Home > New vs. Old Paradigm > Reforming economics: pluralism is not enough

Reforming economics: pluralism is not enough

from Geoff Davies

Much of the current discussion of reforming economics focusses on the need for pluralism, particularly in teaching curricula, and very recently again on RWER.  Pluralist teaching is seen as challenging, because heterodox economic ideas are diverse, have little coherence, and are to a significant extent mutually incompatible.

This theme crops up frequently in discussions on RWER.  Now Cameron Murray, in the first issue of Inside, published by the Institute for Dynamic Economic Analysis, proposes to identify over-arching themes that can bring out the relationships among the various approaches.  This is commendable but it will not, on its own, result in a reformed economics.

I think the perceived difficulty of teaching heterodox economics comes from expecting too much from the exercise.  It will result in better-educated economists, and that is a very good thing.  Breaking the academic dominance of neoclassical economics would also be a very good thing.  However coherence in economics will not result from trimming and hammering existing fragmented ideas into a new box.

Coherence in economic theory will only come from deeper insights into how economies work.  Newton did not propose a more general framework that could accommodate the ideas of Ptolemy, Copernicus and Kepler, with excisions of a few difficult bits.  Rather, he found a deeper relationship that implied Kepler’s version of Copernicus’ system, and left Ptolemy’s system, by comparison, clumsy, limited and inaccurate.  It also explained falling apples and flying cannon balls.

Of the three main aspects of economic reform – teaching, theory and policy – the way forward is, perhaps paradoxically, most evident for policy.  Theory is the most challenging.  The approach to teaching can be clarified when it is considered in relation to theory and policy.  Here I will address policy and teaching reform in the context of a more fundamental approach to theory.

Much current economic policy is so misguided it is not hard to identify policies that would be less harmful, and hopefully even beneficial.  This comes into sharper focus if we identify some of the sources of mainstream nonsense.  Beyond that first step, a more coherent and fundamental view of the operation of economies can, I will argue here, be inferred from well-known observations in conjunction with modern ideas of self-organising systems.

I would identify three central follies of mainstream economics:  the neoclassical general equilibrium, the neglect of the roles of debt, money and banks, and the misuse of GDP to measure welfare.  There are other follies, to be sure, but if we got these idiocies out of policy thinking the world would already be a much better place.  More sensible policy approaches are already evident in broad outline, and future work can refine them.

Critiques of the neoclassical theory are plentiful, but not all of them are as fundamental as they might be, so I will summarise here my own assessment, from my book Sack the Economists.  The assumptions required to obtain a theoretical general equilibrium are absurdly unrealistic:  we must all be able to predict the future, there must be no increasing returns to scale beyond an ill-defined point of diminishing returns, we must all have complete and timely knowledge, we must not be influenced by third parties (thus excluding fashion, manipulative marketing and herd behaviour in financial markets), and so on.  The predictions of the theory are also blatantly contradicted by observations of real economies.

Both theory and observation tell us real economies are unstable.  Theory first: if you relax any of these assumptions, your system is likely to become unstable.  This is most obvious for increasing returns to scale, which can allow the biggest firm to grow at the expense of all the others.  Delayed or incomplete information implies delayed or weak feedback, which can result in overshooting instabilities.  Herd behaviour exaggerates trends, also yielding overshoot, as is most obvious in financial markets.  The whole point of marketing and fashion is to cause one product to “go viral”, at the expense of all others, another kind of instability.  So a more realistic theory of economies will involve internal instabilities (otherwise why would neoclassicists restrict themselves with such glaringly unrealistic assumptions).

Now observation:  instabilities are easy to identify in real economies.  A market crash is an obvious example.  The growth of one firm to dominance in a market segment is an instability so common that many market segments are dominated globally by a handful of firms, through the operation of increasing returns and other mechanisms, both economic and political, legitimate and not.  Henry Ford and Microsoft are the cliche examples.  The distribution of wealth tends to become highly concentrated, a form of instability.  Herd behaviour in financial markets, due to following trends and rumours rather than “fundamentals”, is commonly remarked, and it drives rapid fluctuations.

If your system is full of internal instabilities, there can be no general equilibrium.    Without equilibrium, the neoclassical claim of optimality is lost.  The fundamental consequence is that there is no basis whatsoever to conclude free markets are best.  An unfettered market might yield results that are desirable and efficient, or they might be undesirable, or inefficient, or both.  The central claim of the neoliberal ideology that dominates the world is lost.

A system that is full of internal instabilities will be a self-organising system, and it may be far from equilibrium all the time.  Its behaviour may be simple (like the neoclassical system), not-so-simple, complex or chaotic.  Evidently, given their erratic behaviour, our modern economies are in the regime of complexity or chaos.  From the theoretical perspective, a complex self-organising system is a radically different beast from the gently oscillating, near equilibrium neoclassical system.  Equilibrium is not a useful first approximation, to understand it you must start from a quite different place.  You have to ask quite different questions about it, such as whether you can recognise general trends or “character” in its behaviour, and identify the main drivers of those trends.  You also have to be humble, because a strongly interconnected system will not respond simply to interventions.

All of this means you cannot make any general claims about a “free” market, you have to look and see what it is doing.  If it is doing bad things, like trashing the planet, then you need to look at the incentives that drive it to such behaviour.  It is not hard to identify incentives to profit by dumping pollution or over-exploiting natural resources.  Many such perverse incentives are actually due to interventions in the market (on behalf of rich sponsors).  If we just got rid of subsidies to the fossil fuel industry, the world would be better off.

