The Wrong Model

Dazzled by the great success of physics, economists took this science as their model in formulating their theories of human economic activities. In doing so, they overlooked some rather obvious and crucial differences between the very different subject matters of physics and economics – in particular, the obvious fact that human behaviour does not exhibit the same unchanging and predictable regularities that are observable in the behaviour of inanimate particles of matter.

But economic theory, in particular its style of reasoning, was rapidly changing: Paul Samuelson’s Foundations [of Economic Analysis – a widely-used introductory economics textbook in the United States] had appeared in 1949, establishing physics as the science for economics to imitate[…][1]

The discipline [of economics] achieved its academic and political status in large part because, in an attempt to be a science like physics, it grounded itself in rigorous mathematics to describe market and human economic behavior. In the eighteenth and nineteenth centuries—when Adam Smith, David Ricardo, Thomas Malthus, and other early economists were laying the foundation for economics—mathematics did not dominate economic theory. It was Francis Edgeworth in 1881 with Mathematical Psychics who tipped the balance. To apply mathematics, Edgeworth simplified the world with an assumption that allowed human behavior to be quantified: “every [hu]man is a pleasure machine.” Edgeworth’s proposal that economics could quantify not only physical things but also economic behavior was attractive. For more than a century, mainstream economists have embraced mathematics for the credibility it gave their endeavor. In emulating physics, they sought fundamental laws for economic behavior that would allow scientifically based prediction. Unfortunately, economists trusted their mathematically rigorous models without authentic validation in the human world. As a result the sound decision to employ mathematics in the discipline has led to some huge unforeseen problems as economics gained stature and the market economy became widely accepted as the central organizing principle in industrial societies.[2]

The reason why physical laws and theories are immutable is because the behaviour of particles and molecules does not change over time. The microscopic constituents of matter, whether they are quarks, protons, neutrons, electrons, atoms, or molecules, are assumed to behave in the same manner in different situations and at different times, both in the past and future, an assumption that is borne out by careful repeated experiments and measurements. But clearly these things are not true of human behaviour. As most people are aware, human behaviour is constantly changing, and never more rapidly than it is today. The implications of these constant changes are obvious: economists must pay close attention to the way that people actually behave – and not the way that economists simply assume they behave – in order to see whether these changes do not invalidate some of their laws and theories, or require that they be modified or rejected. But instead, what we find economists doing is behaving like a doctor who continues to prescribe the same antibiotic to cure a person of a viral or bacterial infection, not realizing that the virus or bacterium, being a living organism, can evolve, thus rendering the antibiotic that was formerly effective against it no longer effective.

Like many others who study human behaviour, economists have completely overlooked the great importance of models of behaviour in determining people’s behaviour. In good or bad economic times, it is the prevailing models of behaviour that determine whether the times are good or bad, and not, as they mistakenly believe, the interest or savings rate, government programs, monetary or fiscal policy, the money supply, and so forth, although these things can, of course, have indirect effects on the prevailing models of behaviour. Why is English spoken in Australia, New Zealand, and the United States, while Japanese is spoken in Japan, Portuguese in Brazil, and Spanish in most of the other countries of South and Central America? It is due to the prevailing models of behaviour in these places – in other words, what the majority of people do in a certain place or time. Why is money accepted in exchange for labour performed or for products and services that we want? Because we have seen other people accepting it, which influences our own behaviour. But there occur situations, such as during periods of hyperinflation, when people refuse to accept a country’s currency in exchange for products and services, in which case this will influence others also not to accept it, which in turn can beget a serious economic crisis by impeding people’s ability to obtain the things they want and need.

This is another example of how the economists’ very foolish attempt to imitate physics has led them astray. For while physicists have been able to discover laws that accurately describe the behaviour of particles and large bodies, apart from the Laws of Imitation, no such laws exist in the realm of human behaviour. Except for collisions, the force of gravity, the electromagnetic force, and the strong and weak nuclear force, particles cannot influence the behaviour of other particles. But human beings very clearly do influence the behaviour of other human beings in a non-physical manner. It is as if, in a random scattering of particles, the fact that the majority of particles happen to go in a certain direction ultimately leads to most or all of the particles going in that direction, or the fact that the first particle goes in a certain direction makes it more likely that many or all subsequent particles will also go in that same direction. Another example is if a particular kind of atom, such as a gold atom, were placed among a large number of a different kind of atom, such as lithium atoms, and the gold atom were to become a lithium atom simply with the passage of time. Clearly these things cannot and do not happen in physics. But in the realm of human behaviour, these common phenomena are called imitation, conformity, and assimilation, whereby the behaviour of a person becomes more and more like the behaviour of those whom one associates with regularly, whether in the language one speaks, the clothes one wears, and the foods one eats, including economic behaviours such as how much one spends and how much one saves, the kinds of things one buys, what one does with one’s savings, the manner in which one invests or speculates with one’s money, and so on.

