Quotation of the Day…

by Don Boudreaux on July 14, 2011

in Complexity & Emergence, Curious Task, Hayek, Reality Is Not Optional, Scientism, State of Macro

… is from Hayek’s 1974 Nobel Prize lecture, “The Pretense of Knowledge” (original emphasis):

This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world. This view, which is often quite naively accepted as required by scientific procedure, has some rather paradoxical consequences. We know, of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information. And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.

The correlation between aggregate demand and total employment, for instance, may only be approximate, but as it is the only one on which we have quantitative data, it is accepted as the only causal connection that counts. On this standard there may thus well exist better “scientific” evidence for a false theory, which will be accepted because it is more “scientific”, than for a valid explanation, which is rejected because there is no sufficient quantitative evidence for it.

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tomwinfl July 14, 2011 at 10:57 pm

It seems to me that the knowledge problem isn’t just for social sciences any more. “[I]n…disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones” seems an apt description of the limits of climate science as well, as is this: “they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.”

muirgeo July 15, 2011 at 1:10 am

No..nope… carbon dioxide warms the Earth and increases in wages increase demand…

The key here is that whenever data doesn’t support your claims… attack the data… make it seem really really complicated… and maybe you can play to a draw… except you can’t because reality will still be reality.

Dan J July 15, 2011 at 4:41 am

Too bad, there wasn’t some crazy ‘life’ thingy that loved carbon dioxide….. And …

Underconsumption theory put the ‘great’ in great depression. The NRA and it’s price controls, wage controls, kept them in the continual recession.
Put down the FDR bible. It’s a farce. Those policies made life ten times as harsh.
Less jobs, higher prices, you think that was good. Shortages on everything from cotton to food.
The policies of FDR failed and to highlight achievements is a joke. Even his sec. of Treasury, Morgenthau, said they tried everything, and still they are broke.

muirgeo July 15, 2011 at 8:41 am

Yeah right Dan… we should instead submit to the autocratic rule of JP Morgan… Fortunately we don’t do that here. We over throw kings.

You guys did great though last quarter….13% profits… nice. That’s gotta make you feel good. Those lobbyist are worth every penny.

morganovich July 15, 2011 at 9:13 am

right muirgo. everyone who makes money does it by sponging off the government, the great source of largess from which all blessings flow.

take the tinfoil hat off and get to work buddy.

Methinks1776 July 15, 2011 at 9:50 am

Ah, yes, Morganovich. Throughout 2008 we were treated to the great feelosofur, Muiron’s pontifications on the “paper pushing assholes on Wall Street sucking Main Street dry”. I’m sure it was more incoherent than that, but as a normal person, I’m unable to perfectly recreate Muirdiot’s inane drivel.

The rants about derivatives were priceless. He has no idea what a basic equity option is, but he’s absolutely sure that all derivatives need to be illegal because he doesn’t understand them.

muirgeo July 15, 2011 at 10:39 am

morganovich,

You have to be an idiot to think that Wall Street is making its profits by doing something productive. They are the Neofeudal Lords of Global Finance more powerful than governments. These companies are nothing more than racketeering mobs using global finance to impoverish nations like Greece and then to take over their assets… it really is modern day Neofeudalism and you’re a idiot for supporting it and not recognizing… or you work in the industry

Mesa Econoguy July 15, 2011 at 10:47 am

13% profits…

Amazing, isn’t it, when government pumps money into favored pockets?

muirgeo July 15, 2011 at 10:48 am

Shut the hell methinks you pathetic dolt and sell out. You were wrong about derivatives and UI was right. Go look up the pre-crash debate. You are nothing but a supporter of massive concentrations of power and have a philosophy that is so internally self conflicting you are unthinking dope.

“Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.”

Nassim N Taleb

From the Financial Times online; Ten Principles for a Black Swan-proof world
4/7/2009

muirgeo July 15, 2011 at 10:52 am

“13% profits…

Amazing, isn’t it, when government pumps money into favored pockets?”

Which will happen EVERY time you try to push the policy in the direction of less regulation and take the power out of the hands of the people.

“We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.
Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.”

Sound familiar?

http://www.dailykos.com/tv/w/000499/

David Shaw July 15, 2011 at 11:03 am

“…Citizens need to be protected from themselves…” — Taleb, as quoted approvingly by muirgeo.

