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Mainstream economics — nothing but pseudo-scientific cheating

from Lars Syll

A common idea among mainstream — neoclassical — economists is the idea of science advancing through the use of ‘as if’  modeling assumptions and ‘successive approximations’. But is this really a feasible methodology? I think not.

60088455Most models in science are representations of something else. Models “stand for” or “depict” specific parts of a “target system” (usually the real world).  All theories and models have to use sign vehicles to convey some kind of content that may be used for saying something of the target system. But purpose-built assumptions — like “rational expectations” or “representative actors” — made solely to secure a way of reaching deductively validated results in mathematical models, are of little value if they cannot be validated outside of the model.

All empirical sciences use simplifying or unrealistic assumptions in their modeling activities. That is not the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

The implications that follow from the kind of models that mainstream economists construct are always conditional on the simplifying assumptions used — assumptions predominantly of a rather far-reaching and non-empirical character with little resemblance to features of the real world. From a descriptive point of view there is a fortiori usually very little resemblance between the models used and the empirical world. *As if’ explanations building on such foundations are not really any explanations at all, since they always conditionally build on hypothesized law-like theorems and situation-specific restrictive assumptions. The empirical-descriptive inaccuracy of the models makes it more or less miraculous if they should — in any substantive way — be able to be considered explanative at all. If the assumptions that are made are known to be descriptively totally unrealistic (think of e.g. “rational expectations”) they are of course likewise totally worthless for making empirical inductions. Assuming that people behave ‘as if’ they were rational FORTRAN programmed computers doesn’t take us far when we know that the ‘if’ is false.

Theories are difficult to directly confront with reality. Economists therefore build models of their theories. Those models are representations that are directly examined and manipulated to indirectly say something about the target systems.

But models do not only face theory. They also have to look to the world. Being able to model a “credible world,” a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.

One could of course also ask for robustness, but the “as if worlds,” even after having tested it for robustness, can still be a far way from reality – and unfortunately often in ways we know are important. Robustness of claims in a model does not per se give a warrant for exporting the claims to real world target systems.

Anyway, robust theorems are exceedingly rare or non-existent in macroeconomics. Explanation, understanding and prediction of real world phenomena, relations and mechanisms therefore cannot be grounded (solely) on robustness analysis. Some of the standard assumptions made in neoclassical economic theory – on rationality, information handling and types of uncertainty – are not possible to make more realistic by de-idealization or successive approximations without altering the theory and its models fundamentally.

If we cannot show that the mechanisms or causes we isolate and handle in our models are stable, in the sense that what when we export them from are models to our target systems they do not change from one situation to another, then they only hold under ceteris paribus conditions and a fortiori are of limited value for our understanding, explanation and prediction of our real world target system.

The obvious shortcoming of a basically epistemic — rather than ontological — approach such as “successive approximations” and ‘as if’ modeling assumptions, is that “similarity” or “resemblance” tout court do not guarantee that the correspondence between model and target is interesting, relevant, revealing or somehow adequate in terms of mechanisms, causal powers, capacities or tendencies. No matter how many convoluted refinements of concepts made in the model, if the successive ‘as if’ approximations do not result in models similar to reality in the appropriate respects (such as structure, isomorphism, etc), they are nothing more than ‘substitute systems’ that do not bridge to the world but rather misses its target.

So, I have to conclude that constructing minimal macroeconomic ‘as if’ models or using microfounded macroeconomic models as “stylized facts” somehow “successively approximating” macroeconomic reality, is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies. Many of the model assumptions standardly made by neoclassical macroeconomics are restrictive rather than harmless and could a fortiori anyway not in any sensible meaning be considered approximations at all.

Mainstream economics building on such a modeling strategy does not  produce science.

It’s nothing but pseudo-scientific cheating.

The thrust of this realist rhetoric is the same both at the scientific and at the meta-scientific levels. It is that explanatory virtues need not be evidential virtues. It is that you should feel cheated by “The world is as if T were true”, in the same way as you should feel cheated by “The stars move as if they were fixed on a rotating sphere”. Realists do feel cheated in both cases.

Alan Musgrave

  1. November 13, 2015 at 8:38 pm

    All the unrealistic assumptions are simply subsidiary assumptions needed to redeem the dogma that the price system is a built-in mechanism for restoring equilibrium between “supply” and “demand.” Assumptions that don’t conform to this standard are deemed “fallacies.” It is that simple.

    Of course “supply,” “demand” and “price” need not be rigorously defined because, like obscenity, we know it when we see it. Come to think of it, supply, demand and price are a lot like obscenity in more ways than one.

  2. November 13, 2015 at 8:40 pm

    The only way we can advance, in any discipline, is to question underlying assumptions.

    History is a good example: “If we cannot find evidence of previous civilizations in the gravels under our feet, they very likely did not exist”. A typical example of tunnel vision.

    Theories of evolution is another case in point: Fragments of evidence are strung together to fit into a preconceived network of ideas. Fragments that don’t fit into the mosaic are discarded.

