Noah Smith's Rejection of "Bloodless Abstractions" and Harvard's Next Econ 10 Professor

Harvard University

By Robert Wenzel

Bloomberg columnist Noah Smith has gone on a screed calling for Harvard to replace the departing Econ 10 professor Gregory Mankiw with a professor with a more empirical-leaning viewpoint.

Smith writes:

Mankiw’s economics is based largely on classic ideas. The idea that the market is a mostly well-functioning system driven by rational actors engaging in voluntary trade for mutual benefit goes back to 18th and 19th century economists like Adam Smith, David Ricardo, Leon Walras, and William Jevons.

And then it appears that he goes bat shit crazy and rejects the fundamental principle of supply and demand:

And the theory of supply and demand, which undergirds much of Mankiw’s introductory-level analysis, was formalized by economist Alfred Marshall, himself the author of a famous textbook called “Principles of Economics.”

You see, he wants to go all hip and new. "Cutting-edge," he says:

Mankiw’s approach to economics education may have a more subtle problem: an over-reliance on theory instead of data. Mathematical models and logic figure prominently in a Mankiw textbook, with supply and demand taking pride of place. But in the world of cutting-edge economic research, deductive theorizing has long been supplanted by empirical analysis.

Even the venerable theory of supply and demand has encountered major failures when confronted with data, especially in labor markets.

 In other words, economics is becoming more like the natural sciences -- a discipline that first looks at the evidence, and then tries to use theory to explain those observations.

But while Smith thinks he is advancing something new, he fails to realize this methodological debate between theory and empiricism was an intellectual battle fought decades ago and that the empiricists lost.

It is noteworthy that Smith mentions Adam Smith, David Ricardo, Leon Walras, and William Jevons but fails to mention the Austrian school economist Carl Menger who simultaneously discovered marginal utility theory with Walras and Jevons. If he had mentioned Menger, he wouldn't have been able to toss in the straw man of "rational actors" to attack theory over empiricism since Menger and other Austrians to follow used the subjective value approach which rejected the rational actor notion.

The Austrian economist Murray Rothbard in an essay highlighted from the 1957 work of Ludwig von Mises, Theory and History, where Mises discussed the problem of attempting to replace history (empiricism) with theory:

A particularly vital question is the relationship between economic theory and history. Here again, as in so many other areas of Austrian economics, Ludwig von Mises made the outstanding contribution, particularly in his Theory and History.  It is especially curious that Mises and other praxeologists, as alleged "a priorists," have commonly been accused of being "opposed" to history. Mises indeed held not only that economic theory does not need to be "tested" by historical fact but also that it cannot be so tested. For a fact to be usable for testing theories, it must be a simple fact, homogeneous with other facts in accessible and repeatable classes. In short, the theory that one atom of copper, one atom of sulfur, and four atoms of oxygen will combine to form a recognizable entity called copper sulfate, with known properties, is easily tested in the laboratory. Each of these atoms is homogeneous, and therefore the test is repeatable indefinitely. But each historical event, as Mises pointed out, is not simple and repeatable; each event is a complex resultant of a shifting variety of multiple causes, none of which ever remains in constant relationships with the others. Every historical event, therefore, is heterogeneous, and therefore historical events cannot be used either to test or to construct laws of history, quantitative or otherwise. We can place every atom of copper into a homogeneous class of copper atoms; we cannot do so with the events of human history.

This is not to say, of course, that there are no similarities among historical events. There are many similarities, but no homogeneity. Thus, there were many similarities between the presidential election of 1968 and that of 1972, but they were scarcely homogeneous events, since they were marked by important and inescapable differences. Nor will the next election be a repeatable event to place in a homogeneous class of "elections." Hence no scientific, and certainly no quantitative, laws can be derived from these events.

Mises's radically fundamental opposition to econometrics now becomes clear. Econometrics not only attempts to ape the natural sciences by using complex heterogeneous historical facts as if they were repeatable homogeneous laboratory facts; it also squeezes the qualitative complexity of each event into a quantitative number and then compounds the fallacy by acting as if these quantitative relations remain constant in human history. In striking contrast to the physical sciences, which rest on the empirical discovery of quantitative constants, econometrics, as Mises repeatedly emphasized, has failed to discover a single constant in human history. And given the ever-changing conditions of human will, knowledge, and values and the differences among men, it is inconceivable that econometrics can ever do so.

Indeed, in The Historical Setting of the Austrian School of Economics (1969) Mises reminds us that the rejection of theory in economics has a long history:

In the second and third quarter of the nineteenth century some German professors wrote valuable contributions to economic theory... the books of Professors Hermann, Mangoldt, and Knies will be remembered in the history of economic thought. But after 1866, the men who came into the academic career had only contempt for "bloodless abstractions." They published historical studies, preferably such as dealt with labor conditions of the recent past. 

Then, of course, there is the Austrian economist and Nobel Prize winner Friedrich Hayek who wrote, in 1952 in The Counter-Revolution of Science, that social scientists who attempted to apply the methods of the natural sciences to social science suffered from an inferiority complex and explained why in the book.

So what Smith is promoting here as brand spanking new has been around a very long time and has been destroyed as a correct approach for the social sciences decades ago. Nothing hip about it.

Finally, on another topic, Smith claims Mankiw taught with a "libertarian slant."

I guess you could say that if you compared Mankiw next to Cornell West, but I have always considered Mankiw an apologist for the state.

Harvard hasn't had a truly free market economist teaching Econ 10 for decades, if ever.

But now that Smith brings up the point, perhaps it is time that Harvard choose a free market-oriented professor to teach Econ 10 to balance out the socialist coprolite they are going to be exposed to in the rest of their classes, and maybe one who is a  great teacher who can make important and basic abstractions like supply and demand come alive and who knows the Methodenstreit battle is not something new and was fought decades ago--and won by the Austrians.

Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and Target Liberty. He also writes EPJ Daily Alert and is author of The Fed Flunks: My Speech at the New York Federal Reserve Bank and most recently Foundations of Private Property Society Theory: Anarchism for the Civilized Person Follow him on twitter:@wenzeleconomics and on LinkedIn. His youtube series is here: Robert Wenzel Talks Economics. More about Wenzel here.