July 19, 2016

Feeble minds, shaky assumptions, and the inevitable failure of economics

Comment on Edward Fullbrook on ‘Shaky Assumptions’

Blog-Reference

Every perceived event is a hard to unravel clew of unique space/time specifics, eternal laws/invariants, and free target-oriented human action. The flow of events is a clew of regularities, novelties, and apparent randomness. In order to think about a smaller or bigger section of reality it is imperative to simplify/abstract/idealize the perceived flow of events. This is known to every economist since J. S. Mill.

“Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)

What we call ‘the economy’ is an abstract mental construct. Nobody can see or touch or experience ‘the economy’. From the history of science, though, it is known that simplification/abstraction/idealization can go badly wrong. This happened in economics as almost everybody has realized by now. To better see want went wrong, here is the famous prototype of how ‘abstract speculation’ is done and how it finally approaches the complexity of reality with the highest possible degree of perfection. The prototype comes from physics but the step-by-step process can be customized for other disciplines. Mindless one-to-one copying of the procedure is, of course, not such a good idea.

“The Principia begins with an idealized world, a simple mental construct, a ‘system’ of a single mathematical particle and a centrally directed force in a mathematical space. Under these idealized conditions, Newton freely develops the mathematical consequences of the laws of motion that are the axioms of the Principia. At a later stage, after contrasting this ideal world with the world of physics, he will add further conditions to his intellectual construct ― for example, by introducing a second body that will interact with the first one and then exploring further mathematical consequences. ... In this way he can approach by stages nearer and nearer to the condition of the world of experiment and observation, introducing bodies of different shapes and composition and finally bodies moving in variant types of resistant mediums rather than in free space.” (Cohen, 1994, p. 77)

Orthodox economics, too, starts with an idealized world. There is NOTHING WRONG with that in general but ALL is wrong in particular because: “The program is organized around the following hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to   equilibrium states.” (Weintraub, 1985, p. 109)

The problem with this axiom set is NOT that it defines an idealized world but that it defines a world that does not and cannot possibly exist. HC3 or HC5 do not define limiting cases of reality like friction-free motion but introduce NONENTITIES, that is, entities like angels, unicorns, Spiderman, or the Easter Bunny. In addition, there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is a quite primitive methodological blunder.

Clearly, when only one of the foundational propositions fails the whole formal basis breaks apart and with it the whole theoretical superstructure. In general terms, the fatal fault of Orthodoxy is that it is based upon behavioral assumptions which can, as a matter of principle, not be other than shaky. In other words, Orthodoxy does not satisfy Aristotle’s definition of science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” There is no such thing as a ‘certain, true, and primary’ behavioral premise. The fatal mistake/error is to define economics as a behavioral science.

Because of this, there is no other way out of the calamity than to reconstruct economics entirely WITHOUT the concepts of constrained optimization, rational expectations, equilibrium and other nonentities. In methodology this is called a paradigm shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)

Obviously, there is until this very day ‘no indication of what it might mean’ to do economics without nonentities. Traditionally, heterodox economists have always been very clear about that the neoclassical axioms are unacceptable but they have not come forward with a concrete proposal how to replace them.

Just like Orthodoxy, traditional Heterodoxy could not solve the starting problem, which consists in defining the elementary monetary economy in simple/abstract/idealized and consistent terms. Many heterodox economists do not even understand the starting problem. J. S. Mill put it thus:

“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (2006, p. 746)

Krugman has clearly told the world “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Traditional Heterodoxy has always been very outspoken that these premises are “unrealistic” or “shaky” but never told the world what the ‘certain, true, and primary’ premises of economics are. And this is how Heterodoxy has become part of the problem and in fact one of the many obstacles for economics to become what it claims already since Adam Smith to be: a science. Both, orthodox and heterodox economics, is nothing more than storytelling and a more or less plausible myth.

