Foundations of Economic Science

[Nicolaus Nemeth 0]

Before anybody can begin to “do economics” we must first justify its existence. Where does economic science come from? How is its existence as a science justified? Does Robinson Crusoe alone on an island need economic science? Do we need economic science if we live within a society? What exactly does economic science study? What are the implications from philosophy on economic science? Let’s see if we can’t get some good discussion on these topics!

[Burgess Laughlin 0]

What exactly does economic science study? What are the implications from philosophy on economic science?

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My only contribution is to ask another -- but preliminary -- question: What is science as distinct from philosophy? Each deserves careful definition before going on to discuss a particular science, economics.

[Nicolaus Nemeth 0]

Burgess,

That is a great question!

I define philosophy as the science that studies reality and man’s relation to it. Philosophy makes the most fundamental and broadest generalizations about reality, man, or both. I think that any science other than philosophy studies one of the aspects that philosophy points out. For instance, philosophy says that there is something. The science of physics is then born to actually discover and find out what that something is.

Simply, philosophy discovers the generalities and the other sciences study the particulars of the generalities. I can now reformulate my question. What generalities of philosophy does economics study in the particular?

[HeroicLife 0]

Economics is the science which studies the principles of human value allocation and exchange. It begins with an examination of the nature of man and from it derives the principles of human action. Unlike ethics and politics, economics is a value-free science, which means that it takes human values as a given and examines the consequences of the various actions taken to accomplishment.

“Does Robinson Crusoe alone on an island need economic science?”

Definitely. Economics begins with the principles of individual value-preferences and actions, and determines the principles of exchange from them.

“Do we need economic science if we live within a society?”

Economics is a crucial science for all men because each man’s resources are necessarily limited, and therefore, economics must be grasped in some form for any rational value pursuit.

“What are the implications from philosophy on economic science?”

One way to sum them up is: Man acts volitionally to choose the actions he takes to pursue the values he chooses.

As a side note, it is important to understand that economics is a value-free science, and is therefore not concerned with whether values are rational or materially beneficial. It is a common mistake to believe that irrational or non-material goals fall outside economic analysis.

[Nicolaus Nemeth 0]

Economics is the science which studies the principles of human value allocation and exchange. It begins with an examination of the nature of man and from it derives the principles of human action.

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You don't provide these principles. That is what I'm asking for in this thread. Please provide your principles and how they follow from philosophy (i.e. "the nature of man").

Unlike ethics and politics, economics is a value-free science, which means that it takes human values as a given and examines the consequences of the various actions taken to accomplishment.

As a side note, it is important to understand that economics is a value-free science, and is therefore not concerned with whether values are rational or materially beneficial.  It is a common mistake to believe that irrational or non-material goals fall outside economic analysis.

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I do not think that economics is a "value free" science. There are things that economics holds as values that no other science does. It upholds the value of the division of labor and of money exchange. It is true that only in the light of philosophy may one discover these things as values, however it is economics and not philosophy which discovered them as values.

“Does Robinson Crusoe alone on an island need economic science?”

Definitely.  Economics begins with the principles of individual value-preferences and actions, and determines the principles of exchange from them. 

“Do we need economic science if we live within a society?”

Economics is a crucial science for all men because each man’s resources are necessarily limited, and therefore, economics must be grasped in some form for any rational value pursuit. 

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Why does Robinson Crusoe need economics? How does a description of market behavior benefit an individual to whom no markets are available or even possible?

[HeroicLife 0]

There are things that economics holds as values that no other science does. It upholds the value of the division of labor and of money exchange. It is true that only in the light of philosophy may one discover these things as values, however it is economics and not philosophy which discovered them as values.

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Economics does not “uphold the value” of these things. Economics only tells us that these things are conductive to wealth creation under certain conditions. It is ethics that tells us that “since life is our value, and these things improve our lives, they are values.”

There is a certain ambiguity in the sciences regarding whether science qua science can ever produce normative conclusions. I would answer that it is only appropriate to answer yes when a particular value is the very foundation of the science. In other cases, normative conclusions are not appropriate without an external, ethical motivation. For example, nutrition, architecture, and politics are founded on certain values – the health, living condition, and social coexistence of human beings. Physics, mathematics, and economics on the other hand, are descriptive sciences that not based on any particular value.

