Which German economist stated that economic laws Cannot be treated as a natural science they are just laws of analogy?

The Economist, 25 St James's Street, London SW1A 1HG

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Unrepentant

SIR--In "Palindrome repents" (January 25th) you accuse me of ignorance of economic theory. In particular, you say that my "claim that economics is inherently flawed on some deep epistemological level is just embarrassing." Is it?

Economics aspires to the status of a hard science. Specifically, it seeks to establish universally valid laws similar to 19th-century physics. For this purpose it relies on the concept of equilibrium, similar to the resting place of the pendulum, which is the same irrespective of any temporary perturbation. Paul Samuelson, an economist, called this the "ergodic hypothesis" and considered it indispensable to making economics a hard science.

The trouble is that economics cannot be made into a hard science, because of the reflexive interaction between the participants' thinking and the actual state of affairs. The interaction does not have a determinate outcome, because the outcome is contingent on the participants' expectations, and the participants' decisions do not merely passively discount the future but also actively help to shape it. There is a two-way feedback mechanism that does not lead to a predetermined resting place, but keeps a historical process in motion. Economic theory can protect the false analogy with 19th-century physics only by eliminating reflexivity. It does so by assuming demand and supply as independently given. The result is an axiomatic system that has little relevance to the real world.

You are correct to claim that, in practice, economists have learnt this, in order to deal with the real world. Alan Greenspan's recent Humphrey-Hawkins testimony is a brilliant exercise in reflexivity. But the theory has never been discarded and it serves as the scientific underpinning for the prevailing belief in the magic of the marketplace.

You are also right to claim that markets do not reign supreme; but you cannot deny that there is a powerful body of opinion that passionately believes that they should. You are plain wrong in asserting that I do not know the "big difference" between laisser-faire and totalitarian ideologies. I stated it explicitly in my Atlantic Monthly article and have been guided by it in my philanthropic activities. I can tolerate personal attacks but I must object when they are used to obfuscate valid arguments.

GEORGE S

New York

Asia's economic growth

SIR--Your article on Asia's economies (March 1st) says that my argument in "The Myth of Asia's Miracle", which popularised the research of Alwyn Young and Lawrence Lau, has been "ripped up at the roots by other economists". These are strong words: they convey the impression that the underlying research has been thoroughly discredited by subsequent work.

This is untrue. For example, in the most recent issue of "Brookings Papers on Economic Activity", Susan Collins and Barry Bosworth of the Brookings Institution published a comprehensive, careful study which strongly confirms the Young-Lau result--that increases in total factor productivity have played a surprisingly small role in Asian growth.

You also thoroughly misconstrue the relationship between capital accumulation and technological progress, suggesting that the whole growth-accounting exercise is meaningless because the two cannot be separated. The possibility that technology may be "embodied" in capital is indeed an important one. It means that a growth-accounting exercise which suggests that most growth is due to technological progress may be misleading, because that technological progress would not have happened without the investment. If technology is embodied in capital, this can lead to an exaggeration of the "residual" component of growth.

But the surprise about Asia is that the residual is lower, not higher, than one might have expected. Insisting that capital brings technology along with it can only worsen this paradox; it cannot make it go away.

PAUL K

Cambridge,

Massachusetts

SIR--Your welcome rebuttal of Krugmania suffers from a familiar flaw. Your careful examination of the specifically economic arguments is not matched by equivalent rigour when it comes to the political context.

This leads you to a contradiction. Having raised the spectre that "governments may be tempted to 'do something'," you then tell the South Koreans to do lots of things, including reducing "the power of the overweening and indebted chaebol". Most South Koreans would agree. But how? Presumably by tough government action to enforce antitrust policies--as favoured by Seoul's Fair Trade Commission--such as Kim Young Sam's early effort to force conglomerates to specialise in no more than three core businesses.

If Mr Kim beat a hasty retreat from this policy, it is because the chaebol are now more powerful than the state that nurtured them. In effect, Samsung and the others are the Korean economy. One reason why privatisation in South Korea is behind schedule is the difficulty in finding a way to do it in which the conglomerates do not simply gobble up everything and become even more "overweening".