If removing perverse incentives (intentional or not) does not improve markets’ behaviour sufficiently, then actively introducing benign incentives may be advisable.  A cap-and-trade scheme for reducing greenhouse gas emissions is an example.

Thus, despite the perhaps-daunting conclusion that economies are complex systems, improved policy approaches are readily evident.  We already intervene a lot in economies, we just do it incoherently, guiltily, or for perverse ends.  If we intervened more coherently and with a clearer vision, we might find our world improves with amazing speed.  At the very least, we would be better off if we stopped accelerating toward a precipice.

The role of academic economics in this conception will be to refine and better quantify the ideas just outlined.  Old questions will recede and new questions come to the fore.  Thus, it is important to clarify which are the most important feedbacks in the system, and which behaviours they most influence, and that will be a large and continuing task.  Questions like “Why do firms exist?” are secondary, until more basic things are sorted out.  Questions like “What is my optimal investment strategy for the next fifty years?” become irrelevant.

There are already some strongly developing correctives to the second major folly of mainstream economics, the neglect of debt, money and banks, both commercial and central.  Commercial banks and other private financial institutions generate money and debt endogenously to the system.  A number of prominent people identified the role of excessive debt in the Global Financial Crisis (or Great Recession) starting in 2007.  Steve Keen has perhaps the best-developed theory of how debt renders a whole economy dynamically unstable.  I have given a very simple but instructive model of how a weakly restrained debt build up can lead to overshoot and crash.

The other major institutions involved with money and debt are the central banks.  The group promoting Modern Money Theory has shown that the operations of central banks are almost the opposite of the intuitions of most economists and politicians.  J. D. Alt’s explanations in Diagrams and Dollars are the easiest to follow.  They argue, for example, that the role of taxes is not primarily to balance a budget, but to “pull” the circulation of official money, which the central banks produce.  A government with money-creating power can never go broke, and never default on its debts.  Nor need “printing money” yield ruinous inflation unless the economy is already at full capacity, which is certainly not true in the post-GFC world.  They fully expose the folly of austerity policies, which exacerbate recession and depression.

The third major mainstream folly is the misuse of the GDP to measure the overall welfare of a society.  This misuse grossly distorts our priorities.  Things that involve money are promoted, while the many good things that do not involve money are neglected or disparaged.  Anything that involves money counts as a positive, even cleaning up pollution, recovering from a natural disaster, or suffering the consequences of ill health or a car crash.  There is a well-developed, unholy and unspoken alliance between unscrupulous businesses and politicians to promote anything that involves money, no matter how destructive, because it simultaneously increases the firms’ profits and the GDP.  The drive to endlessly increase the GDP is destroying the planet.

There are well-developed alternatives to the GDP that could be quickly deployed.  They involve balance sheets:  positives, negatives and a net benefit.  Some yield one number, like the Genuine Progress Indicator, others three numbers, like triple bottom line, and yet others may not be reduced to simple numbers, like reports on the state of society or the natural environment, and whether or not they are improving.

Thus broad policy alternatives to mainstream doctrines are readily identifiable, to manage markets, to manage banks, money and debt, and to measure or characterise the effects of policies.  Other aspects of the economy can also be addressed without a lot of theory, such as promoting more responsible forms of collective ownership than corporations, and promoting business models that strengthen beneficial market feedbacks.

How economics is to be taught is still somewhat challenging, but the framework just outlined clarifies an approach.  The new ideas can be taught, and in fact taught more readily, because they are not as highly elaborated as the neoclassical theory.  One reason neoclassicism now dominates curricula is that it requires the mastery of difficult mathematics applied to a great many aspects of the imaginary neoclassical world.  These can all be dispensed with, and the new ideas taught more readily and quickly.

(As a scientist, a non-economist, I observe among some heterodox economists a tendency to think that any replacement of neoclassical economics will necessarily have to be highly developed mathematically.  In fact much economic management relies on experience and qualitative assessments, because neoclassical models have little to say about much of the economy, like banks, and because the inadequacy of the neoclassical theory is recognised in practice, if not commonly admitted or articulated.  Also, when economies are understood as complex systems, there is a limit, a kind of uncertainty principle, to how much quantification is useful.  This is because such systems are not predictable in intimate detail, but only in general trends and character, like climate, or animals.  Thus the lack of a theory as highly elaborated as the neoclassical theory is not a problem.)

The difficulty Murray addresses is that non-neoclassical economics comprises many distinct schools that are diverse and not uncommonly incompatible with each other.  No doubt there is much of value that can be carried over into a new, more integrated economics, and over time much else might be discarded.  I am no expert in all of that, except to note that many habits of thought from old schools and paradigms will need to be let go, and that is not easy.

In the context developed here, the existing schools of thought can be sensibly taught the way the history of economics is taught.  Murray’s proposal to identify over-arching domains that can bring some coherence to this teaching is certainly constructive, but it does not change the nature of the exercise, which is still more like history.  As I have already argued, pluralism, on its own, will not generate a new and coherent economics.

