Saturday, April 18, 2015

Are There Any True Laws, Especially Economic Ones?

This is triggered by the recent post by Tyler Cowen and some followups by others.  In it Tyler posits three laws: 1) There is something wrong with everything (no slam dunks, and one only understands something if one knows its flaws), 2) There is a literature on everything, and 3) All propositions about real interest rates are wrong.  The first clearly contradicts itself, and while most laws may be limited or not universally true, some are truer than others, e.g., round earth model closer to reality than flat earth one.  The second is clearly false as some ideas have never even been verbally expressed by anybody, although the real point of this is probably to warn that if somebody thinks they know the full literature on something that has a literature, they probably do not.  The final one is probably empirically correct, although properly stated theoretical models contingent on unrealistic assumptions may be correct if their unrealistic assumptions hold.  More generally, Tyler warns that we should all be wary of thinking we know too much, which is clearly correct.

In a followup he links to Arnold Kling who poses three laws due to his poli sci prof dad, Merle Kling: 1) Sometimes it's this way, and sometimes it's that way (I can think of some things that are pretty much always one way), 2) The data are insufficient (often the case, but maybe not always), and 3) The methodology is flawed (see 2).  He calls these "iron laws of social science," but they do not look  any more ironclad than Ricardo's Iron Law of Wages, which depends on some assumptions holding that are in fact not true, such as there being no technological change.  More like silly putty laws.

OK, so are there really any fully true laws?  Even beyond economics, most "laws" depend on certain assumptions holding for them to hold as well.  In some areas, this is not such a big deal, and thus in chemistry, a lot of its laws hold pretty widely.  Physics gets a bit iffier, with the good old law of gravity the classic example.  Sure enough the equation explains rates of acceleration in a vacuum, but outside of a vacuum, well we even see some things moving away from each other, such as a helium balloon rising away from the earth.  Nevertheless, in many hard sciences it is a lot easier to figure out when the necessary assumptions are holding and when they are not so that one can figure out when the supposed laws will apply to the real world or not, even if those assumptions do not always hold everywhere and at all times (and some physics laws hold simply everywhere at all times, as best we know).

When we get to economics, it looks to me that Tyler's first law holds pretty well.  Most economics laws do not hold universally.  Demand curves do not always slope downwards, even though Misesian a prioristic praxeologists insist so, and socially necessary labor time does not always determine values that equal "natural" long-run prices, even though fundamentalist Marxians might believe so.  The basis "law" of supply and demand, although useful for understanding many real world markets,  does not always hold in its standard formulation for a long list of reasons.  And most of the laws used to study or explicate macroeconomics, such as claims about real interest rates, are by and large wrong or only true in limited cases.

Given all  that, I shall note one economics law that I so far  do not know of any exceptions to.  That is the law of diminishing returns, or diminishing marginal productivity.  Keep in mind that its formulation says that "eventually" marginal product of an input will decline, not that it is always declining, and for many agricultural activities many inputs have increasing marginal productivity for awhile.  If anybody can think of a real world exception to this law, I would warmly welcome learning of it, but so far, it seems to hold universally.

Barkley Rosser

18 comments: said...

Let me add something. In my comments on Tyler's post, I poked at him for apparently labeling his own laws with his own name, although I realize that he may not have done so. He apparently has been handing them out for some time in classes, particularly macro classes.

I have a couple of things named for me, an equation and a form of complexity (with Day). My late mathematician father has many more things named for him, three theorems (two of those joint with others, one with Godel and one with Church), a sentence and a trick (the trick is to use the sentence to prove the Godel-Rosser theorem), a matrix, a sieve, a rule, and some other things, with neither of us putting our own names on any of these things.

However, for better or worse, neither of us has managed to get a "law" named for ourselves. Oh well, :-).

Don Levit said...

Time value of money means interest must always be Positive
Don Levit said...

But Don, we now have not only real but even negative nominal interest rates on government bonds in many nations, even on 10-year ones now in Germany and Switzerland. What does that do to the "positive time value of money"?b

Don Levit said...

It totally turns it upside down
Why would any one buy such a bond?
If rates go up the principal goes down
The only way they can win is if rates go even more negative
Why would someone buy into such a lose-lose proposition?
Don Levit

Sandwichman said...

What about the law that economists must ignore the discussion in philosophy of science of "ceteris paribus" laws?

Sandwichman said...

The Sandwichman would sooner have a sandwich named after him than a law. said...

Maybe they are nuts, but plenty of people are buying those bonds. If they were not doing so, the rates would not doing so, those rates would not be holding, and they are.

I grant that testing the law of diminishing returns in principle an element of ceteris paribus as one thinks of increasing one input while holding others constant, or at least more or less. But one can in effect do this without the c.p. assumption by simply comparing different production sites with different ratios of the inputs.
A theory put forward to explain why it is a universal law was proposed back in 1919 by Julius Davidson, who tied it to the law of entropy, although I am not fully convinced by that.

And, S-man, you are named for a sandwich, heck, the generic sandwich. So, that means that all sandwiches are in principal named for you, :-).

Sandwichman said...

Law is a very mixed-up metaphor. The origin is political and then it migrates to theology then science and ultimately to pseudo-science (or economics, if you will).