One need not know anything more about either of these men to dismiss offhand everything they say and everything they stand for.

I’d like to keep the responsibility for my own life and well being thanks. I’m pretty sure that with some diligence and the cooperation of the millions of people also looking to better themselves through peaceful market exchanges, I’ll get by just fine. You and Taleb go build a bubble and protect yourselves from yourselves (WTF?), I prefer to live.

Mesa Econoguy July 15, 2011 at 11:27 am

“Which will happen EVERY time you try to push the policy in the direction of less regulation…”

Trouble is, there wasn’t a push toward “deregulation” – financial regulation increased.

So the fundamental premise of your theory is wrong, you vituperous sniveling turd.

God, you continue to be the biggest GSP on the interwebs.

[btw, DailyKos links are automatic disqualifications, and immediate laughter generators. You should try to avoid those. Thanks.]

muirgeo July 15, 2011 at 12:58 pm

“Trouble is, there wasn’t a push toward “deregulation” – financial regulation increased.” Mesa

Trouble is you can say stuff like that and think serious people won’t think you’re an idiot. I said serious people not all your fellow unthinking cult members here…

Dan H July 15, 2011 at 1:09 pm

I think you have your Dans mixed up (unless Dan J also works at JP Morgan).

I’m the Dan that works at JP Morgan. And guess what! I was against the bailouts! (for the record, JP Morgan refused the bailout money, but the company was later forced to take it)

Nice try though.

Methinks1776 July 15, 2011 at 1:38 pm

Complex derivatives need to be banned because nobody understands them and few are rational enough to know it.

Awe. Naseem Talib is just pissed off and bitter, poor thing. He’s started at least two hedge funds. Seems all he’s capable of is buying teeny options and praying for black swan events as he bleeds his investors’ money until they pick up and leave. Finally, one of his followers manages to stumble into a black swan event in 2008 and hit the jackpot – only the jackpot is a paltry38%. Pathetic. Oh well. At least he now has more capital to bleed on options premiums!

There’s always a silver lining.

Methinks1776 July 15, 2011 at 1:40 pm

Hey, Muirdiot. What happened? I thought you had me on “ignore”. I want back on your shit list!

brotio July 16, 2011 at 12:14 am

And guess what! I was against the bailouts! – Dan H

You’re in good company. Every individualist at this Cafe opposed the bailouts. Yasafi Muirduck supported the bailout of Chrysler, and GM. He only opposed the Wall Street bailout because he believes them to be Republican corporations.

I’ll assume that you are also opposed to all corporate welfare; which also puts you in good company with the individualists here. There is one regular here who supports corporate welfare. That person is Ducktor Yasafi Muirduck.

Yet, he calls us corporatists.

Greg Webb July 16, 2011 at 1:48 am

George, I am interested in why you are so irrationally and incoherently angry with the investment banks. Did you lose the family fortune by investing in private-label mortgage-backed securities?

Greg Webb July 16, 2011 at 1:54 am

George, did you know that FDR was a fascist? I have this information on good account from a self-professed communist (Jehu). Or, will you now challenge my evidence?

Dan J July 15, 2011 at 2:10 pm

I thought I would get points for my post being a poem…. Apparently not.

Dan H July 15, 2011 at 2:17 pm

Dan, we did not see
That your post was a poem
Next time, try haiku ;-)

Slappy McFee July 15, 2011 at 9:57 am

Increases in wages increases demand, huh.

So instead of paying employees in health care, companies should provide them with cash instead so they can increase demand to ‘fix’ the ‘economy’?

Or perhaps you could increase the wages of employers by deregulating them to increase their demand for employees?

Or you could eliminate capital gains taxes to increase the wages of savers so they can in turn invest/lend in more efficient and productive ways?

Or we could cut government spending, increasing the wages of those who labor, and they could decide their own fate?

