Lux Lucet

This evening I came across an article on Zero Hedge titled Why Isn’t There A Demonstrably Correct Economic Theory?
Now that’s a good question. Secular thinkers since the time of Aristotle have pondered the problems of economics, and some folks have gotten wise to the fact that they have little in the way of answers.

The post begins,

“My wife has asked me a ‘simple’ question that I cannot answer. After 2000 years, why do we not know which economic theory is correct: Keynesian or Hayek-Friedman? Surely, there is a demonstrably, statistically correct answer.”

Now this is an interesting way of framing the issue. The quote begins with a question asking why we do not know which two economic theories is correct and ends with an expectation that the matter can be decided on the basis of statistical – i.e. empirical – proof.

There are, of course, far more than two schools of thought on matters economic. The mention of Keynesian and Hayek-Friedman economics – Hayek and Friedman are really quite different, Hayek was a rationalist from the Austrian school whereas Friedman was a Chicago school empiricist, they do not represent a single school of thought – is just a small sampling of the universe of secular economic schools of thought. The author himself concedes this by throwing in the name of Karl Marx. That doesn’t complete the list either, but for the sake of space, let’s leave it at that.

The author then proceeds with his attempt to answer the initial question, why do we not know which economic theory is correct?, and offers two reasons for this: 1) economics is not a real science, and 2) money printing.

Regarding the first reason, he writes,

“Many others have noted the obvious, that economics is a pseudo-science rather than a real science: beneath the fancy quantification and math, economics is fundamentally the study of human behavior, and that complex mix of dynamics cannot be reduced to a tidy model that spits out accurate predictions.

One key element of science is that the results must be reproducible, that is, the same experiment/conditions should yield the same results time and again. I suspect that economic models are not applicable across all times and situations; a model might “work” in one era and in a very specific set of circumstances, but fail in another era or in a similar set of circumstances.

So presenting an economic model as “scientific” and quantifiable is in effect claiming that the bubbling stew of human culture can be reduced to quantifiable models that will yield predictions that are accurate in the real world. This is clearly false, as culture is not a static set of objects, it is a constantly shifting interplay of feedback loops.

This helps explain why human behavior is so unpredictable. Virtually no one successfully predicted World War I in 1909, and no one predicted the collapse of the U.S.S.R. in 1985.”

Here, the author argues that we cannot know an economic theory is true, because, unlike science, it is not reproducible in a laboratory. The problem with this line of argumentation is that it assumes that “real” science – presumably fields such as physics and chemistry – is able to provide us with truth. It doesn’t. It can provide us with useful opinions on the way the physical world works, but this is not the same thing as furnishing us with truth. As Gordon Clark, John Robbins argued – and secular scientists are in agreement with them on this point – all scientific laws are false. Some may be better approximations of the truth than others, but none of them is true.

So even if economics made the grade as a true science in the eyes of the author, it would still be false.

The author’s second reason for the failure of economic models is this,

“Another reason all economic theories fail as scientifically verifiable models is that economics boils down to a very simple dynamic: those in power issue financial claims on resources as a “shortcut” way of gaining control of the resources without actually having to produce the resources or earn the wealth via labor and innovation.”

The author seems to be arguing that money printing ruins the ability of economists to conduct controlled experiments. While I certainly sympathize with his disdain for the printing press, even in the absence of quantitative easing (QE), the empiricist/positivist school of economic thought would not furnish us with truth. Not because economics is not a “real” science, but because the scientific method can never furnish us with truth, regardless of what field or question it is applied to.

The real reason that economists have failed to develop a true economic theory is has nothing to do with economics being a pseudo-science or money printing. The problem is that economists are looking for truth in all the wrong places. The vast majority of professional, academic economists are of the positivist/empiricist school. That is, they believe that the field of economics can be advanced by gathering data and then coming up with theories that explain that data. This can never lead to truth.

