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Economic Realism

from Peter Radford

Lars Syll seems to have started a perpetual conversation when he posted a comment about Tony Lawson’s longstanding complaints about realism in economics. I don’t want to get dragged into what appears to be an endless, and pointless, debate … but.

The debate is endless because some economists seem to thrive on endlessness. That is to say they react with horror at closure on any topic. Thus arguments begun in the early 1800’s still roil along happily employing at least a few economists who have specialized in whatever it is that stirred the arguments back then. No one seems inclined to end the discussion, instead it is added to the ever increasing inventory of points-of-view-come- theoretical-stances that clutter economics and make it opaque to all but the most intrepid cognoscenti.

Ah, but there are others who have, in their own minds at least, arrived at closure. And that’s where the pointless part comes in.

You see they achieved closure by departing from reality so it is pointless to argue with them about realism. They don’t care. They really, truly, don’t. On the contrary, they see reality as an obstacle to be overcome. It is a departure from the pristine world they want to create, inhabited as it is by all sorts of inconveniences like human frailty, human foible, and human inconsistency. Those there things – foible, frailty, and inconsistency – are the very devil to model nicely in mathematics, so they have had to be tossed out of the realm of economic theory.

So there appears to be a choice. Either economics has to be bedded in reality and thus be a messy, inconclusive, and always partial pursuit. More art than science. More history and contextual than timeless and law-driven, economics would then never rise above those endless debates. Instead it would be sunk within the constant turmoil of the socio-political realm, buffeted on all sides by contesting ideas, and without any dominant theme to distinguish it from related topics such as business organization, sociology, psychology, and so on. Even its core claim to have a unique view about the allocation of scarce resources within budget constraints could be just as easily the province of applied mathematics rather than the domain of economics.

Well, that’s exactly what happened.

By trying to become a distinct science able to make timeless statements about universal “laws” economics had steadily to strip away all the stuff that kept it stuck in reality. It had to become ever more abstract, not because abstraction allowed the elicitation of great insight, but because it made mathematical modeling more tractable. Economists chose method over reality.

Now, I must give them their due. Their efforts were incredibly successful. The constant striving to achieve greater internal consistency in their model representations of an economy has culminated in an intellectual edifice of epic proportions. Unfortunately of epic and Ptolemaic proportions. We ought not mock the effort simply because of its irrelevance. It surely stands as one of mankind’s greater accomplishments.

Like the cliched boiling frog, economists shed reality only slowly. Each step appeared warranted. Each step promised to bring them closer to the scientific purity they sought. That each step also walked them further from the real world they thought they were studying was never considered a serious problem. After all the prize of being able to describe the vast complexity of the economy in pure mathematical terms was too enticing to resist.

Please recall that this journey into irrelevance began back in the mid 1800’s when the entire intellectual community was abuzz with similar promise. This was before physics came to grips with the quantum. It was before biology fully embraced evolution. It was before sociology was even begun as an enterprise at all. Back then the excitement of being able to cram complicated systems into understandable and manageable packages was irresistible. Economics was no different. The so-called marginal revolution, when economics began its march into modern – modern back then – scientific terms, was a determined effort to end those endless debates. It promised to establish a more mechanical, predictable, and thus more tractable field of study. And it helped set economics apart from politics.

Remember, also, that getting rid of the taint of politics was vital to economists in the wake of the Marxist critique of capitalism. It was both intellectually attractive and ideologically imperative that economics move itself into a domain where it could opine about markets without having to be drawn into discussions about the power relations that inevitably fester wherever political views intrude. And without, incidentally, ever really defining what it meant by a market.

But, of course, humans are inherently political. We were political before we were economical. So to get rid of politics was to get rid of humanity. Economics had to transform itself by squeezing out human beings and inventing for itself all sorts of alternative perspectives in order act as substitutes for the now eliminated humans. Thus it invented its own psychology that eventually became rational choice theory. Humans, when they exchange goods, are making choices. Real humans do this very idiosyncratically. They make mistakes. They miscalculate. They change their minds. They do all sorts of things that throw grit – lots of it – into the workings of economic models. So economists ignored real humans and invented a more compliant rational alternative. With rationality being quaintly defined as doing whatever an economist would do under the same circumstances.

This made life very easy for subsequent economists. It also made their work irrelevant for anyone relying on it for insight into actual exchange.

With this triumph under their belts, economists then moved onto the economy at large. Whereas previously it had been seen as the vast, unkempt, ever changing, and open ended system that it is, it was now closed off. It was sealed up so that nothing could enter and disturb the pursuit of something called equilibrium. Even this wasn’t enough. Time had to be dealt with by truncating and collapsing it into the present. Economists discovered the convenience of discounting the future. To do so they had to ignore uncertainty and pretend that it was only risk. This was seen as small price to pay along the march toward purity.

