Home > Uncategorized > Swedish economics establishment and pluralism in economics

Swedish economics establishment and pluralism in economics

from Lars Syll

1390045613In the latest issue of Fronesis yours truly and a couple of other academics (e.g. Julie Nelson, Tony Lawson, and Phil Mirowski) made an effort at introducing its readers to heterodox economics and its critique of mainstream economics. Rather unsurprisingly this hasn’t pleased the Swedish economics establishment.

On the mainstream economics blog Ekonomistas, professor Daniel Waldenström today rode out to defend the mainstream with the nowadays standard defense — heterodox critics haven’t understood that mainstream economics today has gone through a pluralist and empirical revolution. Since heterodox critics haven’t noticed that, their views on the mainstream project is more or less irrelevant.

Well, the problem with that defense is that it has pretty little with reality to do.

When mainstream economists today try to give a picture of modern economics as a pluralist enterprise, they silently ‘forget’ to mention that the change and diversity that gets their approval only takes place within the analytic-formalistic modeling strategy that makes up the core of mainstream economics.   You’re free to take your analytical formalist models and apply it to whatever you want — as long as you do it with a modeling methodology that is acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. If you haven’t modeled your thoughts, you’re not in the economics business. But this isn’t pluralism. It’s a methodological reductionist straightjacket.  

To most mainstream economists you only have knowledge of something when you can prove it, and so ‘proving’ theories with their models via deductions is considered the only certain way to acquire new knowledge. This is, however, a view for which there is no warranted epistemological foundation. Outside mathematics and logics, all human knowledge is conjectural and fallible.

logo_netzwerk_500px_transparentValidly deducing things in closed analytical-formalist-mathematical models — built on atomistic-reductionist assumptions — doesn’t much help us understand or explain what is taking place in the real world we happen to live in. Validly deducing things from patently unreal assumptions — that we all know are purely fictional — makes most of the modeling exercises pursued by mainstream macroeconomists rather pointless. It’s simply not the stuff that real understanding and explanation in science is made of. Had mainstream economists not been so in love with their smorgasbord of models, they would have perceived this too. Telling us that the plethora of models that make up modern macroeconomics ‘are not right or wrong,’ but ‘just more or less applicable to different situations,’ is nothing short of hand waving.

Take macroeconomics as an example. Yes, there is a proliferation of macromodels nowadays — but it almost exclusively takes place as a kind of axiomatic variation within the standard DSGE modeling framework. And — no matter how many thousands of models mainstream economists come up with, as long as they are just axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and explanation of real economies.

Most mainstream economists seem to have no problem with this lack of fundamantal diversity — not just path-dependent elaborations of the mainstream canon — and the vanishingly little real world relevance that characterize modern macroeconomics. To these economists there is nothing basically wrong with ‘standard theory.’ As long as policy makers and economists stick to ‘standard economic analysis’ — DSGE — everything is fine. Economics is just a common language and method that makes us think straight and reach correct answers.

Most mainstream neoclassical economists are not for pluralism. They are fanatics insisting on using an axiomatic-deductive economic modeling strategy. To yours truly, this attitude is nothing but a late confirmation of Alfred North Whitehead’s complaint that “the self-confidence of learned people is the comic tragedy of civilisation.”

Daniel Waldenström — like so many other mainstream economists today — seems to maintain that new imaginative empirical methods — such as natural experiments, field experiments, lab experiments, RCTs — help us to answer questions concerning the validity of economic theories and models.

Yours truly beg to differ. There are few real reasons to share his optimism on the alleged pluralist and empirical revolution in economics.

I am basically — though not without reservations — in favour of the increased use of experiments and field studies within economics. Not least as an alternative to completely barren ‘bridge-less’ axiomatic-deductive theory models. My criticism is more about aspiration levels and what we believe that we can achieve with our mediational epistemological tools and methods in the social sciences.

The increasing use of natural and quasi-natural experiments in economics during the last couple of decades has led several prominent economists to triumphantly declare it as a major step on a recent path toward empirics, where instead of being a deductive philosophy, economics is now increasingly becoming an inductive science.

