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Ostrich economics

from Lars Syll

ZJL-Head-In-Sand

 

 

 

 

 

 

 

 

Deductivist modeling endeavours and an overly simplistic use of statistical and econometric tools are sure signs of the explanatory hubris that still haunts neoclassical mainstream economics.

In a recent interview Robert Lucas says

the evidence on postwar recessions … overwhelmingly supports the dominant importance of real shocks.

So, according to Lucas, changes in tastes and technologies should be able to explain the main fluctuations in e.g. the unemployment that we have seen during the last six or seven decades. But really — not even a Nobel laureate could in his wildest imagination come up with any warranted and justified explanation solely based on changes in tastes and technologies.

The Chicago übereconomist is simply wrong. But how do we protect ourselves from this kind of scientific nonsense? In The Scientific Illusion in Empirical Macroeconomics Larry Summers has a suggestion well worth considering — not the least since it makes it easier to understand how mainstream neoclassical economics actively has contributed to causing today’s economic crisis rather than to solving it:

Modern scientific macroeconomics sees a (the?) crucial role of theory as the development of pseudo worlds or in Lucas’s (1980b) phrase the “provision of fully articulated, artificial economic systems that can serve as laboratories in which policies that would be prohibitively expensive to experiment with in actual economies can be tested out at much lower cost” and explicitly rejects the view that “theory is a collection of assertions about the actual economy” …miracle-at-blackboard

A great deal of the theoretical macroeconomics done by those professing to strive for rigor and generality, neither starts from empirical observation nor concludes with empirically verifiable prediction …

The typical approach is to write down a set of assumptions that seem in some sense reasonable, but are not subject to empirical test … and then derive their implications and report them as a conclusion. Since it is usually admitted that many considerations are omitted, the conclusion is rarely treated as a prediction …

However, an infinity of models can be created to justify any particular set of empirical predictions … What then do these exercises teach us about the world? … If empirical testing is ruled out, and persuasion is not attempted, in the end I am not sure these theoretical exercises teach us anything at all about the world we live in …

Reliance on deductive reasoning rather than theory based on empirical evidence is particularly pernicious when economists insist that the only meaningful questions are the ones their most recent models are designed to address. Serious economists who respond to questions about how today’s policies will affect tomorrow’s economy by taking refuge in technobabble about how the question is meaningless in a dynamic games context abdicate the field to those who are less timid. No small part of our current economic difficulties can be traced to ignorant zealots who gained influence by providing answers to questions that others labeled as meaningless or difficult. Sound theory based on evidence is surely our best protection against such quackery.

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  1. June 5, 2014 at 9:32 pm

    These very instructive histories are kept out of sight, to fool the people.

    http://www.showrealhist.com/RHandRD.html

    I call this omission “intellectual savagery”. Maybe “ostrich economics” …

  2. June 5, 2014 at 9:58 pm

    “A great deal of the theoretical macroeconomics done by those professing to strive for rigor and generality, neither starts from empirical observation nor concludes with empirically verifiable prediction”

    This is quite simple once you realize that money is created as a debt-of-itself, usually on a schedule.

    The empirical observation is the chart itself.
    The pattern holds for the duration of the chart.

    After 4 years of increasing money supply (M2) with most of it going into savings (M2-M1)
    a spike in foreclosures (1987) or a recession (1991) or both (2001) (2008) happens.

    The continued divergence of M2 from M1 predicts a clearing of unpayable debt by means of mathematically inevitable defaults.

    http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/problem5.htm

  3. Ken Zimmerman
    June 6, 2014 at 1:20 am

    Let’s assume that economics is a science, that all science functions in essentially the same manner, and that a reasonable description of how science functions is presented by Richard Feynman in his famous “Lectures on Physics.” Now keep in mind any one or more or all of these assumptions could be incorrect. But if we accept the assumptions for now, this is how science functions. 1. We guess at a new law. 2. Compute the consequences of the guess. What consequences does the guessed law imply? 3. Compare those computations of consequences to experience/experiment. 4. If the computations disagree with experience/experiment the law is wrong. No ifs, ands, or buts, it’s wrong! Based on this economics is not a science. Even recognizing the difficulty of applying this scientific process to the areas investigated by economists, economics is not a science. So what is it? I invite “guesses” from one and all.

    • June 6, 2014 at 2:59 am

      Agree with “economics is not science” here:

      http://www.asepp.com/what-is-science/

    • davetaylor1
      June 6, 2014 at 9:46 pm

      Ken, Feynman follows the methodology of Hume (1740), starting with the axiom there is no God, so at the root of physics he misses a trick or two. Modern science began with Bacon (1603) advising his new king on ‘The Advancement of Learning’ “for the glory of God and the relief of Man’s estate”, taking things to bits to see how they worked (so mapping causes and effects rather than numerical laws), and compiling an Encyclopaedia for passing scientific findings down to future generations.

      So science works in two directions, labelled by Kuhn (1964) “revolutionary” and “normal” science; and it isn’t a thing, it is a process scientists perform which takes time (sometimes a long time), has phases [as your numbering suggests], and in these scientists with different types of mind may specialise or interact. Bhaskar (1993) characterises the phases of the retroductive (revolutionary) and deductive (normal) types [at pp.109,133] with mnemonics DREI(c) and RRREI(c), i.e. description (of situation), retroduction (to multiple possible explanations), elimination and identification of the structure of the solution (continued until the description can be satisfactorily expressed in terms of the causal explanation). Given the theory, application [as of Aristotle by Bacon] proceeds by resolving a situation/proposal into its components, redescribing these in terms of the theory, retrodicting possible causal structures, and as before, elimination, identification and continuation, now until causal influences in the situation/proposed design have been sufficiently identified and/or eliminated. When they can’t, it is time to go back to square one, i.e. DREI(c) seeking the less restrictive axioms of a more general theory.

      To answer your question, then, I see economics as teaching and practicing the RRR phases from its out-of-date version of the Encyclopaedia of normal science, never eliminating its errors or identifying its inability to do so, so never reaching the conclusion of its need for fundamental revision.

  4. June 6, 2014 at 4:59 am

    As Heilbroner once put it: “Mathematics has brought to economics rigor–and alas, also mortis.” Hypothetico deductivism has the advantage not only of contrived assumptions to arrive at a preordained and “deductively valid” conclusion leading to working “hypotheses” to be “tested” and predictions confirmed or “nullified” on the basis of cherry-picked data, sources and methodologies, time frames, parameters and the like that will yield that ideologically-safe theory of the kind that gets tenure, promotions and sweet gigs and grants.

    Another advantage is the hyopthetico-deductivist not only can engage in quantified metaphysics and ideologically custom-fit theory, but he or she does not have to get his hands or anything else “dirty” with reality, the real world and real people. And if reality and real people do not fit the model and the math, then they are simply outliers or rationalizing their real motives and calculations in their economic decision making.

    As the old saying goes: “It is difficult if not near impossible to get a person to grasp and understand something when his or her paycheck and job depend upon not understanding or grasping something.”

  5. Herb Wiseman
    June 7, 2014 at 2:52 pm

    I was in seeing my financial advisor the other day and there was huge chart on the wall showing the economic events such as stock market gains from 1935 to 2010. On it was also marked the downturns. Two downturns between 1935 and 1970. Numerous downturns after 1970. Whassup?

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