Chapter 41: Economics Is Not Physics
Updated: 4/13/20
For it is written, “As I live,” says the Lord, “to me every knee will bend, and every tongue will give praise to God.” So then, each one of us will give an account of himself to God (Romans 14:11–12).For we must all appear before the judgment seat of Christ, so that each one may receive what is due for the things done in the body, whether for good or for bad (II Corinthians 5:10).
The New Testament’s doctrine of the final judgment rests judicially and ethically on the concept of personal responsibility. There will be personal negative sanctions: hell (Luke 16) and the post-resurrection eternal lake of fire (Revelation 20:14–15). There will be personal positive sanctions: heaven (Luke 16) and the post-resurrection eternal new heaven and new earth (Revelation 21, 22). The eternal stakes are far higher than covenant-breakers believe. This is why Jesus warned His listeners: “For what does it profit a person if he gains the whole world but forfeits his life? What can a person give in exchange for his life? For the Son of Man will come in the glory of his Father with his angels. Then he will reward every person according to what he has done” (Matthew 16:26–27). [North, Matthew, ch. 35]
The doctrine of the final judgment is the biblical context of all decision-making. Nothing that someone thinks or does is outside of his personal zone of responsibility. There are eternal consequences for every thought, word, and deed. These consequences are personal. This element of comprehensive personalism is a reflection of the cosmic personalism that is taught in the first chapter of Genesis: God’s creation of the universe. There is nothing that is purely impersonal. Everything is judged by God. Everything is subject to the Trinitarian imputation of meaning and value, including economic value. God’s subjective imputation is definitive and therefore judicially objective. Men’s subjective imputations are derivative. They will result in objective sanctions: positive and negative. This is the context of the doctrine of responsibility. Jesus warned:
The Lord said, “Who then is the faithful and wise manager whom his lord will set over his other servants to give them their portion of food at the right time? Blessed is that servant whom his lord finds doing that when he comes. Truly I say to you that he will set him over all his property. But if that servant says in his heart, ‘My lord delays his return,’ and begins to beat the male and female servants, and to eat and drink, and to become drunk, the lord of that servant will come in a day when he does not expect, and in an hour that he does not know, and will cut him in pieces and appoint a place for him with the unfaithful. That servant, having known his lord's will, and not having prepared or done according to his will, will be beaten with many blows. But the one who did not know and did what deserved a beating, he will be beaten with a few blows. But everyone who has been given much, from them much will be required, and the one who has been entrusted with much, even more will be asked” (Luke 12:42–48).
This element of personal responsibility governs every area of life. It governs economic decision-making. It therefore must govern economic theory. Any attempt by an economic theorist to reduce this element of personal responsibility in all decision-making must be regarded by Christian economists as a fundamental conceptual error: an unstated attempt to substitute impersonalism for personalism. This may not be self-conscious, but the implications of any such attempt are inherently anti-Christian. It is an attempt to separate economic theory from cosmic accountability.
The Bible makes it clear that personal accountability is central to the concept of human action. Any discussion of human action apart from a discussion of man’s accountability before God and other men is an attempt to establish the autonomy of man and an impersonal universe. This is why it is crucial to base economic theory on human action, which means personal action. This is necessary in order to affirm the New Testament doctrine of personal accountability. Men are responsible before God and other men for their words and deeds. They are responsible to God for their thoughts.
A major advantage of Austrian School of economics is that it rests self-consciously on the doctrine of individual human action. Ludwig von Mises titled his magnum opus Human Action. He insisted on making a fundamental distinction between the methodology of economics, which is grounded in human action, and the methodology of physics. In his book, The Ultimate Foundation of Economic Science (1962), he made this crucial point. “Valuing is man's emotional reaction to the various states of his environment, both that of the external world and that of the physiological conditions of his own body. Man distinguishes between more and less desirable states, as the optimists may express it, or between greater and lesser evils, as the pessimists are prepared to say. He acts when he believes that action can result in substituting a more desirable state for a less desirable.” Men’s valuation is the subject matter of economic theory. This is not true of the natural sciences. “The failure of the attempts to apply the methods and the epistemological principles of the natural sciences to the problems of human action is caused by the fact that these sciences have no tool to deal with valuing. In the sphere of the phenomena they study there is no room for any purposive behavior" (Chap. 2, Sect. 3). Human action is purposeful. It is therefore personal. In his book, Epistemological Problems in Economics (1960), he wrote this.
