Home > New vs. Old Paradigm, The Economics Profession > How to make economics a realist and relevant science

How to make economics a realist and relevant science

from Lars Syll

As yours truly has reported repeatedly lately, university students all over Europe are increasingly beginning to question if the kind of economics they are taught — mainstream neoclassical economics — really is of any value. Some have even started to question if economics really is a science. Two Nobel laureates in economics — Robert Shiller and Paul Krugman — have responded.

This is Robert Shiller‘s view:

Critics of “economic sciences” sometimes refer to the development of a “pseudoscience” of economics, arguing that it uses the trappings of science, like dense mathematics, but only for show. For example, in his 2004 book Fooled by Randomness, Nassim Nicholas Taleb said of economic sciences: “You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment” …

My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles. People can just change their minds and behave completely differently. They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes.

And this is what Paul Krugman says:

So, let’s grant that economics as practiced doesn’t look like a science. But that’s not because the subject is inherently unsuited to the scientific method. Sure, it’s highly imperfect — it’s a complex area, and our understanding is in its early stages. And sure, the economy itself changes over time, so that what was true 75 years ago may not be true today …

No, the problem lies not in the inherent unsuitability of economics for scientific thinking as in the sociology of the economics profession — a profession that somehow, at least in macro, has ceased rewarding research that produces successful predictions and rewards research that fits preconceptions and uses hard math instead.

My own take on the issue is that economics — and especially mainstream neoclassical economics — has as a science lost immensely in terms of status and prestige during the last years. Not the least because of its manifest inability to foresee the latest financial and economic crisis – and its lack of constructive and sustainable policies to take us out of the crisis.

roughly right

We all know that many activities, relations, processes and events are uncertain and that the data do not unequivocally single out one decision as the only “rational” one. Neither the economist, nor the deciding individual, can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.

Neoclassical economists, however, have wanted to use their hammer, and so decided to pretend that the world looks like a nail. Pretending that uncertainty can be reduced to risk and construct models on that assumption have only contributed to financial crises and economic havoc.

How do we put an end to this intellectual cataclysm? How do we re-establish credence and trust in economics as a science? Five changes are absolutely decisive.

(1) Stop pretending that we have exact and rigorous answers on everything. Because we don’t. We build models and theories and tell people that we can calculate and foresee the future. But we do this based on mathematical and statistical assumptions that often have little or nothing to do with reality. By pretending that there is no really important difference between model and reality we lull people into thinking that we have things under control. We haven’t! This false feeling of security was one of the factors that contributed to the financial crisis of 2008.

(2) Stop the childish and exaggerated belief in mathematics giving answers to important economic questions. Mathematics gives exact answers to exact questions. But the relevant and interesting questions we face in the economic realm are rarely of that kind. Questions like “Is 2 + 2 = 4?” are never posed in real economies. Instead of a fundamentally misplaced reliance on abstract mathematical-deductive-axiomatic models having anything of substance to contribute to our knowledge of real economies, it would be far better if we pursued “thicker” models and relevant empirical studies and observations.

(3) Stop pretending that there are laws in economics. There are no universal laws in economics. Economies are not like planetary systems or physics labs. The most we can aspire to in real economies is establishing possible tendencies with varying degrees of generalizability.

(4) Stop treating other social sciences as poor relations. Economics has long suffered from hubris. A more broad-minded and multifarious science would enrich today’s altogether too autistic economics.

(5) Stop building models and making forecasts of the future based on totally unreal micro-founded macromodels with intertemporally optimizing robot-like representative actors equipped with rational expectations. This is pure nonsense. We have to build our models on assumptions that are not so blatantly in contradiction to reality. Assuming that people are green and come from Mars is not a good – not even as a “successive approximation” – modeling strategy.

  1. February 14, 2014 at 1:31 pm

    Number four is my favorite; I see economics as a subset of sociology and economists purposefully blind to the economy as a subset of Earth’s environment, which functions on a solar energy budget.

  2. wallflower
    February 14, 2014 at 3:45 pm

    Math isn’t the issue but the fact that the choice of models is so arbitrary (or self serving) and empirical data doesn’t enter in so much (often because it is hard to get, especially from experiments). In this empirical vacuum, as Max Sawicky put, it’s about the politics.