A similar situation is evident in the banking sector. Here, too, government assuredly needs to "do something"; namely revamp and consolidate South Korea's banks into fewer, stronger and leaner entities that might stand a chance when financial markets are opened in the next few years. But that done, should the state simply leave the banks to be brought up by conglomerates, which will no doubt use them to lend themselves even more money and rack up their gearing ratios still higher?

Obviously a general overview cannot be expected to cope with the specificities of every country. But you should try harder to factor in the political and cultural dimensions as well as the economic. The real lesson is surely that governments should not do less but do things differently.

AIDAN

Shipley

West Yorkshire

Teaching Science

SIR--Your leader on understanding science (February 22nd) only begins to touch on what should be the real issue in the debate on educating people about science. Who honestly believes that the average citizen should be able to rattle off the latest refinements in quantum theory or protein synthesis when even seasoned scientists become glassy-eyed when subjected to the minutiae of any field outside their own?

What is far more important in the quest for a scientifically literate population is a basic understanding of scientific method--especially the part which tells us that nothing can be unquestionably proven, only not disproven given the evidence. All too often the public is encouraged to view scientific theories and discoveries as infallible. They are later shocked when the theories are proved wrong. They conclude that science itself is flawed and that scientists are untrustworthy. Teaching a fundamental understanding of scientific method would not only make science more accessible to the public, it would also prevent people from developing unrealistic expectations about the subject.

BARBARA R

Berkeley,

California

SIR--I commend your call to move away from "the traditional linear fashion" in science education. Why, though, limit the benefits of your proposed education reform to science? Most disciplines are full of the "arcane or frankly unintelligible". If mastery of hard things is not necessary to develop a layman's appreciation of a subject, let us teach students that family conflict often makes for riveting drama, rather than subject them to the quibbles of Hamlet.

Timur

Amherst,

Massachusetts

A Public Service

SIR--Your article "A relic of empire" (February 8th) states that British lawyers charge for their services when appearing before the judicial committee of the Privy Council. It has been the practice for many years of those acting for death-row prisoners in the Caribbean to do so entirely free of charge. Many have been saved from the gallows by the efforts of London lawyers who believe that, given what one Law Lord has described as the "uniquely irreversible" nature of the death penalty, legal representation should be provided for no fee pro bono publico.

Michael S

London

The Rock

SIR--The rec ent Spanish proposals for joint sovereignty over Gibraltar are nothing new (February 15th). They have been put forward by Spain at almost every Anglo-Spanish summit meeting on Gibraltar since a negotiating process was agreed at Strasbourg by David Owen and Marcelino Oreja, the then foreign ministers, in November 1976. At subsequent meetings in the early 1980s variants of the condominium idea were listened to politely by the British side, and equally politely rejected as unacceptable to the Gibraltarians. There has certainly been a change in thinking, but not in the way that you suggest. On this latest occasion, Spain, by breaching confidence and making public their latest variant, has decreased the likelihood of an "Andorra solution" slipping back into vogue.

The Gibraltarians' dearest wish is to be decolonised and accepted as part of the United Kingdom with a status analogous to that of the Channel Islands or the Isle of Man, while retaining their EU status. In return for Spanish acquiescence to this change, we should guarantee Spain the right to call a plebiscite at, say, 25-year intervals to test Gibraltarian opinion. If two-thirds of the electorate opted for Spain, Britain would relinquish sovereignty. This concession would encourage Spain to adopt a good-neighbour policy through which it might eventually win back the Rock with Gibraltarian consent.

William Jackson

Marlborough,Governor-general

Wiltshire of Gibraltar, 1978-82

Government Salesman

SIR--The Economist implies ("Don't be salesmen", February 1st) that the United States government in general and the Department of Commerce in particular exerts undue influence on foreign buyers on behalf of American companies. Nothing could be further from the truth.