Human action invariably aims at the attainment of ends chosen. Acting man is intent upon diverting the course of affairs by purposeful conduct from the lines it would take if he were not to interfere. He wants to substitute a state of affairs that suits him better for one that suits him less. He chooses ends and means. These choices are directed by ideas. The objects of the natural sciences react to stimuli according to regular patterns. No such regularity, as far as man can see, determines the reaction of man to various stimuli. Ideas are frequently, but not always, the reaction of an individual to a stimulation provided by his natural environment. But even such reactions are not uniform. Different individuals, and the same individual at various periods of his life, react to the same stimulus in a different way. (Preface to the English Language Edition)
Mises placed individual decision-making at the center of his economic analysis. This is why the Austrian School of economics is closer to Christian economics than all rival humanistic schools of thought are.
Modern economists rely heavily on graphs and higher mathematics to express their thoughts. There are exceptions to this, but very few. Mises was one of them. Another was the author of the most widely quoted academic economics article, R. H. Coase. His 1960 article, “The Problem of Social Cost,” contained no graphs and no equations. It helped win him the Nobel Prize in 1991. But he has not been imitated by members of the economics guild.
It can be argued that the widespread use of graphs and higher mathematics is mainly a matter of academic positioning and the jargon required to get published. But the issue is more fundamental than the issue of academic convention. There are fundamental conceptual issues involved. These are matters of truth and falsehood, both in theory and practice.
1. Illegitimate Graphs
I go beyond what Mises wrote of the use of graphs in economic theory. In Human Action, he wrote that graphs may be used to illustrate supply and demand. “Always, what we know is only market prices—that is, not the curves but only a point which we interpret as the intersection of two hypothetical curves. The drawing of such curves may prove expedient in visualizing the problems for undergraduates” (XVI:2). This assessment is incorrect. Curves do not prove expedient. They always mislead, just as equations always mislead. Mises admitted this elsewhere. He criticized mathematical economists. “They formulate equations and draw curves which are supposed to describe reality. In fact they describe only a hypothetical and unrealizable state of affairs, in no way similar to the catallactic [market process] problems in question. They substitute algebraic symbols for the determinate terms of money as used in economic calculation and believe that this procedure renders their reasoning more scientific. They strongly impress the gullible layman. In fact they only confuse and muddle things which are satisfactorily dealt with in textbooks of commercial arithmetic and accountancy” (XVI:5). This intellectual muddling is universal in modern economic theory. It is the result of economists’ implicit rejection of the discrete nature of prices and pricing.
2. Connecting the Dots
Prices are expressed as dots on a graph. They intellectually represent discrete prices. But the dots on an economist’s graph are not visible. This is because economists connect the dots. They turn a series of discrete dots into contiguous lines. A line hides the dots. Lines are inherently deceptive in economic theory. They imply a continuity that cannot exist in the real world. Human action is about specific decisions. Decisions lead to objective actions: from here to there, from this to that. There are always costs associated with a decision. Jesus warned us to estimate the costs of our future actions (Luke 14:28–32). [North, Luke, ch. 35] We should think twice about such actions, He said. A graph offers no indication that anyone thought twice, or even once.
A dot represents a price. A price is the objective outcome of an exchange. The exchange was in money. The best information available to two parties was focused on that decision. If the price is the price of a specific quantity of a raw material or a certificate of ownership, it is the outcome of the competitive bids from people with highly specialized information about the asset. Economists say that a price is the outcome of buyers’ expectations. The economic effects of those expectations regarding that future set of circumstances are already present in the price. The price reflects a discount of the best information about the expected factors. So, economists say, the next price in this series will be random when compared with the immediate price. We do not know if it will be a little higher or lower. But we do see stability in the graph of prices over time. Prices rise and fall, but they usually come back to the statistical mean. This phenomenon is called regression to the mean. “What goes up will come down.”
