The Hindu Business Line : Why economics is not physics

The day after the previous article in this series appeared, an agitated reader wrote to the editor to lengthily complain that I was wrong. That article had argued that economics was a victim of one of its own explanations of economic phenomena, namely, the paradox of value.

This paradox says that the demand for a commodity increases even when its price rises, whereas common sense demands that it be the other way round.

I had made the point because in a response to an even earlier article, someone else had written to ask why, if economics was such a useless subject, was the demand for it so high among students.

How dare, said the more recent complainant, I say that men like Paul Samuelson and Robert Solow, both ‘Nobel’ prize winners, were incompetent? He named several other economists as well, who have cut a swathe after 1975.

It is probable that the complainant is an economist because his method is that of one. I call this the “If it’s Tuesday, it must be Belgium” method, suggesting inevitability. (The reference is to a film of that name, made in the 1960s about packaged tours from the US to Europe).

Basically, the method is based on the assumption that a view or opinion must be right merely because of the person who holds it.

Questioning and enquiry is not permitted.

Robert Solow’s quotes

Well, I have a surprise for this gent, supplied to me by my good friend, Niranjan Rajadhyaksha. He sent me some quotes from a contribution that Robert Solow made to The American Economic Review in 1985. The paper can be found in Vol. 75, No. 2, (May, 1985) on page 328 of the AER. The following link will also take you to it. (http://www.autisme-

economie.org/article160.

html?lang=en)

Quote 1: “To get right down to it, I suspect that the attempt to construct economics as an axiomatically based hard science is doomed to fail.”

Quote 2: “… all narrowly economic activity is embedded in a web of social institutions, customs, beliefs, and attitudes. Concrete outcomes are indubitably affected by these background factors, some of which change slowly and gradually, others erratically. As soon as time-series get long enough to offer hope of discriminating among complex hypotheses, the likelihood that they remain stationary dwindles away, and the noise level gets correspondingly high. Under these circumstances, a little cleverness and persistence can get you almost any result you want.”

Quote 3: “My impression is that the best and brightest in the profession proceed as if economics is the physics of society. There is a single universally valid model of the world. It only needs to be applied.”

Tracing the terminology

The clearest manifestation of this notion, that economics is really like physics, can be traced back to the terminology, as for example, the term equilibrium. When the early economists introduced this phrase, they had in mind a rough balance, rather than a perfect one of the sort physics demands.

But the very existence of the term made it possible to apply the mathematical techniques that are used in physics, quite unmindful of the fact that these techniques were devised to deal with wholly different problems.

Economics is only indicative

And, then, as a result of this mathematicisation, came the ‘theorems’ in economics. Theorems are the name given in formal logic to a proof. You state a hypothesis and then prove it by a set of mathematical steps.

In maths and physics, this method works because of two things. One is empirical verification and the other is the absolute or near-total absence of assumptions. After all, Pythagoras didn’t assume there was a tape to measure the hypotenuse with or that if there was a tape and it was an inch short, that it was all right to assume that it was ok. In other words, much of economics is only indicative. It tells us what might happen, not what will or must happen.

Taylor rule

But over the last quarter of a century, the tendency to move away from the tentative to the definite and then on to absolute insistence has grown.

No better example of this can be found than in the so-called Taylor Rule which says that in a completely open economy, with no capital controls, the central bank can control the interest rate or the exchange but never both at the same time. This is basically a restatement of Heisenberg’s “Uncertainty Principle”, which says that the more you know about the position of a particle, the less you will of its velocity and vice-versa. However, while the uncertainty principle works, the Taylor Rule doesn’t quite because of the extraordinarily restrictive assumption it makes about openness.

There are, I think, only 10 countries that would meet this condition whereas there are 185 sovereign jurisdictions which don’t. So how do you get a generalisable ‘rule’ to recommend to central banks?

Will a Taylor Rule adherent reply, please?

blfeedback@thehindu.co.in

More Stories on : Economy | Economics | T.C.A. Srinivasa-Raghavan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page