Coherence will only be brought to economics when a sufficiently fundamental insight is identified.  I have argued above that recognising economies as complex self-organising systems is such an insight.  How well this hypothesis serves to make sense of economies can be explored and debated.  It may be supported, or it may be superseded, but for now it brings more coherence to understanding economies and is therefore a useful framework both for teaching economics and for further research.

Though some may recoil from mention of the “s” word, this is just how science proceeds to improve our understanding of the world.  Newton gave us an insight into the motions of falling apples and orbiting planets.  Subsequently Einstein gave us a more accurate and more general insight into how gravity works.  Nevertheless Newton’s version was, and remains, very useful.

To those who are not comfortable with the idea that economics can be a science I would offer several observations.  First, modern science is moving beyond the reductionist clockwork universe of Descartes.  The power of systems theory is that it can be holistic:  it can embrace living things without killing them, and we can understand more about them without pretending they are predictable, determinist automatons.  (Indeed that pretence is a central deficiency of neoclassicism.)  There is room for free will.

Second, there are such things as historical sciences.  In my own field of Earth science, we cannot run experiments with alternative Earths.  We must make do with evidence from the remote past or the remote interior, but it is still possible to pose hypotheses and test them for consistency with observations.  The Earth is rather messy and the details of its development are affected by myriad details, but it is still possible to gain a broad understanding of its development.  Human societies are even messier and more erratic, but historians and social scientists are still able to draw out coherent broad narratives.

Third, mathematics can be useful, but it is not science.  Mathematics is a tool that is sometimes useful in science.  Sometimes it is appropriate to use elaborate mathematics, or to work at high precision, but in other contexts a rough estimate using simple algebra may yield important insight.  Many neoclassical economists seem to believe that sophisticated mathematics makes their work scientific, but neoclassical economics is pseudo-science:  it is a system of belief, with no useful relevance to the observable world, dressed up in mathematics to look like science.  Just because neoclassical economics abuses mathematics does not mean mathematics has no place in economics.

Fourth, only in some fields, like experimental physics, is the point of science to make accurate predictions of the future.  In the historical and living sciences the point is to gain broad understanding of how something works, without expecting to predict what will happen next.  Market crashes, in their nature, will not yield to accurate predictions of when they will occur.  However if we can better identify the conditions under which they are likely and adjust things so they are less likely, then economics can be extremely useful and beneficial.

Fifth, if the point of economics is to give us useful guidance on how real economies work, and if some ideas are abandoned because they don’t fit what we can see, then to my understanding it is science, in the most general sense.  If you don’t agree with my semantics, but you agree we are trying to elicit useful guidance about the observable world, then let’s not get hung up on the semantics, let’s just get on with it.


  1. robert r locke
    December 5, 2014 at 3:11 pm

    “Henry Thomas Buckle
    The English historian Henry Thomas Buckle (1821-1862) was a major figure in the positivist movement in historical scholarship. He applied the methods of natural science to history in an effort to discover scientific laws governing the historical process.
    Henry Thomas Buckle was born in Lee, Kent, on Nov. 24, 1821….
    Buckle felt that there was a need to demonstrate that historical development occurs in accordance with universal laws, and perhaps more than any other historian of the 19th century he popularized the belief that scientific laws of history could be formulated. Thus the aim of his work was to discover by inductive inquiry the causal uniformities governing society and its development. Buckle’s historiographical method was influenced by John Stuart Mill’s empiricism and by Auguste Comte’s belief that society should be studied through the application of scientific procedures.
    In his History of Civilization in England Buckle argued that in order to develop a scientific study of history, it is necessary to take into account not only how man modified the natural world but also how the natural world modified man. In particular, he believed that physical factors (climate and food, among others) are the most important force in determining how a civilization will develop. Thus for Buckle the differences among the world’s civilizations are due in large part to the unique physical circumstances in which each culture evolved. He held that the high level to which European civilization had developed was due to a combination of environmental factors that had encouraged full use of man’s intellectual capabilities. The key to human progress was, therefore, the development of knowledge.
    Buckle’s work enjoyed an immediate success, but his failure to assimilate Charles Darwin’s and Herbert Spencer’s evolutionary theories resulted in a rapid decline in his fame. While traveling in the Middle East in 1862, he contracted a fever and died in Damascus.
    Further Reading
    The best book on Buckle is Giles St. Aubyn, A Victorian Eminence: The Life and Works of Henry Thomas Buckle (1958), an account of his life and thought against the background of Victorian England. An older but reliable work is Alfred Henry Huth, The Life and Writings of Henry Thomas Buckle (1880). □

    Geoff, I have entered this quote from the Encyclopedia of Biographies, to show that historians went down that road in the 19th century to try to turn history into a scientific subject. When I, like any regular PhD student in history took the obligatory historiography course required of history students, I read Buckle.

    Buckle and others did not get very far in turning history into science because of the problem of the unknown and the irrational in dealing in questions of human affairs. That is why I am skeptical about economists who are trying to do the same thing in economics, wishing it were a science does not make it so.

    So what have historians settled for in their discipline. Induction, looking at the evidence in the historical record and then debating how to interpret it among historians and smart people. Be very careful about trying to apply systems thinking, contrived by people at various times in specific contexts, unless you have some very good evidence to back it up.

    You might call that nonscientific plurialialism, but it is all we have; I mean all we have is history, but that is no reason to be sad. History is a great subject. It is an unending quest to understand the human experience through the human experience.

