Shapiro and Varian: scientific “laws of economics”

by Sebastian Benthall

I’ve been amiss in not studying Shapiro and Varian’s Information Rules: A Strategic Guide to the Network Economy (1998, link) more thoroughly. In my years in the tech industry and academic study, there are few sources that deal with the practical realities of technology and society as clearly as Shapiro and Varian. As I now turn my attention more towards the rationale for various forms of information law and find how much of it is driven by considerations of economics, I have to wonder why this was not something I’ve given more emphasis in my graduate study so far.

The answer that comes immediately to mind is that throughout my academic study of the past few years I’ve encountered a widespread hostility to economics from social scientists of other disciplines. This hostility resembles, though is somewhat different from, the hostility social scientists other other stripes have had (in my experience) for engineers. The critiques have been along the lines that economists are powerful disproportionately to the insight provided by the field, that economists are focused too narrowly on certain aspects of social life to the exclusion of others that are just as important, that economists are arrogant in their belief that their insights about incentives apply to other areas of social life besides the narrow concerns of the economy, that economists mistakenly think their methods are more scientific or valid than other social scientists, that economics is in the business of enshrining legal structures into place that give their conclusions more predictive power than they would have in other legal regimes and, as of the most recent news cycle, that the field of economics is hostile to women.

This is a strikingly familiar pattern of disciplinary critique, as it seems to be the same one levied at any field that aims to “harden” inquiry into social life. The encroachment of engineering disciplines and physicists into social explanation has come with similar kinds of criticism. These criticisms, it must be noted, contain at least one contradiction: should economists be concerned about issues besides the economy, or not? But the key issue, as with most disciplinary spats, is the politics of a lot of people feeling dismissed or unheard or unfunded.

Putting all this aside, what’s interesting about the opening sections of Shapiro and Varian’s book is their appeal to the idea of laws of economics, as if there were such laws analogous to laws of physics. The idea is that trends in the technology economy are predictable according to these laws, which have been learned through observation and formalized mathematically, and that these laws should therefore be taught for the benefit of those who would like to participate successfully in that economy.

This is an appealing idea, though one that comes under criticism, you know, from the critics, with a predictability that almost implies a social scientific law. This has been a debate going back to discussions of Marx and communism. Early theorists of the market declared themselves to have discovered economic laws. Marx, incidentally, also declared that he had discovered (different) economic laws, albeit according to the science of dialectical materialism. But the latter declared that the former economic theories hide the true scientific reality of the social relations underpinning the economy. These social relations allowed for the possibility of revolution in a way that an economy of goods and prices abstracted from society did not.

As one form of the story goes, the 20th century had its range of experiments with ways of running an economy. Those most inspired by Marxism had mass famines and other unfortunate consequences. Those that took their inspiration from the continually evolving field of increasingly “neo”-classical economics, with its variations of Keynesianism, monetarism, and the rest, had some major bumps (most recently the 2008 financial crisis) but tends to improve over time with historical understanding and the discovery of, indeed, laws of economics. And this is why Janet Yellen and Mario Draghi are now warning against removing the post-crisis financial market regulations.

This offers an anecdotal counter to the narrative that all economists ever do is justify more terrible deregulation at the expense of the lived experience of everybody else. The discovery of laws of economics can, indeed, be the basis for economic regulation; in fact this is often the case. In point of fact, it may be that this is one of the things that tacitly motivates the undermining of economic epistemology: the fact that if the laws of economics were socially determined to be true, like the laws of physics, such that everybody ought to know them, it would lead to democratic will for policies that would be opposed to the interests of those who have heretofore enjoyed the advantage of their privileged (i.e., not universally shared) access to the powerful truth about markets, technology, etc.

Which is all to say: I believe that condemnations of economics as a field are quite counterproductive, socially, and that the scientific pursuit of the discovery of economic laws is admirable and worthy. Those that criticize economics for this ambition, and teach their students to do so, imperil everyone else and should stop.

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