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Saturday, April 30, 2011

Theory and Practice

Bob Murphy recently asked me, "Do you believe in the very concept of economic theory at this point?"

Well, on one level, how could one not "believe" in economic theory? There is obviously tons of it. It would be like not believing in trees.

But Bob surely means "Do you approve of economic theory?" or "Do you think economic theory is..." Is what? Well, hmm, there's the rub.

I think economic theory is a fine thing. I teach it. Some times I even engage in it.

But is it true? Well, there certainly are true and false conclusions in economic theory. For instance, it is false that an increase in demand will, ceteris paribus, result in a lower price for a good, and true that it will result in a greater quantity demanded.

But is economic theory true, strictly speaking, of the world? Well, no, because no theory is. Every theory is literally false, in that a theory is always a partial and abstract description of the world, and, as such, defective. And as Collingwood put it, "One cannot abstract without falsifying."

Then what is the use of theory for practice? It is very much like the use of a map in driving: it can guide practice, but not dictate it. So we drive along using our map, but we must continually look at the road as well, and ignore the map when need be. Otherwise, we will wind up driving off the bridge under construction and into the bay because our map shows a solid line across the bay at that point.

So, for instance, sure, free trade is a great idea. Except when it isn't. And the fact that you have an abstraction showing you that it is always a great idea is no evidence against my caveat. It just means you have made a mistake about how to employ abstractions.

26 comments:

  1. 'And as Collingwood put it, "One cannot abstract without falsifying."'

    But, if I say to someone 'that is my dog' when it is something more 'realistic' - a German Shepard - am I falsifying reality by using the word dog?

    I thought Dr. Long wrote a good essay on the distinction between using precisive and non-precisive abstractions when theorizing about reality.

    http://mises.org/journals/qjae/pdf/qjae9_3_1.pdf

    Maybe I am wrong (theoretically, anyway);

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  2. Richard, I'm familiar with Long's essay. These are deep issues, but I believe that Collingwood is correct, and Long wrong.

    And yes, I think "That is my dog" is false, at least if we take it for more than it is. (We try to pretend we have captured the full situation with our abstraction, which is what one does when one tries to use theory as the dictator of practice.)

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  3. That's right, Gene. You can see it very well when applied to political science. The best example is the "argumentation ethics" theory of Hoppe. It amuses me how can some people think that, as we argumentate, we assume some "property rights", so "private property rights" are natural, universal and absolute.

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  4. It seems to me that your argument works only if we define the word "theory" so that "the theory such-and-such" is equivalent to "the proposition that such-and-such, and only such-and-such, is true."

    I doubt whether many supposed theories would actually qualify as theories under that definition. (Does general relativity, for instance, postulate that nothing but its own tenets are true?) And if I'm right, it's out of bounds to characterize all of them as false—using, that is, this line of reasoning.

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  5. 'It seems to me that your argument works only if we define the word "theory" so that "the theory such-and-such" is equivalent to "the proposition that such-and-such, and only such-and-such, is true."'

    Not quite, but close. My argument is directed against those who think we can take the conclusions of any theory and straight away read off from those conclusions directives for how we should proceed in practical life. To think that, one does not have to think that no other theory is true, but merely that the theory in question can resolve some class of practical matters definitively.

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  6. Gene writes:

    "And yes, I think "That is my dog" is false, at least if we take it for more than it is. (We try to pretend we have captured the full situation with our abstraction, which is what one does when one tries to use theory as the dictator of practice.)"

    This seems odd. The remark is made in a context and can do various jobs within that context (e.g. making clear it is my dog, not my neighbor's, making clear it is actually a dog and not a cat, or as an expression of pride, etc. etc.), and it seems unusual to say the least that the job is to "capture the full situation."

    If your only objection is that the description is false if the purpose is to give a complete description, then yes, okay, but that seems like a straw man.

    Also in science, the purpose seldom (if at all) is to give a complete description. One tries to pick out those factors that one deems crucial for predicting or understanding.

    Perhaps it is less of a straw man when applied to the use of economic theory if by that you mean "my abstraction shows that free trade is good, therefore in every concrete situation free trade is good." And I would agree that such simplistic use is silly, and think your map-analogy is quite apt and helpful

    But given your own standards, your analogy is apt and helpful, but false (because it is not a complete description of the problem and solution)

    I guess the problem I have with your point is that, if we were to follow it, the concepts "true" and "false" come to be used in very unusual ways.

    Perhaps then we should use your point in the manner you suggest we use theory, as a guide, but not as a dictate.

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  7. Gene writes:

    " For instance, it is false that an increase in demand will, ceteris paribus, result in a lower price for a good, and true that it will result in a greater quantity demanded."

    This in itself is odd, for the question is what the starting point is from which all else is equal.

    "All else is equal" is always applied from a given specific situation, and it may still depend on the situation whether this statement (incl. the ceteris paribus clause) is true or false.