    • Geoff Davies
      December 6, 2014 at 11:37 pm

      Robert, we regularly debate this topic, and thanks for your thoughtful comments. Buckle was necessarily using the reductionist, clockwork kind of science known at the time. That’s what Walras attempted to do too, setting in motion a century and a half of nonsense “economics”. If Buckle’s attempt was soon superseded, then good for historians. Would that economists had as much sense and moved on from Walras. But Buckle’s insufficiency does not invalidate the quest, any more than Ptolemy’s attempt did.

      If you want to predict the detail of what happens next, in society or the economy, then “the unknown and the irrational” will indeed defeat you. That does not preclude identifying patterns in the behaviour of societies and economies. If enough debt accumulates, then defaults may cascade into a crash, but it’s hard to tell just when the collapse will start. If an arms race runs too far, then a destructive war may occur, as it did 100 years ago, but fortunately did not 50 years ago.

      It’s not that I’m trying to force history into a restrictive mould, it’s that I can’t see much difference between my broad concept of science and your description of history: “Induction, looking at the evidence in the historical record and then debating how to interpret it among historians and smart people.” I would only add “and testing interpretations against further historical evidence”, which I’m sure you do too, witness the fate of Buckle’s ideas.

    • Geoff Davies
      December 6, 2014 at 11:48 pm

      Incidentally, Jared Diamond’s “Guns, Germs and Steel” lays out an impressive synthesis in which he argues that geography, species and climatic belts gave Eurasia an edge in developing agriculture and civilisation, compared with the Americas, Australia etc. Sounds like a much more sophisticated, less Euro-centric example of what Buckle might have been attempting.

      And Diamond, an anthropologist, says at the beginning of that book that he thinks your average New Guinea highlander is more intelligent than your average Western city dweller, because the highlander has to contend with a much more complex and less predictable world. (But I get that Buckle was not just appealing to the innate superiority of Europeans, and English men in particular. Good on him, he deserves some credit.)

  2. Rhonda Kovac
    December 5, 2014 at 5:22 pm

    A large part of economic policy foolishness is the result not of flawed theories, but of political corruption, by which policy is driven to serve special interests irrespective of what the theories say. So, not only is ‘pluralism’ insufficient. So also are better economic theories.

  3. December 5, 2014 at 9:46 pm

    The pluralism of nonsense is still nonsense
    Comment on Geoff Davies’s ‘Reforming economics: pluralism is not enough’

    According to scientific criteria conventional economics is a failure. From this you draw the conclusion: “Sack the economists and disband their departments.” This seems to be a straightforward conclusion, however, it is not because it takes us beyond the realm of science into the realm of politics. Within the confines of science the only legitimate and praiseworthy action is to replace a theory/paradigm by a better one.

    Again, it is a logical mistake to conclude from the fact that conventional economics is defective that the curriculum can be improved by counterbalancing it with other defective approaches.

    We can agree, for example, that the orthodox profit theory is false (Desai, 2008). But what about Heterodoxy? The profit theories of Marx, Schumpeter, Keynes, Kalecki, Davidson, Minsky, Keen are also demonstrably false (2014; 2011; 2011; 2011; 2013). Despite the obvious fact that they cannot all be correct at the same time, all are propagated under the banner of pluralism as heterodox alternatives. As it happens, they are all different AND false. Real scientists would feel the need to clear up this internal contradictions and not to advertise them as pluralism.

    As there is only one Law of the Lever, there can be only one objective Profit Law for the economy as a whole as long as profit cannot be created by wishful thinking. And, being a scientist, you know this quite well: “Coherence in economic theory will only come from deeper insights into how economies work.” (Geoff Davies, see above)

    As it happens, this coincides perfectly with my recent post: “This, then, could be the new directive: Economics is the science which studies how the monetary economy works.” See:https://rwer.wordpress.com/2014/12/01/the-ramsey-keynes-dispute/#comment-84221

    What is needed is a paradigm shift. The problem is that Heterodoxy has no clue how to achieve this. And because it cannot be claimed that the heterodox paradigm is better it is claimed that heterodox policy is better.

    While this may be the case, it begs the question. To argue that orthodox theory is false but heterodox policy is right is simply a category mistake.

    There is no way around it: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

    What is expected from economists is the true theory and not the pluralism of false theories. After Orthodoxy has failed, quite naturally all hopes rest on Heterodoxy.

    Don’t dally until someone demands: Sack them all!

    Egmont Kakarot-Handtke

    Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume
    (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave
    Macmillan, 2nd edition. URL http://www.dictionaryofeconomics.com/article?id=
    Kakarot-Handtke, E. (2011a). Schumpeter and the Essence of Profit. SSRN Working
    Paper Series, 1845771: 1–26. URL http://ssrn.com/abstract=1845771.
    Kakarot-Handtke, E. (2011b). What is Wrong With Heterodox Economics?
    Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803:
    1–9. URL http://ssrn.com/abstract=1845803.
    Kakarot-Handtke, E. (2011c). Why Post Keynesianism is Not Yet a Science. SSRN
    Working Paper Series, 1966438: 1–15. URL http://ssrn.com/abstract=1966438.
    Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series,
    2357902: 1–5. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
    Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series,
    2414301: 1–25. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
    Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
    Method in Economics and Econometrics. Cambridge, MA: MIT Press.