When the dots on a graph represent hypothetical purchases of goods at hypothetical prices in a single instant of time, they become confusing to most people. They do not convey much information. Economists love to teach with these timeless graphs. They do not like dots, so they “smooth” the dots into lines. At that point, economists depart from reality altogether. A graph’s only function in teaching economic theory is to make a verbal explanation clearer. If a graph is not perceived almost intuitively, it defeats its purpose. I have never seen an economist’s graph that is intuitive.
3. Responsibility and Decisions
Murray Rothbard was a disciple of Mises. In his 1962 exposition of Mises’ economic theory, Man, Economy, and State, Rothbard warned against the importation of the categories of physics into economic theory. Economic theory must be based on personal decision-making. This means that individuals must perceive differences between the options available to them. They cannot perceive infinitesimal differences. He spoke of “the assumption of continuity, or the infinitely small step.”
Most writers on economics consider this assumption a harmless, but potentially very useful, fiction, and point to its great success in the field of physics. They overlook the enormous differences between the world of physics and the world of human action. The problem is not simply one of acquiring the microscopic measuring tools that physics has developed. The crucial difference is that physics deals with inanimate objects that move but do not act. The movements of these objects can be investigated as being governed by precise, quantitatively determinate laws, well expressed in terms of mathematical functions. Since these laws precisely describe definite paths of movement, there is no harm at all in introducing simplified assumptions of continuity and infinitely small steps.Human beings, however, do not move in such fashion, but act purposefully, applying means to the attainment of ends. Investigating causes of human action, then, is radically different from investigating the laws of motion of physical objects. In particular, human beings act on the basis of things that are relevant to their action. The human being cannot see the infinitely small step; it therefore has no meaning to him and no relevance to his action. Thus, if one ounce of a good is the smallest unit that human beings will bother distinguishing, then the ounce is the basic unit, and we cannot simply assume infinite continuity in terms of small fractions of an ounce (4:9).
Modern economic theory and exposition are both based on the concept of infinitesimal differences. This is the basis of the adoption of the calculus as a tool for discussing economic theory. Rothbard wrote this about mainstream economists. “They assume that it is possible to treat human action in terms of ‘infinitely small’ differences, and therefore to apply the mathematically elegant concepts of the calculus, etc., to economic problems. Such a treatment is fallacious and misleading, however, since human action must treat all matters only in terms of discrete steps. If, for example, the utility of X is so little smaller than the utility of Y that it can be regarded as identical or negligibly different, then human action will treat them as such, i.e., as the same good. Because it is conceptually impossible to measure utility, even the drawing of continuous utility curves is pernicious.” But then he made a fundamental conceptual mistake. He refused to dismiss the use of economic graphs. “In the supply and demand schedules, it is not harmful to draw continuous curves for the sake of clarity, but the mathematical concepts of continuity and the calculus are not applicable” (Chap. 2, note 27). If he was correct about the calculus—and he was—then the use of graphs in conveying economic theory is illegitimate. Why? Because graphs use visual representations of infinitesimal changes: lines, not dots (discrete prices/decisions).
In footnote #1 of Chapter 5, he wrote: “Another difference is one we have already discussed: that mathematics, particularly the calculus, rests in large part on assumptions of infinitely small steps. Such assumptions may be perfectly legitimate in a field where behavior of unmotivated matter is under study. But human action disregards infinitely small steps precisely because they are infinitely small and therefore have no relevance to human beings. Hence, the action under study in economics must always occur in finite, discrete steps. It is therefore incorrect to say that such an assumption may just as well be made in the study of human action as in the study of physical particles. In human action, we may describe such assumptions as being not simply unrealistic, but antirealistic.” Throughout his career, he rejected the use of the calculus. He wrote this in graduate school, probably in 1952: “A Note On Mathematical Economics.”
The use of the calculus, for example, that has been endemic in mathematical economics assumes infinitely small steps. Infinitely small steps may be fine in physics where particles travel along a certain path; but they are completely inappropriate in a science of human action, where individuals only consider matter precisely when it becomes large enough to be visible and important. Human action takes place in discrete steps, not in infinitely small ones. . . .The best readers’ guide to the jungle of mathematical economics is to ignore the fancy welter of equations and look for the assumptions underneath. Invariably they are few in number, simple, and wrong. They are wrong precisely because mathematical economists are positivists, who do not know that economics rests on true axioms.
