Home > Uncategorized > Deductivist modeling leading economics astray

Deductivist modeling leading economics astray

from Lars Syll

To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational-choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational.

mcgregor4_clip_image002_0000In what was perhaps the first sustained criticism of the theory, Keynes emphasized indeterminacy, notably because of the pervasive presence of uncertainty. His criticism applied especially to cases where agents have to form expectations about the behavior of other agents or about the development of the economy in the long run. In the wake of the current economic crisis, this objection has returned to the forefront. Before the crisis, going back to the 1970s, the main objections to the theory were based on pervasive irrational behavior. Experimental psychology and behavioral economics have uncovered many mechanisms that cause people to deviate from the behavior that rational-choice theory prescribes.

Disregarding some more technical sources of indeterminacy, the most basic one is embarrassingly simple: how can one impute to the social agents the capacity to make the calculations that occupy many pages of mathematical appendixes in the leading journals of economics and political science and that can be acquired only through years of professional training?

I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all. I cannot make a quantitative assessment of the proportion of work in leading journals that fall in this category, but I am confident that it represents waste on a staggering scale.

Jon Elster

Elster’s article is essential reading for all those who want to understand why mainstream – neoclassical – economists actively have contributed to causing todays’s economic crisis rather than to solving it.

Perhaps this becomes less perplexing to grasp when considering what one of its main proponents today – Robert Lucas – maintained already in 2003:

My thesis in this lecture is that macroeconomics in this original sense has succeeded: its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

And this comes from an economist who has built his whole career on the assumption that people are hyper rational “robot imitations” with rational expectations and next to perfect ability to process information. Mirabile dictu!

So, yes, I can’t but concur with Elster — the deductivist modeling endeavour of mainstream economics is leading economics astray.

  1. Dave Raithel
    November 17, 2015 at 1:08 pm

    The Elster paper was a good (quick) read. I was most entertained that “mind-binding” (by analogy to “foot-binding”) sure sounds like an n-person Prisoner’s Dilemma. The foot-binding version is solved by changing the game entirely. I wondered to myself if “false consciousness” might be something like mind-binding? More generally: Would Jon Elster find David Ruccio’s post of the other day – Beyond The Standard Explanation – an instance of Marxist soft obscurantism? And etc.

  2. November 17, 2015 at 3:59 pm

    That elster paper is quite good and amusing (like alot of john elster). I think its a bit incomplete and occasionaly vague but its a short paper. Also he may be a bit harsh on soft obscurists and hard ones—people like levi-strauss, freud, bourdiue. even badiou now were somewhat experimenting with and exploring the unknown, like ptolemy and copernicus, darwin and d’arcy thomspon, leibniz, newton , spinoza and plato,. rousseau and hume. The Curies (of radioactivity) were interested in ESP; wolfgang pauli was interested in jung, david bohm in krishnamurti, etc. The problem is many things can be partly useful, partly wasteful and partly harmful (think nuclear physics, the internet, the car, etc.)

  3. November 18, 2015 at 3:53 pm

    Heterodoxy as superior alternative
    Comment on ‘Deductivist modeling leading economics astray’

    Since the human brain works sequentially every analysis has a start and then proceeds logically from there. It seems pretty obvious that if the premises are false then the conclusions are false, too, or as the IT-crew always had it: garbage in, garbage out. This is known since antiquity: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Resume of Aristotle’s Posterior Analytics) http://en.wikipedia.org/wiki/Posterior_Analytics

    Everyday thinking, of course, works differently: “The animistic fallacy is the informal fallacy of arguing that an event or situation necessarily arose because someone intentionally acted to cause it. While it could be that someone set out to effect a specific goal, the fallacy appears in an argument that states this must be the case. The name of the fallacy comes from the animistic belief that changes in the physical world are the work of conscious spirits.” http://en.wikipedia.org/wiki/Animistic_fallacy

    So, animistic thinking explains the appearance of a thunderbolt with Zeus being angry while physics explains it as electromagnetic phenomenon. The latter thinking eventually leads to the lightning rod. Animism regularly leads to a milder or stronger form of paranoia, that is, in speculation about the behavior of unknown entities, which are seen as either benevolent or malevolent. Thus, everyday thinking or common sense runs essentially in the categories good/bad or like/dislike while scientific thinking runs in the categories true/false.