Instead of physics, which was a very bad and highly misleading model for economists to imitate, due to the fundamentally different natures of the phenomena which they study, economists should have looked to languages for a model to guide them. Economic behaviour is much more like linguistic behaviour than it is like the behaviour of atomic or subatomic particles, in the sense that they are both constantly changing. And just as there is no set or defined state of any language, except perhaps one that is no longer spoken, when it becomes frozen in time like a cultural human fossil, there is no definite state of economic behaviour. And yet, even with all these changes, there are recognizable regularities and patterns in both kinds of human behaviour. Hence, the belief that there exists an unchanging theory that can explain this subset of human behaviour – in all societies, no matter how different they are from each other, and for all time, whether in the past, present, or future – is very obviously wrong.

To give an example, although there are some similarities and common features, the dominant economic system in Europe during the Medieval Age, called feudalism, was as different from the economic systems that exist today as were the languages that were spoken then from modern European languages. Consequently, it would be ridiculous to claim that present economic theories, which were developed primarily from studying the behaviour of people living in Western industrialized countries during the eighteenth, nineteenth, and twentieth centuries, can also account for the behaviour of people back then.

There are some important lessons that economists can learn from the study of languages that also apply to their field of study, since both of them are examples of widespread human behaviours. First, there exist regularities in languages, such as grammatical rules and the meanings of words, some of which regularities remain constant over centuries; second, but even though these regularities exist, there are many exceptions to them and, what is more, changes in behaviour over time can alter their validity or applicability; third, there are perhaps no universally valid rules of grammar or language usage; and fourth, different cultures have developed different modes of linguistic behaviour, and to ignore these cultural differences can lead, in the economic sphere, to grief, oppression, or misunderstanding, as occurs whenever and wherever economists attempt to impose their Western modes of behaviour on others.

Contrary to the prevailing belief among economists, economics is not a field of study whose theories are valid for all time and for all the people living in all the different places of the world. Instead, it is the study of particular models of behaviour that are constantly changing, and so economists must be prepared to modify their theories to reflect these changes in behaviour. The economists’ naive belief that, in economic matters, there exists a single, globally valid theory that explains the behaviour of all human beings, in all times and in all places, no matter how great are the differences in their cultures and traditions, is another pernicious result of their wanting so desperately to imitate true sciences like physics and chemistry, which, unlike economics, limit their study to inanimate things. In other words, the most that economists can hope for in their disparate and heterogeneous field of study is a piecemeal approach. It is because many economists have failed to understand the limits of the validity, and hence, the applicability, of their theories that they have caused so much harm by applying them indiscriminately to all people everywhere in the world.

The seeming globality of some economic theories is due to the spread of Western behaviours, lifestyles, and models of production to other countries. In a similar manner, the English language is being spoken by a greater and greater portion of the human population. But this does not mean that economic theories are globally or universally valid in the same way as the theories of physics or chemistry. This erroneous belief has led to their being imposed on people who previously had practised and observed very different models of behaviour. In a similar manner, in the case of English, despite the commonalities, there are many regional variations in the way it is used, in terms of vocabulary, pronunciation, and even grammar.

Academic and consultant economists from the West – of which Jeffery Sachs of Harvard, who acts as an adviser to the Russian government, is perhaps the most prominent example – descend on Eastern Europe, proclaiming the urgent need to move to free-market economies as soon as possible. Yet tremendous economic dislocation has taken place in many countries where this advice has been followed. In the autumn of 1993, much is being made of the fact that the Polish economy, an early subject of these experiments, is set to grow by some 4 per cent during the course of the year. But the Polish people in the general election have at the same time given their verdict on the collapse of their economy in the immediately preceding years, by restoring many former communists to power.

In an article in the British newspaper the Independent in October 1993, Sachs argued that the failure of ‘shock therapy’ – his phrase – in countries such as Russia and the Ukraine was not due to the idea itself being wrong, but to the fact that it had not been implemented with sufficient rigour.[3]

What the shock therapists and advocates of economic austerity have done in former communist countries and elsewhere is to take a terrestrial animal like a weasel, attach wings to its front legs, and, after pointing to other animals that can fly, bring it to the edge of a precipice and tell it, “Now, although it will take a little adjustment, just make sure to flap your wings vigorously like you see all the birds and other flying creatures doing, and you too will be able to soar high in the air,” before pushing it over the edge. But instead of flying gracefully in the sky, the poor weasel fell over the precipice and hit the ground rather hard, breaking the pretty wings that were fashioned by its foolish advisers, along with some other parts of its unprotected and vulnerable body.