The mathematical economists are therefore framing assumptions which are admittedly false or partly false, but which they hope can serve as useful approximations, as they would in physics. The important thing is not to be intimidated by the mathematical trappings.
Yet, a decade later, he was intimidated. He was intimidated by the graphs of the economics guild. Graphs visually represent the calculus. This is true in physics. It is also true in economic theory.
4. Rothbard’s Use of Graphs
Chapter 2 of his book uses graphs in which the price points are discrete. Yet from Figure 18 onward, Rothbard adopted the standard teaching methodology of using graphs in which the lines are contiguous. This means that he implicitly denied the foundation of his own epistemology. Lines, being contiguous, are made up of hypothetical infinitesimal points. Infinitesimal points are not aspects of individual human action. Therefore, it is harmful to draw continuous curves. They distort human action and therefore Austrian School economic theory. Nevertheless, Rothbard imported the methodology of physics, as seen in graphs.
A graph that uses a line is easy to draw. It is a great temptation to use such graph. Conceptually, lines are incorrect. In actual use, they may appear harmless. But what we find in practice is this: the economist who uses the graph devotes precious space on a page to explaining the graph rather than explaining the economic concept behind the graph. Here is an example from Man, Economy, and State, Chapter 5. Rothbard offered Figure 44.
Here is his explanation of the graph. It is not lucid. It adds nothing to our understanding of economic decision-making. It focuses on the graph, not human action.
A typical aggregate market diagram may be seen in Figure 44. Aggregating the supply and demand schedules on the time market for all individuals in the market, we obtain curves such as SS and DD.DD is the demand curve for present goods in terms of the supply of future goods; it slopes rightward as the rate of interest falls. SS is the supply curve of present goods in terms of the demand for future goods; it slopes rightward as the rate of interest increases. The intersection of the two curves determines the equilibrium rate of interest—the rate of interest as it would tend to be in the evenly rotating economy. This pure rate of interest, then, is determined solely by the time preferences of the individuals in the society, and by no other factor.
The intersection of the two curves determines an equilibrium rate of interest, BA, and an equilibrium amount saved, 0B. 0B is the total amount of money that will be saved and invested in future money. At a higher interest rate than BA, present goods supplied would exceed future goods supplied in exchange, and the excess savings would compete with one another until the price of present goods in terms of future goods would decline toward equilibrium. If the rate of interest were below BA, the demand for present goods by suppliers of future goods would exceed the supply of savings, and the competition of this demand would push interest rates up toward equilibrium. If the rate of interest were below BA, the demand for present goods by suppliers of future goods would exceed the supply of savings, and the competition of this demand would push interest rates up toward equilibrium.
Rothbard’s use of graphs is one reason why Human Action is easier to read and remember than Man, Economy, and State. Methodologically, Mises remained faithful to his epistemology. With one major exception—his use of the concept he called the evenly rotating economy (equilibrium with another name)—he resisted the importation of physics into economic theory. Rothbard surrendered on the issue of graphs. His magnum opus suffered as a result. He was a gifted writer. Sadly, he abandoned his mastery of the written word every time he used a graph. He used his verbal skills to explain a superfluous and ultimately conceptually misleading methodological import from mainstream economics. This was a waste of an otherwise productive resource.
Rothbard cited Keynes in a 1977 paper, “Praxeology: The Methodology of Austrian Economics.” Keynes earned his bachelor’s degree in mathematics. He did not earn a degree in economics. He was skeptical of the use of mathematics in economics. This is from The General Theory (pp. 297–98).
It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed: whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish. Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.Rothbard added this: “Moreover, even if verbal economics could be successfully translated into mathematical symbols and then retranslated into English so as to explain the conclusions, the process makes no sense and violates the great scientific principle of Occam's Razor: avoiding unnecessary multiplication of entities.” This comment applies to every graph in Man, Economy, and State.