A few secular economists are of the rationalist Austrian school. Rationalists start with propositions, ideas, and then make deductions from those initial postulates. This is the method of the geometry, where one begins with theorems and then moves on to deduce corollaries from those initial theorems. And while this author has respect for the Austrian school – their method is correct and much of what they have to say is actually true – he has a problem with the Austrians’ method for finding their initial propositions. To but blunt, they pull them out of thin air. This is a weakness that Austrian economics shares with all rationalist philosophies. Who’s to say that the Austrian’s have chosen the correct propositions from which to deduce their economics?

Now to answer the initial question, why after 2,000 years we do not have a demonstrably correct economics?, the principle reason for this is that economists have spent most of the last 2,000 years looking for economic truth in all the wrong places. But if truth cannot be deduced from gathering and analyzing data as the empiricists do, or making deductions from self-generated propositions, as the rationalists do, where are we to find a foundation on which a true economics can be built? To answer this questions, it is important to recognize that economics is properly a branch of Christian theology. That is to say, the foundation for a true economics is found in the propositional truths in the Bible alone. And beginning with those true propositions, we can deduce a true economics.

This may sound strange to some, so let me illustrate my point. One of the great debates among 19th century economists was over the theory of value. Some argued – echoing Aristotle and the teaching of the Roman Catholic Church-State – that the value of an item is intrinsic. Others, that value comes from the labor put into making it. This was the argument of the Marxists and was termed the labor theory of value. Still others contented that value comes from the cost of production. An item is worth a certain amount because of the cost that went into producing it.

In the late 19th century, the idea of subjective value was put forth by those who founded the Austrian school of economics. Subjective value holds that an item is worth what it is worth because individuals impute value to it. That is to say, value is in the eyes of the beholder, not, as Aristotle would have us believe, in the thing itself. This is correct, and we know it is correct because Jesus made that very point nearly 2,000 years before the Austrians did in his commentary on the widow’s mite. This account, found in Luke 20:1-4, tells about a poor widow who put a small copper coin into the temple treasure while at the same time the rich were putting in their far larger – larger in terms of face value – offerings. Jesus made the point to his disciples that the widow had put in far more than the rich. How could this be? The monetary value of what the rich offered was far greater than the “penny” the widow put in. Jesus explained this by saying that the rich gave out of their abundance, but that the widow had put in “all the livelihood that she had.” In this brief comment, Jesus stated not just the principle of subjective value – the idea that value is imputed or ascribed or reckoned to items by people, the value does not reside in the thing itself – but also that of marginal utility – the notion that the out of a group of like items, the value imputed to the last unit is the value imputed to all units. Marginal utility and subjective value are two of the most important concepts in all of economics. Had economists been paying closer attention to Scripture rather than trying to go it alone, perhaps it would not have taken nearly 2,000 years after the birth of Christ for men to grasp the correct theory of value.

There are other examples – monetary theory for one, the Bible teaches that governments should not be in the business of manufacturing money and further that the inflationary practices of the Federal Reserve Bank and all other central banks are not only poor economics, but actually sinful, God hates Quantitative Easing, it is an abomination to him – but I will save those for another time.

If anyone is interested in learning more about Christian economics, please see the following two lecture series on economics found on the Trinity Foundation website: Collection 1: Introduction to Economics and Collection 2: Intermediate Economics.

The author of this article First, he holds that economics is a pseudo-science rather than a real science. In his words, “beneath the fancy quantification and math, economics is fundamentally the study of human behavior, and that complex mix of dynamics cannot be reduced to a tidy model that spits out accurate predictions.” The problem here is that the author seems to assume that “real science” – presumably physics or chemistry – in contradistinction to the “pseudo-science” of economics is able to produce demonstrably correct models. But this is not the case. The hard sciences can produce models that “work” in the sense that they are useful for building things, but they are not true in the sense that these models ever produce final answers.

Fiat money is offered as the second reason for the failure of economic theory. This strikes me as a bit off the mark. The current worldwide dominance of central banking is the evil fruit of prior false economic theory – Keynesianism for example –