The communists and socialists believed that they could remake societies according to their simplistic beliefs. In wanting to make radical changes to societies, these foolish economists have shown that they have learned absolutely nothing from the communists’ tragic failures. The results in both cases were far from what they expected, and the outcome was in many ways worse than what had existed before their foolhardy interventions in these poor people’s lives.

Coupled with the economists’ Three Deadly Sins are their Three Basic Mistakes: 1) assuming that human beings are rational creatures 2) taking physics as their model[4] instead of some other study of human behaviour such as languages and 3) adopting a philosophical rather than a scientific standard of truth, since they do not subject their conclusions to rigorous testing before presenting them to the world, as all true scientists do; instead economists simply assume that logical and mathematical consistency are sufficient to ensure that their laws and theories, as well as the conclusions which they draw from them, are true. Economists have done tremendous harm by their foolish belief in the global validity of their theories. They have been confirmed in their errors and falsehoods by the well-intentioned idiots who founded that misguided monument to economic error and exaggeration, the Nobel Memorial Prize for Economic Sciences. This prize is an example of a group of fools being honoured and applauded by another group of fools, while much of the rest of humanity believes this ridiculous charade.

Economists urgently need to stop theorizing about the nature of economic behaviour – their widespread penchant for wandering aimlessly round and round the Byzantine mathematical labyrinths which they have created – and instead start paying attention to what is actually happening in the world and how the human beings whose behaviour they supposedly study actually behave. When they do so, they will find that many of their basic assumptions, beliefs, laws, and theories are partly or completely wrong, and thus they will either have to be modified or abandoned.

I hereby declare that the laws and theories of economics are not universally valid or immutable like the laws of physics or chemistry. Instead, they are no more true than the rules of grammar, which admit of many exceptions to them and are liable to change with time. This is the highest degree of regularity and uniformity that can be hoped for in the realm of human affairs. In other words, although an economic law or theory may generally be true, it almost certainly has exceptions to it, and therefore it should not be assumed to be globally valid, and neither should it be applied indiscriminately without considering the circumstances of each particular situation. Anyone who believes otherwise is either a fool or a dangerous theorizing lunatic who, like a quack doctor, most certainly should not be allowed to ruin people’s lives by the indiscriminate application of one’s false beliefs and theories, as many economists have been allowed to do until now.

[1] The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom by F. A. Hayek, p. 5. Edited by Peter G. Klein. University of Chicago Press, Chicago, 2013.

[2] Wisdom for a Livable Planet by Carl N. McDaniel, pp. 132-133. Trinity University Press, San Antonio, Texas, 2005.

[3] The Death of Economics by Paul Ormerod, pp. 62-63. John Wiley and Sons, New York, 1997.

[4] However, economists have failed to copy one of physics’ basic features, which is that, being good and diligent scientists, theoretical physicists work hand-in-hand with experimental physicists in order to make sure that their theories are correct. Instead, the situation that exists in economics is as if the theoretical physicists were to ignore what the experimental physicists were doing to test the validity of their theories, instead assuming that mere logical and mathematical consistency is enough to ensure the truth of their theorems. All theoretical physicists are ready to abandon or modify a theory, no matter how long it has been accepted as true, if the evidence shows that it is wrong. This is what happened with Newtonian mechanics, which was believed by physicists in the nineteenth century to be universally valid and complete. But in economics, one sees no such comparable willingness on the part of economists to abandon or modify their theories when the evidence shows that they are wrong. This makes economic theories like communism or free-market capitalism more closely resemble philosophical theories such as Platonism, Idealism, or Materialism, or religious doctrines that are maintained by their believers in spite of all the evidence to the contrary.

The economic historian Alfred Chandler, who studied in detail the development of the modern corporation in several different countries, in particular the United States, comes as close as one can get, in the imprecise realm that is economics, to a systematic experimental economist. In my opinion, Chandler has done for economics what the great astronomer Tycho Brahe did in making, without the aid of a telescope, his meticulous and comprehensive celestial observations, which later enabled Johannes Kepler to formulate his Three Laws of Planetary Motion. Considering the great importance of the corporation in modern economic life and production, economists should have paid close attention to his findings and sought to ensure that their theories are consistent with them. But instead, his work is regarded as belonging to a subcategory of economic history, and therefore is largely ignored by most economic theorists, most of whom have probably never read his works, lost as they are in the theoretical economic world of their own creating, which only occasionally and marginally coincides with the real world in which the rest of us live.