Searching for laws of economics: causality, conservation, and ideology

Abstract

This review is intended for scientists who may be curious about “laws” of economics. Here, I search for laws governing value, including the value of money (inflation). I begin by searching out early scientists, e.g., Aristotle, Copernicus, and Galileo, who contributed to theories of value, or who, like Isaac Newton and J. Willard Gibbs, inspired students of political economy and thereby profoundly influenced the evolution of economic thinking. From a period ranging from Aristotle to John Stuart Mill in the mid-nineteenth century, I extract two candidates for “laws” of economics, one the well-known “law of supply and demand” (LSD) and the other, less well-known, “Fisher’s equation of exchange” (FEE). LSD, in one form or another, has been central to the development of economic thought, but it has proven impossible to express LSD in any compact, deterministic form with causal implications. I propose, however, that, as suggested by Irving Fisher early in the twentieth century and 100 years later by Nobelist Thomas Schelling, FEE is analogous to the first law of thermodynamics (FLT). I argue that both FEE and FLT can be viewed as “accounting identities,” pertaining to energies in the case of FLT and money in the case of FEE. Both, however, suffer from a similar limitation: neither provides any information concerning causal relations among the relevant variables. I reflect upon the impact of the absence of firm, fact-based, economic laws with causal implications on modern economic policy, allowing it to be dominated by ideologies damaging to American society.