But I suppose those aren’t the ‘wage-increasing’ solutions you were referring to.

morganovich July 15, 2011 at 12:43 pm

muirgo-

you’d have to be an economic illiterate not to understand the role wall street plays in funding every significantly sized business in the US.

that said, it’s obvious that you are, so QED i suppose.

and the logic of this:

“These companies are nothing more than racketeering mobs using global finance to impoverish nations like Greece and then to take over their assets”

is so bad that i’ll bet you really do have a tinfoil hat on. wall st made greece run huge chronic deficits? thwey made them put a welfare net in place they could not afford and have half of GDP be government derived?

all these firms did was help get greece some financing. if that hadn’t loaned them money, you would have screamed then that they were screwing greece, as you are now.

in your bizarre fantasy, it appears that lending to greece is oppressive, and so is not lending. it seems there is no course open to wall street that makes them unoppressive in your mind, a clear sign that your thinking is deeply flawed.

and you ideas about “don;t sell people things that could hurt them” is just stupid. that’s nanny state fascist dogma. shall we ban cars? people get killed in them by the millions. how about kitchen knives? people cut themselves all the time.

if you buy something you don’t understand, you a re the idiot, not the guy who sold it to you.

morganovich July 15, 2011 at 12:44 pm

methinks-

wow were you right about this guy. what a lunatic.

Sam Grove July 15, 2011 at 12:41 pm

Superficial man.

CO2 does not warm the earth. The sun, internal friction, and radioactive decay warm the earth. CO2 plays a role, a diminishing role as it increases in retention of some solar energy. Water vapor plays a much greater, and indeterminable, role in energy retention.

The hypothesis of AGW is only that, and the predicted smoking gun has yet to be seen in the data.

Greg Webb July 15, 2011 at 12:12 am

Excellent analysis by Hayek. Politicians and other charlatans also pretend at knowledge by using statistical and other data to justify grabbing more power and spending more of the public treasury. Apparently, everyone has forgotten the old joke that there are three kinds of liars: (1) Liars, (2) Damn Liars, and (3) Statisticians.

Scott G July 15, 2011 at 12:35 am

Don, thanks for this insightful quotation. One reason that I love Cafe Hayek is that you and Russ point me to resources which I learn a great deal from. My stack of books to read and videos to watch is more than I have time for, and the way I decide what to read or watch is a complex mix of what I’m interested in, what is being talked about and what you and others recommend. Often times it takes repeated recommendations from you and others for me to put a book, article or video at the top of my stack. This quote lifts Hayek’s Nobel lecture up higher in my stack.

Another reason I love Cafe Hayek is because of its theme regarding the limits of human and scientific knowledge. Being an engineer, I often face a scarcity of knowledge in my job. Yes, with enough time and money engineers can measure many of the entities they want to measure. The question for us is usually, how much is it going to cost? Is it worth it to buy or build an instrument to measure the shape of that surface? Is it worth it to conduct an experiment which will improve our knowledge of the system’s reliability? We are always looking to get by with the least amount work (lowest cost) and thus are naturally driven to go without measurements when it makes sense. Thus we are constantly debating and trying to make decisions with limited information. Usually the outcome of a meeting is a list of action items regarding what information we need to collect.

Data is the bedrock of decision making when engineering a new product. A good engineer will listen to the data and ask what the data is trying to say.

There is another type of engineer (arrogant ones) that relies too heavily on theory and not enough on experimental data. As you would imagine these guys usually head off in a wrong direction, often due to a bad assumption. The best way to deal with these type of people is to let them talk themselves up, let them make their claims and then give them the opportunity to succeed or fail. There’s nothing more destructive to an engineer’s reputation than not delivering what he originally promised and claimed.

In summary, data is bedrock. Data is not just what one can measure, but also what one says. Promises, claims, actions and language are also data. The way to deal with people who talk big is to let them try. Sit back and wait for them to succeed or fail. Learn from their mistakes. If they fail, then be ready to implement a better solution.

Matt Young July 15, 2011 at 1:01 am

He got the physics wrong, as in 1974 uncertainty was all the rage in physics, forming the basis of particles.

Scott Murphy July 15, 2011 at 8:07 am

Very different kind of uncertainty, a conflation of terms.

DG Lesvic July 15, 2011 at 1:09 am

Do all of you, including Prof Boudreaux himself, who have been arguing with me in favor of mathematical economics, not see the repudiation of it here by Hayek. He is saying what Mises said, there is no measurement in sciences of human action. That’s what mathematics is, measurement. To say that there can be no measurement is to say that there can be no mathematics.

Put that in your mathematical pipe dreams and smoke it!

vikingvista July 15, 2011 at 2:42 am

You don’t understand mathematics. Mises and Hayek would both disagree with you.

