What is economics? How is it distinguished from business, finance, and politics? How can a training in the economic way of thinking uniquely qualify someone to add value in the “real” (non-academic) world? These are the kinds of questions that have interested me for the past six years.
This is a profound and compelling question. Men and women far smarter than I have written volumes over the centuries addressing it. Because one of my goals for this blog is to make the posts punchy and pithy, I will attempt to limit myself only to a few interesting ideas to get the ball rolling. The more excited I am about the topic, and thus the more motivated I am to discuss it, the more difficult this will be.
“The curious task of economics is to demonstrate to men how little they know about what they imagine they can design.”
This little-known quotation by the Nobel-winning economist Friedrich von Hayek (1899-1992) is one of my favorites. And since Hayek is one of my favorite economists, I will no doubt reference him repeatedly. In his seminal article, The Use of Knowledge in Society (American Economic Review, 1945), Hayek provides revolutionary insight on the topic of tacit knowledge, or the “knowledge of the particular circumstances of time and place.” He argues that the fundamental problem of society is wholly separate from the problems economists frequently address with theory, modeling, and data. The fundamental problem of society is that the relevant knowledge for coordination is dispersed among individual people. He says that this tacit knowledge “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all separate individuals possess.” If it is fundamentally impossible, by nature, for any one mind to know all of the relevant observable and tacit knowledge for every given transaction or optimization problem, is it impossible for us to solve problems?
Of course not. Hayek is not telling all economists and econometricians that they should pack up and go home. This paper was largely a response to socialism during the socialist calculation debate that took place in the early 20th century (future blog fodder). So how do we make use of this crucial tacit knowledge, as a society? I will give away the punchline: we already do. How? Through prices. Prices are nothing more or less than relative scarcities of goods and services – they are bits of pure information. Prices capture and coordinate all of the dispersed bits of tacit information in ways that conscious human efforts never could. I don’t want to summarize the paper in too great of detail, because it is eloquently written and profoundly multi-faceted. You should read it. Suffice it to say that prices are miraculous in their utility and simplicity. Few pause to try and understand or appreciate their role and significance.
So what have I said so far? I have asked what economics is, particularly in what sense is it different from business, finance, and politics. I think most of my family still believes that I am either going to get rich on Wall Street or run for office and “fix the economy.” It is neither surprising nor unreasonable that most people do not know what economics is, and so they reduce it to something associated with money. Business and finance fall within the purview of economics. But I want to argue that it is something much broader and more fundamental. At its core, I think that economics is a methodology for thinking clearly about the world.
Another way to think about it is to think of economics as the study of all human action and interaction. If economics can be more fittingly thought of as a methodology based on sets of assumptions or axioms, then as a methodology for thinking it can be applied to everything that people do. While this sounds very broad (and it is) it is actually quite limiting with respect to other disciplines. For example, economics is not like sociology or psychology. The economist wearing their economist hat is not in the business of evaluating matters of the heart, soul, spirit or psyche. I posit that economics takes those things as given, and rightly so. In game theory, there is a well-known distinction made between a person’s stated preferences and their actual preferences, or revealed preferences – their actions. Economics limits itself to evaluating actual actions, or revealed choices, as they are.
Lest anyone think that these ideas are mine – of course they are not. Not really. Perhaps unsurprisingly, it was a mentor and teacher of Hayek’s, Ludwig von Mises (1881-1973) who first spurred me on this trajectory of thought. In his magnum opus, fittingly titled Human Action, one of the things Mises does with rigor is argue that economics is a methodology which makes a distinction between “means” and “ends.” It must take human ends as given, which include things like tastes, preferences, ethics, and morals, because it is primarily the job of the economist to determine whether various means achieve their intended or stated ends. In doing so, the economist does not speak to the competing value of the chosen ends. He takes them as given, and only speaks to the relative successes of various means in achieving those ends. There are explicit and compelling historical reasons why Mises made this argument so carefully and painstakingly, but that also is a subject for another post. Reading Human Action is a daunting task, and one best done under the tutelage of someone who has already studied him, as I was lucky to have done. I am eager to do a repeat read soon. Human Action was so intellectually life-changing that it was the primary reason I was inspired to go to grad school. Therefore I am sure I will also reference Mises, or at least his ideas, again in the near future.
I love ideas. I love learning, and particularly, learning in pursuit of things that are true. My first class in economics changed my life because I did not know that there existed one discipline that could make so much sense of the world around us. There is an irony to learning economics: the insights economics offers are often so intuitive and clear that we wonder at how we did not know them before.
“Economics is the painful elaboration of the obvious.”
Our knowledge can be divided into three categories: what we know that we know, what we know that we don’t know, and what we don’t know that we don’t know. Learning should be a constant expansion of our intellectual horizon. An exploration taking us deeper into the frontier of what we don’t know that we don’t know. I know that it takes hard work and integrity to learn – to constantly pursue what is true – and that this is possible only when we are driven by genuine curiosity. This is what studying economics has done for me so far. And this is why I aim to continue studying it, hoping to synthesize into a non-academic career, even as I leave the classroom.
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