Egmont Kakarot-Handtke


References
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund. URL
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

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REPLY to Ken Zimmerman on Jul 20

You say “I put it to you that there are no certain, true, and primary premises of economics, ...”

This is incorrect. The true economic axiom set is shown here.

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REPLY to Ken Zimmerman on Jul 21

(i) You made the assertion “... there are no certain, true, and primary premises of economics, ...” without giving a proof or citing a proof.

(ii) In direct refutation of your purely rhetorical assertion I gave you the certain, true, and primary structural axiom set as a replacement for the false Walrasian microfoundations and the false Keynesian macrofoundations.

(iii) You now have two options either (a) to prove your unfounded assertion (i) ex post, or (b), to empirically disprove one of the many theorems that follow from the certain, true, and primary macrofoundations (ii) yourself or to follow the standard procedure and let econometricans do the test.*

The ball is in your field. I am looking forward to the results of empirical testing.


* I submit the rather complex structural Phillips curve eq. (33) in ‘Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster’ (augmented with foreign trade and government) as an IDEAL object for testing.

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REPLY to Ken Zimmerman on Jul 23

Science is special because it is the systematic attempt to establish truth which in turn is well-defined by material AND formal consistency. Scientific truth is double-checked, everything else is blather, storytelling, gossip, rhetoric, propaganda, sitcom, etcetera.

The very characteristic of a scientific proposition/theory is that it is open to logical and empirical proof/disproof. In general terms, the sole task of the scientist is to produce logically and materially consistent propositions about a segment of reality: “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein, quoted in Brown, 2011, p. 244)

You say: “The question that any social science must answer is ‘why is there durability?’”

I say:
(i) Economics is NOT a social science but a system science. Your specification of the subject matter is false to begin with.
(ii) Economics has to answer the question of how the monetary economy works.
(iii) Iron Law of methodology: No way leads from the understanding of human behavior to the understanding of how the economy system works.
(iv) Orthodox economics is built upon subjective-behavioral axioms. Because of (iii) this is the false starting point. In addition: From green-cheese behavioral assumptions, e.g. utility maximization, no testable proposition ever follows. Second-guessing human behavior has always been and will always be a pointless exercise.*
(v) Economics has to be built upon objective-structural axioms.
(vi) From objective-structural axioms follow testable propositions about the relationships of measurable economic variables. The two most important of theses relationships are the Profit Law and the employment equation. There can be no doubt that it is of utmost importance for an economist to know the Profit Law. The actual situation is that the representative economist cannot even tell what profit is. This includes all Nobel Prize winners.
(vii) All questions about human nature/behavior/action have to be left to psychology, sociology, anthropology, political science, etcetera. Knowledge about human behavior is imported into economics from these disciplines IF NEEDED. Economics is NOT a science of behavior (2011).
(viii) In order to become a science economics has to move from shaky subjective-behavioral microfoundations to solid objective-structural macrofoundations (2014) and to refrain entirely from political agenda pushing.

Conclusion: Your clueless PsySoc philosophizing is irrelevant for economics.

* “The disciplines that we currently call ‘social sciences’ may accumulate gossip or spot correlations, but Rosenberg believes they will never succeed in formulating laws and theories with the force and fruitfulness of those in the natural sciences.” (Hausman, 1992, p. 326). In other words, the term ‘social sciences’ is a misleading pretension. Feynman aptly called them cargo cult sciences.


