The 2009 Nobel Prize in Economics was recently awarded to Elinor Ostrom and Oliver Williamson for their work on "economic governance". The official press release notes:
Especially considering that Ostrom is a professor of political science, this award appears to be a recognition of fundamental economics, its method, which applies in all social studies.
The nature of this method, its basis in human experience, and its comprehensive scope were well described by Philip Wicksteed in 1910:
"Man himself is the beginning and end of every economy," wrote Carl Menger, when preparing notes for his ground-breaking Principles of Economics (1871) -- beginning, because aggregate economic and social phenomena (such as prices in the marketplace) do not arise except from individual men's actions (not society but man alone acts); and end, because even though each man acts on his subjective values towards his subjective goals, calling upon his subjective judgment and using his subjective skills, the rational principles that govern this individual behavior, properly understood and applied, are, miraculously, sufficient to explain not only the market process that guides the production of economic goods but in fact, the evolution of the entire social order.
Menger's essay on the Origins of Money is a splendid example of the economic method in action. He proves that differences in individuals' valuations of different goods and the absence of a co-ordination agency or mechanism (such as a government or State) are no obstacle to the natural emergence of money in any human society. In fact, differences in valuations are the reason social exchanges happen in the first place, and people realize without anyone's prompting that the most marketable goods should be accumulated for their own sake because they would be useful in future exchanges.
Man's position at the center of its method distinguishes economics from physical science as well. Only man chooses and acts, so causes and effects in human society are of a different kind than in the natural world. Ludwig von Mises, who determined to become an economist when he first read Menger, and who was recently described as "the man who predicted the Great Depression", did more than anyone to clarify the nature of economic knowledge. He says (on pg. 7 of his essay on The Ultimate Foundations of Economic Science):
The economist does not proceed by observation and measurement to hypothesis and inference but deductively from the axiom that men consciously choose, economize and act to achieve their individual ends in the presence of relatively scarce resources, to its inevitable consequences in the marketplace and society.
Another important feature of economics is that it is positive, not normative -- it illuminates how the human world, as it is, has come to be, and does not prescribe how it should be. Economists and their models are often used by those in power as justification for the policies they wish to carry out; sometimes the economists understand this and co-operate in the project, sometimes not. How a man should live, what values he should have, what kind of society "we" should aim to construct, and how -- important as these questions are, they lie outside the scope of economics.
It is also too much to ask of economics that it should predict how specific government measures (such as the 2009 stimulus measures) will affect specific aggregate measures of the economy (such as the unemployment rate). Each event has many causes that cannot be always separated. However, the laws of economics do apply 'in the large' -- using them, Mises was able to see through the credit-induced boom of the 1920s and anticipate the bust and depression that followed. In the 1930s Mises and Hayek also worked out the main economic problem with socialism and predicted its collapse. Of course, the actual collapse of a socialist economy (like Russia) does not prove them or their theory right, and neither does the continuing success of a socialist economy like China prove their theory wrong. Economic theory is correct in the construction or not at all.
Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.
Especially considering that Ostrom is a professor of political science, this award appears to be a recognition of fundamental economics, its method, which applies in all social studies.
The nature of this method, its basis in human experience, and its comprehensive scope were well described by Philip Wicksteed in 1910:
the general principles which regulate our conduct in business are identical with those which regulate our deliberations, our selections between alternatives, and our decisions, in all other branches of life. And this is why we not only may, but must, take our ordinary experiences as the starting point for approaching economic problems. We must regard industrial and commercial life, not as a separate and detached region of activity, but as an organic part of our whole personal and social life;
"Man himself is the beginning and end of every economy," wrote Carl Menger, when preparing notes for his ground-breaking Principles of Economics (1871) -- beginning, because aggregate economic and social phenomena (such as prices in the marketplace) do not arise except from individual men's actions (not society but man alone acts); and end, because even though each man acts on his subjective values towards his subjective goals, calling upon his subjective judgment and using his subjective skills, the rational principles that govern this individual behavior, properly understood and applied, are, miraculously, sufficient to explain not only the market process that guides the production of economic goods but in fact, the evolution of the entire social order.
Menger's essay on the Origins of Money is a splendid example of the economic method in action. He proves that differences in individuals' valuations of different goods and the absence of a co-ordination agency or mechanism (such as a government or State) are no obstacle to the natural emergence of money in any human society. In fact, differences in valuations are the reason social exchanges happen in the first place, and people realize without anyone's prompting that the most marketable goods should be accumulated for their own sake because they would be useful in future exchanges.
Man's position at the center of its method distinguishes economics from physical science as well. Only man chooses and acts, so causes and effects in human society are of a different kind than in the natural world. Ludwig von Mises, who determined to become an economist when he first read Menger, and who was recently described as "the man who predicted the Great Depression", did more than anyone to clarify the nature of economic knowledge. He says (on pg. 7 of his essay on The Ultimate Foundations of Economic Science):
in the orbit of natural events of the external world
which [the scientist] explores there is no such thing as action.
The economist does not proceed by observation and measurement to hypothesis and inference but deductively from the axiom that men consciously choose, economize and act to achieve their individual ends in the presence of relatively scarce resources, to its inevitable consequences in the marketplace and society.
Another important feature of economics is that it is positive, not normative -- it illuminates how the human world, as it is, has come to be, and does not prescribe how it should be. Economists and their models are often used by those in power as justification for the policies they wish to carry out; sometimes the economists understand this and co-operate in the project, sometimes not. How a man should live, what values he should have, what kind of society "we" should aim to construct, and how -- important as these questions are, they lie outside the scope of economics.
It is also too much to ask of economics that it should predict how specific government measures (such as the 2009 stimulus measures) will affect specific aggregate measures of the economy (such as the unemployment rate). Each event has many causes that cannot be always separated. However, the laws of economics do apply 'in the large' -- using them, Mises was able to see through the credit-induced boom of the 1920s and anticipate the bust and depression that followed. In the 1930s Mises and Hayek also worked out the main economic problem with socialism and predicted its collapse. Of course, the actual collapse of a socialist economy (like Russia) does not prove them or their theory right, and neither does the continuing success of a socialist economy like China prove their theory wrong. Economic theory is correct in the construction or not at all.
I love this post & your blog very much. This post explains in simple terms what might have taken years for me to understand otherwise. I look forward to reading more of your posts.
ReplyDeleteInsightful and interesting. Keep writing...
ReplyDeleteWe think we choose and act, but sometimes I wonder. Are these actions really resulting in something different than the "natural world"?
ReplyDeleteNot in the ultimate sense, of course, i.e. humans are part of the universe, but, for example, the UN didn't come to be in the way that the Grand Canyon came to be.
ReplyDelete