In randomized trials the researchers try to find out the causal effects that different variables of interest may have by changing circumstances randomly — a procedure somewhat (‘on average’) equivalent to the usual ceteris paribus assumption).

Besides the fact that ‘on average’ is not always ‘good enough,’ it amounts to nothing but hand waving to simpliciter assume, without argumentation, that it is tenable to treat social agents and relations as homogeneous and interchangeable entities.

Randomization is used to basically allow the econometrician to treat the population as consisting of interchangeable and homogeneous groups (‘treatment’ and ‘control’). The regression models one arrives at by using randomized trials tell us the average effect that variations in variable X has on the outcome variable Y, without having to explicitly control for effects of other explanatory variables R, S, T, etc., etc. Everything is assumed to be essentially equal except the values taken by variable X.

Just as e.g. econometrics, randomization promises more than it can deliver, basically because it requires assumptions that in practice are not possible to maintain.

Like econometrics, randomization is basically a deductive method. Real target systems are seldom epistemically isomorphic to our axiomatic-deductive models/systems, and even if they were, we still have to argue for the external validity of the conclusions reached from within these epistemically convenient models/systems. Causal evidence generated by randomization procedures may be valid in ‘closed’ models, but what we usually are interested in, is causal evidence in the real target system we happen to live in.

‘Ideally controlled experiments’ tell us with certainty what causes what effects — but only given the right ‘closures.’ Making appropriate extrapolations from (ideal, accidental, natural or quasi) experiments to different settings, populations or target systems, is not easy. ‘It works there ‘s no evidence for ‘it will work here.’ Causes deduced in an experimental setting still have to show that they come with an export-warrant to the target population/system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods — and ‘on-average-knowledge’ — is despairingly small.

So, no, I find it hard to share Waldenström’s and other mainstream economists’ enthusiasm and optimism on the value of the latest ’empirical’ trends in mainstream economics. I would argue that although different ’empirical’ approaches have been — more or less — integrated into mainstream economics, there is still a long way to go before economics has become a truly empirical science.

Heterodox critics are not ill-informed about the development of mainstream economics. Its methodology is still the same basic neoclassical one. It’s still non-pluralist. And although more and more economists work within the field of ’empirical’ economics, the foundation and ‘self-evident’ bench-mark is still of the neoclassical deductive-axiomatic ilk.

Sad to say, but we still have to wait for the revolution that will make economics an empirical and truly pluralist and relevant science. Until then, why not read Fronesis and get a glimpse of the future to come? Mainstream economics belongs to the past.

  1. April 13, 2017 at 6:52 am

    It’s quite correct that mainstream economics belongs to the past. But a brief look at the history of major changes in government, technology, and yes, even science shows clearly that in most instances those who want and promote the changes in question often are ignored and bullied. The changes they propose, or the changes that the conditions they want to establish lead to are strongly resisted in multiple ways. Including with money, resources, propaganda, and social conventions. Lars, seems you and others like you are on the receiving end of mighty efforts to preserve ways of life and of ways of wealth around which many professionals have structured their lives, their reputations, and their comfortable and prestigious location in the class structure. Against that all you offer is academic honesty and insight. Not a fair trade, in their view.

  2. April 13, 2017 at 3:29 pm

    you say mainstream economics or economic theory) doesn’t explain ‘what is happening in the real world ‘ nor provide a ‘real understanding and explanation’ of it.

    I guess i wonder what or which ‘real world’ you are referring to and what is ‘happening’ in it.
    Did something happen? I must have missed that news report. Also if mainstream econ doesn’t provide it, then how does one determine what is real ‘undersanding’ and a ‘real explanation’ (apparently something you dont get, orget only a little bit ) from standard economic models–commonly phrased in math— and experiments.

    (I dont know if say Keen’s stuff, or Chen’s (chaos theorist who had a post on RWER) or the prof at UCLA who does petri nets (and whose son was a journalist killed by al_qaeda in Pakistan) , which are somewhat or very mathematical have any relevance to the real world or provide any understanding and explanation by your criteria, or are the same as mainstream ones.)