DG Lesvic July 15, 2011 at 3:44 am

Can’t you see Hayek immediately above agreeing with me.

He’s saying, as Mises said, that there’s no measurement in economics.

From the Funk and Wagnalls Dictionary:

“Mathematics…the science that treats of quantity or magnitude, and of their measurements…”

If there are no measurements in economics, there is no mathematics.

And, in fact, you already, in a previous discussion, admitted as much, abandoning any claim for the analytical role of mathematics in economics, and holding out only for its expository role, saying, in effect, that it was suitable and even preferable even for non-mathematical concepts.

And while that was quite a reach, it was all you held out for.

vikingvista July 15, 2011 at 4:50 am

Economics deals with quantities. Mathematics will always be relevant.

You don’t understand mathematics.

DG Lesvic July 15, 2011 at 7:36 am

Give me just one such quantity.

Three? Three Hundred? Three Thousand? Three thousand and one? Three thousand and two?

One example. Just one.

Prediction.

Zilch. That’s the quantity of your quantities in economics.

morganovich July 15, 2011 at 9:20 am

dg-

there are lots of quantities you can measure. employment. interest rates. tax levels. output (to a reasonable approximation). you don’t need to have utterly exact figures to make predictions or understand systems. newton developed his theories of motion using heartbeat as a timer.

what hayek is saying (and you are misunderstanding) is that you cannot isolate variables in economics in the same way you can in physics. there is no way to change one thing and hold all the others constant as the variables are heavily interrelated with complex causality.

this will always limit the ability of economists and would be controllers of the business cycle to get good answers on what will happen if you change X.

this does not means there is no predictive power, but it does mean that the keynsians in particular are vastly overshooting in their claims to know how to steer an economy.

i have no idea what your febrile rantings are all about.

DG Lesvic July 15, 2011 at 11:46 am

Sonofavich,

You are confusing the passing data of econometrics with the eternal truths of economics, and business or economic management with economics. The object of management is to adjust to the ever changing data of the market. The object of economics is to discover the never changing laws of the market. Since you cannot derive the laws from the data, what is never changing from what is ever changing, the data and its measurement that is essential to economic management is irrelevant to economics.

vikingvista July 15, 2011 at 11:47 am

“Give me just one such quantity.”

Price is always a ratio of two quantities.

Cripes you are such a moron. You don’t understand mathematics, economics, Mises, or abstraction. There is really something seriously wrong with you.

Sam Grove July 15, 2011 at 12:46 pm

Economics deals with human behavior. Any math in that regard is statistics.

morganovich July 15, 2011 at 12:51 pm

DG-

what meaningless drivel you spew (there is no threaded link, so i’ll reply here)

“Since you cannot derive the laws from the data, what is never changing from what is ever changing, the data and its measurement that is essential to economic management is irrelevant to economics.”

this doesn’t even make sense, grammatically or logically.

you are pretending that there is no data. there’s lots of data. it’s not perfect data, but neither was the data the newton derived his laws of motion from.

you are just playing a foolish parlor game about “if we cannot know with utter precision, then we know nothing” which may be cute at philosophy department cocktail mixers and impress the freshmen, but is just so much drivel in the real world.

you can deconstruct anything to the point of being able to claim it does not exist. this did not stop us from building airplanes using the laws of newton and Bernoulli.

the fact that you respond so rudely to answers to your question makes it seem likely that it’s because you have no actual response. you certainly have not shown me one yet.

DG Lesvic July 15, 2011 at 1:07 pm

Viking,

You wrote,

“Price is always a ratio of two quantities.”

So give me the quantities that you believe constitute a law of economics.

vikingvista July 15, 2011 at 1:26 pm

“So give me the quantities that you believe constitute a law of economics.”

A “law of economics”? Seriously? Are you telling me now that price has no place in economics? Each new post of yours has me picking my jaw off the floor.

DG Lesvic July 15, 2011 at 2:51 pm

Vike,

Sorry but I can’t make any sense out of your last “jaw is dropping” response to me.

Where did I say that price has no place in economics.

I just asked for the quantities you alluded to.

Still waiting to see them.

vikingvista July 15, 2011 at 3:01 pm

“I just asked for the quantities you alluded to.”