As students advance in the career path of academic economics, the complexity of the graphs multiplies. Worse; economists cease devoting space to explaining the cause-and-effect nature of the graphs. They assume other economists understand the visual representations. This becomes a condensed form of jargon. By “jargon,” I mean language that is understood only by members of an academic guild. The jargon of a graph is not verbal. It is visual. It does not convey information in a straightforward way. It is like trying to translate a concept from one language to another. But a graph is not linguistic. It is a form of visual expression imported from physics into the realm of economics.
Because purposes are specific and prices are specific, there is no legitimate use of graphs showing curves. A curve is a line. Euclid’s definition of a line is a “breadthless length.” It therefore is a mental tool, not a real-world entity. In contrast, prices are objective. They are the product of competitive market bids or fiat declarations by bureaucrats. They are specific. They exist in time. So, a market price is unique. It is not part of a curve. Yet modern economics uses lines to describe economic processes. This is misleading. This same error underlies the application of the calculus to human action. This conceptual error is almost universal. Economists use graphs, equations, and the calculus to illustrate economic processes. Economists then use these inappropriate and misleading tools to develop economic theory. These tools convey the illusion of scientific precision.
The most respected American Austrian School economist in the academic community is Israel Kirzner. He was one of four men who received a Ph.D. under Mises, along with Hans Sennholz, George Reisman, and Louis Spadaro. With the glaring exception of one book, Kirzner did not use graphs in his long and productive writing career. The exception was his upper division textbook, Market Theory and the Price System (1963). He targeted mainstream college classrooms. It is by far his least coherent book precisely because it is his most mainstream book. He let it go out of print. (It is available on the Mises Institute site: http://bit.ly/KirznerTextbook. Try to read pages 275–81. Note: I persuaded the Mises Institute to republish it. I knew that its copyright had lapsed. The Institute did not need Kirzner’s permission to reprint it.)
5. Unstated Assumptions Behind Every Economics Graph
A graph has built-in assumptions that economists never bother to explain to readers or students. A crucial assumption is this: a graph is timeless. It expresses people’s responses to changes in price in an instant of time—“other things remaining constant”—despite the fact that in the real world, people’s responses to price change take time.
Second, a graph rests on an implicit assumption that a change in price does not raise questions in the minds of consumers regarding a possible change in quality. The economist who uses a graph makes the assumption, which he never reveals to students, that people do not make guesses about changes in quality when they see a significant change in a price for the same good or service. The economist who uses a graph implicitly assumes a constancy in human decision-making that does not exist in the real world.
A demand curve assumes the following about buyers: (1) their tastes do not change; (2) they think that the same item is being offered for sale at various prices (no counterfeit goods); (3) they think that each price is universal—no better price elsewhere. The graph therefore assumes two things: (1) a representation of timelessness is valid for describing events in time; (2) we can change only one thing. For a demand curve, the continuous line slopes down and to the right. The buyer is assumed to be ignorant of past pricing—higher on the curve—so as not to forecast a lower price in the future, and therefore refuses to buy now. The demand curve, like the graph itself, must be timeless.
A curve—demand or supply—assumes the following scenario: (1) a person or group of people will universally respond in a totally predictable way to separate price offers that (2) are made at the same time, (3) yet each offer must be considered by the price-taker—he is implicitly assumed by the graph to be a price-taker—in complete isolation from all the other price offers, (4) which are infinite in number and infinitesimal in size and can therefore legitimately be represented by a curve. In short, the supply and demand curves are Neverland incarnate.
There is a tremendous benefit associated with refusing to use graphs and the calculus. This benefit is the ability to communicate economic theory to people outside the guild of academic economics. Academic economists rarely possess this skill. They fill their academic journals with unreadable mathematics. Their peers do not actually read these articles. Editors of economics journals sometimes have an arrangement with a mathematician to review the articles to make sure that the authors have not made mathematical mistakes. The editors are not sufficiently skilled as mathematicians to make this judgment. This point was made by liberal economist John Kenneth Galbraith in 1971 in his book, Economics, Peace, and Laughter. Galbraith did not use mathematics and graphs, and he was a superb master of rhetoric. He wrote for the general public. He was a best-selling author. It is a great advantage for any economist to master the skills of verbal communication without any reliance on graphs and mathematics. He sets himself apart from his peers, who have spent their careers learning how to write in jargon, both verbal and visual. This was what R. H. Coase did. It worked for him. He won the Nobel Prize.