    • Geoff Davies
      December 7, 2014 at 12:06 am

      Just three brief remarks. I would not argue “orthodox theory is false but heterodox policy is right” and I’m not sure where you got this interpretation of my article.

      There is no “heterodox paradigm”, the “heterodox is just the assortment of other theories/paradigms that are not orthodox. That’s part of my point.

      Science does not deal with “the true theory”. Science deals with theories that are more useful or less useful as guides to the observable world, e.g. Einstein vs Newton. The claim of “Truth” is a hoary old myth that unfortunately is still widely believed.

      Oh and please read my book before you dismiss it out of hand on the basis of my brief remarks in the article. Clearly you do not properly appreciate my arguments.

      • December 7, 2014 at 12:56 pm

        One brief answer to Geoff Davies

        Be sure that I certainly do not dismiss your book.

        We agree that the neoclassical paradigm has to be replaced. Unfortunately Heterodoxy provides no alternative paradigm. The minimum requirement of a paradigm is that it is logically consistent. A heap of critique, well-meant proposals, and incoherent theories is not a paradigm.

        So, my point is that Heterodoxy does not satisfy scientific standards. You argue, as social scientists have argued long before you, yes but then let us lower the standards. Blaug called this playing tennis with the net down.

        This softening of standards started with Mill’s characterization of economics as an inexact and separate science. There is no such thing. Either you conform to the criteria of material and formal consistency or you are out of science.

        “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)

        In addition, the Einstein-Newton story is entirely misplaced. Standard economics does not resemble Newton’s theory but Ptolemy’s epicycle theory. Therefore, it cannot become the special case of a more general theory but has to go out of the window.

        That “Truth is a hoary old myth that unfortunately is still widely believed” is a widely employed self-deception among so-called social scientists.

        Economists do not really want to get out of the ‘thickness of confusion’ (Suppes) because wish-wash and inconclusiveness helps passably against outright refutation. After all: “… you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158). This helps against being sacked by Geoff Davies.

        Egmont Kakarot-Handtke

        Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.

      • December 7, 2014 at 5:16 pm

        If “…it is science, in the most general sense” (Geoff Davies), then it is not science in the true sense and worthless, because any knowledge is science in the most general sense (a possible dictionary definition). Either it is science (in the true sense) or it is not – it is unhelpful to have different “senses” of science.

        Agree with Egmont that Feynman (scientist) is right and Friedman (economist) is wrong about science. Economics is not a science because much of basic economics is vague and has not been, or cannot be, properly tested against data.


        Economics is pre-Ptolomaic, without any theory which even approximately matches the facts of observations. For example, in the past several years, economists systematically and repeatedly over-estimated economic growth in their forecasts. They have no idea how to improve their poor records, because they cannot get out of the “thickness of confusion”.

      • Geoff Davies
        December 8, 2014 at 1:50 am

        Egmont – I will only say this once more. The point of my article and my comment is that heterodoxy is not a coherent theory or paradigm – just as you are saying.

        I am not a social scientist. I am a geophysicist. I am not softening standards, I just have a more comprehensive view of what “science” comprises than some older definitions. I am not talking about “vague” theories.

        Are you even reading what I write? Neoclassical economics is pseudo-science and needs to be replaced, I have not argued it will become a special case of a more general theory.

        That science does not establish “truth” comes out of physics, not the alleged relativism of some social scientists.

      • Geoff Davies
        December 8, 2014 at 1:59 am

        Lyonwiss – you have over-interpreted my words and substituted your own definition. See my response above to Egmont – I am not talking about “vague” theories, I also agree with Feynmann.

        I have said very clearly, neoclassical economics is not science, it is pseudo-science. You say “economics” is not a science, a much broader claim. Just because you can’t see where to gain specific purchase on an aspect of economies (hence your word “vague”?) doesn’t mean there are not parts of economies that cannot be understood specifically, and that understanding tested in the scientific sense.

        I agree neoclassical economics is pre-Ptolemaic. Are you saying there can never be any scientific understanding of any parts of an economy? If you don’t like my claim economies can be approached scientifically, fine, I beg to differ and I’ll get on with it.

      • Geoff Davies
        December 8, 2014 at 2:28 am

        Oops, too many negatives. Should be “parts of economies that can be understood”. I think. :-)

      • December 8, 2014 at 11:40 am

        Only one small point

        Despite appearances to the contrary I agree with almost all you have said.

        However, it is one thing when physicist who have developed Quantum and Relativity Theory wonder about whether we can know the ultimate Truth. It is quite another thing when you tell confused confusers (2013) that we cannot know whether we have arrived at the truth with a big T.

        It is a bit like telling someone who has troubles going three steps in a straight line that he will never surpass the speed of light.

        The current problem of economics is to get the elementary concepts right (2014).

        Let us agree on this:
        “Although nowadays we have given up the idea of absolutely certain knowledge, we have not by any means given up the idea of the search for truth.” (Popper, 1994, p. 202)

        Egmont Kakarot-Handtke

        Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL http://ssrn.com/abstract=2207598.
        Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
        Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.

