Is there a place for experimental economics?

Economists have always been envious of the practitioners of the natural and exact sciences. They have thought that introducing the methods of natural sciences in economics could lead to a major break-through in our understanding. In 2002 the Nobel prize in economics was awarded to Vernon Smith for the building of a laboratory where various economic theories could be verified.  But while a laboratory is a valid way of doing things in the natural sciences, it is not so in economics. If anything, the introduction of a laboratory in economics only stifles our understanding.

Why is that so? A laboratory is a must in physics, for there a scientist can isolate various factors relating to the object of inquiry. Although the scientist can isolate various factors he doesn’t, however, know the laws that govern these factors. All that he can do is hypothesize regarding the “true law” that governs the behaviour of the various particles identified. He can never be certain however, regarding the “true” laws of nature. On this Murray Rothbard wrote,

The laws may only be hypothecated. Their validity can only be determined by logically deducing consequents from them, which can be verified by appeal to the laboratory facts. Even if the laws explain the facts, however, and their inferences are consistent with them, the laws of physics can never be absolutely established. For some other law may prove more elegant or capable of explaining a wider range of facts. In physics, therefore, postulated explanations have to be hypothecated in such a way that they or their consequents can be empirically tested. Even then, the laws are only tentatively rather than absolutely valid.[1]

Contrary to the natural sciences, the factors pertaining to human action cannot be isolated and broken into their simple elements. The realities of human action are complex historical factors that have emerged on account of many causal variables. However, contrary to the natural sciences, we know the meaning of human action.

One can observe that people are engaged in a variety of activities. They are performing manual work, they drive cars, and they walk on the street and dine in restaurants. The distinguishing characteristic of these activities is that they are all purposeful.

Manual work may be a means for some people to earn money, which in turn enables them to achieve various goals like buying food or clothing. Dining in a restaurant can be a means to establishing business relationships. Driving a car may be a means for reaching a particular place. In other words, people operate within a framework of ends and means; they use various means to secure ends.

In short, we know that actions are conscious and purposeful. Also, note that this knowledge that human action is conscious and purposeful is certain and not tentative. Any one who tries to object to this in fact contradicts himself for he is engaged in a purposeful and conscious action to argue that human actions are not conscious and purposeful.

Various conclusions that are derived from this knowledge of purposeful action are valid as well, implying that there is no need to subject them to various laboratory tests as is done in the natural sciences. For something that is certain knowledge, there is no requirement for any empirical testing.

Vernon Smith, however, rejects the view that human actions are conscious and purposeful. Thus Smith writes,

He (Mises) wants to claim that human action is consciously purposeful. But this is not a necessary condition for his system. Markets are out there doing their thing whether or not the mainspring of human action involves self-aware deliberative choice. He vastly understates the operation of unconscious mental processes. Most of what we know we do not remember learning, nor is the learning process accessible to our conscious experience—the mind………

Even important decision problems we face are processed by the brain below conscious accessibility.[2]

Moreover, argues Smith,

The workings of the economy are not the product, nor can they be the product, of conscious reason.[3]

Not only does Smith downplay the importance of the use of reason in decision making but he argues that good decision making is in response to emotions. He writes,

People like to believe that good decision making is a consequence of the use of reason, and that any influence that the emotions might have is antithetical to good decisions. What is not appreciated by Mises and others who similarly rely on the primacy of reason in the theory of choice is the constructive role that the emotions play in human action.[4]

Obviously once the importance of reason, consciousness and purposeful action is dismissed, what is then left is the possibility of mimicking the natural sciences and treating human beings like objects. According to this way of thinking human action is not navigated by reason but by outside factors that act upon men. By means of a given stimulus one can then observe various human reactions and draw all sorts of conclusions regarding the world of economics. According to Mises however,

It is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.[5]

By rejecting the importance of the human mind, Vernon Smith treats man as another animal. In fact, some of the experimental economists are indeed conducting various experiments on pigeons and rats in order to verify various propositions of mainstream economics.[6]

An important foundation for experimental economics is the 1944  publication of von Neumann and Morgenstern’s  “Theory of Games and Economic Behavior” ( Princeton, 1944, p. 86). Accordingly, it is held that human choices can be ascertained from game-like experiments. The problem with all this is that a game is not the real world. According to Mises,

The immediate aim in playing a game is to defeat the partner according to the rules of the game. This is a peculiar and special case of acting. Most actions do not aim at anybody’s defeat or loss. They aim at an improvement in conditions. It can happen that this improvement is attained at some other men’s expense. But this is certainly not always the case. It is, to put it mildly, certainly not the case within the regular operation of a social system based on the division of labor.