In the beginning, the law was what the Big Guy said it was. "Let there be light." And there was light. Economic "laws" operate at one or two removes from the political laws (& customs & habits) that make them possible. Supply and demand presume exchange, exchange presumes property, property presumes a regime of enforcement, etc.

The fundamentalists who presume all this is neatly grounded in some self-evident "natural law" have evidently never read John Locke. (who, incidentally, thought that an opossum was the offspring of mating between a cat and a rat). Or worse, they have read the classic comics version of John Locke and assumed that they knew all they needed to know.

Imagine an economics based on Molière rather than that motley crue of Locke, Stock, Barrel, Petty, Bourgeois, Adam, Eve, Smith, Ricky Ricardo and Alfred Martial. Instead of sanctifying bogus laws and fleeing chimeric fallacies, a true comedy economics would HONOR folly as a hidden intention. said...

Folly? This way is madness! If you disobey the Law of Diminishing Returns, S-Man, surely the Economics Police will demand your supply of sandwiches!!!

Don Coffin said...

About negative (real or nominal) interest rates...there's starting to be a theoretical literature about this. To the best of my recollection, interest rates can be negative if/when the costs of holding "money" are positive.

While for most of us most of the time, the marginal costs of holding money are zero (or very close), it can be the case that holding for those holding large sums of money, the marginal (and average) cost of holding money is positive. This will clearly be true if financial intermediaries charge fess or interest on idle balances (which, apparently, is happening increasingly for large account balances). Even for currency, the holding costs for large sums of money (security, etc.) are positive.

So it's entirely plausible that, in strange times, financial assets "paying" negative rates of return will be voluntarily purchased. said...


The issue is costs of holding cash, and indeed for large sums, those are positive. For a long time monetary theorists never actually thought about that and thus blindly asserted that interest rates could never go below zero, even though we have been seeing this happen off and on since the mid-1990s, first in Japan. Economists more or less ignored it because until recently most such episodes tended to be quite short and also only barely below zero.

Don Levit said...

Why are they positive for large sums of cash and negative for small sums?
Don Levit

Don Coffin said...

Don Levit--Suppose you wish to hold )on average) $100 in cash. You keep it in your wallet. Suppose, on the other hand, you wish to hold $1,000,000 in cash. You need to have a safe and presumably other security devices to reduce the risk of theft. You have to be (more) concerned about accidental loss (e.g., a fire), and so may wish to insure your cash holdings. (Historical note: One reason businesses began to move to paying wages by check instead of in cash was to reduce the risk of payroll robberies.) It's not cost-efficient to buy a safe to store your $100 overnight; it is to store your $1,000,000. You probably can't insure your $100 against theft or other loss (fire); you probably can insure your $1,000,000.

Don Coffin said...

Incidentally, it occurred to me late last night that sellers of gift cards can easily deal with negative interest rates. (1) Expiration dates--spend it quickly or lose it. (2) Transaction fees (which are, effectively, negative interest). Both of these are used, and have been used, by sellers of gift cards even in a positive interest rate environment.

Don Levit said...

Don Coffin
Why would someone store cash if he can get a positive interest rate on a secure bond?
Or if he needs liquidity a money market fund?
To the extent one wishes to hold cash in large amounts your example makes sense
By why would someone so successful to accumulate such a large sum of cash keep all of it in that form?
Don Levit said...

why are you asking this? You have been the one saying that there cannot be negative nominal interest rates, and the longstanding argument why one cannot is that one can hold cash and pay zero. But, as Don Coffin points out, holding large amounts of cash does cost money, safes, insurance, etc.
Indeed, not many people do store large quantities of cash, unless they are a black marketeer or just paranoid or stupid in a postive interest rate world. Most people carry smallish sumes of cash for immediate liquidity purposes and that is it. Have you gotten yourself turned around and completely confused here?
BTW, my mother was the classic little old lady whose family suffered economically during the Great Depression (her dad was laid off), and she was raised to literatlly pinch pennies, even though in the end she was reasonably well off by the time she died in 2010 at age 97. Anyway, when we went through her house afterwards, we found all sorts of small caches of cash hidden in various locations, including coins. We retrieved a total of 23 pennies from the stash. She pinched those pennies to the end.

Thornton Hall said...

Ugh. Forget Econ. Forget philosophy. Just try to get gravity correct. John Quiggin has made the exact same mistake. It's really annoying. Gravity is not "things are attracted according to their mass and inverse to their distance, all things being equal." Gravity is part of physics and always operates in exactly the same way no matter what. There's no need to throw in a ceritus paribus claim because we know and understand all the other things. We don't assume what the friction of air might be. WE MEASURE WHAT THE FRICTION OF AIR ACTUALLY IS.

This is a classic misunderstanding of science that pervades economics and b/c it is shared by orthodox and heterodox alike it causes the heterodox critique to always miss the mark and therefore the orthodox go on in their madness.

media said...

most reasonable people consider god (not godel) and church to be basic. i personally prefer (e--maybe emile ) post and kleene (hierarchy of degrees, novikov priority problems etc). one can consider 'oracles' of delphi and turing. there are 3 basic laws to me of anything that can be written down---a) 0 b) 1 c) sqrt (-1). thats all
you need. (u may half to prove u r not a robot---so far i dont have that proof).