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

pp.101–109.

"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

operators."

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.

(p.62)

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

thought.

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.

July

3, 2009

Betsy Hansen

[send her mail] is a

summer fellow at the Mises Institute. See

her site.