A Message for Armchair Economists

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At some point in our intellectual development, we
libertarians are naturally drawn to study economics. I think this
stems from the fact that we love to explore the forces which drive
our world. Economics is, in a broad sense, the study of human cooperation.
A solid understanding of economics enables us to see how and why
our world looks and behaves as it does.

You might have started studying economics on your
own, and are now thinking that it would be great to pursue further
study in this field at a university. Not so fast.

When you study economics at a university, especially
at the graduate level, you are dealing with a completely different
animal. Economics has been technically supercharged. A math-mania
has replaced the economic logic we know and love.

How do I know this?

I started studying economics in high school, loved
it, majored in economics along with finance at the University of
Denver, and now I am on the market for a graduate program in economics.
I hope to be one of those "good" economists, seriously
in the minority these days, who study the way economies actually
operate and are not just apologists for government policies.

I have been looking for the right graduate program
for a few years now. I have interviewed professors at a number of
departments and the most important message they have shared with
me has been that the current focus of economic education at the
graduate level is almost solely math based. Given my previous work
at the undergraduate level, I somewhat expected this, but the degree
to which programs were focused on math surprised me. When do students
learn about advanced business cycle theories, money and banking,
and the ideological and political influences on economic activity?
When do students engage in critical reasoning about previous works
that have passed as truth in the economics discipline if they are
spending most of their time working math problems?

It is very unfortunate that economists spend so
much time applying mathematics to economics because it severely
limits the amount of time students spend learning about how the
real economy functions. Economic activity is complex and unpredictable,
but amidst this seemingly chaotic scenario, there is a beautiful
capacity for order and organization. Economics at its best studies
how this works by looking at what motivates individuals and how
they seek to achieve their desired ends.

Mathematics is not an appropriate means of explaining
human action for a number of reasons. A wealth of literature on
this subject exists, so I recommend further reading on this topic,
but to give you a general idea of what I am talking about, here
is a summary of the argument against using math as a means of describing
and predicting human action. The following sections come from a
brilliant article by Bruno Leoni and Eugenio Frola, published in
1977 in the Journal of Libertarian Studies, Vol. 1, No. 2

"The application of mathematics to the human
sciences, and particularly to economics, rests on the implicit
assumption that mathematics is an appropriate tool for all the
sciences. The widespread adoption of this assumption stemmed from
the brilliant success achieved by the use of mathematics in physics,
consisting mainly of accurate predictions of events taking place
under controlled conditions. It is often overlooked, however (particularly
by non-physicists), that these successes scarcely imply that every
type of prediction of events can be attained by mathematics. In
fact, events can only be predicted when the physicist can reduce
and simplify them so as to correspond with a mathematical formula,
capable of a calculable numerical solution."

Here is a specific explanation of this problem.
Referring to indifference curves and utility analysis, two common
concepts in economics where math is used as an illustrative and
predictive tool, Bruno Leoni and Eugenio Frola write,

"Both the theories of indifference classes
and of numerical utility rest on mathematical concepts that are
essentially different from any validly empirical view of utility.
The adherents of the mathematical theory of utility have not justified
their substitution of a mathematical construct for the processes
occurring in the real world. The utility which we have called
"empirical" is that which governs the actual behavior
of human operators, with perhaps the undoubtedly rare exception
of those who purposely commit themselves to following postulates
of the mathematical theory. At best, mathematical utility theory
will only permit us to predict the behavior of these peculiar

Murray Rothbard offers further explanation of the
inappropriate use of mathematics in praxeology, the study of human
action, in an article entitled, "Praxeology: The Methodology
of Austrian Economics." Here he provides the following description
of praxeology:

"Praxeology rests on the fundamental axiom
that individual human beings act, that is, on the primordial fact
that individuals engage in conscious actions toward chosen goals"…"The
praxeological method spins out by verbal deduction the logical
implications of that primordial fact. In short, praxeological
economics is the structure of logical implications of the fact
that individuals act." (p.58)

He adds that mathematics cannot be used to describe
human activity without seriously oversimplifying the reality of
how human beings actually act. Bolstering his argument, Murray goes
on to say, "as political scientist Bruno Leoni and mathematician
Eugenio Frola pointed out,

It is often claimed that translation of such a
concept as the maximum from ordinary into mathematical language,
involves an improvement in the logical accuracy of the concept,
as well as wider opportunities for its use. But the lack of mathematical
precision in ordinary language reflects precisely the behavior
of individual human beings in the real world…. We might suspect
that translation into mathematical language by itself implies
a suggested transformation of human economic operators into virtual
robots. (p.62)

Rothbard continues, "Similarly, one of the
first methodologists in economics, Jean-Baptiste Say, charged that
the mathematical economists

have not been able to enunciate these questions
into analytical language, without divesting them of their natural
complication, by means of simplifications, and arbitrary suppressions,
of which the consequences, not properly estimated, always essentially
change the condition of the problem, and pervert all its results.

