Thursday, August 29, 2013

The Science of Demand (4) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求


If the reader asks: in the whole structure of scientific methodology, which part is the most significant? With no hesitation, my answer is: theoretical prediction must be “refutable by facts”. A theory that is not refutable by facts has no explanatory power. It can be said that the subject of all empirical science is to establish certain refutable statement for prediction. In other words, science does not seek to be right, nor seek to be wrong; science seeks to be “refutable by facts”. Potentially refutable by facts but has not been refuted can then be said to have been confirmed. As aforementioned, to predict the occurrence of a phenomenon and to explain a phenomenon is the same thing. Prediction refutable by a phenomenon but has not been so refuted, whereas the occurrence of a phenomenon confirms the prediction, such phenomenon can then be said to have been explained. Certainly, a phenomenon can be explained by a number of theories. I will subsequently touch upon the choice of different theories.

The key here is: the reason why a theory not refutable by facts has no explanatory power is that such a theory cannot be empirically tested. A tautology can never be falsified, and since it can never be falsified, how can it be refuted by facts? A theory refutable by facts must be capable of being falsified by imagination. A tautology, being non-falsifiable even by imagination, has no explanatory power. Besides tautologies, there are four other situations making theories not refutable by facts, hence destroying the explanatory power of these theories. These are the contents of Sections 5 and 6 that follow.

Being refutable by facts is important. If theoretical prediction is refuted by facts, there are only two choices. The first one is to abandon the theory and look for others; the second one is to insert conditions to remedy it. But as mentioned when discussing ad hoc theory, such remedy requires option to be forgone, and such option forgone should not be too much. Refutable theory that has not been refuted today may not remain so tomorrow – this is the course of scientific advancement. Not refuted as of today means that the theory still retains its uses. The most important criterion in valuing a theory lies in its applicability to explain phenomenon, not in its right or wrong.

Prediction using a sentence or a statement has to focus on testable or refutable implication. Such implication is derived from theory. Logically, the rules for implication are simple: if the occurrence of A implies the occurrence of B (A B), then the non-occurrence of B implies the non-occurrence of A (Not B Not A). This is the most fundamental test. For instance, if it rains (A), then there are clouds in the sky (B). It implies: if there are no clouds (Not B), then it does not rain (Not A). If there are no clouds but it rains, then the hypothesis that if it rains (A), there are clouds (B) is refuted by facts.

The way to test the implication of a theory is to provide evidence to the contrary. This is a crucial point. In testing the implication that if it rains, then there are clouds (A B), evidence to the contrary that if there are no clouds, then it does not rain (Not B Not A) has to be provided. To test using if it does not rain, then there are no clouds (Not A Not B) is a common fallacy (in logic, such fallacy is termed fallacy of denying the antecedent). The occurrence of A implies the occurrence of B, but the non-occurrence of A has no implication whatsoever on B. It is a common misconception to say the non-occurrence of A implies the non-occurrence of B, with many scholars falling into this trap. For instance, in economics we assume every individual maximizes his self-interest (A), therefore under certain constraints, every individual will work hard (B). Some scholars submit that an individual does not necessarily maximize his self-interest (Not A), therefore under the same constraints, an individual will not necessarily work hard (Not B). This is a fallacy.

In 1946, an economist called R. A. Lester published an article catching the whole world’s attention. After investigating the policy of hiring drivers in Boston’s private transport companies, he declared wrong the renowned “marginal productivity theory” (the word “marginal” is not important here, but will later be expounded). According to economic postulate, every private company will maximize its profit, therefore in hiring drivers for its trucks, the marginal productivity contribution of every driver will equal his wage (this is one implication of the “marginal productivity theory”). Lester checked with all the principals of Boston’s transport companies and found that they neither knew nor cared what “marginal productivity” was, therefore this theorem was wrong: the wages of drivers did not equal their marginal productivity contribution. This fell into the aforementioned misconception that if it does not rain, then there are no clouds.

I can cite an interesting (but non-factual) example to illustrate this “A B, therefore Not A Not B” fallacy. Let’s say there were a group of idiots who knew nothing about real-world phenomena. Yet economists assumed that they all wisely maximized their self-interest. In fact, these people were all idiots, therefore this assumption was clearly wrong. On hearing that gasoline station was fun, these idiots all set up their own gasoline stations. Being idiots, some built their gasoline stations on remote mountains, some in dense forests, while some others on the sea. With no highways for vehicles to pass through, how could these gasoline stations survive? Nonetheless, some idiots in the same group unknowingly built their gasoline stations along highways. Not long afterward witnessed the survival of the fittest. Only those stations situating along highways survived. In fact, the idiots had not had a clue of what they were doing. The economists’ assumption that they knew how to maximize their self-interests was obviously wrong. Yet the surviving gasoline stations coincided with the postulate of maximization of self-interest, such behavior was therefore explained. Reasoning that since the idiots had no idea what they did, gasoline stations would not be built on a profitable location is fallacious.

Astronomical science in ancient China was brilliant, having high accuracy in predicting the timings of eclipses and lunar eclipses. I have not gone into any depth exploring what this science is all about, but kids in China have heard about the legend of “heavenly dog swallowing the sun”. Using the postulate of “heavenly dog” to explain eclipse or lunar eclipse is certainly nonsense, but if prediction is accurate and not refuted by facts, it might as well be acceptable. Today’s theories on eclipse and lunar eclipse having replaced those of ancient times is not because today’s are right while yesterday’s were wrong, but due to today’s having more generalization to explain other astronomical phenomena. Perhaps when tomorrow comes, today’s theories could be proven wrong. Tautology is absolute yet without explanatory power. A theory with explanatory power could be wrong, but more importantly, it is refutable by facts. No matter right or wrong, a theory with explanatory power is a useful one. Reasoning that there is no heavenly dog swallowing the sun, therefore it cannot be used to predict the occurrence of eclipse is a fallacy. It is paramount to make the issue crystal-clear.


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