accuracy by the fact that the subjects are human.

One thought that occurs to me is that somewhat like how our understanding of physics developed (as discussed above), economics will be better understood from a macro perspective if it is detached from provably flawed micro concepts like rationality and utility until such time as the knowledge of how to model individual behavior advances.

Posted by Giovanni_I | Report as abusive

When proclaiming the Emperor has no clothes it helps if you know what clothes actually are.

“Because the “laws of economics” say the supply of money will cause inflation if overall output stays the same. In the developed world, clearly, there has been an increase in money supply via the Federal Reserve, the Japanese Central Bank and to a lesser extent the European Central Bank, yet growth is minimal everywhere. While there is no statistically discernible inflation as of yet, the “laws” strongly indicate that there soon will be.”

Said “laws” state that the velocity of money falls in recessions. And it is the combination of the amount of money and its velocity of circulation which determines inflation.

US money supply has recovered to trend but velocit has not. Eurozone velocity has recovered but money supply has not.

The “laws” of economics tell us that either situation will lead to no or negligible inflation, indeed, to the deflation we see in some eurozone periphery countries.

The inflation will come if and when both money supply and velocity return to past trend.

Posted by TimWorstall | Report as abusive

Recent increases in the money supply have not caused inflation because the Fed is paying banks interest on excess reserves- most of this new money is not circulating so it cant cause more inflation.

Posted by BP50 | Report as abusive