    E.g. increasing the minimum wage will, ceteris paribus, increase unemployment" seems false when the minimum wage is increased from $0,01 per hour to 0,015 per hour all else being equal, while saying that an increase in the current New Jersey minimum wage to $15 an hour will increase unemployment, ceteris paribus, does seem true (ignoring for a moment possible complicating factors, such as that it then applies only to an idealized world)

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  8. Gene writes:

    "And the fact that you have an abstraction showing you that it is always a great idea is no evidence against my caveat."
    Yes, at least not prima facie

    "It just means you have made a mistake about how to employ abstractions."
    That doesn't follow. It could also be that your use of these abstractions is justified through pragmatic means: if for example, inductively, we notice that free trade seems to have great consequences (ignoring for a moment, the obvious problem with characterizing "great" here) every time it is applied. Then it seems reasonable to think that this will hold in future instances as well, while admitting that this is not a certainty. Pragmatically speaking (while remaining falibilist) we then use the abstraction in a sensible way even if we use it as a dictate: our inductive success has made us so confident that it becomes reasonable not to take the extra time in every moment to figure out whether it might not work for this specific situation.

    To be sure, I'm not saying that this is the case now, only that this is a possibility.

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  9. 'and it seems unusual to say the least that the job is to "capture the full situation."'

    If I had said that, it would be unusual. But I did not. What I said was IF we used it for that job, it would be a false statement.

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  10. Well, the good thing is that I didn't say that *you* had said that.

    I listed some possible purposes of "This is my dog" and then said that it was "unusual to say the least that the job is to "capture the full situation." (grammatically it would be better to say "unusual for the job to be to capture the full situation")

    In other words, that it will be an unusual context in which "capturing the full situation" is the purpose of that remark.

    That is why I followed that by "If your only objection is that the description is false if the purpose is to give a complete description, then yes, okay, but that seems like a straw man."

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  11. 'That is why I followed that by "If your only objection is that the description is false if the purpose is to give a complete description, then yes, okay, but that seems like a straw man."'

    Ah, got you.

    But I assert this is NOT a strawman. It may be that when pressed people will say, "Sure, my abstraction doesn't capture everything," but, in fact, when they make theory an infallible guide to practice, they are assuming the opposite.

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  12. yep, and as said ("Perhaps it is less of a straw man when applied to the use of economic theory if by that you mean "my abstraction shows that free trade is good, therefore in every concrete situation free trade is good." And I would agree that such simplistic use is silly, and think your map-analogy is quite apt and helpful ") I agree with you there

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  13. I suppose I really ought to finish reading the comments before typing responses!

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  14. It's not clear to me that making a theory "an infallible guide to practice" necessarily assumes that the theory captures all of reality. Imagine a man who invests in the stock market. He knows that it is possible to get a better return by picking individual stocks if you pick the right ones, but he also knows that he isn't any good at picking individual stocks and whenever he tries he ends up losing money. So he decides to put all his money in index funds and not touch it till he retires matter how obvious it seems that he should switch to a particular stock.

    Similarly, "free trade always works, except when it doesn't" is no doubt a more accurate description of reality than "free trade always works." Yet the latter may be more useful as a guide to policy if we lack the ability to tell which situations are the exceptional ones.

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  15. "So he decides to put all his money in index funds and not touch it till he retires matter how obvious it seems that he should switch to a particular stock."

    Imagine him buying an indexed fund of Roman real estate in 200 AD.

    He would do pretty well if he wasn't retiring until 1700 or so.

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  16. And Narrator, as far as the certeris paribus comment goes, I don't understand what you are saying.

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  17. Gene said:
    "And Narrator, as far as the certeris paribus comment goes, I don't understand what you are saying."

    You use the ceteris paribus in the following sentence:

    "For instance, it is false that an increase in demand will, ceteris paribus, result in a lower price for a good, and true that it will result in a greater quantity demanded."

    What does "ceteris paribus (CP)" refer to here? what is being held constant by you? Your statement was very general, so I'm assuming you mean it in the following way:

    "whenever demand for a good increases, the price of that good will increase, if there are no counteracting forces (or in any case no counteracting forces strong enough to cancel out that effect.)"*

    If (roughly) this is what you meant, then it seems false regardless of one's views on whether abstraction necessarily "falsifies", because

    1) the initial conditions/situation and

    2) the extent of the change (in demand) matter too.

    So even if there are no counteracting forces, depending on the initial conditions/situation and/or the extent of the change, the price may not increase, making the statement "whenever demand for a good increases, the price will, ceteris paribus, increase" false.

    Using only such CP clauses only makes sense when saying something like "it is true that in such and such (types of) situations, when demand for a good increases by such and such a minimum amount, the price will, ceteris paribus (no counteracting forces), increase." But not "it is true that *whenever* demand increases by *whatever amount*, the price will, ceteris paribus, increase." And because of the very general nature of your statement, you seemed to be saying the latter. And that, again, is false regardless of one's views on whether abstraction necessarily "falsifies."