    4) Strongly agree, but to some extent it requires more “mathiness” on the part of other social sciences. But it does remind me of a point Josh Mason made, as I understood it, as long as we don’t know how much growth is exogenous (e.g., coming from education and tech, etc), then there’s no way to the assess the social value of all the putative gains to efficiency that neoclassicals claim can be captured by, for example, neo-liberal policies. I.e., Even if they’re right, it could just be a tempest in a teapot.

    • February 14, 2014 at 6:43 pm

      Yes, a tad more mathness would help evaluate unaccounted social and natural contributions plus external costs of all activities, starting with #1.

  3. February 14, 2014 at 4:00 pm

    One can not judge the “scientificity” of economics by the standards of the neo-classical construct, built in good faith but when we were scientifically naive.However, it is now a “religion” at the service of corporations, the public institutions such the World Bank, the IMF, etc.,and the US Dept. of Defense. All heterodox economists who would like to put economics at the service of societies should know that by now.
    Real Economics is a complex man-made construct. In that sense, it is “natural” in the second degree. I have seen lots of criticisms of economics based on the fact that it can not predict. Prediction is not a property of complex system. As yourself: Is Meteorology a science? If the answer is “Yes”, then why would you demand accurate predictions in economics, which is as complex as the weather.
    If it was up to me, I would ask universities to start teaching economics as a reflexive non-ergodic process whose complexity could be demonstrated by the Kaplan-Yorke conjecture , and whose attractor could be reconstructed via the Takens’ theorem(1981). Then, I would identify and put the patterns thrown-off by the economic system at the service of society.

  4. February 14, 2014 at 5:32 pm

    How can you have any social “science” that purports to deal with humans who, in the real world are highly embedded in time and space for example, or in space-time for the daring, in a discipline with no time or space in the modeling or core assumptions/”axioms”? What is the real-world time lag between t-1 and t or t and t+a? Where is this economic activity located in location and geographic “Place”? How do you realistically assume an individual representative actor in a system that celebrates “diversity”, and requires it for mass consumption and markets requisite for the expanded reproduction of capital and capital-labor relations?

    Then we get into the real-world and highly interdependent realms or spheres of the geography of economic activities (hydrosphere, lithosphere, pedosphere, biosphere, atmosphere, magnetosphere and cognitosphere or the realm of human thought and policy shaping human conduct and where and when it occurs and its impacts on location and Place) all of which is simply assumed away as “too squishy” to be quantified and thus be included in “scientific” modeling. As Heibroner put it: “Mathematics has brought to economics rigor and alas also mortis”.

    Next, we get into the real-world dimensions (“contexts themselves interdependent) of the social formations and modes of production into which humans are born, socialized, limited by institutions and resource limits, all of which “economics” must assume, some kind of “pure economy” and “pure economic actor” that can be abstracted to build the models that can incorporate quantifiable variables, parameters, functions and constants: geographic-historical; politico-legal; socio-cultural;

    Finally we get into the real-world of the political economy of commodified academia where theories and their theorists are commodities traded on various markets like any other commodity. They have to be able to supply according to the effective demand which in academia is NOT FOR free thinkers, people who would not trade integrity and intellectual honesty and courage for tenure or some promotion, people with substance who eschew schmoozing and networking, people, people who seek modeling “isomorphic” with the aspects of reality being modeled rather than assumed realities “isomorphic” with the math that is being showcased to get into some “prestigious” journal.

    Bottom line? Under capitalism, cannot buy or effectively demand what is not for sale and cannot be corrupted, bullied or coopted to effectively supply just as no one can effectively supply what is not being bought and for which there is no effective demand.

  5. February 14, 2014 at 5:54 pm

    Like any other professionals, economists fall into four categories described by competence and charlatanism. There are competent charlatans, non-competent non-charlatans, competent non-charlatans and non-competent charlatans. What counts as economics at any given time is determined by the balance of authority conferred on the various components from both inside and outside the discipline. It is not the scientific rigor or pretence that confers this authority. Science is rhetoric.

