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What the scientist's and the lunatic's
theories have in common is that both belong to conjectural
knowledge. But some conjectures are much better than others...
-- Sir Karl Popper, THE PROBLEM OF INDUCTION
Once one gets the scorecard straight, then it will
become apparent that twentieth-century neoclassical theory
resembles nothing so much as the child's game of Mr.
Potatohead -- the fun comes in mixing and matching components
with little or no concern for the coherence of the final profile.
-- Mirowski, MORE HEAT THAN LIGHT
When it comes to public policy, lunatics have a clear advantage over scientists for two fundamental reasons: (1) lunatic knowledge is always certain, but the scientists' epistemology (theory of knowledge) is inherently uncertain; (2) lunatic cosmology (worldview) is always normative (i.e. "political"), but the scientists' cosmology leads to moral and political ambiguity.
I divide knowledge into two categories: "scientific" and "lunatic." The differences between the two categories concern the methods used to obtain the knowledge.
THE SCIENTIFIC METHOD:
WORK TO FALSIFY
Scientific knowledge is "empirical" (based on observation or experiment) and is not inherently normative. Scientists formulate statements that can be tested (hypotheses), and then try to "falsify" them by experiment. If a statement can't be tested, then it's not scientific. Moreover, all scientific knowledge is "provisional" -- scientists assume that subsequent experiments may disprove any hypothesis.
Scientific knowledge is that knowledge which can be disproved, but has not yet been disproved. Thus, scientific knowledge is inherently uncertain.
THE LUNATIC METHOD: FAITH
Lunatic knowledge is based on a certain "faith" and is inherently "political." Milton Friedman is probably the best known and most widely respected free-market economist in the world. Friedman won the Nobel Prize for economics in 1976. In 1989, Friedman's FREE TO CHOOSE was the best selling nonfiction book in the United States and it was translated into most major languages.
Here Friedman identifies the origin of his free-market political crusade:
"Adam Smith's key insight was that both parties to an exchange can benefit and that, so long as cooperation is strictly voluntary, no exchange will take place unless both parties do benefit." 
Since economists do not explicitly define "benefit" -- let alone measure it -- one might ask how Friedman could possibly know? In fact, he doesn't -- Friedman is imposing his personal values on others. Here George Brockway compares the vocabulary of physics with that of value-laden economics:
"The vocabulary of physics is amoral -- not antimoral, but amoral. Mass, force, and velocity have no moral implications because the laws describing them have no alternatives. The vocabulary of economics, in contrast, abounds in ethical terms. It is impossible to define 'good,' 'service,' or even 'utility' without making ethical judgments. Every object has mass, but not every object has utility. Moreover, some people may consider a certain object a good while others do not, but there can be no disagreement about the equivalence and direction of action and reaction. There is no other or better way for a body to fall in a vacuum than s=Â½gt2; this is not because physicists don't happen to be interested in making this a better world. There is no unchanging price for a bushel of wheat; and this is not because economists don't happen to be interested in a stable universe. The price of wheat depends upon what people do, but bodies fall as they do regardless of what people do or think.
"Economics is not value free, and no amount of abstraction can make it value free. The econometricians' search for equations that will explain the economy is forever doomed to frustration. It is often said that their models don't work, because, on the one hand, the variables are too many and, on the other, the statistical data are too sparse. But the physical universe is as various as the economic universe (they are, to repeat, both infinite), and Newton had fewer data and less powerful means of calculation than are at the disposal of Jan Tinbergen and his econometrician followers. The difference is fundamental, and the failure to understand it reduces much of modern economics to a game that unfortunately has serious consequences." 
Upon closer examination, one discovers that the economist's crusade has nothing to do with science, it's a religious crusade! Adam Smith believed that God's divine plan was revealed in a free market: "the divine being, ... contrived and conducted the immense machine of the universe, so as to at all times to produce the greatest possible quantity of happiness."
Economic historian Deborah Redman explains: "Because the order of nature is providential, the free market that reflects natural order also reflects the workings of providence. In this way the spheres of morality, theology, jurisprudence, and economics become hostages to nature, so to speak." 
Smith's free market commandment: "Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interests in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men." (Did Smith know that these "laws of justice" would be authored by the same monsters we need to be protected from?)
