2.2.4 Why a chapter about philosophy / sociology?

If we read the original texts representative for the development of economic thinking, in other words, the authors included in this manual, we can distinguish three phases.

Classical authors, Adam Smith or Jean-Baptiste, Say cover "intuitively" a broad range of topics including aspects we would attribute nowadays to sociology or philosophy. There is no reflection at all on the methodological method to be used. They wrote down whatever they considered relevant. David Ricardo is a little bit different. He didn't reflect on the methodological method to be used neither, but a considerable reduction of the aspects can be observed.

The neoclassical authors, Alfred Marshall, Léon Walras, Vilfredo Pareto, Carl Menger and Joseph Schumpeter, reflected on the methodological approach to be followed and the tried to define the subject of economics.

(In different ways. For Alfred Marshall, for instance, the subject of economics is human behaviour, which can be measured with money.)

In the neoclassic, we see if we disregard Alfred Marshall, a notable reduction of the topics discussed. Actually, it's all about equilibrium.

In nowadays textbooks we have a drastic reduction of the range of topics being discussed and no discussion about the methods to be used, but it is assumed that physics is the methodological paradigm.

We have already given some possible reasons for this, and we will discuss the topic in detail, later on, see mathematical modelization.

It is a general tendency that ideologies don't want to present themselves as a pure "opinion", but as a scientifically proofed fact. Using the same methods as physics, they suggest the same level of evidence as a theory in physics, where indeed very often mathematical modelization allows to predict the outcome of an experiment and to test it against reality.

The more economics abstracts from reality or focuses on trivialities, the more stable, are the relationships between the causes and effects in a theoretical model and the better suited is economics for mathematical modeling. That suggests that economics has some universally valid "economic laws." A lot of attention is paid for instance to the pareto optimum. The affirmation of the Pareto optimum is very trivial. The Pareto optimum is achieved, if none of the exchange partners is worse off after the change but, at least, one of them better off. That can be described verbally, one sentence, graphically and mathematically. The problem is that even a three-year-old child knows that already. He will only give away some of his chocolate if it gets something for compensation. There are entire books about the Pareto optimum with very little utility.

Human capital and technical progress is considered in economics, if ever considered, as a exogenous variable. More attention is paid to parameters like the interest rate, the amount of money, inflation, etc. There is a preference in economics for quantitative methods. Quantitative methods, for instance, statistical relationships, don't explain casual relationships. They just state that (possibly) a relationship between effect and cause exists.

Quantitative relationships in science are a hint that there exists as well a casual relationship and is an orientation for further studies. Economics is almost nothing than quantitative relationships.

Pure quantitative relationships are seldom helpful. If we only know that estrogen has a protective effect against heart attacks (what actually is the case) we cannot produce drugs with the same effect. Detailed information are needed about the casual relationships. .

Pure quantitative analysis leads nowhere. There is an infinite number of studies about expenditure on research and development, education and public health. However, it is unclear how expenditures relates to output and how output is measured. If a stable relationship between expenditures and output existed related to, for instance, education and research and development, the task would be easy. It would be clear how much money must be spent to get a certain output. We all know that things are not so easy.

We are all aware that education and research and development have a massive impact on the economy. If it were possible that everybody can study three things in the time nowadays is needed for one thing, medicine, engineering, and Slavic Studies in for years, it is obvious that unemployment would be reduced to zero if we wouldn't care anymore about interest rates. If it were possible to set up every month a Google, unemployment would be reduced as well to zero.

The outcome of education and research is influenced by parameters beyond economics. Education has to do with organisation, training of the teaching staff, didactical methods, social structure, psychology and so on. The outcome of research is a question of how efficiently research leads to innovation. That's not a trivial problem because scientist are no entrepreneurs. We will discuss this topic later when talking about research and development.

Economic thinking that excludes parameters which can not measured quantitatively leads to narrowing of the perspective. The neoclassical concept that wages correspond to the (monetary) marginal product of labour may be correct. Nevertheless, the conclusion drawn is wrong and the result of "quantitative thinking". The solution proposed by neoclassic economists to reduce unemployment is a reduction of wages. In the logic of neoclassical theory, unemployment is caused by wages higher than the (monetary) marginal product of labour and the problem can, therefore, be resolved by reducing it.

This "solution" abstracts from any non-economic parameter and suggests that economics alone can give an answer to fundamental problems.

Another solution would be to increase the (monetary) marginal product of labour through a technical process, improving education, innovation and so on. (That is, by the way, the normal way to resolve the problem if we take into account larger periods of time.) This solution, however, is far more complex and addresses many aspects that have nothing to do with economics. Admitting that the fundamental economic problems have nothing to do with economics would question the role of economics as the "queen of social science".

The example above are just an illustration of a common problem. The reader can quickly find hundreds of other examples. We will discuss the problem once again later on when talking about Joseph Schumpeter. Joseph Schumpeter wants to study a topic until the cause of an effect is a non-economic one. This approach is not really helpful because it's a circular reasoning. If we don't know what an "economic" issue is, it is hard to define what is not an economic issue, and if a non-economic issue has an impact on economic issues, it doesn't make sense to abstract from these issue.

