No Constants in Human Behaviour?

Consider this passage from Mises:

“Here we are faced with one of the main differences between physics and chemistry on the one hand and the sciences of human action on the other. In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics. For some time economists believed that they had discovered such a constant relation in the effects of changes in the quantity of money upon commodity prices. It was asserted that a rise or fall in the quantity of money in circulation must result in proportional changes of commodity prices. Modern economics has clearly and irrefutably exposed the fallaciousness of this statement. Those economists who want to substitute ‘quantitative economics’ for what they call ‘qualitative economics’ are utterly mistaken. There are, in the field of economics, no constant relations, and consequently no measurement is possible.

If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not ‘measured’ the ‘elasticity of demand’ of potatoes. He has established a unique and individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes, and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions.

Outside of the field of economic history nobody ever ventured to maintain that constant relations prevail in human history. ….

The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations. If it were only caused by technical insufficiency, at least an approximate estimation would be possible in some cases. But the main fact is that there are no constant relations. Economics is not, as ignorant positivists repeat again and again, backward because it is not ‘quantitative.’ It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data.” (Mises 2008: 55–56).

The meaning of this passage can cause confusion, since in fact Austrian economics precisely assumes a number of constants in human behaviour:

(1) the constant that all conscious human action by non-mentally ill human beings has a purpose in view;

(2) the constant operation of the downward-sloping function governing human behaviour that relates quantity demanded of a good to its price (the law of demand);

(3) the constant phenomenon in which the utility gained by consumers derived from consuming each additional unit of the same good purchased will diminish (the law of diminishing marginal utility);

(4) the constant phenomenon that work carries disutility and leisure utility, so that leisure is preferred to work (disutility of labour axiom).

(5) the constant tendency on the hypothetical free market without government or trade union intervention for prices to move towards their market-clearing levels.

Now these “laws” – assuming the basic phenomena are in place like production, pricing and purchasing in money terms by consumers – are supposed to be true for all times and places in human history, even though that necessary truth is all dependent on an untenable Kantian epistemology with its synthetic a priori knowledge.

In fact, there is a deep epistemological problem with all these “laws”: the human action axiom is nothing but a synthetic a posteriori statement. Subsequent “laws” are deduced in a manner that reduces them to mere analytic a priori statements and such statements entail no necessary truths about the real world of human economic life. If they describe general “principles,” those regularities are contingent; they are known empirically; and exceptions do or can in theory exist.

To return to the main point, it follows, then, that Mises certainly must think there are regularities or “constant relations” in a qualitative sense in human behaviour and history, even if there are no strict and universal quantitative ones akin to the speed of light constant in physics.

And we see that this is what Mises thought as interpreted by later Austrians:

“In fact, one lesson above all should be kept in mind when considering the claims of the various groups of mathematical economists: in human action there are no quantitative constants. As a necessary corollary, all praxeological-economic laws are qualitative, not quantitative.” (Rothbard 2009: 845).

“7. PRAXEOLOGICAL PREDICTION
Praxeology can make certain predictions about the future, but they are necessarily qualitative. For example, it can tell us that (other things equal) a fall in the demand for apples will lead to a lower price of apples. But praxeology alone can never tell us that (say) a particular change will yield a 9 percent drop in apple prices. Such quantitative forecasts are possible with the aid of understanding, but then of course they are no longer certain.” (Murphy and Gabriel 2008: 47–48).

“Whereas in physics, causal relations can only be assumed hypothetically and later approximately verified by referring to precise observable regularities, in praxeology we know the causal force at work. This causal force is human action, motivated, purposeful behavior, directed at certain ends. The universal aspects of this behavior can be logically analyzed. We are not dealing with ‘functional,’ quantitative relations among variables, but with human reason and will causing certain action, which is not ‘determinable’ or reducible to outside forces. Furthermore, since the data of human action are always changing, there are no precise, quantitative relationships in human history. In physics, the quantitative relationships, or laws, are constant; they are considered to be valid for any point in human history, past, present, or future. In the field of human action, there are no such quantitative constants. There are no constant relationships valid for different periods in human history. The only ‘natural laws’ (if we may use such an old-fashioned but perfectly legitimate label for such constant regularities) in human action are qualitative rather than quantitative. They are, for example, precisely the laws educed in praxeology and economics-the fact of action, the use of means to achieve ends, time preference, diminishing marginal utility, etc.” (Rothbard 2009: 324).

It follows that the Austrians shun econometrics and what they call quantitative economics (referring to the neoclassical mainstream with its heavy use of mathematical models and econometrics).

But John Maynard Keynes already anticipated this criticism of econometrics: in Keynes’s famous debate with Jan Tinbergen he said very similar things (which can be read in Keynes 1939; Tinbergen 1940; Keynes 1940).

In a letter to Roy Harrod of 10 July 1938, Keynes said this:

“My point against Tinbergen is a different one. In chemistry and physics and other natural sciences the object of experiment is to fill in the actual values of the various quantities and factors appearing in an equation or a formula; and the work when done is once and for all. In economics that is not the case, and to convert a model into a quantitative formula is to destroy its usefulness as an instrument of thought. Tinbergen endeavours to work out the variable quantities in a particular case, or perhaps in the average of several particular cases, and he then suggests that the quantitative formula so obtained has general validity. Yet in fact, by filling in figures, which one can be quite sure will not apply next time, so far from increasing the value of his instrument, he has destroyed it. All the statisticians tend that way. Colin, for example, has recently persuaded himself that the propensity to consume in terms of money is constant at all phases of the credit cycle. He works out a figure for it and proposes to predict by using the result, regardless of the fact that his own investigations clearly show that it is not constant, in addition to the strong a priori reasons for regarding it as most unlikely that it can be so.

