Approaches to Economic Science Part 2: What is Social Science? (Module MW26.1) Winter term 2013/14 Prof. Dr. A. Freytag

1. Approaches to Economic Science Part 2: What is Social Science? (Module MW26.1) Winter term 2013/14 Prof. Dr. A. Freytag (section 2.7) 2.7 Social Science and the Society 1

2. “Her Majesty The Queen … Madam, when Your Majesty visited the London School of Economics last November, you quite rightly asked: why had nobody noticed that the credit crunch was on its way? The British Academy convened a forum on 17 June 2009 to debate your question, with contributions from a range of experts from business, the City, its regulators, academia, and government. …” …So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole….”* * Besley, Timothey et al. (2009), Letter to the Queen“ Homo Oeconomicus, 2010, forthcoming 2

3. “Her Majesty The Queen … Madam, We are writing both in response to the question you posed at the London School of Economics last November – concerning why few economists had foreseen the credit crunch – and the answer to you from Professors Tim Besley and Peter Hennessy dated 22 July. We agree with many of the points made by Professors Besley and Hennessy…but we regard their overall analysis as inadequate because it fails to acknowledge any deficiency in the training or culture of economists themselves… …the letter by Professors Tim Besley and Peter Hennessy overlooks the part that many leading economists have had in turning economics into a discipline that is detached from the real world, and in promoting unrealistic assumptions that have helped to sustain an uncritical view of how markets operate. …”* Hodgson, Geoffrey et al. (2009), Letter to the Queen, Homo Oeconomicus, 2010. 3

4. What do these letters tell us? • Social science is prone to extraordinary failure • This holds particularly if it becomes essentially self-referential! • Social science is not a monolith; its representatives differ from each other wrt methods and aims • Problems within social science reflect difficulties of social science to define its relationship with society • Social science has an obligation to deliver valuable research • Social science has to justify its existence (see the development of humanities in UK) • See also: Symposium: Letter to the Queen, Homo Oeconomicus, Volume 27, No 3 (2010), contributions by Peter Skott, John Hudson, Andreas Freytag, Leif Helland, GebhardKrchgässner, Alain Marciano and Heinz D. Kurz 4

5. Social Science and the Society – the problems Problem #1: What is social science? Problem #2: Economics and other social sciences are dealing with very complex systems  precision low, reason to criticize Problem #3: Researcher is part of the system  endogeneity? Problem #4: What is the quality of science? Problem #5: What is and should be academic independence? Problem #6: Public financed academia and its freedom? Problem #7: He who pays the piper calls the tune? How to deal with external partners? Problem #8: Honesty Problem #9: Students 5

6. Problem #1: What is social science? • Economics belongs to social science as it deals with division of labor. This becomes clear when on looks for a sensible definition of • “Economics is what economists do” (Marshall, Say and Viner) •  sense? • “Economics is dealing with the economy” •  science as a collection of allotments! • “Economics is dealing with scarcity and resource allocation” (Lord Robbins) • social engineering as result? • is economics another natural science? • “Economics deals with chances and boundaries of human interaction in order to create mutual benefits” (Homann and Suchanek) • refers to division of labor, transactions etc. • economics as social science! 6

7. Thus, it is important that Economics deals with social interaction. This implies the danger of arbitrary and non-rational behavior. • It also implies that it cannot completely refrain from normative statements. •  Positive analysis (analyzing what is) • Normative analysis (using a set of theoretical criteria) • weak vs strong value judgement • weak: allocation • strong: distribution (not allowed); •  weakness or strength? • What are the methodological implications? • Complex theoretical relations need simple and clear language, i.e. mathematics • however, economics is not a natural science, controlled experiments are still not possible • no argument without a number • internal division of labor 7

8. Problem #2: Economics and other social sciences are dealing with very complex systems • The fact that social interaction is subject of our analysis makes it difficult to get the full picture in theoretical and empirical models. • Strict assumptions • axioms • ceteris paribus clause • endogeneity problem • feedback loops • There is a need for simplification  math is necessary. • Some economists criticize the mainstream for using models  critical realists. • Others do not like the models for their pro-market approach (Letter #2) • Others do not appreciate the neglect of institutions and the static nature of many models. • Others do not believe in steady-state equilibria. 8

9. Problem #3: Researcher is part of the system  endogeneity? • The problem is that the modeler herself is part of the model. • Does this imply a bias? • Can we imagine models without our own value judgements? • Prognosis: own objectives? • Consulting, policy advice: own objectives? • In a television talk show, a leading German politician claimed that an economics professor, who is a civil servant should not give advice about wage flexibility. The professor is not able to judge it as he never is in such a situation, so the justification. • Right? • Hypothesis: since everyone is part of the economy, the respect for expertise is low. 9