      • Geoff Davies
        December 9, 2014 at 12:23 am

        Egmont – thanks, I hope we are in broad agreement too. To clarify on scientific “truth”, here is an extract from another essay of mine on RWER (https://rwer.wordpress.com/2014/03/10/a-science-of-economies/):

        “The Newton-Einstein comparison also shows that science is not about proof, or Truth. Einstein’s theory in turn may be superseded, so we can’t assume it is the Truth. Newton’s theory is still very useful, so it is not sensible to say it is “wrong” or “disproven”. It is less useful than Einstein’s. The criterion is whether a theory is a useful guide to a given situation.”

        So I have come to think the appropriate criterion for scientific theories is on their level of usefulness. Even Ptolemy’s theory is useful to a certain degree for predicting the positions of planets.

        On the other hand neoclassical economics is so irrelevant to real economies you may as well use tea leaves to make economic predictions. It is pre-scientific.

      • December 9, 2014 at 10:35 am

        The long shadow of Bentham
        Comment on Geoff Davies

        Utility is good enough for engineering but not for science. The methodological problem with truth was that one can arrive at the truth but can never be sure because it is always possible that someone else finds a better theory that contains one’s theory as limiting case. Because of this Popper developed the concept of verisimilitude.

        Newtonian physics was considered as true and corroborated beyond reasonable doubt until Einstein showed that there is no absolute space and that things become very un-Newtonian at high speeds. So Newton became the limiting case for low speeds of general relativity theory. Relativity theory is closer to truth. It can be taken as truth until somebody else comes up and shows that relativity theory is a limiting case of the Theory of Everything.

        Your conclusion: “The Newton-Einstein comparison also shows that science is not about proof, or Truth.” is absolutely false. What do you think physicists are doing at CERN? It is all about proof.

        A well known irony of the history of science was that Ptolemy’s theory was even superior for the purpose of navigation in comparison to the newly developed Copernican theory. Despite of its practical usefulness Ptolemy’s theory is false according to scientific criteria.

        To replace truth by usefulness is exactly what Blaug characterized as playing tennis with the net down.

        It is surrealistic when economists discuss about truth because after 200 years they still cannot tell the difference between profit and income (see 2014).

        Egmont Kakarot-Handtke

        Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

  4. December 6, 2014 at 6:04 am

    Hi Geoff, thanks for the thoughtful comments.

    If you have subscribed to the IDEA newsletter you would have read a follow up article last Thursday that shows how an overarching map would be used, along with some tools for enquiry.

    To be clear, I don’t think that simply taking a tour of different schools of thought will cut it as an alternative curriculum.

    In fact I would avoid referring to schools of thought at all, but merely when puzzling over economic patterns – like the existence of firms – adopt a wide variety of approaches to the pattern and evaluate each what sort of useful predictions they each make, and understand what simplifications are being made.


    • Geoff Davies
      December 8, 2014 at 2:18 am

      Hi Cameron. My piece was written well before your new one came out, and it was also motivated by quite a bit of discussion at RWER and other places over recent times. You evidently are not expecting the of teaching non-orthodox approaches to serve as an alternative, thanks for clarifying, graciously. If I over-interpreted you, my apologies.

  5. Rick Schaut
    December 6, 2014 at 7:53 am

    I’m surprised that the discussion of the “s” word didn’t point to the work of Esther Duflo.

    • Geoff Davies
      December 8, 2014 at 2:27 am

      Well, I’m learning all the time. I see she does “field experiments”. Very commendable, the first step in doing science. Can you explain any more?

  6. davetaylor1
    December 6, 2014 at 12:49 pm

    I can go along with the drift of what Egmont is saying here, but I do wish he’d define his terms. In his very first sentence his “scientific criteria” are Popper’s. Lakatos would say a science isn’t failing until it stops raising questions that haven’t already been answered. Two generations earlier than Lakatos, Chesterton (in “Orthodoxy”, 1908) had made a similar case for paradigm change: “We have found all the questions that can be found. It is time we gave up looking for questions and began looking for answers”.

    Now four generations on, we still haven’t answered the question as to what economics is. What is its purpose? Is it simply about monetary accounting, or is it about how to live well without needing to sell off the family silver? What is money, anyway? Where does it come from and where does it go?

    Economists at any rate are still not asking themselves still more fundamental questions about their use of language. What is the difference between a right answer and a true proposition, between a wrong answer and a significant lie, a misguided interpretation and a miscalculation? (All of which can be deemed false). So is profit real or monetary, part of economics or an artifact of accounting? Is what is currently alleged to be “economics” accounting for real profit or theft? Is science about accounting for what we have now or what we will need to do to get what we and our offspring will need to have? For that would require us to understand relationships (not know facts in detail) a good deal deeper and far-reaching than the unconsidered superficialities (axioms rather than scientific conclusions) on which “Orthodox” [right or self-righteous?] economics now stands.

    Back to Egmont’s denigration of Heterodoxy. If by that he means what the Orthodox understand by the Heterodox, i.e. best-selling authors like his Marx thru’ Keen, then I can accept what he is saying. However, we Heterodox comprise a lot more than that: often not listened to, never mind published!

    Certainly, the three [British] writers on real economics whom the Orthodox most studiously ignore and have done their best to suppress have been John Ruskin, G K Chesterton and E F Schumacher. A bit near the bone? Anyone serious about a new paradigm for Economics would do well to study the personalities, lives and work of these three, and their contemporary standing until they took up economics. The weakness in all three is their lack of attention to money, given their focus on reality.