[HeroicLife 0]

Why does Robinson Crusoe need economics? How does a description of market behavior benefit an individual to whom no markets are available or even possible?

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Robison Crusoe must make the same basic economic decisions we make daily. For example, if he was considering changing his diet from bananas to fish, he must consider the relative values of the various activities and the investment required to make the change. Here are some of the economic questions he would have to answer:

What is his relative value of various activities? What is his productive capacity, and what is the marginal productivity improvement of various capital improvements (such as fishing lures)? How much of his provisions can he afford to save today in order to make in investment in upgrading his productive capacity tommorow? What his present value of future goods, or the interest rate is he willing to pay for those investments?

[Inspector 0]

If I may, Heroiclife?

I think he is trying to say that economics is the science of HOW wealth is produced, and WHAT HAPPENS to wealth production under various conditions. It does not say WHETHER wealth SHOULD be produced. Did I get that right?

And it is valuable to Robinson Crusoe because microeconomics is the science used when he budgets his personal time between various activities. Philosophy, of course, would tell him which outcome is desirable to him, but economics tells him what the possible outcomes are. Did I get that right?

[HeroicLife 0]

You don't provide these principles. That is what I'm asking for in this thread. Please provide your principles and how they follow from philosophy (i.e. "the nature of man").

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My earlier statement “Man acts volitionally to choose the actions he takes to pursue the values he chooses” contains many philosophical conclusions that apply in economics. If we conclude that the values man achieves result from the application of reason to the limited resources he finds in nature, we can reach many economic conclusions. For example, prices are the result of individual valuations, labor has a productivity determined by an individual’s productive capacity, trade is possible because individuals have different values and productivity rates, and so on.

[HeroicLife 0]

Did I get that right?

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Yes, exactly.

[Nicolaus Nemeth 0]

Economics does not “uphold the value” of these things. Economics only tells us that these things are conductive to wealth creation under certain conditions. It is ethics that tells us that “since life is our value, and these things improve our lives, they are values.”

There is a certain ambiguity in the sciences regarding whether science qua science can ever produce normative conclusions. I would answer that it is only appropriate to answer yes when a particular value is the very foundation of the science. In other cases, normative conclusions are not appropriate without an external, ethical motivation. For example, nutrition, architecture, and politics are founded on certain values – the health, living condition, and social coexistence of human beings. Physics, mathematics, and economics on the other hand, are descriptive sciences that not based on any particular value.

I'm not sure that I completely agree with you but as of right now my thoughts on this topic are a bit fuzzy myself. I'll get back to you if I come up with something.

Robison Crusoe must make the same basic economic decisions we make daily. For example, if he was considering changing his diet from bananas to fish, he must consider the relative values of the various activities and the investment required to make the change. Here are some of the economic questions he would have to answer:

What is his relative value of various activities? What is his productive capacity, and what is the marginal productivity improvement of various capital improvements (such as fishing lures)? How much of his provisions can he afford to save today in order to make in investment in upgrading his productive capacity tommorow? What his present value of future goods, or the interest rate is he willing to pay for those investments?

That's just it, Robinson Crusoe doesn't make the same economic decisions that we do everyday. Crusoe and I can make decisions about our diet that are similar (more banannas, less fish) but I cannot make economic decisions that are similar. His "economic" decisions entail how he is going to distribute his labor and capital (fish nets & bananna seeds). My economic decisions focus around how I am going to spend my money in trade for more banannas and less fish.

What I'm trying to point out is that Robinson Crusoe lives alone and outside any society. We live within a society and one that has a division of labor at that. These are two entirely different economic situations and our fundamental definiton of economics needs to reflect this distinction.

[Currence 0]

That's just it, Robinson Crusoe doesn't make the same economic decisions that we do everyday. Crusoe and I can make decisions about our diet that are similar (more banannas, less fish) but I cannot make economic decisions that are similar. His "economic" decisions entail how he is going to distribute his labor and capital (fish nets & bananna seeds). My economic decisions focus around how I am going to spend my money in trade for more banannas and less fish.

