October 8, 2015

Redefining economics

Comment on Lars Syll on ‘Probability and economics’

Blog-Reference

You sum up: “... neoclassical economics lacks sound foundations!” (See intro)

This, of course, is true, and just because of this we have heterodox economics as superior alternative, don’t we? Unfortunately not, because Heterodoxy, too, lacks sound foundations.* And this leads one quite naturally to the conclusion: “... then one model is no more valid than another …” (See intro)

This conclusion is (i) false and (ii) self-defeating. Clearly, if there is no way to discriminate between a true and a false model any further discussion is no better than medieval word play about dancing-angels-on-a-pinpoint. And how can Heterodoxy assert that Orthodoxy is unacceptable, if no model is more valid than another? This is a blatant self-contradiction.

It is pretty obvious that Heterodoxy is in the same dark methodological wood as Orthodoxy and this in turn explains why economics is caught in secular stagnation.

How to get out of the wood? Heterodoxy has, first of all, to stick to the scientific method, which is well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Sticking to the scientific method implies that the heterodox economist avoids at all costs to get involved in questions that have no answer to begin with, like is God male/female or is greed good? Or, more generally, Heterodoxy avoids to apply concepts and tools where they are not applicable. Randomness is a case in point.

“From a realistic point of view we really have to admit that the socioeconomic states of nature that we talk of in most social sciences — and certainly in economics — are not amenable to analyze as probabilities, simply because in the real world open systems that social sciences — including economics — analyze, there are no probabilities to be had!” (See intro)

Yes, indeed, and from this follows that Heterodoxy has to get out of the so-called social sciences. Why? Because, as a matter of principle, we can have neither deterministic nor probabilistic knowledge about human behavior.

“By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

From this follows: economics cannot be built upon an assumption about human behavior. Behavior is neither deterministic nor purely random. To be sure, there is nothing wrong with the concept of randomness, only with its application in economics. That is an old hat.

“Alexander Rosenberg lays great emphasis on the role of intentionality in the social sciences, for in his view this role explains the nomological failures of the social sciences and supports the view that the social sciences (in anything like their current form) can never succeed in formulating real laws of human behavior.” (Hausman, 1992, p. 326)

The subject matter of economics is not homo oeconomicus but the economic system. Because of this, economics has to be redefined.
— Old definition, subjective-behavioral: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
— New definition, objective-structural: “Economics is the science which studies how the monetary economy works.”

The original methodological blunder of Orthodoxy has been that it attempted to axiomatize human behavior. This is a fine example of what Feynman called cargo cult science, i.e. ‘The form is perfect. But it doesn't work.’ The correct approach consists in axiomatizing the objective structural relationships of the monetary economy (2014). Since Jevons, Walras, and Menger neoclassical economists have not got the salient point of methodology.

In sum: Heterodoxy has to free itself from the social science illusion, which it has hitherto shared with Orthodoxy.** The joint failure speaks for itself.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

* With regard to profit theory see the proof ‘Heterodoxy, too, is scientific junk
** See also ‘PsySoc— the scourge of economics