One of the pioneers of modern economics, Hermann Gossen, argues for free markets by not only telling us that the maximization of individual pleasure is God's will, it is "life's ultimate purpose." Gossen maintains that any moral restraint would inhibit God's master plan. As Gossen puts it, "It would only frustrate totally or in part the purpose of the Creator were we to attempt to neutralize this force in total or in part, as is the intention of some moral codes promulgated by men." And he asks with moral indignation: "How can a creature be so arrogant as to frustrate totally or partly the purpose of his creator?" 
These days, disciples of the free market God rarely invoke His name in public debate. These days, His disciples disguise their religious and political agendas in circular (logically meaningless) argument. Robert Kuttner describes the economist's basic premise:
"Those who believe society can best be understood as a series of markets begin by positing a rational, calculating individual whose goal is to maximize 'utility.' This premise says everything and nothing, since it is true by definition in all cases. But it is a key aspect of the market model, since it is the behavioral part of the logical argument that whatever the market decides must be optimal." 
Economists assume people that people make "rational"  decisions but abstain from testing that assumption. Instead of testing, economists invoke "revealed preferences theory" which states that choices are rational because they are based on preferences that are known through the choices that are made . In other words, economists resort to meaningless, circular arguments and mathematical conjuring tricks to justify their normative claims.
If one accepts the first circular argument, then one is conditioned to accept all the rest of the economist's circular arguments:
"There is at the core of the celebration of markets a relentless tautology. If we begin, by assumption, with the premise that nearly everything can be understood as a market and that markets optimize outcomes, then everything else leads back to the same conclusion -- marketize! If, in the event, a particular market doesn't optimize, there is only one possible inference: it must be insufficiently marketlike. This epistemological sleight of hand is an astonishing blend that blurs the descriptive with the normative. It is a no-fail system for guaranteeing that theory trumps evidence. Should some human activity not, in fact, behave like an efficient market, it must be the result of some interference that should be removed or a stubborn human refusal to appreciate markets. It cannot possibly be that the theory fails to specify accurately how human behavior works." 
Researchers who actuality observe humans making decisions, find that economists are wrong. Humans give undue importance to recently presented information.
What does this mean? Simply put, people are manipulated by information providers -- the last commercial has the most influence. Change the order of the messages, and one changes the choices made (no need to change the prices -- or the content).
What are the implications? If people are not "rational", the economist's normative claim for market outcomes can not be defended -- can not be used to rationalize the ongoing destruction of the planet. Unfortunately, formal education seems to immunize economists against logic.
Knowledge derived from "revelation" and circular argument certainly belongs in the lunatic category. Moreover, economics students rarely detect the deception and usually leave school with lifelong political missions -- probably incurable.
In BEYOND GROWTH, Herman Daly notes that the scientific cosmology is "mechanical" (amoral):
"... that Sagan, Wilson, and Gould proclaim the cosmology of scientific materialism, which considers the cosmos an absurd accident, and life within it to be no more than another accident ultimately reducible to dead matter in motion. In their view there is no such thing as value in any objective sense, or purpose, beyond short-term survival and reproduction, which are purely instinctual and thus ultimately mechanical."
Someone with a scientific cosmology is morally ambiguous:
"Calling for a moral compass in such a world is as absurd as calling for a magnetic compass in a world in which you proclaim that there is no such thing as magnetic north. A sensitive compass needle is worthless if there is no external lure toward which it is pulled. A morally sensitive person in a world in which there is no lure of objective value to pull and persuade this sensitized person toward itself is like the compass needle with no external magnetic force to act on it." 
Burdened with uncertainty and a world without purpose, scientists simply can not compete with lunatics in matters of public policy.
In the 1870s, William Stanley Jevons explicitly defined the cosmology of economics as normative (moral):
"... the mechanics of utility and self-interest ... to satisfy our wants to the utmost with the least effort -- to procure the greatest amount of what is desirable at the expense of the least desirable -- in other words, to maximize pleasure, is the problem of economics." 
In THE ECONOMIC WAY OF THINKING, economist Paul Heyne tells us that we really don't "need" things like clean water, because there are no "needs." There are only "wants", and these are backed up by purchasing power, or "demand." Demand can always find substitutes, says Heyne, for there are "substitutes everywhere." 
In his 1974 lecture to the American Economic Association, Robert Solow defended his illusion of unlimited economic growth: "the world can, in effect, get along without natural resources." Like an alchemist who claims that he can change lead into gold, Solow is claiming that he can change money into any exhaustible resource: "at some finite cost, production can be freed of dependence on exhaustible resources altogether."  (In 1987, Solow won the Nobel Prize for economics.)