    Which brings me back to Geoff’s theme. Pluralism is indeed not enough, but in view of our having different “blind spots” it is necessary. He identifies “three main aspects of economic reform – teaching, theory and policy”. I would add a fourth, “philosophy”, which as above is about understanding what terms will refer to before deciding on usage and hence curricula, theory and policy. He identifies “three central follies of mainstream economics: the neoclassical general equilibrium, the neglect of the roles of debt, money and banks, and the misuse of GDP to measure welfare”; I would add that, given the centrality of specialisation in the economy, it is folly also not to even attempt to understand the causes of human difference. As with Egmont I can agree with the drift of his argument, but looking at economics as a science, it is less about discovery or proof or coherence than about an application of science, as equivalent to fundamental information science as physics is to designing a bus. And as for the argument that economics has evolved rather than been designed (or in any case evolved from a primitive design), the focus of economic theory changed almost overnight in Britain and thence elsewhere: from Justice to the injustice of Shylock, then again from the rights and duties of Kings to the financing and management of his budget by IOU’s printed and controlled by the private reserve Banks of England.

    I think the argument I’ve just made applies equally to Geoff’s case for restarting economic theory from self-organising systems. That’s exactly what I’ve done myself, but for pedagogical purposes that can be relegated to a footnote if it is accepted that economic finance constitutes a [PID] control system run via information rather than force. In which case it is fundamentally important that PID cybernetics be understood, the information be true, and the real purpose of the economy be distinguished from the purpose of controlling government, whose control function is likewise primarily advisory. (If that has to be enforced it has already failed).

  7. December 6, 2014 at 6:12 pm

    After reading about the call for “pluralism” on RWER, I hesitated somewhat to write down my observations that would have covered about 95% of what Geoff Davies is saying. He beats me to it and that is good since I do not think that I could match his eloquence.
    The malaise of heterodox economists as well as those trained in science cannot be appeased by pluralism, unless we abandon the idea of turning economics into a genuine scientific activity, Davies tells why.
    Orthodox economists are unfortunately too arrogant to listen to others. Anything that deviates from their religion is heresy; any article not published in some 3 or 4 journal controlled by them and financed by the DOD is no “good” (sic). They seem to exhibit a form of incurable insecurity. Yet often suggestions of others outside the box would have (if incorporated) increased understanding. Many pathologies detected by economists themselves (e. g. Sonnenschein-Mantel-Debreu on aggregation of individual demands, Davidson on nonergodicity, Steve Keen on debt accumulation, etc are pushed under the rug. I have shown (see refs. below) that the illusion of the existence of a stable equilibrium in the Walrasian pure exchange model is nothing but an illusion, which should not have been carried over to real markets. These are reflexive-nonlinear (with feedbacks)-input/output systems. As they operate on incomplete information, unstable coefficients and often devoid of proper matrics, they fail on strict “observability”. And if one begins by assuming observability, then nonlinear feedback H-infinity controls shows that the data requirement is insurmountable; therfore, it cannot be claimed that the stability criterion is met. When it comes to increasing returns to scale, which are ubiquitous at large scale, one can use orthodox arguments and assumptions, but the minute one assumes a convexo-concave technology in either the Hamiltonian formalism or the flexible accelerator principle,one arrives at a complex system. Yet orthodox economists refuse to turn the page to deal with complexity. Imagine where physics would be today had physicists refuse to turn the page after Maxwell!
    Nonetheless, I believe that economics is a useful social activity. From what is known today, the best way to increase understanding in economics is to familiarize ourselves with the theory of complex systems. I do not recommend blind copying of physics,nor central planning. But much progress has been made in the identification of processes; we should not be bashful to appeal to the “spectrum of singularities” to study heterogeneous processes, nor to use valid insights from sociology, psychology, control theory, etc to further understanding of patterns thrown-off by a complex market economy; that is where pluralism would bear fruits.
    Last but not least, scientific research requires a large dose of honesty. Who does not know that economic observables such as interest rates, foreign exchange rates, markets in gold, corn, wheat ,oil, etc. are manipulated. As these pathologies are here to stay, what good is the study of general equilibrium? Laws that characterize the embedding space of modern markets are dictated by big corporations. We are then observing bad policies, spurious data, skewed distributions, etc. Orthodox economists must know about these pathologies and yet they seem to be proud to produce sillinesses like the Efficient Market Hypothesis in a nonergodic system. In that sense they look like medical doctors pushing the spread of viruses.
    All is not lost, however. There exist islands of stability in both high and low-dimensional chaos. We might not know their exact locations, but we can approach them with appropriate policies. We must remember that complex markets produce both “goods” and “bads”. A society endowed with moral values can limit the production of “bads”; that is what is done in some societies where, say, markets in babies or assassinations are proscribed. It would be really sad to let anything goes under the pretense that markets move inexorably toward astable equilibria.

    (2014).”On market economies: Howcontrllable constructs become complex.” Expert Journal of Economics, Vol.2 (3), 100-108.

    (2014) “Could econophysics complement the characterization of difficult neo-classical economics’ solution concepts.” Hyperion International Journal of Econophysics & New Economy, Vol. 7 (1), 46-61.

