Bart Wilson  

Economics as a Branch of Literature

The Mixed Messages of French S... Research That Should Get More ...

Shortly before arriving at Chapman University in 2008 I discovered some essays by Frank Knight. Every graduate student in economics learns about or, at least, has heard references to Frank Knight, one of the original members of the "Chicago school of economics." While his book Risk, Uncertainty and Profit (1921) is well known and considered seminal for disentangling uncertainty from risk, I've met few people who have actually read the book. I have never read the book. What is equally not read from Knight's extensive body of work, but mostly unknown in modern economics, is his collection of essays entitled, The Ethics of Competition.

If I was still teaching graduate level experimental economics, the fourth essay would be required reading. The first three essays on the ethics and psychology of economics, published in the Quarterly Journal of Economics between 1922 and 1925, are equally as important and perhaps lay the necessary groundwork for understanding the fourth essay, which is entitled, "The Limitations of Scientific Method in Economics." (Notice that there is no definite article before "Scientific Method.") First appearing in a 1924 book that is quite hard to come by in hardback, the fourth essay opens with a discussion on the meaning and logic of science.

Given the demands of academic specialization, experimental economists have precious little time to ponder the philosophy of science, much less the philosophy of social science, but that doesn't deter us from calling the professional association of experimental economists the Economic Science Association nor my academic home the Economic Science Institute. Science is the name of the game in experimental economics.

So how far can we take the scientific method in economics? As an ardent existentialist, Knight says only so far: "life is at bottom an exploration in the field of values, an attempt to discover values, rather than on a basis of knowledge of them to produce and enjoy them to the greatest possible extent," and thus, as if straight out of Goethe's Faust, "[w]e strive to 'know ourselves,' to find our real wants, more than to get what we want" (p 97). Earlier in the book he succinctly rejects the first lesson of intermediate microeconomics as answering the wrong foundational question: "[l]ife is not fundamentally a striving for ends, for satisfactions, but rather bases for further striving" (p. 15).

In other words, the operative part of goods in the study of economics is not as a substantive, but rather the adjectival, aesthetical good of goods. Value isn't just a maximum willingness to pay for a good denominated in some currency, but a value judgment on the goodness of spending a sum of money this way as opposed to some other way. Evaluating what we do as good is a human universal. Linguists like Anna Wierzbicka have found that the concept of GOOD is expressible in every language ever studied and thus is presumed to be innate. It's that important to the human condition.

Knight argues that values place a limit on scientific thinking in economics because of the tendency for the scientific method to "subordinate" understanding to a "desire for control" (p. 99). A prominent industrial organization theorist once quipped to me that "experimentalists are control freaks." Indeed we are. It is standard practice to attempt to control for the propensity to cooperate in repeated interactions by ensuring no participant will ever encounter the same participant twice in a single session.

The problem is that this "scientific atmosphere obscures if it does not eclipse a considerable part of the field of values. It centres attention on the results of activity, weakening or destroying the value of the process" (p. 99). Being sociable to those we see daily on the playground is a lesson we are taught from an early age on. If people are so stubbornly determined to cooperate in repeated interactions in the laboratory, then perhaps by attempting to exert control over the results we are instead paradoxically losing control over the big picture of why and how we do good by each other.

This problem of values, however, is only a limitation insofar as it is a self-imposed constraint on the techniques we employ and the questions that we ask in economic science. The deeper constraint is a categorically different kind of problem that economic science faces as a study of human beings, the study of ourselves. In presaging Wittgenstein and Hayek, recall that this is the early 1920's, Knight questions behaviorism and the "much loose talk about the 'analysis' of mental phenomena, a largely a pernicious use of words; in general these cannot be taken apart or combined experimentally, and neither 'elements' nor 'compounds' have any general marks of identification" (p. 107). (What would Knight think of social preferences?) He further recognizes that "people are far more concerned with meanings than with sense qualities, and meaning...must be suggested rather than stated" (p. 126).

