More Art Than Science

One of my favorite shows on TV is Rick and Morty. The show’s titular characters are Rick, an alcoholic, cynical, mad-scientist type and his grandson, Morty.  The show has many great moments, but one of my favorites is after Rick makes a particularly nasty mistake.  His reaction is pretty stoic:

“Ok…Well, sometimes science is more art than science, Morty. A lot of people don’t get that.”

What I like about this quote, particularly in the context it is given, is the reminder to all scientists that we are, ultimately, working off of guess work, theory, and observations.  It’s not as precise as we’d like.  What’s more, his throw-away line at the end (“A lot of people don’t get that,”) is a jab at laymen (and even some scientists) who look towards the sciences to provide clear-cut answers and policies.  But the reality is there is still so much uncertainty, so much more to know, and the world is not often precise.

Rick’s attitude regarding the hard sciences can easily be applied (perhaps to even a greater degree) to social sciences like economics.  In fact, his attitude is identical to that of F.A. Hayek in describing what he called “the pretense of knowledge,” the idea that things can be directed by someone(s) with appropriate amounts of knowledge.  Furthermore, Rick’s chide that “a lot of people don’t get that,” could have been spoken by Hayek himself, especially to those who believe “precise mathematical models” are necessary and sufficient.

Economics is very much more art than science sometimes.  Those who look to us economists to prove clean-cut solutions to the world will be sorely disappointed, and those economists to believe they can direct the world accurately are not much more than snake-oil salesmen.  Economics can offer guidance, but to expect more is to open one’s self up to disappointment.

As an aside, this is one of the few moments in the show where Rick admits he’s wrong.  Rick considers himself a genius, often above reproach.  He is very much mathematically-driven (at one point, telling his grandkids “You’re both pieces of shit, and I can prove it mathematically,”) but even he admits there is limit to what math can tell us.

Technology

Writing at libertarianism.org, Jason Kuznicki of the Cato Institute writes about American poor.  The whole article is interesting, but I want to call attention to one particular quote:

The overwhelming majority of the poor in the United States enjoy technological wonders that didn’t even exist a few decades ago. Outside the free market/liberal democratic synthesis, essentially no other social system has ever delivered as much — because almost none of them can produce a steady stream of new technological innovations in the first place, let alone distribute them to the poor.

I suspect many will discount this quote by simply saying “sure we can buy more iPads, but not important stuff!” but I think it bares remembering that some of the technology referenced includes many household items, like dishwashers, washing machines, refrigerators, cars, clothing, food, education, and so on. “Technology” does not mean just gadgets.

The American poor are not poor by global standards (or even some other 1st World standards).  They’ve gotten to this level of “poverty” through the technological achievements Kuznicki discusses.

H/T: Mark Perry

Mathematics and Economics

Don Boudreaux reminds us of a quote by great economist W.H. Hutt over at Cafe Hayek discussing mathematics and its role in the economic science (for the sake of space, I will refrain from posting the whole quote here).  What follows is my two cents on the matter.
Mathematics is a useful tool in understanding our world if, for no other reason, that to help us separate the probable from the merely possible.
 
But, despite the old cliche, facts do not speak for themselves. Without a good theory underneath, the data are meaningless. A theoretical framework, well-grounded and logical, is important to putting information in context and helping to determine whether an outcome is reasonable or not. Of course, if data run afoul of theory, then both must be considered. Is there a problem with the theory or with the data?
 
I think this is what we’re running into now in regards to minimum wage. In recent years, there have been some data to suggest that minimum wage may not have the negative consequences theory would predict (although there is also data to suggest the outcome is exactly what one would predict).
 
So, then, is the Law of Demand wrong? Possible, but given its consistency on many other subjects (including wages at higher-skilled positions), unlikely. Is there something unique about low-skilled labor? Also possible (and some have suggested that unique conditions like monopsony power do exist). However, given the specificity of these conditions, I think unlikely on any grand scale.
 
This question I think should be answered with mathematics and statistics. But I also think the evidence should be overwhelming before overturning theory. To rule simply by mathematics is to lose sight of the previous body of knowledge, which can lead to disastrous conclusions.

A Thought on the Demand Curve

A common argument we hear whenever economic competition rolls around is along the lines of “how can current participants in the market compete with lower prices offered by the newcomers?” This complaint is commonly heard in dealing with international trade or immigration; the fear is if these foreigners are allowed to have their way, they will displace domestic actors with their lower prices.

On the surface, this seems plausible.  Why pay $5 for something you can get for $3?  The sellers would have to bring down their prices.

However, the key assumption in any demand analysis is that the products compared are identical.  A different product may have a higher price than another product and there would be no substitution.  An example of this is what I discussed a few posts ago in regards to baseball.  David Price is under no threat from me by offering my cheaper pitching services because the quality simply isn’t there.

It’s a similar situation with imports (whether it be of labor or capital).  In competitive markets, a good/service’s price is equal to their marginal revenue (in other words, a good/service is priced by the benefit it provides).  If a new product comes into the market at a lower price, it may be because it is of lower quality; it provides fewer benefits.  Such an entrant would pose little risk to an already-established product of a higher quality.

So, the answer to the question posed by trade restrictionists of “how can Americans compete with low-wage workers from China (or Mexico etc), the answer is simple: remain more productive and provide more marginal benefit.  That is the nature of economic progress.

Property Rights: An Elegant Solution

Whenever two or more people get together, there is bound to be conflict (and, of course, the greater the number of people, the greater the likelihood of the occurrence).  One of the ways of heading off conflict is through the establishment of clearly-defined property rights.

Allow me to tell a story:

A few months ago, I was in New Jersey visiting my friend, her boyfriend, and their two roommates.  4 people living in a house together.  And yet, there was surprisingly little conflict between them.  That was because of the regime of property rights they established among themselves.  Some items (like the TV, furniture, Xbox, etc) were available for common use, but others (like food) were marked with initials, meaning that no one could touch that but for the owner(s).  This had the joyous consequence of heading off any potential conflicts over consumption of goods like food; no one could be accused of slacking about and consuming the goods of others (likewise, no one could feel like s/he were doing all the work and not receiving anything for it).  And what’s more, the property rights were tradeable, too.  If Roommate 1 was making a salad and ran out of mushrooms, he could ask Roommate 2 if he could use some of her’s.  She could trade (or give them away).

The end result of all this, was a peaceful house with multiple people and little conflict.  (Of course, there could be conflict arising from other things, such as the negative externality of a roommate playing their radio too loud, but that did not arise while I was there so I don’t know how they would have addressed that issue.  Knowing them as I do, I’d suspect some kind of Coasian bargaining).

Property rights, when clearly-defined and enforceable, are key to a peaceful civilization.  If we look at the places with the most violence in the world, the key factor among them is a lack of property rights, either for all or for some marginalized group.