    Economics is a strange mixture of analytical and animistic thinking. Orthodoxy holds that the working of the economy is explicable as the result of the interactions of an entity called homo oeconomicus and an entity called Invisible Hand. Both are benevolent and increase an entity called welfare.

    These ideas are explicitly formulated as hard core premises: “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. (Weintraub, 1985, p. 147)

    Now, remember Aristotle, the crucial condition is that ‘premises are certain, true, and primary’. It has been also observed since antiquity that there is no such thing as certain, true, and primary premises about human behavior.

    “Alexander Rosenberg lays great emphasis on the role of intentionality in the social sciences, for in his view this role explains the nomological failures of the social sciences and supports the view that the social sciences (in anything like their current form) can never succeed in formulating real laws of human behavior.” (Hausman, 1992, p. 326)

    This, too, is known since antiquity: “For arguments about matters concerned with feelings and actions are less reliable than facts: and so when they clash with facts of perception they are despised, and discredit the truth as well.” (Aristotle, quoted in Georgescu-Roegen, 1966, p. 184)

    So, what Jon Elster demands is a contradiction in terms: “To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe.” (See intro)

    Gossiping about human behavior is popular but definitively the wrong angle of analytical attack. The crucial methodological point is that economics cannot be based on behavioral assumptions. Neither constrained optimization nor animal spirits will do (Hudík, 2011).

    The set of five hard core propositions has proven its worthlessness. Orthodoxy is a failed approach according to the formal and empirical criteria that define science. And, most important, the failure has been built into the premises. Keynes knew this very well: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes, 1973, p. xxi)

    Therefore, economics has to be redefined, and this amounts to an emancipation of the animistic thinking of the so-called social sciences.

    Old definition, subjective-behavioral: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

    No! It is not the task of the economist to dabble in psychology, sociology, political sciences, history, anthropology, law, ethics, or philosophy. The subject matter of economics is the economy.

    New definition, objective-structural: “Economics is the science which studies how the monetary economy works.”

    This requires a new set of hard core propositions to start with, which — and there is no way around it — have to be ‘certain, true, and primary’ (2014b; 2014a).

    Heterodoxy will either succeed in this task or it will be thrown out of science just like Orthodoxy.

    Egmont Kakarot-Handtke

    References
    Georgescu-Roegen, N. (1966). Analytical Economics, chapter Choice, Expectations,
    and Measurability, pages 184–215. Cambridge, MA: Harvard University Press.
    Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
    Cambridge University Press.
    Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
    Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2517242.
    Kakarot-Handtke, E. (2014b). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2418851.
    Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
    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

    • November 19, 2015 at 11:18 am

      You said: “It seems pretty obvious that if the premises are false then the conclusions are false, too…”

      Not necessarily. You have committed a fallacy called “denying the antecedent” – a very common logical mistake particularly among economists. Both true and false conclusions can follow from false premises. This has to be the case, because if false conclusions always follow from false premises, then we would have learned something which is definitely true: that the conclusions are false. That is getting something for nothing.

      • November 21, 2015 at 11:27 am

        ICYMI (Silwyson Nov 21)

        You say that the fallacy called ‘denying the antecedent’ is “a very common logical mistake particularly among economists.” This is true, indeed, and here is the best example I can think of.

        First, a specimen of the fallacy from Wikipedia*:
        (i) If it is raining, then the grass is wet.
        (ii) It is not raining.
        (iii) Therefore, the grass is not wet.
        Proposition (ii) denies the antecedent. While all premises are true, the conclusion is provably false.

        Now, the application to a central tenet of economics:
        (i) If a system explodes/implodes, then it has no equilibrium.
        (ii) The market economy has not exploded/imploded in the last 200 years.
        (iii) Therefore, the market economy is an equilibrium system.
        Not much more than this logical crap is needed to convince the representative economist of the General Equilibrium approach.

        Economics is traditionally awash with logical fallacies. So much so, that already J. S. Mill took it upon him to categorize and expose them at great length (see the chapter Fallacies in 2006).

        The worst fallacy of economics, however, is the fallacy of composition, i.e. to generalize what is true for a single case (individual, firm) for the whole economy. This fallacy is the very foundation of Marshall’s approach and it is literally built into the neoclassical program of methodological individualism (Arrow, 1994, p. 1). For the fatal Keynesian fallacy see (2011).