    My impression is the ‘real world’ is very big, very complex, and there may be as many real worlds as there are people (or even more since people can live in a multiverse –ie many worlds at the same time—though some are ‘imaginary’ in the sense that their existence is in ‘imaginary numbers’ like square root of -1.)

    My ‘real world’ is very different likely from others—i dont live in a refugee camp, i’m not in a union, nor a cashier, cab driver, electricity maintenance person. Standard economic theory for me has some conceptual use and validity—i have some ‘needs’ which i can think of as a utility function, and i hae a budget, so i can think of my life as maximizing a utility function—though i dont usually do the math.

    I’m not dealing with other economic issues (eg deciding how to set the interest rate as economists at Federal reserve do. As a sort of ‘idiot’ to me that seems like a trivial problem like figuring out how to keep your apartment at a livable temperature–sometimes you turn heat off and open a window, other times you do then opposite.
    But the interest is basically a political issue–and that fact actually invalidates in the real world the applicability of most of standard economic theory which describes how prices and wages are set, what money is, what its value is etc.

    Using the standard theory is like me trying to keep my apt at a constant temperature when my neighborhood is hit by a tornado (we had 2 tornados near here recently so you lose power and so on) , flood or what we call ‘snowmaggedon’ (when you get a rare blizzard which shuts everything down).

    The theory sort of applies but doesnt acount for the ‘black swans’ (and actually doesnt apply at all –except for some abstract totally isolated system). Its an ideal gas model. You can get some approximate understandings of real ones from those, but one needs to modify the m model to get anything more.

    So i wonder if you have an example of what the real world is and what a real understanding and explanation of it is or would be. (The real world around here–if it is real- is a mixture of misery and happiness, comfort and people struggling to survive, a daily work schedule at a desk job or a physical one or selling stuff on a corner and people idling on park benches , going to get their free food and food stamps and selling them, etc. .)

    Alot of people talk about the ‘economic crisis of 2008’ or whenever–maybe that was when obama was elected, and the stock market basically crashed. Only things i really know about that is some public radio economic reporters ‘dissapeared’ because they had predicted the stock market was going up, up, up, and also one started seeing all these foreclosed, vacant new or old houses around. I didnt experience a crisis anymore than the almost permanent one i live in (though that does have peaks and valleys, involving whether you actually have a job and money, and then suddenly dont (so for me seeing those vacant houses at times is like seeing a new place to make my home–i have my eye on one around here if push comes to shove, but i dont thik that would last–govt has it and they come by now and then; plus there’s a big angry dog next door –i told the owner she should keep that dog in the backyard because it terrifies everyone who walks on this public sidewalk, and she told me she was filming me and reporting me to the police listserve. i told her i’m gonna post on that exact same list serve and gonna call the police too–that dog is rarely out there anymore . ).

    One conservative economic journalist Larry Kudlow (worked for ronald ‘mcdonald’ raygun and has some sort of what look like elementary school level qualifications and certifications in economics) aklso predicted sotcks would go up, up up but he’s still on the air giving what i am sure is excellent economic advice. (He also sounds like he’s a bit drunk–slurring his speech. I imagine he actually may be that angry dog up the street when he’s off ‘work’—he continually harps on issue of ‘work’ and people who get ‘free stuff’ (healthcare—i get free health care since i qualify tho i rarely use it —which is actually stupid, i should use it a little bit more so dont end up in emergency room (eg when i broke my wrist last year when i stupidly decide to play in the creek during a flood).
    He considers his blabbermouthing fake news stories work. That station has alot of people working for it, and a big building. Rush Limbaugh is on it and does same thing—i heard he makes 30$million a year for that.
    Wild animals didnt notice no crisis either except the usual permanent ones. Flowers bloom, trees lose and regrow leaves, fish and snakes and turtles appear and dissapear with the seasons. You can tell ‘global warming’ is likely real—all these areas are changing (sometimes gradually, sometimes rapidly—eg one notices entire species of fish, birds, and plants suddenly basically dissapear. and then you get new kinds some of which are ok and some of which are not –to me.)

