10 July 2013

A Stupid Question

I find it ironic that many economists (particularly Austrian-school adherents) reject mathematical logic under the belief that mathematical theories lack sufficient depth to provide explanatory insight into the economy. It would be counter-productive, however, to inject more ambiguity into the social sciences when they are already vague to the point of near-meaninglessness.
The better approach would be to ask: Is a gold-backed currency empirically superior to a fiat currency, and if so why? Answering such a question will almost certainly require mathematics, either via logic or quantitative analysis. The answer is also far more likely to reveal an array of costs and benefits, rather than a hard-faced ideological call-to-arms. Such is quite often the case when science tackles problems that involve a great deal of nuance.

To put this excerpt in context, Long is discussing Motlian epistemology.  In this particular instance, Long is writing about Motl’s discussion of whether there are, in fact, stupid questions.  Motl concludes that there are indeed stupid questions, a position that Long appears to agree with.  Furthermore, Motl asserts that questions that have ill-defined terms are stupid questions.  Thus, the irony of the excerpted paragraphs become apparent.

Long’s question is a stupid question because it has at least one ill-defined term, the term “superior.”  Asking whether a gold-backed currency is superior to a fiat currency is like asking whether white people are superior to black people, except that there will probably be less hand-wringing, controversy, and charges of racism when asking the former.  Neither question can really be answered until one defines the word superior.

Thus, Long also (inadvertently?) ends up making his question doubly stupid since he ends up asking, in the words of Motl, “a rhetorical question to spread a certain way of thinking or emotion, usually a misconception” (alternatively, it could be that “[t]he question implicitly makes some invalid assumptions about the insights that are already known”).  In this case, Long makes a category error in asserting that Austrian school (or anyone) must demonstrate empirically that a gold standard is superior to a fiat currecy.*  See, those from the Austrian school who argue for a gold standard usually do so on the grounds that the Gold standard is a superior system.  The system itself is superior because it (hypothetically) constrains government while remaining fairly stable for consumers, in that there is a finite amount of gold, etc.  All of these assertions are really tautologies because, once you break them down into something more meaningful (say, determining just how constrained the government actually is), you find that definitions and arguments become increasingly circular.

Ultimately, those who argue for the gold standard are doing so because they are enamored of the system’s intrinsic design.  In many ways, the actual outcome of the system is not all that relevant to them because the systemic outcomes simply do not matter.  What matters is that the system works a certain (hypothetical) way.

The question of a gold standard versus a fiat currency is radically different than a question of whether disaster relief is better provided by state governments or the federal government.  In the case of the latter, it is assumed that some type of government, with its attendant bureaucracy and bureaucratic procedures, is the proper method for addressing the problems that arise with natural disasters.  The real argument is about the relative efficiency of localized governments relative to a more centralized government.  The difference is of degree, not kind.

In contrast, the gold versus fiat currency question is a matter of kind, since the two types of currency systems have different setups, administrations, features, and bugs.**  They are completely different animals, even though they work towards a roughly identical solution.

Really, though, the whole question is predicated in part on the underlying assumption that economics (particularly the Austrian school) is actually a science at all.  Truth be told, the Austrian school of economics bears a closer resemblance to philosophy, and borrows quite a bit from epistemology, than it does to what now passes for modern economics.  But then, anyone well-versed in the history of economics should know that it was generally referred to as “political economy” and has strong roots in theoretic conjecturing (indeed, that was the basic gist of Adam Smith’s complaint about the French Physiocrats).  Even with Adam Smith, the theoretical often took place over the actual (cf. the labor theory of value), and this bias continues relatively unabated.

The problem of economics as a science is twofold.  First, the subject of inquiry is massive.  It essentially tries to understand the entirety of human interaction on a transactional basis, on both a micro and macro level scale.  This is a ridiculous thing to attempt, and it downright arrogant to suppose that that the discipline can ever attain a complete and thorough understanding of the subject, since human nature, though basically unchanged over history, is subject to a large degree of weirdness at the margins (cf. Japan), which means that no one person, let alone a collective entity of them, can ever be truly and completely understood.