    Paradoxically, the cherished strategy for refuting the charlatans is to challenge the rigor of their scientific pretensions. This reinforces the myth that the authority of economics is or should be a matter of objective determination. Meanwhile, the technical jargon required to mount an effective rebuttal remains incomprehensible to the uninitiated. Must the layman then become fluent in gibberish as the only conceivable defense against the abuse of gibberish?

    Rather than dwelling incessantly on how to restore the elite status of economics as a science, wouldn’t it make more sense to systematically compare it to other idioms and genres of publicity and mystification (some of which are more accessible to a broader public)?

  6. February 14, 2014 at 9:13 pm

    I hate to sound too radical here, but how about, as a test of the “scientific nature” and extent of “rigor” of any theories, propositions, asserted “axioms” or modeling, is in the application and relevance to real-world issues and conditions expressed by those living under them? How about those being interviewed to provide “data” having access to and being able what has been written about, themselves and their own lives that produced the “data” for the scholarly research? Of course that would mean that the prose and math might have to be translatable to and for the people who provided the data and can report on how well these various theories, policies, propositions and asserted “universal truths” are working out.

    How many of those, for example, doing theory work on say the economics of discrimination in the workplace ever follow-up with those whose lives they have intruded on, who shared their lives and sufferings yielding the “data” in their research on their dissertations or got them tenure, just to see how they are doing? Or how about running by some of the research subjects core constructs and how they are to be measured with the people living under the conditions those constructs are supposed to provide some measurement of as well as changes in them? For example, for someone working on the political economy of American Indian Reservations could find out, from those who live there, all sorts of possible metrics (e.g. percentage of members of the Tribal Council from the same Clan or Family or Price-spreads between and availability of certain commodities Rez vs surrounding urban areas) that the isolated, detached, hypothetico-deductivist academic theorist could never know or know how to use “apriori” or as a matter of asserted “universal axioms” of human conduct and “choices”and the motives behind the conduct and choices. .

    And finally, when do we get to the issue of “structure” which granted is difficult to quantify to assess changes in structures and their implications? For example, we focus on levels rather than structures of output, income, prices, trade etc. What about the specific types and relative quantities being supplied or demanded (commodity structure)? What about chronic mismatches over time and space between what and how is being supplied or demanded? What about where and when various commodity types are being produced and demanded and imbalances in temporal-spatial structures? What about the issue of structures of supply and demand affecting structures of investment and vice-versa, affecting distributions and structures of incomes and wealth etc? What about endogenous as well as exogenous aspects of even vast institutions themselves? What about the issue of complexity (number and interdependence of decisions or tasks required) of structures as a variable or parameter, and how to measure it?

    What happens, when, outside of anything allowable within neoclassical theory, not only are changes in say “expectations” acting as ” exogenous shocks” triggering changes in supply or demand, thus changing market prices via clearing any short-run shortages or surpluses, leading to some kind of new and “predictable” equilibrium state via the endogenous market-equilibrium processes, instead, not only is market price shaped by changing expectations, but the changing market prices feedback on the expectations (in the same or opposite directions e.g. bubbles in housing, finance and so many other kinds of markets) so that market price is not determined by changes in supply and/or demand, but also a partial determinant of changes in expectations that lead to changes in market supply and demand? What happens when the forces on the supply side are not autonomous from those on the demand side but there is some co-determination between supply and demand?

    Science is not only what science does and how it does it, tests its results, but how and for whom it applies and tests and corrects what it does. The development of Zyklon-B gas by the Nazi chemists, was not only anti-human, but not even real science in how its effects were tested and verified before use. From Marx;s letter to Arnold Ruge in 1843 who was asking Marx to be more specific in laying out what future socialism might look like, he wrote back:

    “If the construction of the future, and its completion for all time is not our task, all the more certain is what we must accomplish in the present: I mean, the ruthless criticism of everything that exists; the criticism being ruthless in the sense that it fears neither its own results nor conflict with the powers that be.

    Doing real science, which requires intellectual courage and honesty, can be hazardous to your career, your life, your reputation, your liberty and your health.