Meaning must be suggested because it is "felt but not reasoned," to quote Hayek. We can't sense the 6-D waggle dance of a bee, but mathematicians can specify it precisely as a flag manifold. Human conduct is the opposite. We can sense the fairness, justice, equity, etc., of human conduct, but because of the (literally) "imperceptible differences in the situation" we cannot precisely specify what we feel (p. 114). Try to specify all the rules of fair play.

In this way discussing economics can be much more like discussing art than gravity. Take, for example, a Rothko painting. If I have to state what I see in the painting, I say I see some "rectangles" (where are the boundaries?) that appear to float and others that pulse. We cannot specify how the colors, textures, lighting, brush and sponge strokes, distance from the painting, angle of view, etc., combine to generate those feelings when in the intimate Rothko Room of The Phillips Collection. But I can suggest what it feels like. Similarly, we cannot account for all the sensory inputs that lead us to judge a situation as just but not fair, or fair but not equitable, or equitable but not just. We simply feel but not reason that it is unfair for one person to receive 80% of the pie in an ultimatum game or unjust to let a defendant off due to a lack of evidence beyond a reasonable doubt.

From this fundamental difference between the natural and human sciences Knight concludes that the "real sociology and economics must be branches of literature as much as of science. In fact they need to be both, and commonly succeed in being neither" (p. 139). Ninety years later, it is worse than commonly succeeding in being neither. A chasm separates economics from the humanities. The positive facts about how we became the most prosperous species in the history of the planet are unappreciated in the humanities, often because the facts and logic of wealth creation are regrettably unknown. And it is equally unappreciated in economics that ours is not comprised only of objective science. The economics of prosperity is the study of ourselves as human beings, and so value judgments of good have had something to do with it along the way.

Because our minds present the GOOD of economics to us in a scientifically unpinpointable way, we must engage our imaginations through literature if we are to discover the values that commingle with the scientific facts and logic of economics. Is economics a science? Yes, but it can quickly devolve without an aesthetic appreciation of the GOOD in economics. Thus, as Knight concludes (p. 139):

The first step toward getting out of this slough, we suggest, is to recognize that man's relations with his fellow man are on a totally different footing from his relations with the objects of physical nature and to give up, except within recognized and rather narrow limits, the naïve project of carrying over a technique which has been successful in the one set of problems and using it to solve another set of a categorically different kind.

COMMENTS (12 to date)
Bedarz Iliaci writes:

felt but not reasoned
Reason is not absent from human sciences, what else is the philosophy of Aristotle or the dialogues of Plato are?
To specify something in the sense of specifying a procedure or algorithm is one kind of reason, but not the only kind. Specification or algorithmization works for certain fields but not all. It does not mean that these fields are more scientific, only that they are amenable to specification.

Eric Hosemann writes:

James Buchanan's observation that "man wants liberty to become the man he wants to become" tracks closely with Knight. The implications of your quotes above and "Natural and Artifactual Man" do not bode well for experimental economics as presently constituted. Not only is the world of scarce resources in constant flux, but it is acted upon by a creature whose valuations of it are in constant flux as well. How can such an environment be modeled effectively? How can cooperation and exchange be accurately defined when the terms of either may be infinitely modulated?

liberty writes:

"[w]e strive to 'know ourselves,' to find our real wants, more than to get what we want" (p 97)."

This is a point often made by those sceptical of the neoclassical paradigm (which arguably may include Austrians on this point) and of free markets, because they argue that the efficiency of free markets depends upon assuming fixed preferences or assuming that the market, by responding to consumer demand, is responding to our actual values and preferences, rather than helping to create them endogenously.

I wonder how you would respond to this critique.

Brian writes:

One of the reasons we don't know ourselves, we don't know our real wants, is that such things are decided out of view of conscious thought. Our conscious understanding of why we choose what we choose is often an after-the-fact rationalization, no more than a weak guess at what is going on under the hood.

It therefore follows that much of what we prefer and choose is determined by boundedly rational systems following discoverable algorithms. And that implies that our own preferences, those of others, and the interactions that result from them are largely reducible to mathematical formulations of the scientific kind. So there is little evidence that "man's relations with his fellow man are on a totally different footing from his relations with the objects of physical nature."