The calculus also rests on the concept of infinitesimal changes. It works for physics. It does not work for coherent economic theory. It is inconsistent with the concept of personal responsibility for specific decisions to buy and sell. This defense will not work on judgment day: “The calculus made me do it!”
The use of equations in economics is based on an assumption, namely, that human action is predictable in such a way that mathematics can be used to understand economic decision-making. It assumes that there are mathematically predictable patterns of human action. This is what Mises denied. He wrote in Human Action: “Here we are faced with one of the main differences between physics and chemistry on the one hand and the sciences of human action on the other. In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics” (II:8).
In 1938, Mises wrote a paper that was translated into French, “The Equations of Mathematical Economics and the Problem of Economic Calculation in a Socialist State.” He pointed to the impossibility of the use of equations.
The equations which describe the economic equilibrium give expression to this method of approach in mathematical language. They say no more and no less. They say: If an equilibrium situation is to be reached, it can only be a position such that it will no longer be possible to improve the satisfaction of wants: by making changes. It is particularly characteristic of these equations in economics that they are necessarily inapplicable to all practical purposes and computations. The equations of mechanics may help us to foresee future events, because the physicist is able to find out approximately the empirically constant relationships between physical quantities. If we insert these constants in the equations we can work with them. We cannot with exactitude of course but nevertheless with sufficient accuracy for practical purposes solve given problems. With the equations of economics it is a different matter. For within the sphere of human trading activities we do not know any constant quantitative relationships. All quantities that we are able to ascertain have therefore no general significance but only an historical one.
In his 1976 essay, “Praxeology: The Methodology of Austrian Economics,” Rothbard wrote:
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.
This is by far the most pervasive concept derived from physics that has been imported into economic theory. It is also the most perverse. I have gone into detail on why the entire concept is illegitimate in all aspects of human action. I refer you to Chapter 54 of the Teacher’s Edition in this series.
Equilibrium assumes that humans are omniscient. The use of this concept implicitly assumes that we can better understand the world by means of the assumption that people in theory can be God. Equilibrium explains economic causation in terms of an assumption that cannot apply to human action. It is offered as a way of understanding human action, yet by definition, it cannot possibly apply to the realm of human action. Mises and Rothbard usually avoided the use of this term, but they substituted a phrase that is straight out of physics: the evenly rotating economy. They both used this acronym: ERE. They both admitted that this cannot exist in history. Yet they both invoked equilibrium or its equivalent, which cannot possibly apply to human action, in their attempt to explain human action. Anyone can go to the Mises Institute’s website and access PDF copies of Human Action and Man, Economy, and State. He can search for the phrase “evenly rotating economy.” He can also search for the acronym ERE. In the search bar, he must use [space] ERE [space] in order to avoid hundreds of hits for there.
Mises did use the term in a 1938 article, “The Equations of Mathematical Economics and the Problem of Economic Calculation in a Socialist State.” He wrote: “The state of equilibrium which our equations describe is a purely imaginary state of equilibrium. It is merely a hypothetical, though indispensable, tool of analysis which has no counterpart in reality.” He called the concept indispensable. It is not.
No one should ever use either the concept of equilibrium or the evenly rotating economy. Whenever you see either concept invoked, you must search for a different explanation of human action. There is nothing correct about this concept. It is completely fallacious. It always leads to misunderstanding. It is a conceptual liability. It begins with the omniscience of man as the standard of theoretical evaluation.
In every college level textbook in economics, you will find these words: elastic and inelastic. They are applied to prices. What you will not find in any college level textbook in economics are these two words, which are the meaning of these two phrases: price-sensitive and price-insensitive. I have never seen any economist define the words elastic and inelastic by means of these two phrases.
