A Critique of Black Box Economics

A central debate in the philosophy of science concerns the purpose of scientific theories: should they aim to represent the world as accurately as possible or is it sufficient for them to produce useful predictions? Milton Friedman’s influential essay The Methodology of Positive Economics argues for the latter, suggesting that the primary goal of a theory is to generate accurate predictions, regardless of whether its assumptions reflect reality. This instrumentalist-empiricist view has had a profound impact on economics, encouraging the development of models that may not be true in their assumptions, but are judged primarily on their predictive success.

However, this approach risks reducing economics to a mere “black box” tool for prediction, devoid of genuine insight into the underlying mechanisms that drive economic phenomena. From the perspective of scientific realism, which holds that a theory should aim to represent the world as accurately as possible, Friedman’s instrumentalism-empiricism neglects the deeper task of understanding the economy’s workings.

Friedman’s approach can be understood as an application of instrumentalism, a view in the philosophy of science that focuses on the utility of theories rather than their truth. According to Friedman, the assumptions of an economic theory need not be realistic; what matters is whether the theory yields accurate predictions. In his view, the ideal model of a “perfect” billiard player—who makes shots as if they were a mathematical genius, calculating angles and velocities with precision—is valid as long as it predicts the trajectory of the billiard balls accurately. Similarly, an economic theory need not reflect the actual decision-making processes of individuals or firms as long as it predicts their behavior well enough to be useful for policy or analysis. This emphasis on prediction has shaped much of contemporary economics, leading to the proliferation of abstract models that aim for predictive accuracy without concern for the realism of their assumptions.

However, a purely instrumentalist approach to economic theory comes with significant risks. By prioritizing prediction over understanding, instrumentalism can turn economics into a “black box” that provides useful predictions without explaining why those predictions hold. A black box refers to a system whose internal workings are opaque, and whose outputs can be observed, but not fully understood. In this context, economic models may provide policymakers and analysts with predictions about inflation, unemployment, or market trends, but they offer little insight into the causal mechanisms that generate those outcomes. As a result, instrumentalist models may lead to successful predictions in the short-term, but they may also mislead economists about the true nature of economic systems and the dynamics at play.

A wholly instrumentalist model of history may claim that any country that has a national flower, for example, is destined to be invaded. If one examines various countries with national flowers, such as Japan (cherry blossom), France (lily), and the United Kingdom (rose), one might notice that these nations have all experienced invasions at various points in history. From this observation, one could absurdly conclude that having a national flower somehow invites foreign powers to invade. For instance, Japan faced invasions from Mongol forces in the 13th century, while France has a long history of invasions throughout the Middle Ages and beyond. This reasoning, however, overlooks the myriad of geopolitical factors that contribute to a country being invaded, such as military alliances, economic resources, and territorial disputes.

Predictive frameworks, unmoored from real causal mechanisms, have no means of establishing causality. To establish causality, the following are required: (1) one event precedes the other; (2) there is a substantial relationship between the two events; and, (3) there are no confounding variables. While the first two can be established, the third cannot. One can never demonstrate that they have accounted for all confounding variables.

Hence, unless one invokes causal mechanisms, combined with heuristics that approximate truth, such as Occam’s razor, establishing causality is impossible, such that economists could only observe correlations and precedence. Under such a narrow framing, the rejection of the flower theory proposed above can only occur on the grounds that it is insufficiently predictive, not that there is no reasonable causal mechanism one can establish between flowers and invasion. Yet, if this is the case, then all that can be said as it pertains to correlation and causation is that there are stronger and weaker correlations between a lagged variable and a dependent variable. Under this framework, the flag theory can only be dismissed if one could demonstrate a theory with a stronger correlation, but in approaching the problem in this manner, one is rejecting causality.

