Economics — spending time doing silly things
from Lars Syll
Mainstream macro theory has not really helped out the finance industry, the Fed, or coffee house discussions. The reason … is basically that DSGE models don’t work …
But [if] DSGE models really don’t work, why do so many macroeconomists spend so much time on them? …
What if it’s signaling? …
That suspicion was probably planted in 2005 … by a Japanese economist I knew … He gave me his advice on how to have an econ career: “First, do some hard math thing, like functional analysis. Then everyone will know you’re smart, and you can do easy stuff” …
I then watched a number of my grad school classmates go into macroeconomics. Their job market papers all were mainly theory papers, though – in keeping with typical macro practice – they had an empirical section that was usually closely related to the theory. The models all struck me as hopelessly unrealistic and silly, of course, and in private my classmates – the ones I talked to – agreed that this was the case, and said lots of mean things about DSGE modeling in general, basically saying “This is the game we have to play.” …
If macroeconomics research is a coordination game, and if the prevailing research paradigm is not really better than alternatives, then you probably want macroeconomists who are willing to “play the game”, as it were. So DSGE might be an expensive way of proving that you’re willing to spend a lot of time and effort doing silly stuff that the profession tells you to do.
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Real-World Economics Review Blog 
Economists are not alone in “spending time doing silly things.” Since I have multiple careers I’ve experienced this same basic process in psychology, anthropology, history, engineering, and mathematics. I don’t have direct experience with the silly things in economics, but the silliest things I’ve been required to do thus far are in mathematics and psychology. In fact, both these disciplines became so silly that in the 1980s each went through a radical reorganization of their professional requirements, which not all members of the professions have accepted even today.
How to get rid of the silly Queen
Comment on Lars Syll on ‘Economics — spending time doing silly things’
Currently, economists are in the mode of thorough self-critique. Yes, we have done too much math, yes, our reduction of multi-dimensional homo sapiens to one-dimensional homo oeconomicus has been rather one-sided, yes, the Chicago free market philosophy has gone over the top, yes, there has been too much abstract model building and too little empirics and, yes, we have done all these silly things because “the profession” has told us so. Economics, it seems, has all these years not at all been about the economy but about signaling: “So DSGE might be an expensive way of proving that you’re willing to spend a lot of time and effort doing silly stuff that the profession tells you to do.” (See intro)
Why are the once proud heralds of the famous Queen of the so-called social sciences all of a sudden so conspicuously back-pedaling and ducking and discounting relevance? This question opens a wide field for speculation and second-guessing. But, clearly, to enter this playground of storytellers, gossipers, and wish-washers would be beyond silly. The very practical point is to take the opportunity and to get people who have disqualified themselves by doing silly things and talking nonsense finally out of science.
Economics is a failed science. Let us briefly spot the causal blunders. These are NOT located in the theoretical superstructure: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later … attention will have to return to the foundations.” (Hutchison 1960)
Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “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)
Methodologically, these premises are forever unacceptable but economists swallowed them hook, line and sinker from Jevons/Walras/Menger onward. The failure of methodological individualism and all other psycho/socio-approaches can be stated as an impossibility theorem: NO way leads from the explanation of human nature/behavior/action to the explanation of how the economic system works.
Keynes, as the other main protagonist, defined his set of foundational propositions in the General Theory as follows: “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.”
This elementary syllogism is conceptually defective because Keynes never came to grips with profit. As a result, all I=S models and the Keynesian multiplier are false.
Conclusion: The one silliness of economists consists in the inability to spot the errors/mistakes in their respective axiom sets and to blindly build their respective theoretical edifices higher and higher upon unsuitable foundations. This holds also for Marxianism and Austrianism. The other silliness consists in the repetitive critique of well-known defects: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug 1998)
And here is how to transcend the silliness of Orthodoxy and Heterodoxy: the forever unacceptable microfoundations have to be replaced by macrofoundations. This is achieved with this set of objective-structural foundational propositions. (A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
The investment good sector and more and more individual firms come in at a later stage. This increases complexity step by step. So, what we initially have with A1 to A3 is the pure consumption economy as the most elementary economic configuration. These premises are certain, true, primary, entirely free of green cheese behavioral assumptions, and therefore perfectly suited as the foundations of an “edifice that one wishes to expand and to build higher while preserving its stability.” (Hilbert 2005)
Human behavior, tastes, choices, or society have no durable underlying structure, but the monetary economy has and it is given in the most elementary case by A1 to A3. A system can be unambiguously defined.