  7. davetaylor1
    February 15, 2014 at 11:33 am

    While I sympathise with Lar’s prescription #2 for a real economic science, mathematics is not limited to the numerically quantifiable but includes logical quantification (none, one, some, all), topological (path, loop and circuit) dimensionality and order, and modelling of the effects of topologically stable but quantitatively varying populations, fluids and rates of flow. In short, it is not mathematics but its identification with commercial arithmetic we need to stop believing provides answers to the problems of economics. Over all, except in singular cases, mathematics (literally “techniques of learning”) is indexical: not dictating real answers but suggesting more or less efficiently and/or reliably where and how to look for them.

  8. February 17, 2014 at 6:50 am

    This article is defeatist and wrong. #3 is wrong specifically. There ARE economic laws – we just ignore them and suffer the consequences over and over. E.g: The law of rent:
    “The law of rent is an economic theory about measuring the value of land, developed by English economist David Ricardo in 1808. The theory is sometimes referred to as Ricardian rent. Its premise is that the rent or value of a piece of land is equal to the amount gained by putting it to its most productive use over that gained by using the most productive free land for the same purpose…
    The law of rent is in some ways reflected in the rental price of the use of land, whether it is commercial or residential. The amount paid is relative to the value of land used for the same purposes. Value is measured by economic gain obtained by choosing one location over another. For warehousing or shipping commercial goods, a site located on a harbor or near railways and interstate highways would be superior to one that is not.

    Rental locations for individuals that offer access to better employment, educational opportunities, or cultural activities may be superior to locations lacking these things. Rents represent the cost to the owner of the land and the buildings on them. The rental of a dwelling is a large expenditure of personal income. It is usually calculated as the income that can be obtained in a particular location less the amount it actually takes a person to live on.”

    • February 17, 2014 at 6:54 am

      There are also axioms that nearly laws:

      1. Man seeks to gratify his desires with the least amount of exertion.

      2. Man’s desires are unlimited.

      3. Man hoards consciously and systematically.

      • davetaylor1
        February 17, 2014 at 12:10 pm

        Rubbish. Look at athlete’s training, my desires being limited by experience of my own limitations and the needs of others, husbands who systematically throw out everything their wives systematically hoard. Personalities differ, and with them values.

      • February 17, 2014 at 2:22 pm

        It’s aggregate desires that are unlimited, not specific ones, or even just desires for one Man. It’s “Man’s desires,” meaning all of humanity, that are unlimited.
        I’m sorry you haven’t fulfilled your desires. Welcome to the club :)

      • February 17, 2014 at 6:19 pm

        Insatiable want is an affliction, sometimes a trained one.

  9. February 17, 2014 at 5:00 pm

    @davetaylor1, ” Personalities differ, and with them values.”
    Perhaps that maybe a ‘rule’:” Value changes”.

    • davetaylor1
      February 17, 2014 at 7:56 pm

      Come on, jalf. To differ is not to change. The one is static comparative, the other dynamic.

      Garrett below: I’m not surprised. A location is a location whether you are talking about universal space or the location of information in a library. But why THERMO dynamics? Are you going give us a reference to these young info age PhD’s and their postulates?

      • February 18, 2014 at 12:23 am

        I don’t remember the group reference, however,Carsten Herrmann-Pillath takes us on one parallel, in depth, with “Foundations of Economic Evolution.”

      • February 18, 2014 at 12:52 am

        May I rephrase:
        “Personalities differ = values differ” isn’t that the same as: @davetaylor1, ” Personalities differ, and with them values.”
        But, it still leaves the question,” Would it be a ‘rule” “value changes”.?Could we then go from there to “Wealth also changes in its appearance and/or its ownership.”?

  10. February 17, 2014 at 6:13 pm

    We are all aware that several young recently minted info age PhDs cooperatively worked from six verbal info theory postulates and reached mathematics used in quantum physics and just about anywhere one might imagine using mathematics. Spice to taste with the laws of thermodynamics and we are closing in on formulating fundamental economic laws that would actually be helpful for avoiding specie suicide.

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