    How do you explain or understand this.

    To me mainstream economic theory is quite useful but only 50%—its a starting point. I’d buy it—but its overpriced and also only one half what i want . (i used to buy basically junk food which also had some vegetables in it which i value, so i threw half of it away).

    I do value math–its a sort of game , similar to hiking. On face it has no value except as a way of keeping you away from trouble and maybe staying fit. (but hiking can also lead you to free food—i know where i can get my wild food locally. thats one job i have–i get paid in free food if i go there.) How does one understand that? what economic theory explains why some people prefer to do math (i’m sortuh restarting a project on how to write down a reasonable utility and social welfare function in most simplest intuitive form –may not look like standard notation, much of which maybe should be thrown in the trash or arxived) rather than join the army or work for NSA. (i also do music; not valued m uch tho i used to pay my very few bills with that; but i assign zero value to most music around even tho thats the kind that makes alot of money).

  3. Frank M Salter
    April 13, 2017 at 6:19 pm

    In your discussion you have accepted as true, what should be called, the fundamental myth of conventional analysis: that models used are to be construed as being axiomatic. They are not!
    The Wikipedia entry for first principle contains the statements:
    ‘In mathematics, first principles are referred to as axioms and postulates.’
    ‘In physics and other sciences, theoretical work is said to be from first principles, or ab initio, if it starts directly at the level of established science and does not make assumptions such as empirical model and fitting parameters.’
    These statements are only applicable to a very small number of economics papers.
    It is instructive to consider the prevalence of the terms first principle(s), ab initio and model(s) in published literature. Searching for these terms in all journals and in journals with titles containing economic(s), econometric(s) and econometrica provides the following results.
    For all journals containing ab initio equivalent terms there are about 3,341,000 articles; for economic journals 5,950. A difference of about three orders of magnitude! For all journals
    containing model(s), there are about 14,750,000 articles; for economic journals 1,851,020. A
    difference of about one order of magnitude! Furthermore, a quick sampling of the actual use of first principles in economics journals reveals that the usage is mainly rhetorical and would be considered unacceptable in the physical sciences.
    It is equally instructive to read DeMartino, George (1993). ‘Beneath “First Principles”: Controversies Within the New Macroeconomics’. In: Journal of Economic Issues 27.4, pp. p.1127–1153. While he introduces “entry point concepts” which he does not distinguish from initial hypotheses, he does not ascribe them to be first principles, nor he does maintain the separation. The ideas become conflated. Despite intending “an exploration of the content — and especially the status — of the “first principles” of new classical thought” (1993, p.1128), no obvious conclusion is reached about the status.
    A cogent remark is made by Blinder, Alan S. (1987). ‘Keynes, Lucas, and Scientific Progress.’ In: American Economic Review 77.2, pp. 130–136. On page 135 he states “it is far from clear that the particular first principles selected by new classical economists deserve to come first”. Thus clearly identifying that first principles is only understandable as the initial hypotheses of the analysts. I believe this to be a truth, universal within conventional analysis’ universe of discourse.
    As you say, “Validly deducing things in closed analytical-formalist-mathematical models — built on atomistic-reductionist assumptions — doesn’t much help us understand or explain what is taking place in the real world we happen to live in.” This is as absolute truth. The results are only applicable to that particular universe of discourse and do not apply to the real world. The acceptance of this would appear to be posited only upon the belief that the postulates in some way correspond to reality despite the empirical evidence pointing in the opposite direction. Only when the assumptions can be demonstrated to be realistic will this change. To every one of the innumerable modelling exercises in the literature, the demand must be, prove your universe corresponds to reality.
    Only when convincing demonstrations of the flawed thinking are made, will the situation be changed. So, what can you do to disprove any of the papers you know to be flawed. Only by refuting items of conventional theory, will success be achieved.

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