How would a Nobel Prize-winning economist solve our global environmental crisis? Friedman:
"Ecological values can find their natural space in the market, like any other consumer demand. The problems of the environment, like any other problem, can be resolved through price mechanisms, through transactions between producer and consumer, each with his own interests." 
So with a boundless faith in the market founded on "revelation" and circular argument, promises of endless material growth, and a product endorsed by God himself, lunatics lead humanity into a new Dark Age from which it will never emerge...
No other discipline attempts to make the world act
as it thinks the world should act. But of course what Homo
sapiens does and what Homo oeconomicus should do are often quite
different. That, however, does not make the basic model wrong, as
it would in every other discipline. It just means that actions
must be taken to bend Homo sapiens into conformity with Homo
economicus. So, instead of adjusting theory to reality, reality
is adjusted to theory.
-- Lester Thurow
We must stop crying to the growing economy, "Deliver me,
for thou are my god!" Instead, we must have the courage
to ask with Isaiah, "Is there not a lie in my right hand?"
-- Herman Daly
 pp. 1-2, FREE TO CHOOSE, Milton and Rose Friedman; Harvest, 1980 http://www.amazon.com/exec/obidos/ASIN/0156334607
 pp. 38-39, THE END OF ECONOMIC MAN, George Brockway; Norton, 1995 http://www.amazon.com/exec/obidos/ASIN/0393313522
 p. 237, THE RISE OF POLITICAL ECONOMY AS A SCIENCE, Deborah Redman; MIT, 1997 http://www.amazon.com/exec/obidos/ASIN/0262181797
 p. 45, HUMANIST ECONOMICS, Mark Lutz and Kenneth Lux; Bootstrap Press, 1988
 p. 41, EVERYTHING FOR SALE, Robert Kuttner; Knopf, 1997 http://www.amazon.com/exec/obidos/ASIN/0394583922
 "The social sciences have a long, rich history of writings on rationality. In the tradition of neoclassical economic science, as in the writings of Pareto (1935), an action is rational when it corresponds with the ends or goals sought. Rationality means the adaptation of means to ends. The more congruent the means to the ends, the more efficient the decision and, therefore, the more rational the organization (Weber 1947). Economists abstain from applying the test of rationality to ends." [p.16, DECISION MAKING: ALTERNATIVES TO RATIONAL CHOICE MODELS, Mary Zey; Sage, 1992] http://www.amazon.com/exec/obidos/ASIN/0803947518
 p. 31, RATIONAL CHOICE THEORY AND ORGANIZATIONAL THEORY: A CRITIQUE, Zey; Sage, 1998 http://www.amazon.com/exec/obidos/ASIN/0803951361
 p. 6, Kuttner.
 p. 20, BEYOND GROWTH, Herman Daly; Beacon, 1996 http://www.amazon.com/exec/obidos/ASIN/0807047090
 p. 25, ADAM SMITH'S MISTAKE, Kenneth Lux; Shambhala, 1990 http://www.amazon.com/exec/obidos/ASIN/087773593X
 pp. 84-85, Ibid.
 p. 117, STEADY-STATE ECONOMICS, Herman Daly; Island Press, 1991 http://www.amazon.com/exec/obidos/ASIN/1559630728
 p. 32, ECONOMISTS AND THE ENVIRONMENT, Carla Ravaioli; Zed, 1995 http://www.amazon.com/exec/obidos/ASIN/1856492788
Once upon a time, Daddy Economist, Mommy Economist,
and a litter of little Economists were in a mountain cabin,
sitting in front of a small coal-burning stove to keep warm.
Although most people know that when coal burns, it's gone
forever, Daddy Economist isn't worried because he was trained
to believe that when the coal is gone, a substitute will
magically appear. So when the coal is gone, he looks around, and
his furniture pops into view -- just like magic! So Daddy
Economist starts breaking up his furniture and burning it in the
Now the Economists must sit on the floor, but heck, it's better than the alternative: dying. Then one day, SURPRISE!!! All the furniture is nearly gone. But Daddy Economist isn't worried because he believes a substitute will magically appear. So when the furniture is gone, he starts ripping the boards off the walls of his cabin and burning them in the stove to keep warm.
Now the Economists must sit on the floor very close to the stove, but heck, it's better than the alternative: dying. Then one day, SURPRISE!!! All of the cabin that will burn is gone. But Daddy Economist isn't worried. He starts pulling the clothes off his family and burning them in the stove to keep warm.
