Home > Uncategorized > Mainstream economics — a pointless waste of time

Mainstream economics — a pointless waste of time

from Lars Syll

Paul Krugman has a piece up on his blog arguing that the ‘discipline of modeling’ is a sine qua non for tackling politically and emotionally charged economic issues:

You might say that the way to go about research is to approach issues with a pure heart and mind: seek the truth, and derive any policy conclusions afterwards. But that, I suspect, is rarely how things work. After all, the reason you study an issue at all is usually that you care about it, that there’s something you want to achieve or see happen. Motivation is always there; the trick is to do all you can to avoid motivated reasoning that validates what you want to hear.

In my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead some place you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

Hmm …  

So when Krugman and other ‘modern’ mainstream economists use their models — standardly assuming rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative agents with homothetic and identical preferences, etc. — and standardly ignoring complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc. — we are supposed to believe that this somehow helps them ‘to avoid motivated reasoning that validates what you want to hear.’

Yours truly  is, to say the least, far from convinced. The alarm that sets off in my brain is that this, rather than being helpful for understanding real world economic issues, sounds more like an ill-advised plaidoyer for voluntarily taking on a methodological straight-jacket of unsubstantiated and known to be false assumptions.

Let me just give two examples to illustrate my point.

In 1817 David Ricardo presented — in Principles — a theory that was meant to explain why countries trade and, based on the concept of opportunity cost, how the pattern of export and import is ruled by countries exporting goods in which they have comparative advantage and importing goods in which they have a comparative disadvantage.

Ricardo’s theory of comparative advantage, however, didn’t explain why the comparative advantage was the way it was. In the beginning of the 20th century, two Swedish economists — Eli Heckscher and Bertil Ohlin — presented a theory/model/theorem according to which the comparative advantages arose from differences in factor endowments between countries. Countries have a comparative advantages in producing goods that use up production factors that are most abundant in the different countries. Countries would a fortiori mostly export goods that used the abundant factors of production and import goods that mostly used factors of productions that were scarce.

The Heckscher-Ohlin theorem –as do the elaborations on in it by e.g. Vanek, Stolper and Samuelson — builds on a series of restrictive and unrealistic assumptions. The most critically important — beside the standard market clearing equilibrium assumptions — are

(1) Countries use identical production technologies.

(2) Production takes place with a constant returns to scale technology.

(3) Within countries the factor substitutability is more or less infinite.

(4) Factor-prices are equalised (the Stolper-Samuelson extension of the theorem).

These assumptions are, as almost all empirical testing of the theorem has shown, totally unrealistic. That is, they are empirically false. 

That said, one could indeed wonder why on earth anyone should be interested in applying this theorem to real world situations. As so many other mainstream mathematical models taught to economics students today, this theorem has very little to do  with the real world.

From a methodological point of view one can, of course, also wonder, how we are supposed to evaluate tests of a theorem building on known to be false assumptions. What is the point of such tests? What can those tests possibly teach us? From falsehoods anything logically follows.

Modern (expected) utility theory is a good example of this. Leaving the specification of preferences without almost any restrictions whatsoever, every imaginable evidence is safely made compatible with the all-embracing ‘theory’ — and a theory without informational content never risks being empirically tested and found falsified. Used in mainstream economics ‘thought experimental’ activities, it may of course be very ‘handy’, but totally void of any empirical value.

Utility theory has like so many other economic theories morphed into an empty theory of everything. And a theory of everything explains nothing — just as Gary Becker’s ‘economics of everything’ it only makes nonsense out of economic science.

Some people have trouble with the fact that from allowing false assumptions mainstream economists can generate whatever conclusions they want in their models.

But that’s really nothing very deep or controversial. What I’m referring to is the well-known ‘principle of explosion,’ according to which if both a statement and its negation are considered true, any statement whatsoever can be inferred.

Whilst tautologies, purely existential statements and other nonfalsifiable statements assert, as it were, too little about the class of possible basic statements, self-contradictory statements assert too much. From a self-contradictory statement, any statement whatsoever can be validly deduced. Consequently, the class of its potential falsifiers is identical with that of all possible basic statements: it is falsified by any statement whatsoever. [Karl Popper, The Logic of Scientific Discovery]

On the question of tautology, I think it is only fair to say that the way axioms and theorems are formulated in mainstream (neoclassical) economics, they are often made tautological and informationally totally empty.

Using false assumptions, mainstream modelers can derive whatever conclusions they want. Wanting to show that ‘all economists consider austerity to be the right policy,’ just assume ‘all economists are from Chicago’ and ‘all economists from Chicago consider austerity to be the right policy.’ The conclusion follows by deduction — but is of course factually totally wrong. Models and theories building on that kind of reasoning is nothing but a pointless waste of time.

  1. June 29, 2016 at 1:56 pm

    What’s wrong with economics? Economists, of course!
    Comment on Lars Syll on ‘Mainstream economics — a pointless waste of time’

    Imagine for a moment, you ask a pre-Copernican astronomer directly: Is Geo-centrism true or false? And imagine further he answers: ‘Geo-centrism is the distillation of almost 1500 years of rigorous thought about how to analyze the behavior of celestial bodies. What we have come up with so far is very imperfect ― more than 20 epicycles are admittedly a bit awkward ― but it is still the most effective tool we have for systematically thinking about the behavior of celestial bodies.’ (A paraphrase of Glasner’s argument)

    This sounds good and reasonable and balanced, except for the fact that the answer is evasive. Worse, it is delusional. With hindsight we know that Geo-centrism had been axiomatically false and that the inconsistencies had not been localized over more than 1500 years but only papered over with epicycle upon epicycle. Eventually, though, Geo-centrism has been withdrawn from the corpus of scientific knowledge and fully replaced by Helio-centrism.

    The situation in economics is exactly the same, that is, pre-Copernican. Economics is still at the proto-scientific level: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work …” (McCauley, 2006, p. 17)

    What is the lethal methodological error/mistake of economics? The short answer is that it is behavior-centric, that is, it is based upon folk psychology and folk sociology. This approach does not have some minor weaknesses but is a complete failure. Therefore, the inescapable paradigm shift consists in moving from the behavior-centric approach to the structure-centric approach. This is comparable to the Copernican turn from Geo-centrism to Helio-centrism. Nothing less will do.

    The defenders of standard economics try to avoid the conclusion of absolute failure by freely admitting the most obvious weaknesses and by issuing a barrage of disclaimers which in sum amount to: If you take this stuff seriously it’s your own fault. Don’t blame us if it does not work.

    Many economists are well aware that they are scientifically lost in the wood. The problem is that they have no idea how to get out: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

    So, the representative economist continues to do what he is since Jevons/Walras/Menger supposed to do: “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). What does methodological individualism mean in detail? All variants of orthodox economics are built upon this hard core 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, p. 147)

    It is pretty obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of standard economics is methodologically forever unacceptable. HC2, HC4, HC5 are blatant nonentities, but the representative economist swallows them hook, line and sinker since more than 140 years. Note in particular that to take equilibrium into the premises is an elementary methodological mistake which is known since antiquity as petitio principii.* Therefore, all equilibrium models are a priori false and by consequence worthless.**

    To admit minor weaknesses is insufficient. The fact of the matter is that already elementary supply-demand-equilibrium is scientific garbage because it is built upon the unacceptable axiom set HC1 to HC5.

    David Glasner for one has come close to the crucial point on his blog: “The deeper problem that I think underlies much of the criticism of Econ 101 is the fragility of its essential propositions. These propositions, what Paul Samuelson misguidedly called ‘meaningful theorems’ are deducible from the basic postulates of utility maximization and wealth maximization by applying the method of comparative statics.”

    The point is: the essential propositions, a.k.a. axioms, are not fragile they are FALSE and forever unacceptable. The solution consists in moving from subjective-behavioral axioms (= microfoundations) to objective-structural axioms (= macrofoundations).

    By telling the world “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman) and by rationalizing the failure of this research programme economists confirm their hopeless scientific incompetence. The maximization-and-equilibrium approach has already been dead in the cradle. Orthodoxy is scientifically behind the curve since Adam Smith and Heterodoxy has failed to come up with an alternative. That’s what is wrong with economics.

    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.
    Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
    Cambridge University Press.
    McCauley, J. L. (2006). Response to “Worrying Trends in EconoPhysics”. EconoPhysics Forum, 0601001: 1–26. URL http://www.unifr.ch/econophysics/paper/
    show/id/doc_0601001.
    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

    * For details see ‘Petitio principii—economists’ biggest methodological mistake’
    http://axecorg.blogspot.de/2016/05/petitio-principii-economists-biggest.html
    The second fatal methodological blunder of the microfoundations approach is the
    fallacy of composition.
    ** See ‘Could we, please, all focus on the key question of economics?’
    http://axecorg.blogspot.de/2016/05/could-we-please-all-focus-on-key.html

    • Jeff
      June 29, 2016 at 5:46 pm

      There is no-one who stands to earn hundreds of millions of dollars if the world will only re-adopt a Geocentric model. The same cannot be said about Economic leeching, however.

  2. jlegge
    June 29, 2016 at 2:12 pm

    I agree with your analysis but not our conclusions. If someone pays me to dig a hole in their back yard in a specific place you can’t accuse me of being wrong just because the hole isn’t where you (or any reasonable person) would have dug it.

    The ability to develop models exploiting the universal logical consistency achieved by starting from self-contradictory premises is clearly a valuable skill, in that there are plenty of people and institutions who will pay to have it deployed on their behalf. The physical effort required to develop a model “proving” that some financial scammer deserves to keep his (or her) loot is trivial compared to the effort required to dig a reasonable sized hole, and pays much better.

    Ford used machine guns to keep unruly workers in their place at Dearborn in 1932. His successors use economists for the same purpose. The primary guilt stops with the persons who commissioned the crime; their instruments, whether motivated by venal considerations or a misplaced trust in their own ability to prepare valid economic models, must be pitied as much as blamed.

  3. jlegge
    June 29, 2016 at 2:12 pm

    “your” not “our”

  4. June 29, 2016 at 4:28 pm

    Nice summary Lars. For many years my widowed mother rented rooms to students learning to measure the variables of the weather in order to forecast it. They would release balloons carrying all kinds of what were thought to be the appropriate instruments for measuring the variables that they thought were relevant and then spend hours compiling the data and plotting it on topographical maps. Of course they had no idea how the variables had changed from the time of measuring to the time when they were releasing their findings nor how the topography affected the changes in the variables. So they were often imprecise in their predictions. Today different methods and equipment are used to gather the data and weather forecasting has dramatically improved. Yesterday for example we had a prediction of 60% chance of rain in the afternoon. If the afternoon includes the evening, it was 100% which was not part of the forecast as it started to rain after 6 pm. Understanding the economy seems to me much like understanding the weather. It is easy to do after the fact but predictions are chancy at best because of the flux in multiple variables. We could also include as an example earthquake predictions which as we know from tsunami events also influence weather.

    It seems that the models loved by Krugman and others are extensively reliant on linear analysis and largely ignore non-linear variables. They also are subject to reification which he seems to sort of recognize. But Chaos and Complexity theory to which you referred indirectly seems to inform this discussion more so than fantasies about holes being dug in the back yard although jlegge is correct about economists being used as the new storm troopers to intimidate people into conformity and to manufacture consent.

  5. June 29, 2016 at 4:53 pm

    I’m shocked (though as a Brit after Peterloo, not surprised) to read about Dearborn, but at least that seems to have been sufficiently obviously wrong to have led to unionisation.

    In retrospect, Ricardo appears to have been wrong because he has kept quiet about the resource of freely available but still valued money. UK financed Hong Kong was a case in point, and before that, Amsterdam, and now, all too obviously London. Financiers in such trade centres notionally buy resourses from lands which have them but export them not to countries which need them but irresponsibly: to people in whatever country (resource rich or not) who have access to the money to buy them (including incidentally their own). Calls for an economic system in which financial organisations are responsible for their own debts and international balance of trade.

    On theorems which are always true, the problem appears to be in the static nature of the form of words and hence of deductive logic. Real things have insides in which other things are going on, and the same real form can have different things going on inside it, e.g. an electric circuit may be conveying power, or it may be a telephone circuit conveying information in the form of soundwaves or digital impulses. The ontological task of science is
    what Bacon said it was, taking [particular types of] things to bits to see how they work. The epistemological view of science sold to the gullible by Hume was how to agree on what he (self-contradictorily) said you couldn’t see anyway.

    • June 29, 2016 at 5:04 pm

      Sentence missed before “The ontological task”. What a thing is is what it does.

  6. Ed Seedhouse
    June 29, 2016 at 8:04 pm

    “Yesterday for example we had a prediction of 60% chance of rain in the afternoon. If the afternoon includes the evening, it was 100% which was not part of the forecast as it started to rain after 6 pm.”

    Nonsense. First the word “afternoon” in normal speech (at least in English) does not include the evening, which is why we have two words for them, not one. Second probability only refers to possible events which have not yet happened. After the event using the word “probability” is just a misuse of the language. “It rained this evening” is a simple declarative sentence while “it is 100% probable that it rained this evening” is just a long winded way of saying the same thing inelegantly.

  7. June 29, 2016 at 10:31 pm

    My view is that economics does perfectly what it is designed to do. It is a MISTAKE to think that conventional economic theory is WRONG. In order to make progress, it is essential to understand the function of economic theories.
    1. Every economic policy hurts some groups and helps others
    2. No group has sufficient POWER to ENFORCE policies favorable to them.
    3. Groups with power MUST somehow create consent among a majority to enact policies favorable to them. If they do not do so, then policies against their interests will be enacted in a democracy.
    4. People judge policies according to their THEORETICAL IMPACT, since no one can actually foresee the future. This means that policies are not evaluated as good or bad according to reality, but according to how widely accepted theories predict their impact (for a vivid example, consider BREXIT)
    5. Thus the elite, the top 1%, are faced with the necessity of creating theories which show that policies which favor their interests are actually benefical for all, or for a majority. Let us a label a theory to be ET1% — an Economic Theory of the top 1% — if it shows a policy to be favorable for the majority, when in fact the policy actually favors the top 1%.
    7. Now if we consider conventional economic theory, it is easy to show that nearly all of it is ET1% — it is DESIGNED to prove that policies which favor the top 1% are beneficial for all.
    NOW LET US consider dominant economic theories and models in the light of this analysis.