What I'm trying to point out is that Robinson Crusoe lives alone and outside any society. We live within a society and one that has a division of labor at that. These are two entirely different economic situations and our fundamental definiton of economics needs to reflect this distinction.

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@ Nicolaus Nemeth:

Your original question was: "Does Robinson Crusoe alone on an island need economic science?" The facts that RC doesn't make the same economic decisions as we do, that he lives alone, and without the division of labor all concern the nature of his economic decisions, not their existence. To directly answer your question: yes, RC certainly makes economic decisions. He makes different economic decisions from those we make (or from those one would make in an anarchic society or a communist society), but that does change the fact that he does make economic decisions.

As for whether economics should concern itself with normative judgments, I think that it is a contextual question. Depending on one's audience and one's purpose normative conclusions may or may not be in order; in saying this I am adopting the position that science need not always be positive (in contrast to normative). If I were analyzing the affects of taxes on inflation, to also include a treatise on why government involvement in the economy is immoral would most likely be unfruitful and innapropriate. If I were, however, discussing the issue of taxes in general (justifications for their existence and nature), normative judgments would certainly be appropriate. The issue of value-judgments-in-science is not an intrinsic either/or question; it is a question whose answer requires a proper integration of context.

[Currence 0]

I didn't realize there was no Edit function, so I apologize for the double post. From now on I'll make sure to preview my posts with care.

The last sentence in my first paragraph should read:

He makes different economic decisions from those we make (or from those one would make in an anarchic society or a communist society), but that does not change the fact that he does make economic decisions.

Also, "affects" should be "effects"... for anyone who cares about that sort of thing (I do, heh).

[Stephen Speicher 0]

... in saying this I am adopting the position that science need not always be positive (in contrast to normative).

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I do not think I agree with this. Science, qua science, is not, and, speaking normatively, should not be a normative endeavor. Science, per se, deals with what is, not what should be. Now, it is possible to transfer science to another context in which the normative is appropriate (as you attempted to do with your example), but doing so is not doing science, qua science.

Incidentally, I greatly prefer replacing the positive/normative distinction with the one which Ayn Rand used, namely cognitive and normative abstractions. The value in doing so is to remove the distinction from the Humean and later logical postivist formulations. Is the positive/normative distinction even used much nowadays in the more theoretical side of economics? (I really do not know. I am just curious.)

[The General 0]

Is the positive/normative distinction even used much nowadays in the more theoretical side of economics? (I really do not know. I am just curious.)

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I took Micro and Macro about 8 years ago in college. In each course the professor made a point of calling the students' attention to this distinction, as well as the definition from the textbook. Here it is (from Microeconomics: Private and Public Choice, 8th ed., by Gwartney and Stroup):

Positive economics - The scientific study of "what is" among economic relationships.

Normative economics - Judgments about "what ought to be" in economic matters. Normative economic views cannot be proved false, because they are based on value judgments.

The text elaborates:

In contrast with positive economics statements, normative economic statements cannot be tested and proved false (or confirmed to be correct).  "Business firms should not maximize profits."  "The use of pesticides on food to be sold in stores should not be allowed."  "More of our national forests should be set aside for wilderness."  These normative statements cannot be scientifically tested, since their validity rests on value judgments.

Ugggh! This brings back bad memories!

[Betsy Speicher 0]

Normative economics - Judgments about "what ought to be" in economic matters.  Normative economic views cannot be proved false, because they are based on value judgments. 

That assumes, of course, that values cannot be derived from facts.

The text elaborates:

In contrast with positive economics statements, normative economic statements cannot be tested and proved false (or confirmed to be correct).  "Business firms should not maximize profits."  "The use of pesticides on food to be sold in stores should not be allowed."  "More of our national forests should be set aside for wilderness."  These normative statements cannot be scientifically tested, since their validity rests on value judgments.

Ugggh! This brings back bad memories!

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What about "normative" statements like "Congress shall make no law abridging the freedom of production and trade?"