Let me quote myself:

“Price is always a ratio of two quantities.”

You are not a moron, but a complete and total blithering idiot–this year’s winner of the muirdiot award for astounding stupidity. I tell you something, and then you tell me I didn’t. Fool, or liar? Let the people decide. I’m through with this Kafkaesque farce.

vikingvista July 15, 2011 at 3:10 pm

“Economics deals with human behavior. Any math in that regard is statistics.”

Economics does deal with human behavior. And if you can do economics without reference to ordinal relationships or quantities (which always makes mathematics applicable), I’d like to see it.

“Any math in that regard is statistics.”

This is false. Disappointing, Sam. Not understanding statistics, I can maybe see. But how do people get through high school in this country–which supposedly covers algebra through calculus–not understanding the abstract nature of mathematics?

Emil July 15, 2011 at 4:17 pm

Math is not measurements, it is a tool for processing measurements.

Saying that something is “very big” is a measurement (albeit a poor one) in the same way as saying that something is 3 feet. With good measurements you can draw more conclusions based on your mathematics but that does not mean that mathematics is measurements

Scott Murphy July 15, 2011 at 6:56 pm

Measurements are a part of math, even measurements like: “really big”. because that is the way we use the word math

Steve_0 July 15, 2011 at 1:39 am

Protons do not make decisions.
But the relevant agents of economics are people.
I, for one, am deeply skeptical of econometrics.

Greg Ransom July 15, 2011 at 2:07 am

Note well. This was written before Hayek’s attention was turned to pattern creating non-linear dynamic systems with sensitivity of outcomes to measurement of initial conditions.

In effect, most physical systems have the same problem of the impossibility of obseving initial condition to the degree required to make Laplacian predictions at particular places and times for all states of the system.

Consider the 3 body problem.

And as I’ve shown in my paper “Insuperable Limits to Reduction in Biology”, Darwinian Biology faces the same limits on the observation of initial conditions and prediction as does biology.

And as Hayek notes, this doesn’t rule out some non-causal yet insight providing role for equilibrium math constructs in either formal mathematical population biology or formal mathematical General Equilibrium economics.

DG Lesvic July 15, 2011 at 3:33 am

General Equilibrium Theory is a misnomer. In fact the Austrian School opponents of it are general equilibrium theorists themselves insofar as they assume equilibrium throughout and not just within limited segments of the market. But whereas they see it as an imaginary construction, the so called General Equilibrium theorists see it as an actual state of affairs, and a starting point not just for logical but mathematical analysis.

If, as the Austrians hold, a new equilibrium point is constantly being established before the previous one could be reached, the market is constantly in disequilibrium, and therefore imperfect. But since the cause of the “imperfection” is change, perfection implies the cessation of change, and the “perfection” of the graveyard.

That is what characterizes mathematical and socialist economics. The final state of rest and equilibrium is no longer an imaginary but a real state of affairs in which supply/demand relations are unchanging and constant, like those between inert mechanical elements, and from which you could calculate the change in one that a change in another would bring about. So, with a socialist dictator deciding what the future should be and technocrats planning for it with mathematical precision, there’d be no more need for the judgment nor profits and losses of entrepreneurs.

And, so Marx, booted out of the house, has slipped back in through the back door of this Keynesian, New Welfare, Neo-Classical, or General Equilibrium Theory.

The problem for it is that the New Theorists have never told us where action ended and rest began, and they got the data for their calculations, the constant relations between the magnitudes of supply and demand upon which they based their equations.

They have simply leaped from the premise that the market was imperfect to the conclusion that their dictatorships would be perfect, a leap of Keynesian faith, not economics, and, madmen, not economists.

morganovich July 15, 2011 at 9:24 am

that fact that markets seek equilibrium does not mean they will ever find it. it’s recursive.

the act of seeking equilibrium creates new states that change the equilibrium target. exogenous changes to likewise.

nothing in nature is EVER at equilibrium, not even dead things.

everyhting is change.

DG Lesvic July 15, 2011 at 11:52 am

Sonofavich,

It is true that even the most seemingly inert matter is itself undergoing constant change. But at a much slower rate than the data of the market. So, as a practical matter, we may consider the numerical relations between mechanical elements to be constant. But we cannot consider any of the numerical relations in the market to be constant. And, without constant relations between magnitudes, there can be no mathematical laws.