There is not the slightest analogy between playing games and the conduct of business within a market society. The card player wins money by outsmarting his antagonist. The businessman makes money by supplying customers with goods they want to acquire. There may exist an analogy between the strategy of a card player and that of a bluffer. There is no need to investigate this problem. He who interprets the conduct of business as trickery is on the wrong path.[7]

[1] Murray N. Rothbard, “Towards a Reconstruction of Utility and Welfare Economics”, On Freedom and Free Enterprise: The Economics of Free Enterprise, May Sennholz, ed. (Princeton, N.J.: D.Van Nostrand, 1956), p3.

[2] Vernon L. Smith “ Reflections on Human Action after 50 years.” Cato Journal, 19, No.2 (Fall 1999), p200.

[3] Ibid.,p201

[4] Ibid.,p203.

[5] Ludwig Von MisesThe Ultimate Foundation of Economic Science. Chapter 2 Mises Institute website.

[6] Frances K. McSweeney and Samantha Swindell, “Behavioral Economics and Within-Session Changes in Responding,” Journal of the Experimental Analysis of Behavior 72, No.3 (November,1999): 355-71

[7] Ludwig Von Mises, Human Action, p116.

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4 replies on “Is there a place for experimental economics?”
  1. says: mrg

    “Also, note that this knowledge that human action is conscious and purposeful is certain and not tentative. Any one who tries to object to this in fact contradicts himself for he is engaged in a purposeful and conscious action to argue that human actions are not conscious and purposeful.”

    Only the person who asserts that no human actions are purposeful contradicts himself.

    There is no contradiction in asserting that some human actions are not purposeful.

    In reality, there is surely a spectrum of rational/irrational & conscious/unconscious motivation for our actions.

    I don’t understand why some Austrians take such an extreme view on these matters.

    1. says: Abhinandan Mallick

      I think it’s important to bear in mind Dr. Shostak is applying the notion of rationality in the sense that Mises defined it, which bears some differences and is internally self consistent in comparison to the conventional conception (which it equates with perceived effectiveness of an action by an outside observer) , though it makes the term rational as an adjective to describe action pleonastic.

      This is whereas in a Misesian sense, even those affected by primitive, instinctive urges, or intoxicated under the influence of substances, as long as they still have the ability to refrain from blindly following their impulses are still acting, though their valuations may have been disarranged from what they otherwise would have been.

      The same goes for the purposeful behaviour of neurotics whose behaviour we may disparage as “irrational” in the conventional sense because we who consider ourselves sane deem their ends strange and the means they wish to achieve them contrary to purpose. Mises in fact praised Freud and his school for successfully demonstrating the purposeful nature of even the aberrant behaviour of these individuals.

  2. says: Ivan Petrovic

    Brilliant and lucid article. I must read more Frank Shostak and Mises of course. Rational men indeed.

  3. says: Paul Johnson

    Quote 3 is a restatement/parallel of Adam Smith:

    “This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.”

    Notice: “propensity.” The idea that ALL action is always both conscious AND purposeful? Hardly. I drove to work along my usual route today and it was purposeful but hardly all conscious. Do I begin to stop at my usual stop sign because my active conscious mind deliberately calculated all the options and told me to? When I and another driver are merging on the highway is there a precise rule telling us who goes first? Or is there some “sympathy” that causes us to coordinate without either party being able to explain exactly how it worked? God forbid that every time we step into an automobile it all depends on conscious AND purposeful calculation every second we are on the road! Do entrepreneurs create businesses because they are motivated solely by a rational calculation of the costs and benefits to themselves of doing so? Or are there creative impulses at work which they themselves may not be fully aware of?

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