Now the Economists are forced to stand right next to the stove and constantly turn, but heck, it's better than the alternative: dying. Then in a few hours, SURPRISE!!! All the Economists' clothes have been burnt in the stove. But Daddy Economist isn't worried because ....
Once upon a time there was a spaceship in which "rivets" were used for currency. Why rivets? Because on this particular spaceship, one could trade rivets for sex!
Those individuals who were best at pulling rivets out of the spaceship hull -- the "Pullocrats" -- had the most political power because they controlled the most sex. As might be expected, "pulling rivets" became the most-talked-about and most-envied measure of personal worth.
GOD REVEALED IN EACH
Unsure of their moral justification, the Pullocrats employed "Pulling Priests" (or "PPs") to search Holy Scripture for the truth. A careful re-read of the Scripture by the PPs discovered that "pulling rivets" maximizes "utility". Although no one has ever seen or measured "utility", the PPs say that God reveals his preferences in each transaction thereby proving that "utility" is maximized.
So with the circular blessing of the PPs, the doctrine of continuous and unlimited "rivet pulling" became the organizing principle of the entire spaceship. Indeed, nothing else mattered to anyone.
A TINY BIT OF A
In the real world of a spaceship, a tiny bit of air leaks out after each rivet is pulled out of the hull. And while the air supply system was designed to stay ahead of normal leakage, so many rivets have been yanked out of the hull, that at the present rate, the ship's atmosphere will be unable to support life in 12 hours.
A rescue ship is on the way, but it will take 24 hours to reach the ship. The Pullocrats must:
#1. Organize to ignore their PPs, stop pulling
rivets out of the hull, and start pounding them back in,
#2. They will die.
SOMEBODY, presumably Groucho Marx, once offered the following advice: "The secret of success is honesty and fair dealing. If you can fake those, you've got it made."
If you aren't smiling, you may be cut out for economics. Students of the subject are trained to regard self-interest as the force that decides economic choices. It is easy to imagine cases where cheating is advantageous. The economist's view is: others will see that the logic of the situation calls for cheating, so you had better cheat, too. This idea pervades the literature. But here's a disturbing thing: it may be having some effect. Nothing personal, but economists are an unpleasant lot.
The evidence is in a new paper by a team of one economist and two psychologists from Cornell University*. It reviews several behavioural studies. In one, first-year graduate students were asked to take part in an experiment. They were given some money, and told to divide it into two accounts, one "private", one "public". Money in the private account was given to the student at the end of the experiment. Money in the public account was pooled, multiplied by a factor of more than one (the exact figure varied), and then divided equally among all the students.
For society as a whole, as it were, the best thing is for the students to put all their money into the public account. That creates the biggest pie, which is then shared equally. But for each individual student, the best thing is to put everything into the private account. That way, you get back all your own stake, plus a full share of the pool provided by the suckers. The study found that economics students contributed, on average,20% of their stakes to the public account. Students of other subjects contributed 50%. The researchers then asked the students to explain their actions: had they worried about whether their decision had been fair? Nearly all the non-economists said yes, they had worried. The response of the economists was different.
More than one-third of the economists either refused to answer the question regarding what is fair, or gave very complex, uncodable responses. It seems that the meaning of "fairness" in this context was somewhat alien for this group. Those who did respond were much more likely to say that little or no contribution was fair.
Another study involved a game played by an "allocator" and a "receiver". The allocator was given $10 and asked to divide the cash between himself and the "receiver". The receiver could either accept the division (in which case, both parties kept the sums proposed by the allocator) or refuse it (in which case, both got nothing).
Fairness calls for an equal split. But what does self-interest tell the allocator to do? Only a non-economist could ask. The answer is: keep $9.99, and give the receiver one cent. The receiver will not refuse because one cent is better than nothing (and self-interest does not understand spite). Note also that the game was played just once for each pair, so there was no reason for the receiver to refuse in the hope of prompting a better offer next time. As before, the study found that economics students "performed significantly more in accord with the self-interest model" than non-economists.
Other studies have found the same. A survey asked 1,245 randomly selected college professors how much they gave to charity each year. About 9% of the economics professors gave nothing; the proportion of professors in other disciplines giving nothing ranged between 1.1% and 4.2% (despite generally lower incomes than the economists). The median gift of economists to big charities such as the United Way and viewer-supported public television was substantially smaller than the median gift of non-economists.