I could give many more explanations of why mathematics
is not appropriate for the analysis of human action, but I think
you get my point.

Math is used to such an extent because economists
are required to understand and create mathematical models which
are used to make forecasts, calculate variances, correlations and
much, much more. I don't want to sound too critical here because
mathematical models can be effective if the assumptions they are
based on are reasonable, but in many economic models assumptions
are clearly false. For example, most models used for forecasting
purposes need to measure risk in some way. They factor in various
market risks and asset-specific risks. At first glance, this seems
reasonable, but how do you define risk? Risk is very subjective,
just as value is subjective. So it should be obvious that a model
would not forecast future prices or growth rates if the assumptions
about relevant risks are completely wrong. Unfortunately, false
assumptions are accepted because they make it easier to build and
manipulate mathematical models.

The way I see it, economists have become glorified
mathematicians. Of course, statistics and modeling can be very useful,
but they are not a means to solving every economic problem. Unfortunately,
the economics profession has been hijacked by those who think that
economists are most useful when they are trained to run models,
versus discussing and developing economic theory and history. This
has led to the regrettable demise of history of economic thought
courses in graduate programs. There just isn't enough time, most
teachers say, to teach all the necessary math and modeling techniques
students are expected to know, as well as cover the history of economic

I spoke with an admissions officer who told me that
the math content of their economics programs was so difficult that
even math majors had a hard time. And even according to lenient
admissions standards, you have no place in graduate economics programs
unless you have taken 2 years of calculus, 1 year of statistics,
linear and matrix algebra. This is ridiculous! When the use of mathematics
gets this complex, how in the world do students have the time to
deal with the study of human action, uncertainty and change? The
answer is that they don't.

What is the problem with academia that they do not
have the backbone to stand up to whoever is calling the shots about
the graduate economics curriculum? Is this all due to an intentional
"scientific" push from economists seeking academic respect
from the scientific community? If it is, don't they realize that
they have taken the quantitative focus too far?

When will academics revolt against this obsession
with quantitative analysis that runs rampant throughout graduate
economics programs today?

Hasn't the current crisis proven that economists
and their models have failed miserably? If anything good comes of
this economic downturn, one would think that a thorough reexamination
of existing economics programs was in order.

I am not the only one complaining about this problem.
I have not met a single professor who is happy about the current
state of economics. Many lament the fact that economics has become
more or less a math program rather than a study of human actions
and economic logic. A huge number of financial and economic commentators
are making the same point as well. Here’s an excerpt from a speech
given by former Fed Chairman, Paul Volcker:

"There was so much opaqueness, so many complications
and misunderstandings involved in very complex financial engineering
by people who, in my opinion, did not know financial markets.
They knew mathematics. They thought financial markets obeyed mathematical
laws. They have found out differently now. You know, they all
said these events only happen once every hundred years. But we
have “once every hundred years” events happening every year or
two, which tells me something is the matter with the analysis."

So there you have it — even Paul Volcker sees that
the mathematically driven economic and financial analysis is unsound.
Yet, if professors and many in the financial community are so unhappy
with the analytical techniques which are taught in economics programs
today, why have we not seen much change? I presume that economics
departments could adapt if they wanted to, right? Who is influencing
the discipline so much, to the point where no one likes it, but
they go along with what looks and feels like torture to everyone
but math nerds? Is it the government? Our bureaucracy needs lots
of bean counters to manage their affairs. I don't really know. The
whole discipline seems like it's lost its mind.

Thankfully we have the wonderful exception of a
few Austrian programs, with the Ludwig von Mises Institute leading
the way. Until we see a Mises University that can train and certify
economists, I think economics students are forced to make the best
of things as they are. Unfortunately, the unseen cost of our poor
state of economic education is enormous. Because economics programs
are so mathematically focused, many brilliant minds are deciding
not to go into that field of study. The opportunity costs our society
faces by having mathematicians run economics programs are huge.
Society will be worse off because of it.

3, 2009

Betsy Hansen
[send her mail] is a
summer fellow at the Mises Institute. See
her site

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