There are, in the market, constant relations between cause and effect, but not between the magnitudes of the causes and effects. And that is why economics is a logical but not a mathematical science.

morganovich July 15, 2011 at 12:57 pm

DG (dumb guy?)-

wow, more utter drivel. you think the market changes more rapidly than matter? what an odd world you inhabit. it seems devoid of logic however.

“So, as a practical matter, we may consider the numerical relations between mechanical elements to be constant.”

no, we cannot. if we could, you could predict how bubbles form in boiling water, but you can’t.

numerical relations in a market as just as constant as those of bubbles in water or eddies in clouds. they just have such complex interdependency that they are difficult to predict.

cause and effect relationships in a market change no more than those of bubbles or air turbulence behind a wing. not being able to precisely predict the turbulence behind a wind no more negates cause and effect than it makes a plane unable to fly.

viking is right, you really are an idiot.

do you have some particularly pretentious form of tourettes syndrome?

DG Lesvic July 15, 2011 at 1:44 pm

Mr Courtesy,

You wrote,

“you are pretending that there is no data.”

I specifically referred to the passing data of economics, which wasn’t to deny it, but simply its relevance to the eternal truths of economics.

I can only repeat that you cannot derive the eternal truths from the passing data, what never changes from what constantly changes.

If that strikes you as grammatically wrong and incoherent, I can’t help it. It’s the best I can do.

You seem to be trying to tell us that physical matter changes as rapidly as the data of the market, and gave us the example of a bubble in boiling water. What about the properties of gold? Do they change as rapidly as the data of the market? Whether gold is really eternal or not, as has been said, it is certainly eternal enough for human purposes. But from what data of the market could you derive any of the eternal laws of economics?

That is not to ask, from what data of the market could you derive useful information about the market. It is to ask, from what data of the market could you derive the laws of the market.

There is a difference between useful information and the laws, the information that is useful in adjusting to changes in the market, and the logic that is essential to grasping its eternal truths.

I’m sorry if you cannot see that difference, but I cannot give sight to the blind.

Scott Murphy July 15, 2011 at 8:19 am

The difference is, that in the physical (at least physics and chem). It is possible to construct systems which are controllable and scalable. So that applied physics and chemistry are very useful. This is done mostly using feedback systems and control theory. The stuff would be economic engineers have tried to apply to markets.

I read this comparison, the engineered physical system vs. the attempted engineering of a market as the thing Hayek is mostly speaking of. The former gives us I-pads, the latter, stagflation.

morganovich July 15, 2011 at 2:05 pm

“I can only repeat that you cannot derive the eternal truths from the passing data, what never changes from what constantly changes.”

and i will reiterate that that is ridiculous. that’s like claiming that you cannot know the boiling point of water because atmospheric pressure changes.

i didn’t say ALL inert matter changes more rapidly. you are just using logical fallacy to avoid the point.

just because a system is complex and chaotic (like turbulence over a wing) does not mean you cannot calculate meaningful data about it (like lift). everyhting, including the physical laws you seem to feel are different, is just an approximation. to demand utter perfection for your “eternal laws” means that nothing at all is measurable.

your whole argument is just a parlor game.

Scott Murphy July 15, 2011 at 6:59 pm

Assume this was meant for the DG guy and not my comment.

It is funny though watching a bunch of people who are already skeptical of mathematic’s role in economics argue with someone who just goes off the deep end.

DG Lesvic July 15, 2011 at 7:13 pm

Morgue,

Either you’re crazy or I am. It may be I.

Pom-Pom July 15, 2011 at 2:10 am

It’s all true, but ignores an important value in the hubris drenched political class: some people like to play god.

“The great differences between the characteristic methods of the physical sciences and those of the social sciences explain why the natural scientist who turns to the work of the professional students of social phenomena so often feels that he has got among a company of people who habitually commit all the mortal sins which he is most careful to avoid, and that a science of society conforming to his standards does not yet exist.” — Hayek, _The Counter-Revolution of Science, Studies on the Abuse of Reason_

morganovich July 15, 2011 at 9:26 am

pom-pom-

it may just be simple response to incentives, not god complex. keynsianism is so attractive to politicians because it gives them ideological cover to do the thing they want to do anyway: shower largess upon those who reelect them.

the only way to short circuit that is to remove the perverse incentives by making government small and unobtrusive enough that such is not possible.