In the second place, all attempts at empiricism are basically bullshit.  Sonic Charmer has argued, persuasively in my opinion, that all large calculations are wrong. Most of the metrics used to measure and test macroeconomic growth are large calculations and predicated on many debatable assumptions and definitions.  Not only that, a lot of big calculations (like BLS figures) are highly subject to political pressures, and therefore may be manipulated at the behest of a politician.  Even moderately large calculations, like the budget sheets of large corporations, may be highly misleading if someone is trying to embezzle the company.  Not only that, a huge amount of economic activity, even in this modern age of NSA spying, goes completely unreported and is largely forgotten.  Additionally, most of the empirical data for a lot of the recent research in behavioral economics is completely useless.***

But not only is the data suspect, the analysis of said data still has the same problems that empiricism tries to avoid.  Even in a world of perfect, complete, non-false data, the question still remains:  How do we look at the data and make sense of it.  And here we fall right back into problem that empiricism tries to solve.  Fundamentally, economics is a matter of worldview.  Saying that, say, 12% of job-seeking white college-educated males between the ages of 25 and 30 are unemployed is simply a piece of trivia.  Saying that such a state of affairs is a travesty (or an accomplishment worthy of celebration) is a matter of perspective, or worldview.  Thus, economics will always remain a fundamentally philosophic discipline because interpreting economic data can only be done though one’s own particular philosophic worldview.  Incidentally, this means that empiricism is basically a rhetorical device.

Thus, calling for more empiricism in the realm of economics is misguided at best.  Really, it might even be counterproductive since a lot of people have placed their faith in science (or things that just seem sciency, like numbers and technical-sounding jargon), so asking for more empiricism, even though it’s essentially bullshit and irrelevant, will only make people act more certain than reality warrants.

Ultimately, asking whether a gold-backed currency is empirically superior to a fiat currency is asking a fundamentally stupid question.  Even armed with perfect data, the validity of the answer is entirely contingent on a) how you define “superior” and b) whether one agrees with the metric selected to designate superiority.  It’s like arguing over who is the best quarterback of all time.  The debate rages on, and will continue to rage, but not because of a lack of data.  Rather, the debate over both monetary systems and quarterbacks will continue because, fundamentally, we all have differing ideas on what constitutes superior.

* Of course, if you had a room with six Austrian “economists” in it, you would have proposals for at least a dozen different monetary systems that would be better alternatives to the current US Federal Reserve System.  I kid, of course, but the Austrian school is hardly united in its desire for a gold standard.  Some like free banking, a small minority appears to hate money entirely (usually recent converts from anarcho-leftism), and a couple appear to be fond of BitCoin, though there are plenty who love the gold standard.  But the assumption that the Austrian school has a single, official position on monetary systems is kind of hilarious.

** If the two systems were only slightly different, it wouldn’t be all that difficult to switch between them, and few people would rail against switching from one system to the other.  Thus, we could probably infer the real-world magnitude of the differences between the two systems by seeing how just how vociferously a switch from a fiat system to a gold standard, or vice versa, would be opposed, especially since there tends to be a lot of money in banking and currency.

*** As noted elsewhere on this esteemed blog, the biggest problem with social science experiments is that they are not replicable.  Most testing consists of asking college students to play some sort of game for a short amount of time in an effort to simulate some sort of decision-making process.  The obvious flaw in this method is its artificiality.  As such, it is positively unlikely that the decision-making behavior of a 21st century American college student is even remotely similar to that of similarly-aged non-American, or an older (or younger) American, or even a similarly-aged American living three decades ago.  As such, it is wise to view all claims from behavioral economists with an extremely jaundiced eye.

(I suppose it would be good to take this time to mention that I generally enjoy reading Ryan Long’s blog.  There’s a lot of good stuff to be found at Stationary Waves, and I find a lot of his writing to be thought-provoking.  However, I was struck by the sheer amount of irony contained in this particular post, and couldn’t help but to point it out.)