Economics has to step down as Queen of the so-called social sciences in order to eventually become King of the system sciences. This paradigm shift, clearly, is beyond the means of the silly folks of traditional orthodox and heterodox economics.
Egmont Kakarot-Handtke
I am weary of the wiggle-waggle you define as the world, economic or otherwise. First, of the 200,000 history of Homo sapiens over 90% was spent as foragers, often called by the name hunter-gathers. That economy did not have households in the sense you use the term, and certainly did not have a business sector. Your axioms may work for humans since the first Agricultural Revolution about 12,000 years ago. Your A1 to A3 may, I say may apply afterwards, but not before. Second, the economy is inherently human-involved, although not always human controlled. So if “[h]uman behavior, tastes, choices, or society have no durable underlying structure,” the same is the case for the monetary economy. So your argument that the economy (monetary) is given most elementally by your A1 to A3 is fallacious. And over 50 years ago chaos science showed clearly that no system can be unambiguously defined. So again your A1 to A3 is fallacious. Finally, American economists and economics, unlike those in Europe cut its teeth on being “sociological.” That’s borne out by the minutes from the first 20 (1886-1905) of the national meetings of the American Economic Association. As sociologist Edward Ross pointed out to the AEA in 1889, ignorance of custom, tradition and authority left economists ill-equipped to carry out their analysis of trade. It’s my view Ross hit the error of economists today on the head. Economics needs to be more fully integrated with the other social sciences. And in my view if you’re really interested in finding ways to “fix” current economics a good place to begin is Yuval Noah Harari’s book “Sapiens: A Brief History of Humankind.” Integrated and contextualized analysis, emphasizing the creativity and intuitiveness involved in building human arrangements of collective life, including economic ones.
Ken Zimmerman
You write: “As sociologist Edward Ross pointed out to the AEA in 1889, ignorance of custom, tradition and authority left economists ill-equipped to carry out their analysis of trade. It’s my view Ross hit the error of economists today on the head.”
The fundamental error of Ross and you is to assume that economics is about ‘how society works’. No! This is the subject matter of sociology. Economics is about ‘how the economy works.’ Society and economy are intertwined but must be separated analytically.
Since Adam Smith, economics claims to be a science. Methodologically, it started as a mixture of sociology and political science: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, …” (Mill, 1874, V.39)
With respect to the subject matter there is no difference between Mill and Marx “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, …” (Marx, 1906, M.9)
With Jevons/Walras/Menger the focus shifted to methodological individualism and economics became a mixture of dilettantish psychology, sociology, and political science. This approach has failed abysmally.
Economics is NOT a science of Human Nature or individual/social/political behavior but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”
As a consequence, the overdue Copernican turn in economics consists in the methodological switch from behavior-centered bottom-up, i.e. subjective microfoundations, to structure-centered top-down, i.e. objective macrofoundations of the world economy. All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/Darwinism/evolution theory, political science, social philosophy, etcetera) and are taken in from these by way of multidisciplinary cooperation IF NEEDED.
Economics is NOT a science of behavior (Hudík, 2011).* Economics is not a so-called social science like psychology/sociology and not a natural science like physics but a system science.
By the way, it seems to have escaped your attention that Luhmann has defined sociology also as a system science (1995) and this, indeed, is the common methodological platform of sociology and economics (2014). With Edward Ross of 1889 you are way behind the curve.
Egmont Kakarot-Handtke
References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2418851
Luhmann, N. (1995). Social Systems. Stanford, CA: Stanford University Press.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
http://www.econlib.org/library/YPDBooks/Marx/mrxCpA.html
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL http://www.econlib.org/library/
Mill/mlUQP5.html#EssayV.OntheDefinitionofPoliticalEconomy.
* See also cross-references
http://axecorg.blogspot.de/2015/12/behavior-cross-references.html
All that happens, I repeat, ALL is created via interactions (relationships) among a number of actors. That includes all parts and features of the universe that physicists take such pride in revealing (by interacting with many nonhuman actors). And it also includes the “monetary economy.” So in part you are correct. The economy is not wholly a human creation. But humans are one of the actors involved in its creation. Is it possible for economists to study the interactions that create the “monetary economy” in the same manner as physicists study the interactions that create the physical universe? In short, it is not. It is not possible because the interactions are not the same. The study object, the interactions determine the manner of the study of those interactions. Not the reverse. Physicists have stumbled around now for four centuries looking for ways to reveal how the universe was created and changes. Economists never did the stumbling. They really never even looked at what it was they were supposed to be studying. Just as you have never really looked at what you say you’re studying. The coward’s way to be a scientist. Just pick some ways of doing science, some mathematics and complex logical equations and run with them. Never verify that they are actually working to help you reveal how this thing you call the “monetary economy” is created, sustained, destroyed, and recreated. As to Ross’ advice to economists, I chose him as an example only because of the brevity of his remarks. Sociologists and psychologists both have given economists similar advice, at least until economists dubbed economics queen of the sciences and thus the giver but never the taker of advice, of truth.