We already know what happens when economics is reduced to literature--we get something like the Marxist critique of capitalism, which is still haunting the humanities like a specter and is likely why "positive facts about how we became the most prosperous species in the history of the planet are unappreciated in the humanities."

Bart writes:

The efficiency of markets does not depend on stable preferences. Economists make the assumption of stable preferences so that they can logically solve the problem they themselves posed. I don't check my preference map and then head out to the grocery store. At the grocery store I discover what I want to purchase.

liberty writes:

It does in the sense that you cannot say that free markets fulfil our preferences better than any other system (such as planning, communitarianism, tribalism, corporatism, guided markets, etc) if we concede that these preferences which were filled were actually also created by the market system. If we recognize that outside of the market system we might not have even had those preferences at all. Efficiency is posited on the notion that the market is providing us with stuff we actually want--this was a big part of the critique of planning: that it did not provide people with what they wanted since it did not rely on a supply-demand system--but if we concede that we do not know what we actually want, only what the market makes us want, then this falls apart.

Troy Camplin writes:

Markets may in fact provide us with things we did not even know we wanted, but that does not in any way support the arguments of the socialists, given that socialism cannot even provide us with already-existing stuff we want. It not only puts a brake on innovation, it is inefficient at providing the things that already exist. Markets do both. Wealth is, in no small part, a measure of the degree to which we are provided not just things that already exist more efficiently, but also provide us with new things. The fact that markets are technologically far more innovative is no argument against them.

liberty writes:

Troy -

You are missing the point made in the quote about not knowing what we want--or you are assuming that market processes lead to the true and only discovery of what we truly want, rather than merely making us want what they offer, or the lesser claim that they are indeed what we want *when we are in the market system* but they may not be what we want if we were not in the system. Let me give you an example:

In a market system individuals might work 40 hours a week, and spend their money on expensive furniture, electronics including flat screen TV, spend a lot on baby clothes and toys and on babysitters and schools, etc.

In a more communal-tarian system the same people might be able to only work 20 hours per week, share their electronics, baby clothes and toys (as hand-me-downs) and even some of the furniture, and create volunteer-based schooling and babysitting, and they might be far happier than they ever knew was possible -- because free time, leisure, community and social activities and lifestyles, etc are all much more important to happiness than stuff. Stuff can never really make us happy.

Shue writes:

Very interesting piece. A couple of comments. First, it is important to understand the interplay of values and knowledge. Our social and economic conditions and experiences form our values. But that is not all. Our knowledge of the reality around us matters. Without context, we rely on the application of our values in a hypothetical world. It makes it easy to justify our values. Even when presented with reality, people will filter it to fit their values--some more than others. They are committed to their values more than reality. Its been shown how uniformed people are in regards to social and economic conditions, and when they are informed, they selectively believe and reject things to fit their values. So claiming values are important is not an excuse to follow ideology over science; rather it is a call to recognize biases and ignorance in our values to better use science.

Second, metrics matter. By being focused on the metrics used in economic science, we focus on them and ignore the other things that are equally important. The discipline's desire to be a science has caused it to be far too narrowly focused. We're increasingly irrelevant, as seen by the strikingly low impact factors of economics journals and the low impact we have in many policy arenas. Economists that only talk to other economists are limited. There is much that we can learn from sociology, political science, psychology, etc. Our methods are very useful, but they are not reality---they are a guide, which can be improved upon with some broader understanding, thinking and humanity.

Greg G writes:

So economics is kind of like literature...but without the great writing.

Ross Emmett writes:

Greg G: Knight once remarked that the great literary writers were better psychologists than the "psychologists so-called." Deirdre McCloskey would say that economists aren't telling good enough stories anyway.

Liberty: Knight was critical of neoclassical theory. He called the theory of perfect competition a theory that reduced humans to vending machines trading with each other. For him, economics could not explain everything, even though it was essential to understand economic principles in order to makes sense of markets. Read Intelligence and Social Action, in which he argues for an economics, a study of politics, and ethics as all essential to understanding intelligent social action.

Nathanael Snow (@jurisnaturalist) writes:

How interesting that the "hard to find" book was edited by Rex Tugwell...

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