Without a firm understanding of the underlying causes, economists may struggle to adjust their models when conditions change or unexpected events occur, leading to policy missteps or failures in prediction when those models are applied to new situations. A striking example of this failure is the 2008 financial crisis, in which instrumentalist models—derived from historical market data—failed to predict the collapse because they were overfitted to the preceding period of stability, overlooking the deeper systemic risks, such as unsustainable debt and financial interconnectivity. Those focused on the underlying causal relationships, as opposed to making predictions, were able to counterintuitively, successfully predict the crisis, such as the many Austrian economists who provided accurate warnings of the impending collapse.

From the perspective of scientific realism, this instrumentalist approach is deeply flawed. Scientific realism holds that the goal of a theory is not merely to make predictions, but to represent the world as accurately as possible. In this view, a theory is valuable not only because it predicts future events, but because it explains why those events occur, shedding light on the causal structures and relationships that underpin observable phenomena. In the natural sciences, for instance, a successful theory of planetary motion not only predicts the movements of celestial bodies but also explains them in terms of gravitational forces and physical laws. The predictive power of such a theory is derived from its accurate representation of the real-world mechanisms that govern planetary motion. By contrast, an economic model that accurately predicts inflation while relying on patently false assumptions about human behavior lacks explanatory power and fails to provide a deeper understanding of the economy.

Theories that accurately reflect the underlying reality of the phenomena they study are more likely to be durable and adaptable over time. In contrast, models that prioritize prediction over understanding may work well in specific contexts but break down when applied to new situations. In the natural sciences, the history of scientific progress has often involved the refinement of theories to better represent the underlying reality. Newton’s laws of motion were refined by Einstein’s theory of relativity, which provided a more accurate representation of the universe at large scales and in conditions of high gravity. Similarly, in economics, a theory that accurately represents the decision-making processes of individuals and firms, the dynamics of markets, and the role of institutions is more likely to provide robust predictions across a range of different contexts than one that relies on unrealistic assumptions simply because it works in a narrow set of cases.

Finally, Friedman’s instrumentalism assumes that predictive success is the ultimate test of a theory’s validity, however, in complex systems like the economy, predictions can sometimes succeed for the wrong reasons. A model might produce accurate predictions in the short-term due to chance, or because it captures superficial regularities in the data, without actually representing the deeper structures that cause those regularities. In such cases, the model’s predictions may fail when the underlying conditions change. Hence, it is hardly remarkable that economists have a notoriously poor track record when it comes to making predictions. Deirdre McCloskey pointedly remarked, “the industry of making economic predictions…earns only normal returns.”

By contrast, a theory that accurately represents the underlying reality of the causal mechanism of the economy is more likely to produce robust predictions that hold up even when the environment changes. Just as understanding the genetic basis of evolution allows biologists to make more reliable predictions about the development of species, understanding the real structures of the economy allows economists to make predictions that are grounded in the actual dynamics of markets, institutions, and human behavior.

While Friedman’s instrumentalist approach has been influential in shaping the development of economic theory, it risks reducing economics to a mere “black box” for generating predictions without offering real insight into the workings of the economy. From the perspective of scientific realism, the goal of a scientific theory should be to represent the world as accurately as possible, not just to produce useful predictions. In economics, this means striving to develop theories that accurately reflect the real mechanisms driving economic phenomena, rather than relying on assumptions on empirical data that yield predictions but fail to provide genuine understanding. By aiming for accuracy in representation, economists can produce more robust, durable theories that not only predict future events but also explain why those events occur, offering deeper insights into the nature of economic systems.

Originally Posted at https://mises.org/

zerohedge
Economics , News , Politics , Science
December 7, 2024
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From Marcus Aurelius To Omar Little: A Man’s Code Is Vital

Authored by Josh Stylman via The Brownstone Institute,

With Thanksgiving weekend still fresh in our memory, my gratitude centers not on the usual holiday platitudes, but on something that has become increasingly precious in our artificial age: authentic relationships – both family and lifelong friends – that deepen rather than fracture under pressure. What binds these relationships, I’ve come to realize, isn’t shared opinions or circumstances, but a shared code – an unwavering commitment to principles that transcends the shifting sands of politics and social pressure. I’m particularly grateful for my inner circle – friends I’ve known since elementary school and family members whose bonds have only strengthened through the crucible of recent years.