References
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL

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REPLY to Ken Zimmerman on Jul 26

I am on one page with Capra.
(i) I say that economics is a systems science, he titles one of his books: “The Systems View of Life: A Unifying Vision.”
(ii) He says: “What makes the scientific enterprise feasible is the realization that, although science can never provide complete and definitive explanations, limited and approximate scientific knowledge is possible.” I hasten to add that non-science cannot, as a matter of principle, provide any explanations at all.
(iii) Capra enumerates the main deficiencies of orthodox economics (1983, ch. 7). I prove that economics is a failed science.
(iv) Methodologically: “All of physics has to follow uniquely from the requirement that its components be consistent with one another and with themselves.” (1983, p. 92) This brings us directly to the shaky axiomatic foundations of economics.*

Where things go awry is: Capra (a) does not understand how the economic system (= monetary economy works), (b) has no idea what profit is and how the profit mechanism works, (c) has not gotten the crucial point of a paradigm shift: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

Capra argues from the highest peaks of theoretical physics down to actual theoretical economics. The insights of quantum physics or relativity theory, though, are completely irrelevant for economics because economics is still at the proto-scientific level and has not even arrived at something like Archimedes’s Law of the Lever. It is lagging more than 2000 years behind: “Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (von Neumann, quoted in Ingrao et al. 1990, p. 197)

For economists Descartes is NOT outdated. These confused blatherers and silly agenda pushers have still a long way to go until they arrive at Descartes’s level of rigorous thinking. Economists have no Cartesian clarté about their foundational concepts profit and income.

To tell people who cannot even define the systemic relations of an elementary consumption economy (2012; 2014) that they need apply the tools of complexity theory is beyond absurd.

Orthodoxy is false. But Orthodoxy bashing is not enough. It even becomes a bit comical when it is done by unqualified heterodox folks who recommend ‘Science and Spirituality’ but have never produced a testable economic proposition and insist: “I don’t have to prove anything.” (Zimmerman Jul 22)

Note, the first rule of science says: If it cannot be proved it cannot be accepted to the corpus of scientific knowledge. It is just another repugnant instance of storytelling, cargo cult science, or economics.

References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Capra, F. (1983). The Turning Point. Bantam.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2012). Geometrical Exposition of Structural Axiomatic Economics (I): Fundamentals. SSRN Working Paper Series, 2060073: 1–22. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL

* For my take on formal and material consistency go to the AXEC blog and enter ‘consistency’ into the search field

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REPLY to Ken Zimmerman on Jul 28

In the philosophers’ section* of this economics blog you communicated your most profound insight: “Like all of life, including human communities ‘freedom to’ is complex and its evolution uncertain.”

True, even trivially true. But you are not only a philosopher on a par with Socrates (I know that I know nothing) but also an expert on scientific methodology and kindly enlighten me and the world: “But you miss the really basic point before this one. That the components of physics have to be consistent with observations (with experience, experimental and otherwise). A logically, even mathematically self-consistent framework is useless and misleading if it is not consistent with observations.”

True, except for: “But you miss the really basic point before this one.” It seems, your attention span is even shorter than that of a fruit fly.

In the immediately preceding post of Jul 22 I wrote: “Science is special because it is the systematic attempt to establish truth which in turn is well-defined by material AND formal consistency.” Note that AND is in capital letters. So, as a matter of provable fact**, I missed nothing.

I even realized that you are the most prolific blatherer near and far and that means something given the abundance of white-noise producers on economics blogs in general. And this in turn only proves that BOTH Orthodoxy AND Heterodoxy are way below the scientific level. Nothing has changed since von Neumann wrote this: “You know, Oskar, if those books are unearthed sometime a few hundred years hence, people will not believe they were written in our time. ... Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (quoted in Ingrao et al. 1990, p. 197) In fact, economics is not even at the level of Archimedian mechanics and Cartesian logic.

Orthodox economics is based on shaky assumptions, a.k.a. Walrasian axioms. To accept these axioms is an incontrovertible proof of scientific incompetence. This holds for Orthodoxy since more than 140 years. So, Heterodox Economists of the World!, what are the certain, true, and primary axioms of economics? To say that reality is complex and its evolution is uncertain and that science is hard does not count as an answer.***

References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.

* See ‘Escape from Freedom’ .
** See this exhibit which neatly summarizes the scientific process.
*** For the comprehensive list of excuses see the post ‘Economic recommendations out of the swamp between true and false’.