The point needs emphasising because the art of thinking in terms of models is a difficult – largely because it is an unaccustomed – practice. The pseudo-analogy with the physical sciences leads directly counter to the habit of mind which is most important for an economist proper to acquire.

I also want to emphasise strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous in the same way that the material of the other sciences, in spite of its complexity, is constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth.
Keynes, J. M. 1938. Letter: J. M. Keynes to Harrod, 10 July
http://economia.unipv.it/harrod/edition/editionstuff/rfh.34a.htm

And in another letter to Roy Harrod:

“It seems to me that economics is a branch of logic, a way of thinking; and that you do not repel sufficiently firmly attempts à la Schultz to turn it into a pseudo-natural-science. One can make some quite worthwhile progress merely by using your axioms and maxims. But one cannot get very far except by devising new and improved models. This requires, as you say, ‘a vigilant observation of the actual working of our system’. Progress in economics consists almost entirely in a progressive improvement in the choice of models. The grave fault of the later classical school, exemplified by Pigou, has been to overwork a too simple or out of date model, and in not seeing that progress lay in improving the model; whilst Marshall often confused his models, for the devising of which he had great genius, by wanting to be realistic and by being unnecessarily ashamed of lean and abstract outlines.

But it is of the essence of a model that one does not fill in real values for the variable functions. To do so would make it useless as a model. For as soon as this is done, the model loses its generality and its value as a mode of thought. That is why Clapham with his empty boxes was barking up the wrong tree and why Schultz’s results, if he ever gets any, are not very interesting (for we know beforehand that they will not be applicable to future cases). The object of statistical study is not so much to fill in missing variables with a view to prediction, as to test the relevance and validity of the model.

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time.”
Keynes, J. M. 1938. Letter: 787. J. M. Keynes to Harrod , 4 July 1938
http://economia.unipv.it/harrod/edition/editionstuff/rfh.346.htm

Keynes’s method is clear: thought experiments by deductive logic only take you so far and must be checked against experience: “a vigilant observation of the actual working of our system.”

Even on the most generous interpretation of Keynes’s opinion of econometrics (O’Donnell 1997: 110–112), while Keynes was not necessarily hostile to the use of mathematics in economics nor to historically specific estimates of variables like the multiplier, he was heavily critical of the idea that certain empirically estimated magnitudes in econometric equations and models were assumed to be constants in the way constants in the natural science were: that is, such magnitudes were not permanently “constant” or “homogeneous through time” like natural scientific constants.

For Keynes, econometrics cannot yield prediction of future economic quantitative variables with objective probability scores in non-ergodic stochastic systems, as, for example, the price of any specific stock on a stock market at some given future date, or what the London Interbank Offered Rate (or Libor) will be in January 2021.

But at that same time it seems that Keynes would not deny that there are observable qualitative regularities, consistencies or trends in human behaviour or economic life, although they are not necessarily stable in the long term.

One must not confuse (1) Keynes’ rejection of fundamental quantitative economic constants (like the speed of light) in economics with (2) the existence of observable qualitative regularities (which do exist).

For example, you cannot make precise quantitative predictions about exactly when a recession will happen and what magnitudes the other relevant variables (such as real output loss and unemployment, etc.) will have with objective probability scores, but a general qualitative inductive inference (with an epistemic, not objective, probability) that it is probable that a recession will follow a boom, on the basis of past experience and the evidence that no radical changes in the current economic system seem likely in the immediate future, is not unreasonable at all.

Further Reading
Lars P Syll, “Keynes’s Critique of Econometrics,” 4 July, 2012
https://larspsyll.wordpress.com/2012/07/04/keyness-critique-of-econometrics/

Philip Pilkington, “Proud to Be a Nihilist: Bill Mitchell on Econometrics and Numerical Prediction,” Fixing the Economists, February 12, 2014
https://fixingtheeconomists.wordpress.com/2014/02/12/proud-to-be-a-nihilist-bill-mitchell-on-econometrics-and-numerical-prediction/

BIBLIOGRAPHY
Keynes, J. M. 1938. Letter: 791. J. M. Keynes to Harrod, 10 July 1938
http://economia.unipv.it/harrod/edition/editionstuff/rfh.34a.htm

Keynes, J. M. 1938. Letter: 787. J. M. Keynes to Harrod , 4 July 1938
http://economia.unipv.it/harrod/edition/editionstuff/rfh.346.htm

Keynes, J. M. 1939. “Official Papers. The League of Nations. Professor Tinbergen’s Method,” The Economic Journal 49.195: 558–577.

Keynes, J. M. 1940. “On a Method of Statistical Business-Cycle Research. A Comment,” The Economic Journal 50.197: 154–156.

Mises, L. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

O’Donnell, R. 1997. “Keynes and Formalism,” in G. C. Harcourt and P. A. Riach (eds.), A “Second Edition” of The General Theory. Volume 2. Routledge, London. 94–119.

Patinkin, D. 1976. “Keynes and Econometrics: On the Interaction between the Macroeconomic Revolutions of the Inter-War Period,” Econometrica 44: 1091–1123.

Pressman, Steven. 2007. “What can post Keynesian Economics teach us about Poverty?,” in Richard P.F. Holt and Steven Pressman (eds.), Empirical Post Keynesian Economics: Looking at the Real World. M.E. Sharpe, Armonk, NY. 21–43.

Rothbard, M. N. 2009. Man, Economy, and State, The Scholar’s Edition (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

Tinbergen, J. 1940. “On a Method of Statistical Business-Cycle Research. A Reply,” The Economic Journal 50.197: 141–154.