Writing about the expatriation of actor Gerard Depardieu, who fled his native France in response to newly-elected President Francois Hollande’s proposal of a 75 percent income tax for millionaires, Anne Applebaum asks:
How much of any nation’s conversation about economics is ever really about economics, and how much of it is emotion, or perhaps national psychology? Sometimes, we write as if economics were a science similar to chemistry or physics: Raise taxes and achieve result X, cut budgets and achieve result Y. But if a French tax policy can succeed or fail and be accepted or be rejected thanks to a mercurial, attention-seeking actor, what factors shape the conversations elsewhere?
Later in the article, she reiterates that “economics isn’t a science like chemistry or physics.” This is correct. There are profound differences between economic and scientific laws. In order to better understand the world around us, it is important to understand these differences and their implications.
First of all, a law may be defined as a universal rule that regulates some activity. The fact that it is universal means that it is valid in every instance and at all times.
This applies to scientific and statistical laws, which, together, are classified as laws of nature.
Scientific laws, such as those related to chemistry or physics, describe what happens in the natural world. When we investigate the laws of nature, we proceed according to the scientific method. First, we begin with the systematic observation and measurement of observable facts. We then formulate hypotheses about causal relationships and conduct empirical experiments to evaluate our hypotheses and reach a conclusion.
In order for the scientific method to make sense, we must hold certain presuppositions. Specifically, it must be assumed that the events in question are reproducible and their effects are quantitatively definite and invariant across time and place. In other words, they contain constant variables. For example, Newton’s law of universal gravitation contains the gravitational constant, G, which relates force to mass and distance. Mathematical relationships containing constants can be used to describe scientific laws. This permits scientific prediction.
In contrast to scientific laws, economic laws fall within the realm of laws of human behaviour, or human action. As a result, the necessary presuppositions of the scientific method do not apply.
Consider the law of demand, which states that consumers demand more of a good the lower its price, other things the same. If the price of a good, say gasoline, decreases by 25 cents a litre, we are safe in assuming that consumers will buy more (other things the same) than at the higher price. However, we do not know exactly how much more will be purchased. Nor can we say that this effect will be invariant and reproducible. The implication of this is that there are no constant variables in economics. As a result, scientific predictions about human behaviour are impossible. As Ludwig von Mises wrote:
In the mathematical treatment of physics the distinction between constants and variables makes sense; it is essential in every instance of technological computation. In economics there are no constant relations between various magnitudes. Consequently all ascertainable data are variables, or what amounts to the same thing, historical data. The mathematical economists reiterate that the plight of mathematical economics consists in the fact that there are a great number of variables. The truth is that there are only variables and no constants. It is pointless to talk of variables where there are no invariables.
Does this mean that economics is a so-called “dismal science”? Not at all.
Economic laws are formulated according to the method of praxeology, which involves various mental experiments. We begin with many reflective facts garnered through introspection. Reflection identifies concepts that are meaningful to human action, such as the fact that the future is uncertain, action is an attempt to change an existing situation into a preferable situation, means are scarce, and value is fundamentally subjective, among others. We then use deductive logic to arrive at conclusions which will become the premises of other arguments. These chains of logic and successive approximations (aided by the use of imaginary constructions) allow economists to correctly understand increasingly complex phenomena, such as the development of the business cycle, characterized by its many booms and busts.
Remember this: when conventional economists purport to use complex mathematical models to make scientific predictions about individual human behaviour, they are committing a fundamental conceptual error with regard to methodology. Economic laws are elucidated through praxeology, not the scientific method.