Ken Zimmerman
For somebody with a small horizon the earth is for all practical purposes flat and all empirical evidence is so convincing that it is almost impossible to transcend this commonsensical world view and ever get out of the tiny box. All the more so because science is as a rule counter-intuitive and requires the emancipation from small scale idiosyncratic personal experience.
Because of this, nothing seems more commonsensical than your assertion: “All that happens, I repeat, ALL is created via interactions (relationships) among a number of actors.” As a matter of fact this view ― let us call it the Science-of-Man fallacy ― is as old as the hills. It goes back to Hume.
“And as the science of man is the only solid foundation for the other sciences, so the only solid foundation we can give to this science itself must be laid on experience and observation.” (2012, Introduction)
It reappears with the Austrian sect.
“Mises’ contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do.” (Foreword, von Mises, 2007, p. v)
And it is the tenet of Orthodoxy.
“It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994, p. 1)
The common denominator of all Science-of-Man approaches is that they are scientific failures. Not much profound insight about how the economy works has come from them. Until this day the representative economist cannot even tell the difference between income and profit.
Consistent with the low performance of flat-earthers in general you have not put forward one single testable proposition about an important economic relationship. This is rather odd for a person who claims to apply the right methodology. In science, claims and opinions do not count for much, only proof counts.
Egmont Kakarot-Handtke
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
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
http://www.gutenberg.org/files/4705/4705-h/4705-h.htm.
von Mises, L. (2007). Human Action. A Treatise on Economics, volume I. Indianapolis, IN: Liberty Fund.
The entire structure of western (but not all sciences) rests on the assumption that’s possible to go from an observation to conclusions about that observation. Whether this is done via simple induction, induction based on deduction, probability, best possible explanation, causation, etc. the problem remains the same – going from observation to some conclusion (explanation, cause, fact, etc.). How do we assess the movement from one to the other? Hume claimed the movement could not be rationally justified. A radical empiricist Hume believed all knowledge comes from experience. However, his definition of experience was narrow. Leaving out such things as mental experience, inferences, daily working experience. As the old joke goes about Hume – with all his rejection of causation and explanation not experienced-based Hume still had no trouble making it to the public house at the end of the day. Another instance in which a philosopher philosophized him/herself out of the world. As to the relational basis of all things and events, take any example you want. Gravity – an interaction between a force and a physical object. A society – interactions between humans and nonhumans to form a collective life. An economy – interactions among humans and nonhumans, some labeled as resources and objects for exchange to meet basic human survival needs. Putting forth testable propositions about economic interactions is not my job. I’m not an economist. Rather, it’s you job as an economist. As an historian I don’t test propositions, I examine the stories of how humans live together. But as a psychologist I do test propositions, as do most experimental psychologists. But these never have the few and mostly clear variables tested in the physical sciences so the conclusions are much more unclear and difficult to identify. That’s dictated by the subject matter of the science, as is appropriate. In science we change the testing and the theories to follow the subjects of our study, not the reverse. Finally, following this dictum if you can find some other variables to measure and test except relational ones let me know. That would change everything. A brand new universe would emerge.
Ken Zimmerman
(i) You say: “The entire structure of western (but not all sciences) rests on the assumption that’s possible to go from an observation to conclusions about that observation.”
False. This holds only for the proto-scientific stage. For details see this chart
The scientific stage starts with a well-articulated theory which is based on axioms. Axioms in turn are NOT DIRECTLY based on naive observation/experience but are a sophisticated logical construct: “If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way?” (Einstein, 1934, p. 167)
As we know from history, scientists have found the correct way. You definitively do not understand the specific characteristics of science and mess it up with observationism: “The Baconian dogma I have in mind asserts the supreme merits of observation and the viciousness of theorizing speculation. I shall call this dogma, briefly, by the name ‘observationism’.” (Popper, 1994, p. 84)
(ii) You say: “Putting forth testable propositions about economic interactions is not my job. I’m not an economist. Rather, it’s your job as an economist. As an historian I don’t test propositions, I examine the stories of how humans live together.”