[Nicolaus Nemeth 0]

@ Nicolaus Nemeth:

Your original question was: "Does Robinson Crusoe alone on an island need economic science?"  The facts that RC doesn't make the same economic decisions as we do, that he lives alone, and without the division of labor all concern the nature of his economic decisions, not their existence.  To directly answer your question: yes, RC certainly makes economic decisions.  He makes different economic decisions from those we make (or from those one would make in an anarchic society or a communist society), but that does change the fact that he does make economic decisions.

As for whether economics should concern itself with normative judgments, I think that it is a contextual question.  Depending on one's audience and one's purpose normative conclusions may or may not be in order; in saying this I am adopting the position that science need not always be positive (in contrast to normative).  If I were analyzing the affects of taxes on inflation, to also include a treatise on why government involvement in the economy is immoral would most likely be unfruitful and innapropriate.  If I were, however, discussing the issue of taxes in general (justifications for their existence and nature), normative judgments would certainly be appropriate.  The issue of value-judgments-in-science is not an intrinsic either/or question; it is a question whose answer requires a proper integration of context.

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Yes, I'm willing to say that he doesn't make economic choices. I think that economic choices are only available to those within a division of labor society and that is the very point I was trying to make. Economics only studies actions within the context of a division of labor and so only those actions may be called economic actions. Robinson Crusoe's actions, outside of a divison of labor, are not economic actions.

[Tom Rexton 0]

Yes, I'm willing to say that he doesn't make economic choices. I think that economic choices are only available to those within a division of labor society and that is the very point I was trying to make. Economics only studies actions within the context of a division of labor and so only those actions may be called economic actions. Robinson Crusoe's actions, outside of a divison of labor, are not economic actions.

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The disagreement is once again due to the definition: if economics is about choices with respect to the "allocation of scarce resources", then, yes, Robinson Crusoe by himself also makes economic decisions. But economics is narrower than that.

[HeroicLife 0]

It’s pretty crazy to say that economics is not concerned with non-social action. Robison Crusoe must deal with things such as marginal productivity, savings, interest rates, investments, depreciation, exchange rates, and entrepreneurship. The fact the he does not engage in trade or use a medium of exchange does not cancel out all the other economic decisions he must make. Once again, the definition of economics is “the science which studies the principles of human value allocation and exchange.” It’s mine, but I have not seen a better one.

[Tom Rexton 0]

It’s pretty crazy to say that economics is not concerned with non-social action.  Robison Crusoe must deal with things such as marginal productivity, savings, interest rates, investments, depreciation, exchange rates, and entrepreneurship.  The fact the he does not engage in trade or use a medium of exchange does not cancel out all the other economic decisions he must make.  Once again, the definition of economics is “the science which studies the principles of human value allocation and exchange.”  It’s mine, but I have not seen a better one.

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Your definition is far too broad, given that "value" is a very general concept, as is "exchange". Human life is all about the pursuit of values through their creation and/or exchange. Economics would then be the study of every and all aspects of human life, including the "value-exchange" between friends and lovers, or the "value-allocation" of my deciding to spend my leisure time reading a book. But these are the province of psychology and personal values, respectively, not economics. Economics is a science that studies the production of wealth, specifically within a system of division of labor. "Wealth" is the totality of material goods and services, and "production" subsumes both the manufacture of goods and the rendition of services.

Robinson Crusoe will be helpless with books on economics if he is alone on an island, for economics deals mainly with the production of wealth within a market economy, and by himself he is not a market. He will be helped greatly with books about techniques of production with primitive tools that he can make from the materials available on the island. He cannot, however, deal with such things as investment, exchange rates, interest rates, depreciation, etc. Such economic calculations cannot be done without a unit of economic accounting; i.e., without money. But money can only arise under a highly developed system of trade. Primitve trading is done through barter, not money.

[HeroicLife 0]

He cannot, however, deal with such things as investment, exchange rates, interest rates, depreciation, etc.  Such economic calculations cannot be done without a unit of economic accounting; i.e., without money.

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Not so. Economic calculation is possible by direct comparison of one value to another. For example, I value two bananas over one apple. Economics is not limited to material goods either – whenever you choose to pursue among competing values and competing means of achieving those values, you engage in economic calculation. The basic need for economics – the scarcity of resources is not limited to any particular form of value or any particular means of choosing among those values.