The prisoner's dilemma -- a game where two players have to decide whether to co-operate with each other or cheat -- has long been of great interest to economists. The key feature is that for each player, "defecting" secures the best outcome regardless of what the other does. But if both players accept this logic and defect, they end up worse off than if they had co-operated. The Cornell team conducted an experiment involving 267 prisoner's dilemma games. Economics students defected 60% of the time; non-economists defected 39% of the time.
Does training in economics make you mean -- or is it just that mean people are somehow attracted to economics? To find out, the Cornell team did a further experiment, to see whether students became more or less "honest" in a hypothetical situation, after doing some economics. They compared three sets of students: the first took a course in mainstream microeconomics, taught by an instructor with an interest in industrial organisation and game theory; the second took a similar course, but taught by a specialist on development in Maoist China; the third took a placebo (astronomy).
Across a range of questions, the pattern was consistent: the first set contained the largest proportion of students who became less honest; next came the second set; honourably in the rear were the astronomers, with the smallest proportion of students who became less honest.
Perhaps, then, there is a public interest in curbing the study of economics. Or alternatively -- a conclusion that this column would prefer to endorse -- economics needs to take psychology more seriously. The fact is that people do co-operate more than the self-interest model (useful though it is) seems to predict. As the Cornell team points out, recent research sheds light on one reason for this.
Imagine a world in which people move from one prisoner's dilemma to the next (ie, the real world). If people can choose their "partners" freely, and if honest types can spot each other in advance, co-operators will be able to interact selectively with each other -- and will therefore do better than cheats. Experiments have shown that people are surprisingly good at telling co-operators and cheats apart, even on the basis of what seems to be limited information.
So there you have it: narrowly self-interested behaviour is ultimately self-defeating. Economics practised with that in mind could become the uplifting science. If economists can only incorporate a bit of psychology, they've got it made.
* "Does Studying Economics Inhibit Co-operation?" By Robert Frank. Thomas Gilovich and Dennis Regan. Journal of Economics Perspectives, Spring 1993.
"The bulk of this text was taken up with examining the claims of neoclassical economic theory to scientific status. Given contemporary views on the nature of scientific theory, I examined neoclassical economic theory in terms of both its historical and contemporary phases. I demonstrated that the cardinal theory of utility that formed the foundation for early neoclassical theory foundered on account of its inability to measure utility in any acceptable scientific way. Its substitute, the ordinal theory of utility, was shown to be equally unacceptable. The scientific pretensions of ordinal utility theory and its correlate, revealed preference theory, were shown compromised by the normative structure of the foundational postulate of rationality. The unscientific nature of ordinal utility theory was further shown to be reinforced by the insulating role played by the ceteris paribus proviso.
"This general critique was extended not only to the neoclassical theory of individual agent choice but also to general equilibrium theory and positive neoclassical welfare economic theory. Given the general dissatisfaction with neoclassical theory, a number of alternative theories have been proposed, but the problem with the latter is that, with few exceptions, they are founded on the premise that an objective science of economics is still possible despite its present failings. I pointed out the shortcomings of those theories and argued that on account of the nature of human decision making, no analysis of it could be scientific in the way in which the natural sciences are scientific. Mental states that must be invoked to explain behavior are just not subject to empirical analysis. The attempts by theorists to establish explanatory theories by appeal to heuristic concepts such as rationality were shown to be unsuccessful. The point is that 'rationality' plays a normative role similar to that of 'goodness' in ethical theory.
"The sociologist can indeed record the behavior of individuals in terms of cultural norms of 'goodness,' 'badness,' 'deviancy,' and so on, but he or she must recognize that theories of behavior founded on such concepts are necessarily normative. Similarly, the neoclassical theorist who embraces a particular notion of rationality and grounds his or her theories on such a notion is certainly formulating a normative theory. My analysis showed that the neoclassical theorist of economic behavior is confronted with the dilemma of restricting his or her analysis to a case-by-case taxonomy of individual agent choice, given the inaccessibility to mental states, or grounding his or her explanatory theories on the normative heuristic of rational choice. Neither alternative yields scientific results." [ pp. 150-151, SCIENCE, RATIONALITY, AND NEOCLASSICAL ECONOMICS, L.D. Keita; Delaware, 1992. http://www.amazon.com/exec/obidos/ASIN/0874134102 ]