What we have here is a classic importation of a category of physics into economics. This importation does not convey any clarity. On the contrary, it confuses students. Yet the two words have been used in economics textbooks and articles for so long that economists do not seem to understand that the students do not understand exactly what these words mean. The students are supposed to intuit what these words mean. If students were told in straightforward English that an elastic price is a price to which consumers are sensitive—to which they will respond rapidly—it would be easier for them to understand the word. But there is no need for them to understand the word. The word conveys no knowledge about human action. It is a word related to physics, not human action. Here is the official definition of the word: the percentage change in quantity divided by the percentage change in price. Economists talk of elasticity of supply and elasticity of demand. Even worse, they assign numbers to this inappropriate word. They talk of an “elasticity of one.” This is an elasticity in which the seller’s lowering of the price does not lead to an increase in consumer demand that is sufficient to increase revenues. The seller breaks even. Why don’t economists call it a break-even price change?
Here is an extract from Wikipedia: “Elasticity (economics.)”
Elasticity can be quantified as the ratio of the percentage change in one variable to the percentage change in another variable, when the latter variable has a causal influence on the former. A more precise definition is given in terms of differential calculus. It is a tool for measuring the responsiveness of one variable to changes in another, causative variable. Elasticity has the advantage of being a unitless ratio, independent of the type of quantities being varied. Frequently used elasticities include price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production and elasticity of intertemporal substitution.
This is followed by pages of equations. What a waste!
This term was imported into the social sciences over a century ago. The model for this is a machine. But the operations of a machine in no way describe human action. The use of mechanical analogies and metaphors came as a result of Newton’s extraordinary breakthroughs in his explanation of physical cause-and-effect. The intellectual model of the machine became almost irresistible in the eighteenth century. It replaced for a time the imagery of a biological organism. In the history of social theory, these two metaphors, the machine and the body, have been used by theorists to explain human society. The apostle Paul used the metaphor of the body and its members to explain the church in two epistles: First Corinthians and Romans. This is why Christians speak of church members and membership. (Oddly, this metaphor appears in chapter 12 of both epistles.) The biological metaphor has become dominant in social theory as a result of Darwinism. But Darwin’s whole concept of biological evolution was imported from eighteenth-century Scottish social theory. Scottish social theory was evolutionistic, a point emphasized by F. A. Hayek.
I have attempted to discipline myself never to use the phrase “mechanism” when speaking of the free market. I have substituted the phrase “market process.” This is consistent with Austrian School economics. It is also consistent with Christian economics. The conceptual model of the free market is an auction, not a machine. This is because the free market really is an auction. The use of the metaphor of the auction is therefore appropriate. The market is not a machine.
This term is used for marketable. If an asset is highly marketable, it is called a liquid asset. This is ridiculous.
Economic theory is intensely personalistic. It has to be. It is a study of decision-making within the context of private property social order. It is highly individualistic. It is based on the idea of personal responsibility. This personal responsibility applies in history, but it also applies in eternity. Therefore, any form of economic theory that de-emphasizes personal responsibility is an assault on the biblical worldview. Modern economic theory has as its model physics. There is no responsibility in the inanimate world. Modern science sees the inanimate world as essentially impersonal. It is devoid of purpose. The Bible teaches otherwise. This purpose is imputed by God and also man. But for purposes of scientific analysis, because we cannot understand God’s purposes for all physical causation, we do not use purpose in explaining physics. This is not the case with human action.
Any attempt to import either the language or the concepts of physics into economic theory is illegitimate. Physics has a completely different methodology. The physicist assumes that inanimate objects are not driven by purposeful behavior of their own.
Jagdish Bhagwati was a professor of economics at Columbia University. He once told this story to his class, and it has been repeated ever since. “If you are a good economist, a virtuous economist, you are reborn as a physicist, and if you are an evil, wicked economist, you are reborn as a sociologist.” If true, this would leave economic theory to ethically mediocre economists.
There is a place for economics as an academic discipline. It is neither physics nor sociology. Nevertheless, “better sociology than physics.” That was my conclusion in my book, The Covenantal Structure of Christian Economics. In those areas of life in which the market process is not allowed to prevail, either by custom or law, because you do not have the right to sell your wife, your church membership, or your legal status as a citizen, sociology does replace economic theory. Physics does not.
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The complete manuscript is here: https://www.garynorth.com/public/department196.cfm