  3. November 14, 2015 at 5:29 am

    The issue here is that to make all the points above “reality” is “assumed” to be unproblematic. It is not. In the words of Bruno Latour, “… ‘Society’ and ‘Nature’ do not describe domains of reality, but are two collectors that were invented together, largely for polemical reasons, in the 17th century. Empiricism, conceived as a clear-cut distinction between sensory impressions on the one hand and mental judgement on the other, cannot certainly claim to be a complete description of what ‘we should be attentive to in experience.” In simple terms “reality” is made up by putting together bits of sense impressions. Latour takes on some of the more obvious examples of the “real” (rocks, metal desks, etc.) and shows how they have been built up. In the same way “reason” and “rationality” are contingent, historical artifacts. Collectors of sensory impressions. Reality is “made up,” invented. Let’s begin from that and see how investigation and the search of understanding fit into that.

  4. November 14, 2015 at 7:20 am

    Do not moralize — simply beat them
    Comment on ‘Mainstream economics — nothing but pseudo-scientific cheating’

    “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter, 1994, p. 11)

    Musgrave has argued convincingly that the methodology of standard economics is defective. The key argument is this: “The implications that follow from the kind of models that mainstream economists construct are always conditional on the simplifying assumptions used — assumptions predominantly of a rather far-reaching and non-empirical character with little resemblance to features of the real world.”

    What are the foundational assumptions of Orthodoxy? Courtesy of Weintraub, here they are in a nutshell: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. (1985, p. 147)

    What can be said with certainty is that this set of five Hard Core propositions has proven its worthlessness. Orthodoxy is a failure according to the formal and empirical criteria that define science. So Musgrave correctly concludes: “Mainstream economics building on such a modeling strategy does not produce science.” (See intro)

    But then Musgrave adds “It’s nothing but pseudo-scientific cheating.” (See intro)

    This is the wrong turn. Until this point the argument has been well-conducted, i.e., “… a critical discussion is well-conducted if it is entirely devoted to one aim: to find a flaw in the claim that a certain theory presents a solution to a certain problem.” (Popper, 1994, p. 160)

    As a result we are entitled to assert that orthodox economists have made a fatal methodological mistake and that standard economics has to go out of the window. However, any speculation about motives is pointless and misleading. With the allegation of cheating the discussion goes over the cliff.

    To recall, heterodox economists have produced much debunking but until now no alternative to standard economics that satisfies the criteria of material and formal consistency.* Should they be called cheaters, too?

    As a methodologist Alan Musgrave should know that nothing of any value has ever come out of good/bad moralizing. This has always been the preferred method of political economics, and political economics has been out of science since Adam Smith. The criterion of theoretical economics has always been true/false and nothing else.

    First Commandment of Science: Do not moralize!

    Egmont Kakarot-Handtke

    References
    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.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    http://www.jstor.org/stable/1805586

    * See ‘Heterodoxy, too, is scientific junk’
    http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html

  5. Alexander Konnopka
    November 15, 2015 at 7:49 pm

    In my opinion the fundamental problem with mainstream economics is the use of wrong mathematics. Mainstream economic models are mostly based on mathematics using the form y = f(x) due to a “mechanistic” and undynamic view on the economic world. But I am convinced that the economy must be seen true the eyes of complexity theory involving phenomena like interdependencies and feedback loops. Accordingly, much of economic theory should be descriped by mathematics using the form x(n+1) = f(x(n)), which can – in most cases – not be approximated by y = f(x) mathematics for various reasons. Combined with the exhaustive use of unworldly assumptions this generated an intellectual parallel universe spanned by mainstream economic models which is – in many cases – completely meaningless for real-world problems.

    • November 17, 2015 at 9:12 am

      ICYMI (Alexander Konnopka Nov 15)

      This is an old chestnut of Heterodoxy: “But why should economic laws, or any laws for that matter, be expressed by analytical functions?” (Georgescu-Roegen, 1966, p. 123)

      To merely reiterate doubt shows that Heterodoxy, too, is clueless. And this provokes the all-decisive question at the end of this 50+ years filibuster: How does the correct formal approach look like? (see for a start 2014).

      References
      Georgescu-Roegen, N. (1966). Analytical Economics, chapter General Conclusions for the Economist, pages 92–129. Cambridge, MA: Harvard University Press.
      Kakarot-Handtke, E. (2014). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2500696

  6. Alex Appel
    November 16, 2015 at 8:35 pm

    I understand your distrust of blanket models and statements being applied to entire economies, but what would you suggest as an alternative method to predict economic activity?

  7. Love the subtitle
    November 17, 2015 at 3:26 am

    Alexander Konnopka,

    One of the tip offs of the wrong mathematics is it is rare to see varables expressed and treated as functions of time. The equilibrium assumption gets rid of that by assuming real things are mathematically constant in time.

    As, if your n was time,t or period n.

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