True. Historians are storytellers and second-guessers but NO scientists. Because of this, they have NOTHING useful to say about methodology. Psychologists, too, have not much to say because economics is NOT about human psychology/behavior but about the behavior of the economic system. Economics is NOT a so-called social science but a system science. For more about the cargo cult science psychology see Feynman on Wikipedia or YouTube.
(iii) You say: “Finally, following this dictum if you can find some other variables to measure and test except relational ones let me know. That would change everything. A brand new universe would emerge.”
Yes, indeed. Here you have the First Economic Law which defines the measurable and testable economic relations for the elementary consumption economy which in turn are entirely free of green cheese psychological/behavioral assumptions: https://commons.wikimedia.org/wiki/File:AXEC06.png.* If you think this equation is false you can try to empirically refute it. This is how science works.
Egmont Kakarot-Handtke
References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL http://www.jstor.org/stable/184387.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111.
London, New York, NY: Routledge.
Egmont, I have no objections to theory, logical or otherwise, and both do occur. But you say, “The scientific stage starts with a well-articulated theory which is based on axioms.” If this is truly all science is then there is little science. Investigations can begin in hundreds of ways – from simple guesses, to insights from taking a bath to sitting under a starry sky, to watching an apple fall. Yes formal logic can play a role in testing all of these. But in the end the real and only test is comparisons with observations. And that’s where all the issues I listed in moving from observations to conclusions come up. And most of these are not subject to formal logic, since follows from life not the reverse. Popper was wrong about so many things I hardly think it adds strength to any argument to quote him. And as Mr. Spock and Star Trek pointed out, even to the lay person logic is too easily manipulated to be a useful scientific tool. Although it can sometimes help us see out choices more clearly. The greatest good for the greatest number is according to Spock logical. But so is help yourself first and then you are able to help others. Science, because it’s the study of life and actions in the world is messy and there is no cure for that messiness, even formal logical ones.
The common denominator of all Science-of-Man approaches is that they are scientific failures
This is a nonsense statement and you should know it EKH. Since neoclassical economics took over economic th0ught in the UK and the US, economics has excluded all Science=of Man approaches in the discipline. I am sure that had policies based on history and social sciences been tried, we would not have the problems we have today, i.e., gap between rich and poor, unemployment, etc.
It’s my view that science is the study of the relationships among all the things, forces, thoughts, etc. that make the world and are made by it. These relationships are epistemological, normative, and ontological all at the same time. That’s the main reason all forms of “realism” and “idealism” are insufficient and lacking, although they are created in this same manner. Here you have in a nutshell the configuration and boundaries of science, and all other forms of knowing. Science is an insightful and useful vision of the world but it’s not the only one. Making science about truth and certainty is simply nonsense. Within the limits the world sets for us we can learn and do things. But let’s not forget the “within the limits.” It’s my view this error is one of the major reasons scientific work fails. It’s certainly the main reason economics has failed.
Ken Zimmerman
Science is well-defined by material AND formal consistency and scientists judge and are judged according to these criteria. Genuine scientists have NO problem with these methodological essentials but the so-called social scientists have. Their persistent attempts to redefine science are understandable but pointless: either one plays according to the rules of science or one is OUT. Your view “that science is the study of the relationships among all the things, forces, thoughts, etc. that make the world and are made by it” is simply irrelevant.
Egmont Kakarot-Handtke
I’ll just respond to the heart of what you assert — “Science is well-defined by material AND formal consistency and scientists judge and are judged according to these criteria.” First, the “well-defined” processes that make science what it is are based on consensus of the members of each particular scientific community. Some of these overlap, such as the need to observe, compare observations, report observations, and compare the results of multiple observations with any theory (whether formal or just guesses) that the scientists’ find of interest. The details of this consensus change. For example, the ways of observing change, as do the theories to which these may be compared. Even who is allowed to observe and compare changes! If you ever go to a real scientific meeting (I go to those of astrophysicists and evolutionary biologists each year) you’d see right away that there is constant argument over who controls or wants to control the criteria for separating good from bad science, especially the methods of observing and reporting. Consensus may sound good “in theory” but it’s damn difficult to achieve in real life. I suggest you spend some time with actual scientists. Might change your views on science and lots of other things.
The question I would have is whether DSGE modeling is or has become unfalsifiable, i.e., do the models allows enough tweaking to fit any data (or any data set they are likely to encounter from the real world).
Generally, yes, given the mix ofa priori ceteris paribusassumptions and the use of dummy variables.