The elimination of uncertainty and time was a major step forward, but it required a further removal from reality. After all humans have evolved a plethora of skills and attributes to deal with uncertainty. A facile intelligence being one. A willingness to take risk being another. These things had to be cut out. Humans in the monster models that now absorbed the entire attention of economists were already inhuman, now they became “agents”. Or, rather, they became “an agent” because having more than one would make the mathematics too complicated. So the new and improved economics modeled the activity of one, precisely one, so-called “representative” agent whose likes and dislikes were an average of all those humans now sitting outside the model. There was, in other words, no diversity.

Even this was insufficient for some. Having banished diversity amongst agents economists pressed on. they abolished diversity of all kinds. Their models now included only one product, which must be some kind of all purpose Swiss army knife like thing. So the one agent negotiates with one manufacturer over the price of one product. And all the raw materials? Well they melt into the background. The one business employs people – quite how is a mystery given that the economy has only one agent in it – to the exact point at which their [his or her?] worth matches their wage. This is because, as we all know, real businesses have such accurate accounting that they do this all the time. Likewise for capital, which, by the way, is never exactly described because its well known elusive nature in the real world would also mess up the equations.

Phew.

It takes imagination, and enormous intellectual capacity to construct something so far removed from reality. It also takes decades. Generations of economists have worked tirelessly at this project. Modern economics is their monument.

And like many monuments it arouses the curiosity of those unaware of its origins. Those outsiders – people like you and me – are prone to ask questions about such monuments.

Questions like: what was it for? Why did the builders do this? What was their aim?

I am tempted to fall into the trap that seems to grip archeologists whenever they come across an artifact they cannot otherwise explain. They often resort to arguing that the artifact must have had some ritual purpose or content.

And this is how I look at most modern economics. The gulf between it and reality cannot be ignored. That gulf is not a bug of economics it is a feature. It is deliberate. It is there because economists don’t want to engage with reality. They are content with irrelevance. Their goal is not to understand real economies, but to tease yet more insights from the hermetically sealed utopia they have created for themselves. It is a utopia that grips their attention and against whose purity the real world’s great impurity is offensive in its ugliness.

It is a utopia that economists try to press upon the real world in order that their body of knowledge can regain some semblance of relevance. That is why some of them advocate changing the real world to conform to the strictures of their models. It is also why some of them suspend their own life experiences whenever they theorize inside the ritualistic walls of their academic domain. That the reality they inhabit conflicts so sharply with that of their intellectual inner sanctum, that the dichotomy is so stark, appears not to concern them.

This is the nub of the problem: by being so able to separate and ignore their own lives, their own frailties, foibles, and inconsistencies as they act out their professional roles, economists display all the outward signs of being zealots of a cult rather than the keepers of a store of knowledge about our world.

That makes them dangerous.

And it makes the entire discussion about reality and economics moot.

The two don’t intersect.

But don’t get me started. I am likely to rant all day about it. Besides, it’s pointless.

  1. Helge Nome
    December 27, 2014 at 3:41 pm

    Please stop navel gazing. You guys are having low enough self esteem as it is.

  2. davetaylor1
    December 27, 2014 at 4:26 pm

    What a load of bollocks from Peter to distract attention from the fact that a genuine discussion about the unscrambling of half-baked theories of economic reality included contributors who understand rather more about scientific theory, technological and human diversity, the interpretation of data and the moral logic of error correction than he does.

    Agreed some economists thrive on endlessness, but isn’t he one of them? I’m not. I just never get to the end of my story because half-baked economists like him find it incomprehensible and prefer to switch off rather than take the trouble to ask questions or look at and reflect on realities that are being, not inadequately described, but pointed to.

    One needs to triangulate latitudes and longitudes [theory and practice] to say where to look; to see what to look for in a scrambled message one needs the right key. As I argued in that discussion, the [theoretical] bottom line may suffice to decide policy, but one cannot justify that without looking at the accounts and exploring (via simulation) the effects of the policy; one can only use privileged position to assert and/or impose what one self-righteously and ignorantly wants. So sod off, Peter. Join in the work of developing adequate answers [c.f. Littlewood’s “The Skeleton Key of Mathematics”] instead of sitting on the side whinging.

    • blocke
      December 28, 2014 at 9:54 am

      Sorry Dave, many have claimed they were on the path to scientific clarification but see where we are today. Until you have actually unscrambled the half baked theories don’t claim you can do it; it is the stuff of fairy-tales. We are participating in vanity fair not the conquest of social science. I don’t find it difficult to live in a social world without any scientific solutions to our problems, since I think that those problems pertain to spirit and heart not the mind. Tell me how to make people care about their fellowman and to build community but don’t tell me and Radford to sod off; The first principle of inquiry is freedom, not shut up you ignorant fools. Happy New Years.

  3. Bruce E. Woych
    December 27, 2014 at 6:36 pm

    this is a great summation and opens a new set of perspectives that derive from assessing the real politik of utilitarian impact on the history of ideology, consensus and mental “stillness’ in the lapse of a century missing a history of ideas !

    Great Job Peter; page 2 should start with the question of fictive realism and economic consciousness as a construction of intentionality in sustaining distorted economies of scale. Of course, definition of terms like “what is an economy” still needs to be worked out since lately it is cut and tranched to fit theoretical designs and the derivatives of mindfulness.