The United States is the only country in the world that criminalises the conduct of offering foreign bribes through a Foreign Corrupt Practices Act. In fact, many of our foreign competitors still allow the tax deductibility of foreign bribes. The American government has led the fight against market-distorting tied aid and subsidies. We will continue to work against these practices in bilateral and multilateral forums such as the OECD, the WTO, the Organisation of American States and APEC. We have found that one of the most effective strategies supporting our multilateral efforts is to shine the light of American government interest on procurements, particularly where governments or government-owned enterprises are involved as buyers, regulators or supporters of American competitors. We almost never involve the United States government in private-sector transactions when market mechanisms work, regardless of foreign competitors.

We also find that our trade-development activities are complementary to our market-access and trade-agreement enforcement activities. While the Clinton administration has reached some 200 trade agreements in its first term, it takes market-opening activities in the form of missions, trade shows and counselling of American business to achieve the purposes of these agreements. Most of this is driven by private-sector resources. But particularly in emerging markets with socialist or statist traditions, there is no substitute for government involvement when other governments are supporting their companies.

The Department of Commerce has no quarrel with The Economist in so far as it advocates the lessening of government participation in decisions that should be driven by the market. But likening our efforts to those of a salesman is wide of the mark. Where deals are based on price and quality, where they are between private parties in free and fair markets, or where small businesses can reasonably be expected to fend for themselves, government should stay out. In other situations, the American government should be a strong advocate for American business.

STUART EIZENSTAT

Under-secretary for Department of

Washington

Belgium Federalism

SIR--You seem to conclude that, fundamentally, all is well in Belgium ("The next identity crisis", February 22nd). Not so.

Belgium's federal structure is not, as you allege, based on "three historic divisions". Rather, it rests on the fundamental bicultural (Flemish and French) nature of our country, with provisions for the small German-speaking community. The divergent social-economic evolution and political outlook of the French-speaking and Flemish communities, which have no common newspaper, radio or TV network, university or political party, is the driving force behind Belgian constitutional reform. This does not mean that a break-up of Belgium is inevitable or even desirable. But it does imply that Belgian federalism is a dynamic process. Further constitutional reform, to let each community take hold of its own destiny within Belgium and the EU, is therefore necessary. Flemish proposals for fiscal autonomy are not "extreme". Nor are they a danger to the future of the Belgian state. That danger comes from the blind resistance to change which some leaders of the French-speaking community continue to exhibit.

BRIGITTE GROUWELS

Member

Brussels Flemish Parliament

Against the Odds

SIR--I was surprised to read that Volkswagen's profits more than doubled, with a 14% increase in worldwide sales (Business this week, March 1st). I thought that the German economy was kaput; that no German firm could make money given the social costs, training obligations and union rules; that VW's four-day week couldn't compete with the long working hours in Britain and America; and that heavy industry was on the way out.

Are VW's profits a blip or are we reading the German economy all wrong?

Denis MacShane, MP

London

The Last Laugh

SIR--Your correspondent ("Not all bull", February 22nd) was amused by the story of the Hong Kong analyst who, on April Fool's day 1993, advised international investors carried away with emerging-market fever to buy shares on the Bhutan stock exchange, even though neither the firms nor the stock exchange existed. But the joke is almost on your correspondent. A stock exchange was set up a few months later, in October 1993. It is small and locally oriented at the moment, but it has a screen-based system equal to many much larger exchanges and provides a sound basis for raising capital as and when this country chooses to develop.

SUSAN SELWYN

Hong Kong

SIR--In your obituary of Robert Graham (February 22nd) you state that Switzerland's name will remain besmirched by possible business connections with Nazi Germany. But Switzerland still stands as a bastion of human rights and did so at a time when it was completely surrounded by Nazi-occupied territory. It requires some degree of naivety to expect Switzerland to have kept out of all business dealings with Germany during the war.Those who now point at Switzerland for having traded, 50 years ago, with a brutal dictatorship happily queue up in Beijing to trade with another brutal dictatorship.

China is a place with concentration camps, where protesting students and Tibetan freedom-fighters are killed, human rights trampled upon and democratic freedoms for still-British Hong Kong dismantled months before the takeover. Today's China traders include leading businessmen and the heads of many Western governments. Will they, too, 50 years from now be reviled for having traded with a tyrant?

E.F. STUMPL

Graz,

Austria

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