Like many others who spoke out against Covid tyranny, I watched what I thought were solid relationships dissolve in real time. As the owner of a local brewery and coach of my kids’ sports teams, I had been deeply embedded in my community – a “man about town” whose friendship and counsel others actively sought. Yet suddenly, the same people who had eagerly engaged with me would scurry when they saw me coming down the street. Professional networks and neighborhood connections evaporated at the mere questioning of prevailing narratives. They reacted this way because I broke orthodoxy, choosing to stand for liberal values – the very principles they claimed to champion – by rejecting arbitrary mandates and restrictions.

In this moment of testing, the difference between those who lived by a consistent code and those who simply followed social currents became starkly clear. Yet in retrospect, this winnowing feels more like clarification than loss. As surface-level relationships fell away, my core relationships – decades-long friendships and family bonds – not only endured but deepened. These trials revealed which bonds were authentic and which were merely situational.

The friendships that remained, anchored in genuine principles rather than social convenience, proved themselves infinitely more valuable than the broader network of fair-weather friends I lost.

What strikes me most about these enduring friendships is how they’ve defied the typical narrative of relationships destroyed by political divisions. As Marcus Aurelius observed, “The impediment to action advances action. What stands in the way becomes the way.” Despite taking opposite sides of the dialectic on political and cultural issues over the decades, we found ourselves united in opposition to the constitutional transgressions and rising tyranny of the past few years – the lockdowns, mandates, and systematic erosion of basic rights. This unity emerged not from political alignment but from a shared code: a commitment to first principles that transcends partisan divisions.

In these contemplative moments, I’ve found myself returning to Aurelius’s Meditations – a book I hadn’t opened since college until Joe Rogan and Marc Andreessen’s excellent conversation inspired me to revisit it. Aurelius understood that a personal code – a set of unwavering principles – was essential for navigating a world of chaos and uncertainty. The connection feels particularly apt – like my own friend group, Rogan’s platform exemplifies a code of authentic discourse in our age.

Critics, particularly on the political left, often talk about needing their “own Joe Rogan,” missing entirely what makes his show work: its genuine authenticity. Despite being historically left-leaning himself, Rogan’s willingness to engage in real-time thinking with guests across the ideological spectrum and across a broad variety of topics, his commitment to open inquiry and truth-seeking, has paradoxically led to his estrangement from traditional liberal circles – much like many of us who’ve found ourselves branded as apostates for maintaining consistent principles.

This commitment to a code of authentic discourse explains why organizations like Brownstone Institute – despite being routinely smeared as “far right” – have become a crucial platform for independent scholars, policy experts, and truth-seekers. I witnessed this firsthand at a recent Brownstone event, where, unlike most institutions that enforce ideological conformity, diverse thinkers engaged in genuine exploration of ideas without fear of orthodoxy enforcement. When attendees were asked if they considered themselves political liberals ten years ago, nearly 80% raised their hands.

These are individuals who, like my friends and me, still embrace core liberal values – free speech, open inquiry, rational debate – yet find themselves branded as right-wing or conspiracy theorists merely for questioning prevailing narratives.

What unites this diverse community is their shared recognition that the reality being presented to us is largely manufactured, as explored in “The Information Factory,” and their commitment to maintaining authentic discourse in an age of enforced consensus.

In The Wire, Omar Little, a complex character who lived by his own moral code while operating outside conventional society, famously declared, “A man got to have a code.” Though a stick-up man targeting drug dealers, Omar’s rigid adherence to his principles – never harming civilians, never lying, never breaking his word – made him more honorable than many supposedly “legitimate” characters. His unwavering dedication to these principles – even as a gangster operating outside society’s laws – resonates deeply with my experience.