    ---

    I'm curious to know what you think of my point about how it follows from your own thesis that your own thesis should only be used as a guide, rather than as a dictate.



    *I know you wrote something slightly different, not that it is true that an increase in demand will increase the price but that it is false that an increase in demand will lower the price. But that doesn't, I think, undermine the point I am making about CP clauses.

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  18. Gene,

    As I said, there are going to be cases where you would be better off not going with index funds. But unless you can tell in which cases this is true, it need not affect your practice.

    If we are talking about driving then your point about trusting your eyes over the map makes perfect sense. But Bastiat's key insight was that when it comes to economics the analogy does not hold. "Yes, your economic theory says that broken windows don't increase employment, but I can see with my own eyes people hard at work fixing the windows." "Yes, your economic theory says that the economic incidence of a tax is not the same as the legal incidence, but I can see with my own eyes that Mr. Moneybags is writing out a check to the government to pay the tax."

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  19. "So even if there are no counteracting forces, depending on the initial conditions/situation and/or the extent of the change, the price may not increase, making the statement "whenever demand for a good increases, the price will, ceteris paribus, increase" false."

    Well, I suppose if the demand curve is vertical the price won't increase.

    But I fear you may be talking about what happens in reality. In reality, the increase in demand may be so little that the new price would be less than a penny higher, or something of the sort. But I am speaking theoretically. In the theory, except for a vertical demand curve, an increase in demand will increase the price.

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  20. "I'm curious to know what you think of my point about how it follows from your own thesis that your own thesis should only be used as a guide, rather than as a dictate."

    I think that is right.

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  21. " But Bastiat's key insight was that when it comes to economics the analogy does not hold."

    Blackward, he said it is *hard* to see these effects, not impossible. If it were impossible, we'd have no idea if the theory applied to reality at all. Yes we have to look beyond immediate effects. But we can still look.

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  22. "Using only such CP clauses only makes sense when saying something like "it is true that in such and such (types of) situations, when demand for a good increases by such and such a minimum amount..."

    You've definitely muddled the model and reality. In the model, there are no "types of situations" -- there are only supply and demand curves and their shapes. And there is no minimum amount demand needs to increase before the price increases.

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  23. Gene wrote:

    "You've definitely muddled the model and reality. In the model, there are no "types of situations" -- there are only supply and demand curves and their shapes. And there is no minimum amount demand needs to increase before the price increases."

    Two things in response:

    1) if true at all, it's only true for neoclassical models, but not for Austrian price theory, where if all is well, the curves (and hence the assumption of continuousnessness) are only used for pedagogical purposes)

    (this, to be sure, doesn't mean that Austrian Economics has no problems re truth/CP/counteracting forces)

    2) I think it's you, not me, who has muddled the model and reality.

    you object to my saying that you should use CP clauses in 2 more respects (to account for initial conditions, and extent of change, respectively) by saying that in the model there are no "types of situations" or "minimum amount of demand increases."

    But in the model (graph) there are no counteracting forces either, so you don't need CP clauses to exclude their effects/role either. Yet you explicitly include in your formulation such a CP clause.

    What I am saying is that *if* you start using CP clauses, you have to use them in two more respects (re initial conditions and re extent of change, respectively) than you're currently doing.

    Here's he thing: We are talking about 3 different elements and the relations between them here: a model, a theory, and the real world.

    Now if a model is what makes the statements of the theory true, then you don't need any CP clauses at all. They are implicit in the strong idealizations / simplification of the model (a graph, by not specifying them, in essence specifies the factors the CP accounts for as absent (no matter what Roderick Long might say)).

    If instead you want to use the theory to say something about the world, you will need CP clauses because a whole lot of elements outside the model matter for real-world outcomes.

    But you need them not just in the one sense in which you use them (to exclude counteracting forces) but also in the two other senses I mentioned above. (to account for initial conditions and extent of change)

    When you only include one CP clause and when you say that I am muddling model and reality, you are basically standing with one leg in the model-theory relation (your not using CP clauses in two respects, and your saying that I am muddling the model and reality), and with the other in the theory-reality relation (your use of CP clause)

    But it's either/or. You either speak of the model-theory relation in which case you need no CP clauses at all, or you speak of the theory-reality relation in which you need your initial CP clause, plus two more.

    So it's you who, I think, has muddled the model and reality (and the theory!)

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  24. "But in the model (graph) there are no counteracting forces either"

    No, supply could have shifted as well -- the CP clause means it didn't!

    Otherwise I agree with the rest of what you say. But I was using the CP clause only in the above sense.

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  25. Okay.

    for what it's worth, I will say that it is a bit confusing to say "*all else* remaining equal" when you mean "*supply* remaining equal," not just because "all else" suggests more than just one element, but also because the former phrase is actually slightly *longer* than the latter phrase.

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  26. Well, I admit to just rolling out the standard phrase without thinking about such sophisticated critics as yourself!

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