Sunday, March 9, 2014

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).

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
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
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

Philip Pilkington, “Proud to Be a Nihilist: Bill Mitchell on Econometrics and Numerical Prediction,” Fixing the Economists, February 12, 2014

Keynes, J. M. 1938. Letter: 791. J. M. Keynes to Harrod, 10 July 1938

Keynes, J. M. 1938. Letter: 787. J. M. Keynes to Harrod , 4 July 1938

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.


  1. Great Post Lord Keynes!

    This has been appropriately timed to a suggestion that Dan Kervick has made over at MNE regarding his belief that MMT needs to develop Our (not necessarily including YOU specifically, as I don't know your position) own theory of prices to combat the current mainstream price theory.

    I don't believe a real, practical theory of prices is possible given our inability to understand the changing nature of the myriad relationships that exist and are dependent variables in the economy.

    As Mises pointed out, we may be able to reasonably infer that a given $ increase in the size of the deficit MIGHT have an inflationary bias, but as of yet, there is no real way to reliably predict the size of the inflationary impact given the size of the deficit. There are too many variables, some of which are unobservable.

    Which is all to say that the MMT prescription that we rely on the data to adjust policy and not expectations and modeled predictions. In other words, in the immortal words of Keynes, "look after employment and the deficit will take care of itself", or something to that effect.

  2. I know you won’t allow any dissenting views on your blog so I thought I would come here even though this may be deleted. Please stop:

    1. Claiming all Austrians are Kantians

    2. Making very ignorant statements about the Austrian position on economic laws

    Here is Karl Menger on exact laws of which Mises called praxeological laws:

    “The types and typical relationships (the laws) of the world of phenomena are not equally strict in all cases. A glance at the theoretical sciences teaches us rather that the regularities in the coexistence and in the succession of phenomena are in part without exception; indeed they are such that the possibility of an exception seems quite out of the question. However, some are such that they do indeed exhibit exceptions, or that in their case exceptions seem possible. The first are called laws of nature, the latter empirical laws.”

    The reason you are confused about Mises passage in your blog post is because you don’t know the difference between praxeological laws and the assumptions of which it analyzes.

  3. "I know you won’t allow any dissenting views on your blog ."

    Au contraire.

    (1) I did not nor do I assert that “all Austrians are Kantians.” You are simply inventing a straw man.

    Do try and get my opinions right before criticizing them.

    I said Misesian praxeology requires Kantian synthetic a priori knowledge to work: that is, for derived inferences to have alleged necessary truth and be necessarily true of the real world. This is correct.

    I am perfectly well aware that other Austrians like Hayek or Rizzo reject strict Misesian apriorism. Hayek, for example, adopted a Popperian method — not unreasonable at all.

    (2) as for Menger, he had strange ideas about economic laws, very different from Mises's.

    And Menger's weird views probably stemmed from his Aristotelian epistemology:

    1. Sorry to mis-characterize your views, LK.

      1) This is not true for reasons explained by this author:

      Namely this quote by David Gordon:

      "Like Immanuel Kant... Mises thought that the human mind grasped the world only through its own categories. But this similarity hardly suffices to make Mises a strict Kantian. Unlike his great predecessor, Mises did not claim that a particular set of categories is a necessary presupposition of expericne. To Mises, the categories are ones that human beings now in fact use. He essays no transcendental argument in the style of the Critique of Pure Reason to derive them."

      2) I think this is explained very well by Knott:

      If you agree with Lachmann, would it not follow that the principle/law of contradiction/non-contradiction is only probable in its modality? I think many people would think this absurd.

    2. hanktheblog,

      (1) I have not said Mises has exactly the same view as Kant, nor that there are not differences between their views. Indeed, Mises was influenced by the neo-Kantianism of his own day than by Kant directly as Lachmann noted (1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: p. 56).

      As for why Mises needs synthetic a priori:

      (2) I have no idea what you mean by "If you agree with Lachmann, ..." since your links contain no mention of Lachmann, and know of know writing by Lachmann on the law of non-contradiction.

      In any case, the contention that the laws of logic are ultimately really empirical is by no means improbable, given quantum mechanics:

    3. I think it is presumptuous to say quantum mechanics makes the law of thought empirical and completely ruling out this may show the limitations of quantum mechanics.

      I think you must agree then with John Stuart Mill when he says that the laws of thought are not actually laws, but conclusions derived from constant experience of their truth. From Mill's Logic pg. 308 and Exam of Hamilton pg. 417.

  4. "Austrian economics precisely assumes a number of constants in human behaviour"

    Mises and Rothbard are saying that there are no mathematical constants in economics. For example, there are no mathematical constants in economics analogous to Avagadro's number in physics and chemistry.

    None of the "constants of human behavior" you mention are mathematical constants.

    1. Even if we grant Mises and Rothbard this point, that the parameters that if known would result in a quantitaive law cannot be known in general, it does not prove what they claim. Even a "qualitative" law can be tested. Take for example downward sloping demand curves. If the law holds then it should be possible to find examples, but with different slopes. The effect of cigarrettes on cancer rates is likewise a qualitative theory, bolstered by many particular quantitative tests. The claim is not that smoking increases cancer rates by .0876% but that it raises them measurably; a study reporting 0.965% would not count against the theory for being too large an effect. So the Austrian claim to an exemption from empirical test fails even granting their assumption.