Like Rogan’s commitment to open dialogue, like Brownstone’s dedication to free inquiry, like RFK Jr.’s determination to expose how pharmaceutical and agricultural interests have corrupted our public institutions: these exemplars of authentic truth-seeking mirror what I’ve found in my own circle. My friends and I may have different political views, but we share a code: a commitment to truth over comfort, to principle over party, to authentic discourse over social approval. This shared foundation has proven more valuable than any superficial agreement could be.

In these times of manufactured consensus and social control, the importance of this authentic foundation becomes even clearer. The 2012 Smith-Mundt Modernization Act, which made it legal to propagandize American citizens, merely formalized what many had long suspected. It represented the ultimate betrayal of the government’s code with its citizens – the explicit permission to manipulate rather than inform. As anyone not under the spell has come to realize – we’ve all been thoroughly “Smith-Mundt’ed.” This legal framework helps explain much of what we’ve witnessed in recent years, particularly during the pandemic – when those who proclaimed themselves champions of social justice supported policies that created new forms of segregation and devastated the very communities they claimed to protect.

This disconnect becomes even more apparent in the realm of charitable giving and social causes, where “virtue laundering” has become endemic. The absence of a genuine moral code is nowhere more evident than in our largest charitable institutions. While many charitable organizations do crucial work at the local level, there’s an unmistakable trend among large NGOs toward what a friend aptly calls the “philanthropath class.”

Consider the Clinton Foundation’s activities in Haiti, where millions in earthquake relief funds resulted in industrial parks that displaced farmers and housing projects that never materialized. Or examine the BLM Global Network Foundation, which purchased luxury properties while local chapters reported receiving minimal support. Even major environmental NGOs often partner with the world’s biggest polluters, creating an illusion of progress while fundamental problems persist.

This pattern reveals a deeper truth about the professional charitable class – many of these institutions have become purely extractive, profiting from and even amplifying the very issues they purport to solve. At the top, a professional philanthropic class collects fancy titles in their bios and flashes photos from charity galas while avoiding any genuine engagement with the problems they claim to address. Social media has democratized this performance, allowing everyone to participate in virtue theater – from black squares and Ukrainian flag avatars to awareness ribbons and cause-supporting emojis – creating an illusion of activism without the substance of real action or understanding. It’s a system entirely devoid of the moral code that once guided charitable work – the direct connection between benefactor and beneficiary, the genuine commitment to positive change rather than personal aggrandizement.

The power of a genuine code becomes most evident in contrast with these hollow institutions. While organizations and social networks fracture under pressure, I’m fortunate that my closest friendships and family bonds have only grown stronger. We’ve had fierce debates over the years, but our shared commitment to fundamental principles – to having a code – has allowed us to navigate even the most turbulent waters together. When the pandemic response threatened basic constitutional rights, when social pressure demanded conformity over conscience, these relationships proved their worth not despite our differences, but because of them.

As we navigate these complex times, the path forward emerges with striking clarity. From Marcus Aurelius to Omar Little, the lesson remains the same: a man gotta have a code. The crisis of authenticity in our discourse, the chasm between proclaimed and lived values, and the failure of global virtue-signaling all point to the same solution: a return to genuine relationships and local engagement. Our strongest bonds – those real relationships that have weathered recent storms – remind us that true virtue manifests in daily choices and personal costs, not in digital badges or distant donations.

This Thanksgiving, I found myself grateful not for the easy comforts of conformity but for those in my life who demonstrate real virtue – the kind that comes with personal cost and requires genuine conviction. The answer lies not in grand gestures or viral posts, but in the quiet dignity of living according to our principles, engaging with our immediate communities, and maintaining the courage to think independently. As both the emperor-philosopher and the fictional street warrior understood, what matters isn’t the grandeur of our station but the integrity of our code.

Returning one final time to Meditations, I’m reminded of Aurelius’s timeless challenge: “Waste no more time arguing about what a good man should be. Be one.”

Tyler Durden
Sat, 12/07/2024 – 23:20