    Let’s all get real …

    • Bruce E. Woych
      December 27, 2014 at 6:59 pm

      http://en.wikipedia.org/wiki/Operations_research covers the practical side of contemporary mainstream economics; worth considering how closely many of its components are the very nuts and bolts of economic realism itself.

  4. December 28, 2014 at 8:36 pm

    I don’t mean any disrespect David, but it sounds like you may have got up on the wrong side of the bed this morning. Undoubtedly, Peter put a lot of time, thought and emotion into his post. For that he needs to be commended. Perhaps his overall tone could have been a little less abrasive, since it gave me the feeling that I was being admonished for my purposeful delinquency.

    As Peter indicated, I likewise believe that meaning (purpose) for the many, too often comes from being involved in the struggle itself with no real concern for the existence and/or implementation of any answer. So, I don’t think that he is totally off base here. At the same time, dismissing our conversation (out of hand) that was precipitated by Lars Syll’s post suggests a little short sightedness. As anyone following this thread can confirm, it covered a lot of new ground.

    Although you previously indicated a diminishing belief in mankind’s ability to save himself from extinction David, I still sense a continuing commitment by you to the rigorous methods that have provided for you throughout your life. Don’t get me wrong here, there is nothing wrong with doing this IF you understand that solutions are not the prime objective in the human equation — but only the incidental result of one’s quest to purify their intent relative to devising an understanding of the insurmountable problems that we are destined to face. In other words, we have a real need to remember who and what we are in all this. And, we are mortal men NOT deity. As a result, the answers we arrive at are always incomplete.

    I too believe, like you, that individuals have a tendency to “switch off” rather than give sufficient thought to conclusions that seem to run counter to their own. If you think about it, it’s probably because new ideas can seem pretty threatening to the thinking around which we have and continue to live your life. Lose one’s identity and you’re in for a very bumpy ride down here. So that’s probably why we have a tendency to take in new ideas in short doses. Since conclusions are necessarily dichotomous, the formation of questions becomes essential to the progression of thought. And I agree with you. Few if any questions appear anywhere on this blog. So obviously, there is sort of a closed mindedness in evidence here which favors one’s own position.

    In your final paragraph David, you again seem to feel the need to authenticate rigorous (rational) thought relative to the ferreting out of a solution (from the past) to our current dilemma. And yes, there seems to be some reason to believe in our capability to accomplish real things. For, during our consideration of the past as it has found form via the limitations by which we have sought to constrain possibility in the form of circumstance, it appears that we are able to change things. But, what we believe we see is really all about appearance and little else. A slight of hand trick, by which we continue to deceive ourselves into believing in our greatness. For, caught in the unknowability of our past, present and future, that is all it can be.

    So, I find myself agreeing with Peter again, with regard to the futility in evidence here. Better we should admit to our inability to divine certainty relative to the human equation and seek to adopt something new. A new paradigm if you will, one that promotes the progression of INTENT as a rallying point for mankind, while prostrating ourselves at the feet of whatever might be willing to deliver us from the mess we’ve created. For surely we’re incapable of this task. It’s like trying to put together a jigsaw puzzle which has missing pieces. Economics can’t do it, neither can science, math, psychology, theology, philosophy, or metaphysics. So, to continue to kick around existing idea in the hopes that it might one day make sense and save us from ourselves is inherently futile. To get on to the only other option we have, we must be willing to admit that. David, I never got any e-mail from you.

  5. January 2, 2015 at 10:05 pm

    Lars Syll’s blog is the perfect starting point. Day after day after day he plays whack-a-mole, slamming down on another bit of nonsense from the world of mainstream economics. But eventually one must step back and say, “how do we progress past ‘whack-a-mole’?”

    There is only one interesting question in economics: how do we make it stop?

    The game of whack-a-mole can occupy corners of the Internet until the end of time, but that won’t make economics stop.

    Why must we make it stop? Because its ideas infect our politics: economics is not a science, but moral philosophy in sheep’s clothing. It insists that efficiency is always and everywhere a virtue, that humans are creative when driven by profit, but dull and unimaginative when driven by the common good. It claims that the costs and benefits of democratic choice can be reduced to math and then it demands that that math always prefers the solution of “the market.” Companies may be created by the state, but their purpose is divinely ordained and immutable: increase shareholder value.

    Lars Syll and endless others can, day after day, point out the flaws in the above. Life creeps in its petty pace. We need a new question: how do we make it stop?

    • January 4, 2015 at 5:18 pm

      Thorton — Your summation of the problem is “brilliant.” This is the question I have been asking over and over again on this blog. How do we stop this madness before it consumes us? Yet, no one has been willing to suggest a realistic way. Why can’t we work together to come up with one? There are supposedly 11,000 potential contributors here, from every walk of life. That constitutes a “think tank” of enviable proportion. Let’s stop talking about the problem and figure out how to fix it.

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