    • Geoff Davies
      December 7, 2014 at 12:48 am

      C-R D, thanks very much for your comments and references. I have wondered for some time if anyone was making formalised arguments like my informal arguments. You have, and with sophistication well beyond my mathematical level, but with the implications described clearly enough.
      I have not interacted much with econophysics, because it seemed to be focussed on such things as extracting more profit from financial market games, rather than on overall properties of the system. I would be interested to know of others who might be looking at the larger questions.

  8. December 8, 2014 at 8:21 pm

    Geoff my understanding of econophysics is the application of proven methods of physics to a complex system such as economics in view of detecting “laws’ if any or durable patterns that can be exploited. For example, could the fat tail found by Mandelbrot in the distribution of absolute returns be better explained by the “Omory Law of earthquake aftershocks, or why the autocorrelation of asset returns decays at a geometric rate while those of absolute and squared returns decay to zero as a power law over many lags, etc., etc.We believe that there exists an economic core that can be augmented by proven methods instead of promoting “popourri” science.

    • December 9, 2014 at 12:10 am

      just an irrelevant comment—the fat tails of mandelbrot are equivalent to ormery law as i understand it (i think j p bouchard or mej newman went through this , on http://www.arxiv.org/abs/cond-mat/0412004 for example .(though that is not the one i was thinking of). The Genuine progresss indicator (herman Daley) is on point, also ‘ecological footprint’–william rees , u british columbia canada; but it aint happening except here and there.

    • Geoff Davies
      December 9, 2014 at 12:12 am

      Thanks C-R D. They sound like potentially useful work. Truth is I haven’t paid the field much attention, partly because it’s so technical, and I’ve focussed more on the framework, mostly qualitative.

      For example, I think you can draw three fundamental conclusions without doing any math, once you identify an economy as a complex system (see for example https://rwer.wordpress.com/2012/11/28/finding-a-framework-for-a-new-economics/):

      There is no reason to expect markets to yield an optimal result: you can’t say anything general at all about market results, you have to observe and manage case by case,

      There are many possible ways to organise an economy, so we can tailor ours to suit the kind of society we choose to live in,

      It is possible in principle to bring an economy into consistency with the natural living world, so the natural world thrives around us.

  9. December 8, 2014 at 11:02 pm

    Same procedure as last time?
    Comment on C-R D

    Econophysicists who intend to apply their methods and tools to economics come in two flavors: either they want to beat one of the financial markets or they want to contribute to the social betterment of mankind.

    “Into this unstable situation, propelled largely by contracting opportunities in the physical sciences, but sometimes also by a fervent desire to apply the scientific method to the social betterment of mankind, came an unprecedented wave of trained scientists and engineers into economics. The roll call is stunning, and included Ragnar Frisch, Tjalling Koopmans, Jan Tinbergen, Maurice Allais, Kenneth Arrow and a host of others. For the first time, noted mathematicians such as John von Neumann, Griffith Evans, Harold Thayer Davis, Edwin Bidwell, Wilson and others were induced to turn their attention, however briefly, to economics, and to participate in its elaboration rather than to jeer from the sidelines. When this influx of talent became acquainted with the corpus of neoclassical theory, they discovered that it consisted largely of the formal models which they had already mastered in their earlier training in physics, with the only difference being that the vintage of the model was clearly that of the later 19th century. Thus, with only the most passing acquaintance with the long tradition of economic theorizing, these tyros could jump right in and apply more up-to-date mathematical techniques and metaphors to the neoclassical program and come up with far-reaching results.” (Mirowski, 1991, p. 152)

    What got lost in the enthusiasm was that the neoclassical approach was fundamentally flawed to begin with. As a result economics got even deeper in the cul-de-sac. The real task would have been to replace the flawed conceptual core construction of supply-function–demand-function–equilibrium and not to update it.

    It is a curious phenomenon that econophysicists habitually overlook the primacy of theory.

    “The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. … The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein, quoted in Schmiechen, 2009, p. 368)

    Before you apply the Omory Law of earthquake aftershocks it would perhaps be a good idea to try some correct economics for a start (2014c; 2014a; 2014b).

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
    Series, 2511741: 1–29. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
    Kakarot-Handtke, E. (2014b). The Synthesis of Economic Law, Evolution, and
    History. SSRN Working Paper Series, 2500696: 1–22. URL http://papers.ssrn.
    Kakarot-Handtke, E. (2014c). The Three Fatal Mistakes of Yesterday Economics:
    Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    Mirowski, P. (1991). The When, the How and the Why of Mathematical Expression
    in the History of Economic Analysis. Journal of Economic Perspectives, 5(1):
    145–157. URL http://www.jstor.org/stable/1942707.
    Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited,
    volume 1. Norderstedt: Books on Demand, 2nd edition. URL

  10. December 15, 2014 at 5:21 pm

    I can agree with much of what Egmont has to say. I have on a few occasions advised econophysicists to be leery about the Chicago School theorizing. In my own work, I ignored utility maximization. I treat the inverse relation between price and quantity as a tendency not a curve; idem for the positive relation between price and scarcity. I paid heed to the presence of increasing returns to scale. I paid heed to the inherent noise in economic data due to the heterogeneity of information sets. I treat economics as a nonergodic self-organized process, etc. Maybe some ‘quants’ on Wall Street might have overlooked the primacy of theory or taken neoclassical economics as is, but most econophysicists are well aware of the importance of theory, complex systems theory in particular.
    However, Egmont if I can borrow a phrase from Ed Wilson: Scientific activities must be “concillient”.

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