[Nicolaus Nemeth 0]

Not so.  Economic calculation is possible by direct comparison of one value to another.  For example, I value two bananas over one apple.  Economics is not limited to material goods either – whenever you choose to pursue among competing values and competing means of achieving those values, you engage in economic calculation.  The basic need for economics – the scarcity of resources is not limited to any particular form of value or any particular means of choosing among those values.

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I think that a concept like "economic calculation" is something that we cannot even begin to discuss since we disagree over fundamental definitions such as what wealth is. HeroicLife, where does your concept of wealth come from? What are your fundamental observations that give rise to your conception of wealth as including both physical and non-physical values?

There are only two types of values. The two types are physical and non-physical. By saying that wealth is both physical values and non-physical values, you imply that the word wealth and the word value are two words for the same concept. There are two types of values and if wealth is both types then wealth is the same thing as value in general. Value is a concept for the realm of philosophy. It is ethics that studies how to gain and keep value. If you are to hold that wealth and value are the same idea then you do not think that there properly is a science of economics. After all, what is economics going to say that philosophy hasn’t already?

[Tom Rexton 0]

Not so.  Economic calculation is possible by direct comparison of one value to another.  For example, I value two bananas over one apple.  Economics is not limited to material goods either – whenever you choose to pursue among competing values and competing means of achieving those values, you engage in economic calculation.  The basic need for economics – the scarcity of resources is not limited to any particular form of value or any particular means of choosing among those values.

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Wealth is not synonymous with value--it is a subset of value. Wealth is the totality of material goods and services. To imply that wealth is the same as value is to imply that moral philosophy (along with countless other fields) is a branch of economics.

Human life is all about "choos[ing] to pursue among competing values and competing means of achieving those values"; so if economics encompasses all that, then economics is the science of all aspects of human life. But, as I said before, economics is not about such choices. You must not confuse the totality with an aspect: economics concerns itself with such choices only insofar as they are related with the production of wealth.

If you don't believe otherwise, take your definition literally and think about this:

Bob has just met Mary at a bar and wants to ask her out on a date. He wants to do so in such a way that she'll accept. There are, of course, several ways Bob can go about doing this.

And so we've fulfilled your definition: Bob's chosen to pursue a value from among many others--Mary--and he's got to choose the best way (from many other ways) to ask her out. I suppose, then, that economics also offers advice on dating and relationships?

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As for your other points:

1) Arithmetical calculations cannot be done until you've converted the bananas and apples to the same units. Only primitive "calculations" such as relative and marginal utility can be done without a unit of economic accounting.

2) The real basic problem of economics is more fundamental than the scarcity of resources--it is the scarcity of labor. Resources are scarce because labor is scarce, and as the productivity of labor rises, so does the supply of resources.

[Walker 0]

Wealth is the totality of material goods and services.

I have a few questions on this definition.

Do you mean total wealth? Or is "wealth" by itself a concept that only describes the totality of all material goods and services that exist in a given economy?

My point of confusion arises from the fact that it is often said that an individual possesses a certain amount of wealth. If that certain amount is relatively large, they are described as being "wealthy."

Also, what exactly do you mean by "material goods and services" vs. immaterial goods and services? Do you mean material values? Such as water, food, cars, a haircut, etc.?

Looking forward to participating in this discussion.

[Tom Rexton 0]

I have a few questions on this definition. 

Do you mean total wealth?  Or is "wealth" by itself a concept that only describes the totality of all material goods and services that exist in a given economy? 

My point of confusion arises from the fact that it is often said that an individual possesses a certain amount of wealth.  If that certain amount is relatively large, they are described as being "wealthy." 

The totality of material goods can be of an individual, or of a group of individuals (such as a nation, a region, a household, or whatever). Wealth is a collective concept, and therefore "totality"--meaning sum or wholeness--is the proper term.

Also, what exactly do you mean by "material goods and services" vs. immaterial goods and services?  Do you mean material values?  Such as water, food, cars, a haircut, etc.? 

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"Material goods" is really a redundant term, because "goods" are material (i.e., of matter). I merely wanted to emphasize that wealth is material values.