10. Problem #4: What is the quality of science? • How to measure quality? Who measures quality? • external benchmark? economic growth? (community as such) appearance in the media? (single scientists) official prizes? appointment in advisory councils etc? salary? students’ judgements? … •  internal benchmark? • Nobel Prize, other prizes? • quotations? rankings?  hypothesis: Rankings mirror the inability of scholars to judge their colleagues! • fundraising? • administrative work? • what about fashions and trends? (Kuhn: marginal revolution) • publishing as prostitution? 10

11.  mixture of both? Digression: The Economics of the Nobel Prize* The unofficial criteria of the Nobel Committee are: specificity, originality and importance. It seems that Economics has moved away from that group. In reality: Missionary or technician? Background: Chance or temptation? World views? Family background? Role of teachers? History’s heavy footprint Lone wolf or tribal animal? Puzzle solvers or system builders? Puzzlers or masters? The unlikely source of crucial ideas What fish in what pond? Notions of progress? Substitutive, cumulative and circular progress Science vs. scientism? * Horn, Karen (2009), Roads to Wisdom, Conversation with Ten Nobel Laureates in Economics, Cheltenham and Northampton: Edward Elgar. 11

12. Problem #5: What is and should be academic independence? • In a television talk show, a leading German politician claimed that an economics professor, who is a civil servant should not give advice about wage flexibility. The professor is not able to judge it as he never is in such a situation, so the justification. • So why should a professor be a civil servant? • Compensation for high security? no • Financial independence allows independent research? depends • Civil servant status makes independent form government order? depends In effect, there is no need to grant professors the status of a civil servant. 12

13. However, academic independence can be very helpful for the academic work (both teaching and research) • Imagine social science professors who argue scientificly funded about the role of government in education, the economy etc. If they are too dependent on the government and have very flexible work contracts at the same time, they might be subject to pressure to teach the “right” themes and lessons. Can they teach revolution (Problem #6)?* This is not the only aspect of academic independence: • Financial independence vs. laziness! • third interested parties (Problem #7) * James Buchanan (1979), What Should Economists Do?, Chapter 14: Public Finance and Academic Freedom, Indianapolis: Liberty Press. 13

14. Problem #6: Publicly financed academia and its freedom? • This problem is closely related to problems #5 and #7. • What can the public expect from academia which it finances? • obedience? • critical minds? • independent research? • independent critical teaching? • what is critical: can the public afford to pay teachers who call for marxist revolution? • public universities and subsidized consulting? • public universities and patents? 14

15. Problem #7: He who pays the piper calls the tune? How to deal with external partners? • Social scientist are involved in policy advice and consulting of private agents. This makes them vulnerable for corruption, media attention and bribery as well as hijacking. • Corruption: the results are biased. • Media attention: Professors are vein. • Hijacking: interested parties claim that the results of research have certain policy implications (theory of strategic trade policy) • To protect oneself from these dangers, it is sensible to base policy advice on peer reviewed research (cross-checking). • The financial independence may help (Problem #6). 15

16. Reputation and Commitment in Consulting Short term vs. long term Independence might be costly, as some attractive research and consulting projects will not be raised. Nevertheless, it may be very helpful to build up a reputation as being incorruptible. Reputation matters: An independent thinker may well be highly appreciated in the public and raise projects in the long run. Nota bene: it may be adverse to the interests of the consulted firm, government branch or the like to insist on certain results or their absence In particular, young scholars cannot afford to be too accomodating. There is the trade-off between research and personal money on the one hand and reputation on the other hand. 16

17. Problem #8: Honesty • 1) There have been a number of spectacular cases of plagiarism of PhDs in German politics. These people have: • copied without citing and/or • obviously hired ghostwriters. • 2) In other cases, authors have submitted the same paper several times to different journals without cross-citations  several publications of (exactly) the same content but different title (sic!) • 3) Others “treat” their data until the results are fitting the expectations  spectacular cases in natural science. • 4) There also have been cases of applications for grants with “fake” publications. • All forms of dishonesty have to be rejected and punished. 17

18. Problem #9: Students • Finally, we come to the objects of this class, this time treated as subject of the course. Universities offer higher education in an increasingly competitive environment. They are dependent on high enrollment as otherwise the public funding dries out.* • students fee and the incentives • Bologna-Reform • accreditation • niches • transferability • employability • Rankings and their meaning (Cantines, grades etc.) • Competition and the mass university • Alumni and their tasks • *Frey, Bruno S. (2010), WitheringAcademia?, Munich: CESIfo, • http://www.cesifo-group.de/cesifo/newsletter/3209_Academia.htm. 18