        In sum: While I agree with you that true propositions can follow from wrong premises — classical case: the sun goes up (true) because it circles around the earth as the center of the universe (false) — I am pretty sure that there is no logical fallacy in my post of Nov 18.

        References
        Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL http:
        //www.jstor.org/stable/2117792.
        Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
        Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation,
        volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

        * https://en.wikipedia.org/wiki/Denying_the_antecedent

  4. November 19, 2015 at 7:02 pm

    In response to Egmont:

    “Since the human brain works sequentially …”. No it doesn’t. The input, output and initial correlation may work sequentially, but as can be explored in computing practice, once a correct answer has been found (i.e. not garbage, even if decaying a little round the edges) it can be stored in memory and looked up as a whole. See Ishi’s comment.

    “While it could be that someone set out to effect a specific goal, the fallacy appears in an argument that states this must be the case.” No. This proposition is two sided and itself possibly false as well as possibly true. The fallacy occurs when the argument claims causation “necessarily must” or “necessarily must not” be the case. The fact is that the facts bear a variety of interpretations, some of which are merely differences of language, some due to believing what we have been told, and some we tentatively remain prepared to believe (i.e. act on), having considered (or not, i.e. discounted) the evidence for and logical consequences of so acting (or not).

    “So, what Jon Elster demands is a contradiction in terms”. No. It is demanding we use both sides of our brain, which are complementary rather than conflicting: deductive logic from theory to outcomes and inductive logic seeking a “near enough” equivalence between remembered and perceived outcomes. (Actually this uses all four major parts of our brain: perception involves actuating the senses and judgement of equivalence feeling the need for neither fight nor flight).

    “No! It is not the task of the economist to dabble in psychology, sociology, political sciences, history, anthropology, law, ethics, or philosophy. The subject matter of economics is the economy”.

    Yes it is! Try reading Imre Lakatos on “The Methodology of Scientific Research Programmes”, In Lakatos and Musgrave (eds), “Criticism and the Growth of Knowledge”, 1970, Cambridge University Press. From p.133:

    “All scientific research programmes may be characterised by their ‘hard core’. The negative heuristic of the programme forbids us to direct the modus tollens at this ‘hard core’. Instead, we must use our ingenuity to articulate or even invent ‘auxilliary hypotheses’ [like homo oeconomicus], which form a ‘protective belt’ about this core, and we must redirect the modus tollens to these. It is this protective belt of auxiliary hypotheses which has to bear the brunt of tests and get adjusted and readjusted, or even completely replaced, to defend the thus-hardened core. A research programme is successful if all this leads to a progressive problemshift; unsuccessful if [as in the case of current economics] it leads to a degenerating problemshift”. Examples mine.

    From pp.175-6: “[This requirement of continuous growth] shows up the weakness of programmes which, like Marxism or Freudism, are, no doubt, unified,, which give a major sketch of the sort of auxiliary theories they are going to use in absorbing anomalies, but which unfailingly devise their actual auxiliary theories in the wake of facts without, at the same time, anticipating others. (What novel fact has Marxism predicted since, say, 1917)? Secondly, it hits patched-up, unimaginative series of pedestrian ‘empirical’ adjustments, which are so frequent, for instance, in modern social psychology. … This theorising has no unifying idea, no heuristic power, no continuity. They do not add up to a genuine research programme and are, on the whole, worthless”.

    Having mentioned Mark and Freud, Lakatos might have instanced political science taking hard core Capitalism as an auxiliary hypothesis, and social psychology taking Statistics rather than Human Psychology as its auxiliary, and human psychology (no doubt to Egmont’s distaste] going behavioural in its hypothesising. But psychology has remained progressive by turning into Physiological Psychology in light of Shannon’s discovery of electric circuits performing logic and the existence or absence of both conductors and pulses encoding information communicated along them. Advances such as Sperry’s split brain experiments of 1968 (cit. Betty Edwards in “Drawing on the Right Side of the Brain”, 1979, London: Souvenir Press) and Barondes’ demonstration (New Scientist 6 Feb69) of the growth of memory in the form of neural synapses, clarify the functional significance of brain structure at both architectural and detail level to raise Jung’s empirical personality theory to the status of fully scientific.

    So Egmont is right to insist on a structural rather than a behavioural basis for economics, though I think he is looking in the wrong place for his structures. What about the structure (including that in the evolving memories) of real Economic Men?

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