Epistemology and Economics

Last summer I read a post by economics professor named Mark Steckbeck called Three Edicts of Economic Thought in which he identifies three schools of thought and higlights the epistemological implications of each. (Note: GMU = George Mason University):

The leftists: "That what is is inefficient." Given the abundant examples of oversupply, undersupply, and information problems, (i.e., market disequilibrium), market inefficiencies abound.

The Chicago School: "That what is is efficient." There are no market inefficiencies given the perfectly informed and rational actions of individuals. Any oversupply or undersupply or information problems (i.e., market disequilibrium) are efficient responses to transaction costs.

The GMU School: "That what is is." The epistemological problem precludes us from ever knowing if there exists a preferred social outcome other than what is - what evolves naturally and spontaneously from individuals freely choosing their preferred outcomes. Seeming inefficiencies are unexploited profit opportunities for entrepreneurs.

I think the third option gets it pretty much right. A market economy is a complex evolutionary organism with highly integrated feedback loops. It adapts and evolves as it interacts with its environment. Given sufficient latitude, it will evolve to address existing problems. That does not mean that adaptations will occur in smooth non-disruptive ways.

Lest I be misunderstood, I’m not talking about a survival of the fittest contest between human beings. I’m talking about a contest between alternative behaviors within an economic system. Nor should it be concluded that by “market economy” that I mean the American economic system. The American economy is one approximation of a market economy.

I think there is a role for government in softening some of the shocks that occur to people’s lives as economies morph but the primary role of government is to provide safe boundaries in which solutions can emerge from individuals, families, and civic/economic institutions searching for solutions. The problem with big top-down government solutions is not that they are malevolent. The issue is one of modernist epistemological hubris, believing that an individual or body of officials can rationally discern with accuracy the ramifications of their actions in a massively complex human ecology.

Thus, I reject the Chicago School idea that the world operates with perfect rational efficiency and that what is is the best we can do. But I’m doubtful that very many solutions can be developed from the top and implemented by the federal government. Instead, virtuous individuals combined with strong families, strong civic institutions, and strong economic institutions, with government playing a supportive mediating role, is the best way to a just and flourishing society.

Comments

[RonMck]

Michael
A major problem for modern secular economists is that they cannot go beyond “positive economics”, because they have no basis for ethical judgments. They are stuck with describing the way the economy functions. Some sneak beyond that by trying to demonstrate what will work. This brings an ethical standard in the back door. In the case of the positions you site, the ethical standard/goal they sneak in is efficiency.

The Chicago school say that the free market will lead toefficiency. The leftists say it won’t, but they can make the economy more efficient. The GMU says we don’t know what is efficient, but if we generally leave things alone we will get their in the own.

Each of these positions is stuck in positive economics where all they can do is describe how the economy works and perhaps get beyond that to what works best (or if we cannot resolve the epistimological problem, they cant).

Christians should do positive economics, but we need to move beyond that We have God’s standards in the scriptures, so we have an ethical base from which we can do “normative economics”. Our goal is not to find out what is efficicient, or what will work best. Our objective to find out what economic system is morally right. What complies with God’s word? What complies with God’s justice?

The truth is that what is right often does not work best. What is just may not be totally efficient. We should do it anyway.

So arguments about whether a particular type of economy is efficient or not is largely irrelevant. That means that we do not have to resolve the epistimological problem. We can bypass it by focussing on the moral problem (where we have a head start.) If we can establish what is right, we do not have to prove that it is efficient, because that is an irrelevant criteria. We should so what is right, even if it not efficient, and if we do not know whether it is efficient or not.