Bergmann: Needed, A New Empiricism

Bergmann Barbara R The Economists’ Voice, 2007, vol. 4, issue 2, 1-4

Abstract: How do economists know what they know? In a call for a new empiricism Barbara Bergmann asserts that economists mainly make it up.

Summary of article:

The paper starts by explaining how biologists studied bottle-nose dolphins for thousands of hours, in order to arrive at conclusions about their behavior. In contrast, economists do not study firm behavior at all — they just sit in comfortable chairs, and invent the theory from scratch. They just make it up!

Behavioral economists who study actual behavior are not welcome guests at economics departments, because they bring the bad news that theories of economists do not correspond to real world observations. Barbara Bergmann describes how she invited Herbert Simon for a talk at University of Maryland. Her colleagues let her know that his talk about real behavior was a waste of their time — it was not economics!

In general, behavioral economists like Kahnemann and Tversky have recorded several significant conflicts between “rational” behavior prescribed by economic theory, and real human behavior. Vernon Smith, one of pioneers of experimental economics, suggests that the notion of “rationality” as used by economists, needs a reality check. However economists dismiss these conflicts by arguing that the behavior of students in labs motivated by small amounts of money does not represent real world business behavior. To overcome this objection would require behavioral and experimental economists to act like anthropologists, and actually go and live among the businessmen to learn how they actually behave.

While no one has actually done this, a few surveys of business behavior have been made,. In 1939, R. L. Hall and C. J. Hitch survey found that managers were unfamiliar with the concepts of marginal cost and marginal revenue, and that they did not use them when setting prices and output. Rather, they made an estimate of cost per unit at what they took to be some plausible level of sales, and then tacked on an amount for profit. “Professional economists received this  news with pained condescension and have succeeded in forgetting it.”  [[ Indeed, it was the need to defend economics from repeated observations of the stark contradictions between observed empirical realities and theoretical assertions that led Friedman to create his F-twisted methodology — see Friedman’s Methodology: A Stake through the Heart of Reason]]

Alan Blinder revived the survey method to study price-setting by business, and found more bad news. Almost 90% of firms set prices for their products, and hence the supply and demand model, which requires price taking behavior, does not apply to such firms!  Similarly, empirical tests have been made of discrimination by sending out matched pairs of candidates for job vacancies. These experiments provide strong evidence for discrimination by race and gender, conflicting with Gary Becker’s idea that profit maximization would lead to elimination of discrimination. Even though empirical evidence strongly supports existence of discrimination, Larry Summers used Becker’s theories to argue that there are very few women at Harvard because of genetic deficiencies in women, rather than discrimination at Harvard. After all, if Harvard discriminated, then it would lose the luster of its name, and be out-competed by Podunk University, which gave jobs to blacks and women!.

Empirical data show that in recessions, wages do not go down — rather, they remain fixed at pre-recession levels. Truman Bewley did a survey of 300 business establishments, to ask them why, and found a simple unanimous answer: it would adversely affect worker morale. However, economists disdain empirical evidence and have invented 25 different theories (listed by Bewley) as to why wages are sticky, without examining any empirical evidence.

Research on actual behavior in business settings is in its infancy. If we had more information about how businesses set prices, we could have better theories of why and how prices increase — i.e. inflation. [[ In this connection, see Daniel Tarullo: Monetary policy without a working theory of inflation]] Similarly, studying business investment and employment decisions would lead to substantially greater clarity on these sources of economic growth.

Barbara Bergmann argues that there is no doubt that the theories and policies advocated favor the rich and powerful, but that knowledge of ground realities of business behavior is likely to curb and counteract these tendencies. “For example, I submit that the idea that lowering taxes for the rich is the best way to stimulate production and employment
would be unlikely to survive a realistic accounting of consumer and business behavior.” She notes that while behavioral and experimental fields have made some progress in an an adverse environment, the prognosis for further progress does not seem favorable: “A
few years ago I had occasion to ask Truman Bewley whether he was training students at Yale to carry on research like that he did on wages. His answer, I am sorry to report, was, “No, that would ruin their careers.”

— See my related post on   Methodology of Modern Economics   for more evidence about how economists completely disregard empirical and observational evidence conflicting with armchair theories regarding an imaginary world which exists only in the minds of economists.

Advertisements
3 comments
  1. Prof Dr James Beckman, Germany said:

    As usual, very useful comments. I have spent my academic career outside departments of economics because I was raised with the notion of correspondence between empirical observations & scientific models. Business & engineering schools have been my setting, with the latter offering the obvious systems model and, oh, so much empirical measurement.

  2. It would be hilarious it weren’t so tragic.

    Economists don’t want to think about money and banking either. That’s like doctors ignoring blood and bone marrow.

    To do so would reveal that banking is a structural fraud, a game of debt-money “musical chairs” that is designed to take our interest payments while the music is playing and our real property when the music stops. That discovery would surely “ruin their careers”.

  3. “Research on actual behavior in business settings is in its infancy.” This may be the case for economics. It certainly is not so for either sociology or anthropology. Consider these examples.

    Callon, M. (1998). The Embeddedness of Economic Markets in Economics. In The laws of the markets: edited by Michel Callon. Oxford: Blackwell Publishers/Sociological Review.
    Carruthers, B. G. (2013). From uncertainty toward risk: the case of credit ratings. Socio-Economic Review, 11(3), 525–551.
    Carruthers, B. G., & Babb, S. (1996). The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America. American Journal of Sociology, 101(6), 1556–1591.
    Fligstein, N., & Goldstein, A. (2015). The emergence of a finance culture in American households, 1989–2007. Socio-Economic Review, 13(3), 575–601.
    Muniesa, F. (2007). Market technologies and the pragmatics of prices. Economy and Society, 36(3), 377–395.

    David Graeber, Debt: The First 5000 Years, 2011.
    Marshall Sahlins, Stone Age Economics, 1974.
    Karen Ho, Liquidated: An Ethnography of Wall Street, 2009.
    Keith Hart, Market and Society: The Great Transformation Today (edited with Chris Hann) (2009).
    Zelizer, Viviana A. Rotman. 1979. Morals and Markets: The Development of Life Insurance in the United States. New York: Columbia University Press.
    David, Ritzer, The McDonaldization of Society (1993)

    Economists might show similar research results if they would stop running everything through theory and just observe humans in action. Humans will show and tell them everything there is to find out about economic actions, including theories of how and why they happen.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: