Home > Uncategorized > Economic Theory as Ideology

Economic Theory as Ideology

from Asad Zaman

Ideology and Science are diametrically opposed to each other. An ideology is a set of beliefs that is maintained even in face of strong empirical evidence to the contrary. Science is primarily concerned with explaining the empirical evidence. Theories which conflict with observations are rejected.  This does not mean that ideology is necessarily wrong or bad – we must maintain our belief in justice, morality, honesty, trust, integrity without any empirical evidence; indeed, even when strong empirical evidence suggests that these beliefs will not bring us popularity or personal benefits. However, ideological beliefs in wrong ideas can blind us to the facts and prevent learning which is essential to progress. Nobel Laureate Joseph Stiglitz remarked that modern Economics represents the triumph of ideology over science. This essay explains the reasons for his remarks.

Modern economic theory is founded on axioms for rational behavior, which is equated with selfish behavior by economists. No empirical evidence is presented for this axiom; rather it is taken to be self-evident. In the 1980’s some psychologists, perplexed by the economic theories of human behavior, decided to test these theories via some experiments. Amazingly, nearly all experiments conducted showed human behavior to be strongly in conflict with the economic axioms. A widely replicated experiment is called “The Prisoner’s Dilemma”. This game is similar to many real life situations, where an individual can benefit by betraying a social agreement, as long as other parties stick to the agreement. However, if all people betray the agreement, then everybody loses. Economic theory predicts that selfish individuals will betray agreements, and social conventions of cooperation will break down. However, real life experiments show that cooperation and maintenance of social conventions, even with complete strangers, is quite common.  Generally, economic theory assumes that selfish motives dominate all others. However, real life behavior in experiments displays a large variety of motivations, based on reciprocity, trust, generosity, charity, morality, and other motives which are assumed absent in economic theories.  read more

  1. David Chester
    July 17, 2016 at 3:55 pm

    Although it is true that some businesses are not functioning basically for the amount of money they can generate for their share-holders, it is also a fact that a larger proportion of these businesses are simply money-making inclined. So the claims that modern macroeconomics is not a profit-dominated world and that people have other kinds of motivations, fails to prove that all or most of businesses no longer are money-motivated. In fact even after all the fine words about how different we are from the original dog-eat-dog theory, we are still mostly of that nature. This means that when we look at the average behavour of the agents on a cert6ain kind within the system, the same original claims do apply, even if there is a degree of relaxation from the jungle-rules.

    • July 18, 2016 at 6:47 pm

      David, you are correct that today and in the recent past the same rules do and did apply with regard to focusing on money making. But such was not always the case. Drucker I think fairly reflected the concerns of businesses after World War II when he said, “The purpose of business is to get and keep a customer,” and “money in business is just a way to keep score.” How did it change from this to “jungle rules” you mention? Some of that change can be traced to the US switch from “production” businesses to financial/banking as the center of the economy. Some can be traced to economists “selling” the idea (propagandizing) that the only purpose of a business is to make a profit for shareholders. Some can be traced to a rabid anti-labor movement paid for mostly by bankers and Wall Street that is now close to destroying labor unions. Some can be traced to laws that advance and protect the needs of CEOs banks, and hedge funds (but not the average investor). Some can be traced to a dislike of anyone who speaks of community needs or public service – so palpable at times in Congressional hearings that I have to leave the room for fear of vomiting. I understand why many voted for and will vote for Trump and why the “draft Bernie” movement will not die. Many ordinary people are tired of being screwed over by smart guys in DC, on Wall Street, and in international trade deals. Bottom line (pun intended), this world of profit-maximizing international businesses and trade was created. It’s not any more natural than the NY Yankees winning 27 world Series pennants. The Yankees spent billions to buy players, shape the rules, influence the regulators, and splash their name across the world. To the extent they could they made the world in which winning 27 pennants was not just possible but virtually inevitable. Bankers, CEOs, fund managers, financial/economic regulators, economists, the major political parties, the media, and in general many rich people did much the same for “business is just a scramble for money.” Only they did a better job than the Yankees did.

  2. July 18, 2016 at 6:44 am

    Ideology and science have never been two ends of the poles. In other words, they are never wholly separate, nor can they be. After all scientists often hold on to their belief in the correctness of science and particular scientific theories and research, even in the face of contradictory evidence. The best that can be said is that scientists have a commitment to empirical research and theories based on that research. In terms of figuring out the world and making our way in it scientific research is still the better option. But science is not supernatural. It is an uncertain effort to figure out an uncertain world. None of this, however excuses “economic science.” Economists have no interest in figuring out the world and how it works. No interest in empiricism of any sort. And apparently no interest in keeping economic science from becoming just one more ideology among the thousands infecting the world today.

    I want to offer one possible answer to your question, “Why do economists maintain an ideological commitment to patently false theories of human behavior?” Power, prestige, and money. Plus a graduate school set up that recruits persons susceptible to the influence of these. And a lack of empathy for the suffering of others completes the picture. When I still worked as a clinical psychologist we called this pattern sociopathic – behaving in a dangerous or violent way towards other people and feeling no guilt about such behavior.

  3. July 18, 2016 at 10:27 am

    Economics: Deadlocked between politics and science
    Comment on Asad Zaman on ‘Economic Theory as Ideology’

    Asad Zaman quotes Joseph Stiglitz’s remark “… that modern economics represents the triumph of ideology over science”. This is only half of the calamity because modern economics represents also the triumph of scientific incompetence.

    First of all, one has to distinguish between theoretical and political economics. The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. From the viewpoint of science, political economics as a whole is a no-go, no matter what the agenda is. The main problem of economics is that the vast majority of economists are agenda pushers of one sort or another. This has always been an impediment to scientific advance.

    Currently, the situation is as depicted in this chart:

    Square D: Economics started as Political Economy. The better known representatives of the two main factions were Smith/Ricardo with a bias for the 1%ers and Marx with a bias for the 99%ers.

    From the very beginning economists claimed to do science but the agenda pushers were dominant and captured theoretical economics as scientific poster-child. Nevertheless, there was also a strong undercurrent away from politics toward genuine science. Because of scientific incompetence, however, neither Orthodoxy nor Heterodoxy could rise above the proto-scientific level and both landed in square C with no sharp demarcation line between science and politics.

    The methodological characteristic of square C is that the axiomatic foundations, that is, Walrasian microfoundations and Keynesian macrofoundations, are defective.* Now, the Iron Law of Methodology says: When the premises/axioms/foundational propositions are false the WHOLE theory/model/superstructure is false. Because of this, ALL economic policy advice lacks sound scientific foundations and is squarely hanging in midair. Economists simply do not know how the market economy works.

    So here we are: “Nothing is more difficult than to turn an entire discipline around, asking in effect to jettison its own history over the last 200 years.” (Blaug, 1990, p. 205)

    What economics needs is a move from square C to A, i.e. a replacement of defective Walrasian microfoundations and Keynesian macrofoundations by true macrofoundations. In other words, nothing less than a paradigm shift will do.**

    Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith onward can be summarized as utter scientific failure. Economics never could itself fully emancipate from politics: Keynes was an agenda pusher, so were Hayek and Friedman, and so are Krugman and Varoufakis. As a consequence, what we actually have is Walrasianism, Keynesianism, Marxianism, Austrianism, and ALL FOUR are axiomatically false and politically biased.

    Egmont Kakarot-Handtke

    Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.

    * See ‘How Keynes messed macro up’
    ** See cross-references

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