Pom-Pom July 15, 2011 at 4:29 pm

yes, but the rich control the government, so we need to make the government more powerful.

Speedmaster July 15, 2011 at 6:49 am

That speech, and it’s title, were my muses. ;-)

vidyohs July 15, 2011 at 11:38 am

“While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable.

“We know, of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information.”

I’ll make it clear once again that I have zero formal training in the field of economics, I am just a dumb street guy whose entire knowledge of business and markets was learned from other individuals like me, and through the application of observation and thought.

The way I see it, the economists are like historians in that they can only deal with data or information on what happened as the word market in its general sense is the sum of the total transactions of billions of individuals on the global scale, and/or millions of individuals on the national scale. If my observations and conclusions are correct, macro-economist look at that sum and try to come up with theories, or a theory, that is useful for making accurate predictions on how to control or direct those unknowable numbers of markets in a socially beneficial direction. But since economical observations are always historical data or information, any economist will always be behind the curve and thus useless in any ability to accurately predict the future and useless to the formation of any useful or meaningful formulation of public policy.

Why are they useless. Well Hayek had it right, but I think it could have been said even more clearly, the market does not depend on the actions of many individuals - it is the action of many individuals. It is the sum of those unknowable numbers of individual markets that take place daily in a nation or in the world, actions taken in formal places of business or even in the driveway of two individuals contracting over a good or service.

When it comes down to it, each individual is a market, and thus is the “invisible hand” of which Adam Smith spoke. There is absolutely no way that any one can collect, data or information of what those billions of markets are going to do, we can only make guesses, generalizations of theory, as to what they will do, what it would be wise to do, what they will want, and what they will need, and pray we are correct. If we are correct, we profit. If we are wrong, we lose.

Who has the cajones to predict what their own children are going to want tomorrow, much less predicting what the actions or wants will be of million or billions of individuals who are not known to each other, or to the one trying to predict? Go ahead, predict what the desires of millions and billions of people whose entire thought process is capable of altering completely overnight.

Can one market influence other markets through clever representation of it product? Of course, and why not? Nature demands individual responsibility for individual action, so if a market seeks to profit by clever representation it is natural, it is up to the other markets to examine the representation for accuracy. But, if it is misrepresentation, then remedy lies in the keen evaluation of those other markets and equal application of the law regarding fraud, not in government policy.

Sure it is beneficial to know what happened in the past and learn from it, and micro-economics can, and does tell us that, but the micro-economist at least forego the ego trip of trying to appear so wise as to tell others what the should do, or must do.

The macro-economists appear to operate on macro-ego, the kind of ego that truly believes that their reading of history makes them capable of directing the future. The kind of ego which also requires them to control regardless of the pain it causes. The kind of ego that refuses to admit it was wrong based on immediate real time observation. They may have some function on the bus, but not as the driver.

In short the macro-economist must either be a statist, or sell out to the statist, in order to have a chance of influencing the actions of what he sees as the “market” (used in its collective sense).

Gordon Richens July 15, 2011 at 12:13 pm

An economy becomes more like a museum when statists get their way.

vidyohs July 15, 2011 at 11:40 am

Crap, missed the close bold. Sorry.

Mesa Econoguy July 15, 2011 at 2:01 pm

I read it extra loud.

J. July 15, 2011 at 1:36 pm

So, with a socialist dictator deciding what the future should be and technocrats planning for it with mathematical precision,

as opposed to….. corporate executives and billlionaires deciding what the future should be, and their financial people planning for it with mathematical precision

vidyohs July 15, 2011 at 3:07 pm

So tell us J., how do corporate executives and billionaires manage to impose a direction on the future of people who do not work for them, without the purchase of that elected government bureaucrat you so love?

Answer: They can’t because they have no physical force to apply like that available to the elected government bureaucrat…….now do they?

So, the answer to your problem is the same answer to the problem we non-statist see, and that is it is government that is the problem.

Your are foolish enough to believe that a government dedicated to the implementation of an ideal that is known factually from historical evidence to never work, an ideal that will always drive a society into degeneration and degradation as well as into hopeless poverty, is the government to hope for, to desire, and to impose.