    A: Consider the DSGE model, which has only ONE actor. By aggregating over all agents, we ensure that policies which favor the top 1% will appear to favor the whole nation.
    B: Consider the use of GNP per capita. It has exactly this feature — a policy which creates more wealth for the wealthy will appear as beneficial for the whole nation.
    C: Consider the principle of methodological individualism. By methodologically failing to consider the group of wealth owners, laborers, and other social groups, we make it impossible to discover what is happening to the economy.
    D: Consider the QTM quantity theory of money. By declaring money to be a veil, we make it impossible to think about the power of money creation, and how it enriches the wealthy, at the expense of the rest.
    E. Consider the Solow Growth model. It says that the best route to highest growth is by REDUCING consumption and increasing capital. What will happen as a result? Laborers will be starved and surplus will be chanelled into the hands fo the capitalists. All this is done in the name of HELPING THE POOR, since high growth will result in enough product to enable the feeding of the poor — of course this always remains a distant goal to be achieved in the future.

    MANY MANY MORE examples can be given. It is clear that ET1% does extremely well what it is designed to do: to deceive the majority into agreeing with, accepting, and voting for policies which actually harm their own interests, and help the top 1% get even richer. My earlier post on the The Keynesian Revolution and the Monetarist Counter-Revolution clarifies this perspective on economic theories in the historical context of the 20th century.

    • June 30, 2016 at 9:11 am

      I don’t much believe in conspiracy theories — in this case that economic theory is formulated to serve the interest of the top 1% and they are involved in the conspiracy. I believe that theory formulation is an academic exercise and that its failings have to be sought out in academia — in this case in a mind set of neoclassical economics that has been institutionalized in business schools and economics departments. To settle the problem is an academic exercise — deal with the shortcomings of economic theory in the places where it is formulated — in academia. Academics do not deal with reform so nonacademics will have to lead the campaign to reform the teaching of economic theory. I never see anybody on this blog seriously discuss how change can be accomplished in the teaching of economics in academic institutions. Conspiracies theories about the need to overthrow the stranglehold of the top 1% on our minds won’t help.

    • June 30, 2016 at 9:38 am

      Very well put. This takes us back to the “Why?” of Egmont’s original proposition, with which I heartily agree: it is time to “Scrap the lot and start again”. Start with a minimum of two active processes having interactions between them rather than the single agent of DSGE.

      Actually, I did that a long time ago, with a great deal of success other than being listened to and enabled to develop understanding by questioning and dialogue. “There are none so deaf as those who don’t want to hear”, like the “grown-ups” frightened of Chinese because they don’t already understand it. So Jesus said: “Unless you change and become like little children you will never enter the kingdom of Heaven”. (Mtt 18.3).

  8. David Chester
    June 30, 2016 at 7:20 am

    Macroeconomics is not designed at at all. It simply happens after a long gestation.

    What is designable is the way that we can examine it using models, and they vary in their nature. It might be thought (as above) that our social system which is macroeconomics was designed, because it is essentially man-made. However, having thought about the nature of our system it seems to me that it is more reasonable to imagine that it is the result of evolution rather than a design. This means that when we model and analyze the system we are actually investigating a phenomenon of a kind which has the qualities of both order and logical structure (as indeed does all nature), because evolution must always follow the rules of logical growth.

    In order to understand it we should try to find the most simple yet complete way of constructing the representative model, and these two contradicting requirements are not particularly obvious nor easy to meet. However, after some study of this and other systems, I find that such a model following the minimization principle of Occam (Occam’s Razor), results in a structure having only 6 role-playing entities and 19 different kinds of exchanges of money for goods etc.This is because when one considers the different KINDS of exchanges in our huge motley of business activity, the myriads of these exchanges all fall into a very limited number of classes, albeit that their magnitudes vary greatly. This minimum model also agrees with Einstein’s simplicity principle, for a satisfactory theoretical model for use in understanding a theory of an observable scientific phenomenon. He adds that the model should not be over-simplified, which unfortunately many past macroeconomics modelers have done after assuming that all effect other than the few of interest will stay unchanged.

    Two ways of expressing this model are presented in my paper SSRN 2600103 (A Mechanical Model for Teaching Macroeconomics), which is intended to be a means for providing basic explanations.

  9. June 30, 2016 at 9:29 am

    PS. I have discussed how to change; it came up in the discussions about the Rana Foroohar Phenomenon. Nobody paid any attention.

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