Economist wants to see economics as a nomothetic science in opposite to idiographic science, who want to understand a phenomenon as something singular. This conceptual pair doesn't make a lot of sense concerning social science. If we abstract from the very beginning from everything individual, spontaneous, unpredictable we get a nomothetic science, that is obvious and because economics seems to be a nomothetic science if we take a look at textbooks is obvious. If we only have quantitative relationships, price <=> supply/demand, interest rate <=> saving /investment, profit <=> (monetary) marginal product of capital and so on we get a nomothetic law.

Seen this way even literature is a nomothetic science. We can find an enormous amount of laws and stable relationships. A writer is a person who writes and reads books. Books consist mainly of texts and pictures. Books can be bought in bookshops.

The assignment of economics or other social sciences to the group of the nomothetic science or to the group of idiographic science depends on the perspective or on a decision which issues are relevant or irrelevant.

Physics is without any doubt a nomothetic science. Physical laws, the relationships between causes and effects are very stable and universally valid. There are no decision taking subjects in physical laws.

Economics is very different. In economics, everything depends on human decision making and human decision making depends on values, religion, rationality, the degree of information or the interaction between different social systems.

It is indeed very illustrative, that the author who follow the nomothetic scheme, like Léon Walras, abstract completely from the subject. There is no entrepreneur in the theory of Léon Walras. Capital alone, without any decision making, finds its way to the best use and the total equilibrium is reached without conscious decision making.

The author hopes that it became apparent that economics frays out at the margins and economy alone can't explain reality.

However, that's is not the only reason we introduced a chapter on philosophy and sociology in this manual.

There is a more basic problem. Economics is a positive science in the sense that it describes things as they are, without taking into account that everything is the result of something.

To illustrate this with an example, the producers of the Sun would say that people are stupid enough to buy and read, or better see, it's all about pictures, this newspaper and the only give them what they want. From a positive point of view, this is true. It is as true as the statement that the dealer gives the addict only what he wants. The point is that the reader of the Sun and the addict are the result of something. We will discuss this topic when we discuss about Karl Popper.

We can try to explain the phenomenon that economics has been reduced over the course of time to a certain amount of canonized concepts we find nowadays in all textbooks. Everywhere the same. However, the stunning phenomenon is that all kind of problems are discussed with these few concepts.

Let's illustrate this with an example. Thousands of "scientific" articles can be found on the internet about the actual financial crises. We are still in the year 2014, and we are still struggling with the debt crises that started in 2008.

The vast majority of these articles argues with concepts we find in any textbook. The Greeks, for instance, have to save more because saving leads to an increase in investment. (Something obviously not true. Greece would only pay back their debts.) Greeks and other countries from the south of Europe should improve their competitiveness. In other words: They have to reduce their wages.

Some who had never read the texts of Keynes argue that expansive fiscal policy is the solution.

We find no concrete article explaining where the savings should be invested to improve the competition and how to avoid that an expansive fiscal policy is used for unproductive consumption. However, that is the critical issue. For whatever reason the countries of the south don't have enough innovations, have problems with the transfer of know how and don't have the infrastructure to improve informal learning. Addressing the right problems would question the role of economics.

If the problem is a simple lack of innovative products, there is little what economists can contribute to the solution of the problem.

Most of the troubadours of freedom of the Austrian kind are public employees and, of course, they never believe that the production of public financed discussion papers is a waste of public resources. If they really want to enjoy freedom, the best thing they can do is to set up a company. Then all the savings are used in the most efficient way. They can prove with acts, that the optimal allocation of resources is no problem and the only condition is that the government doesn't intervene. If they can't really prove it, then is seems that the things are a little bit more complicated.

One can wonder as well why there are so few politicians with a background in economics. This is a worldwide phenomenon. If every problem has economic aspects, what is the case, economists should have the best-suited qualification for this kind of job. However, that's not the case. There are very few politicians with a background of economics.

That can be explained with the academic curricula as well. The tendency to take into account only the variables that can be described by mathematical or graphical modeling leads to the modeling of trivialities. This is irrelevant when it comes to resolving concrete problems.

We don't say that people who studied law make a better job. Very often, the final effect of law or a measure is the opposite of the economic effect intended, but while economists prefer to address irrelevant problems, they have no chance to have any influence on public opinion.

Another reason why we included a chapter about philosophy is the fact that economics rarely or never reflects about the side effect of a market economy. There is a widespread misunderstanding of the homo oeconomicus, the man who only pursue his own interests. The misunderstanding is because people don't understand that the homo oeconomicus is only a useful concept in a market economy. In a market economy with an enough intense competition, the homo oeconomicus can't abuse his power. The only way to pursue his own interests is to produce the best products at the lowest prices. That's not good for him, but good for the consumer.

Nevertheless, competition has an impact on the whole society. There is a tendency to regard everything from an economic point of view. The economy, actually nothing more than a machine to satisfy needs, becomes the goal and the sense of life.

The phenomenon cannot really be proved with data, but seems plausible. East-Germans for instance very often, perhaps glorifying a little bit of the past, say that in East-Germany, there was more "solidarity". That is plausible. If everybody earn more or less the same, there is little need to be better than another. (But there is a big need to be a better socialist to get the attractive jobs.) We will talk about that topic later on when we talk about Theodor W. Adorno.

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