We on the other hand, believe that those corporate executives and billionaires would be powerless to impose any ideas or actions on the people if only people like you would not give that government so much power that it can do the evils it does.

Less government and responsible individuals is the answer to your ideal, and to my ideal as well.

Jim July 15, 2011 at 3:38 pm

You describe the challenge of growing a business or a product line.

Often we are wrong and fail, due to any number of cultural, structural, operational, environmental and financial reasons. The question is not whether we can force a future, but whether we can adapt within one.

Gordon Richens July 15, 2011 at 3:50 pm

There’s always a gratuitous reference to billionaires. Oh well, at least it’s an improvement over millionaires.

Emil July 15, 2011 at 4:21 pm

it’s probably just inflation…

DG Lesvic July 15, 2011 at 2:07 pm

Viking,

At a previous thread, which was a prelude to the discussion here, you directed a comment to me that I missed.

You said, in effect, that the inability of prospective buyers and sellers to agree on the price constituted an excess demand for money.

But, in whose judgment? Certainly not in that of the prospective buyer.

And who is the better judge of how much he should spend and save, all of the people trying to sell him things, or himself?

vikingvista July 15, 2011 at 3:52 pm

“You said, in effect, that the inability of prospective buyers and sellers to agree on the price constituted an excess demand for money.”

I never said that, and it is in fact clearly false to anyone who understands economics. You are so damned hopeless. And instead of going to me for economics 101, why don’t you stop mis-characterizing Mises and Rothbard and actually read them. They do a pretty damned good job at this elementary stuff. Rothbard makes it particularly clear with his liberal use of sample supply and demand schedules, AND GRAPHS GRAPHS GRAPHS. I mean, cripes, how about simply doing a little Internet research on “shortages” before depositing your bizarre word salads on this forum?

DG Lesvic July 15, 2011 at 7:17 pm

Vike,

You’re usually pretty smart so I regret having come to this impasse with you. But I just can’t see any hope of you and I getting anywhere.

I hope you and Morgue will be very happy. You’ll make a lovely couple.

DG Lesvic July 15, 2011 at 7:37 pm

Fellows, as we leave each other with the conviction that the other is mad, ponder the fact that Don Boudreaux is on my side. And we don’t have to ask him. He has already told us by the fact that he so seldom resorts to the mathematical devices that you think so highly of. In fact, after several years here, reading everything he has written, I can recall only one instance in which he resorted to them, and that was one of those rare occasions when he himself was clearly confused. And that is just one of the reasons why I am convinced that those measures are a cover for confusion and incompetence, and a sure sign that what they are covering isn’t worth the bother of uncovering.

Charles R. Williams July 16, 2011 at 9:23 am

Sttart with abstract generalities like money, slack, aggregate demand, consumption, savings, investment, price level. Search for some way to measure these abstractions. Hypothesize crude mathematical relationships between these measurements. Estimate them in some historical period. Arbitrarily treat some as independent variables and some as dependent variables. Assume that the dependent variables can be manipulated in a beneficial way by fiddling with the independent variables. Explain away what happens in terms of your theory and when the explanation doesn’t sell, try a new model or fiddle with the old one. When the world settles into a pattern that seems on the surface to be stable and predictable, pat yourself on the back and tell yourself that you have it all figured out.

And then your world falls apart. Not only did you fail to predict it but wildly spinning the dials on your independent variables seems to do nothing at all to change the course of events. The entire house of cards painstaking built over 80 years collapses – then what …….

Obviously, they didn’t spin the dials fast enough. They should have taken your sage advice three years ago. You come up with a new system to spin the dials. Policy makers should force the dependent variables directly because markets have failed.

The bottom line is that your science has turned out to be an elaborate system of alchemy, a form of shamanism.

kyle8 July 17, 2011 at 10:06 am

That would apply not only to Keynesian economics but to a whole lot of other sinister twaddle passed off as “science” in the last three decades.

Dallas Weaver July 16, 2011 at 1:35 pm

What he says is the truism that you can’t describe a N-dimensional object in N-X dimensions. In other words, if you mental or mathematical model of how a complex systems works doesn’t include ALL relevant variables, you model can give false results as the unknown or un-included variable changes.

Greg July 19, 2011 at 10:25 am

I really hope most of the commenters here aren’t professors.

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