Home > Uncategorized > Neoclassical economics usually reads its models backwards.

Neoclassical economics usually reads its models backwards.

from Edward Fullbrook

In public, including in the training of economists, Neoclassical economics usually reads its models backwards. This gives the illusion that they show the behaviour of individual economic units determining sets of equilibrium values for markets and for whole economies. It hides the fact that these models have been constructed not by investigating the behaviour of individual agents, but rather by analysing the requirements of achieving a certain macro state, that is, a market or general equilibrium. It is the behaviour found to be logically consistent with these hypothetical macro states that is prescribed for the individual agents, rather than the other way around.[1] This macro-led analysis, this derivation of the micro from a macro assumption, is and always has been the standard analytical procedure of theory construction for the Neoclassical narrative. Sometimes, for pedagogical reasons, authors call attention to how the “individualist” rabbit really gets into the Neoclassical hat. For example, consider the following passage from a once widely used introduction to economics.

 “For the purpose of our theory, we want the preference ranking to have certain properties, which give it a particular, useful structure. We build these properties up by making a number of assumptions, first about the preference-indifference relation itself, and then about some aspects of the preference ranking to which it gives rise” (emphasis added) (Gravell and Rees 1981, p. 56).

In other words, it is not the behaviour of the individual agents that determines the model’s overall structure, nor even the structure of the preference ranking. Instead it is the macro requirement for a particular structure which dictates the behaviour attributed to the individual agents.[2] The “purpose” of this “particular, useful structure” is to rationalize the macro “conclusion” assumed at the beginning of the exercise. The resulting model shows micro phenomena determining macro phenomena, whereas, in fact, it is the starting point of the macro structure that has determined the behaviour of the model’s micro elements. Likewise, “rationality” becomes something defined to meet the exigencies of a desired conclusion.

[1] At the macroeconomic level, Neoclassical theorists these days usually drop the pretence that they are concerned with individual choice and adopt “the assumption that all individuals have the same utility function” (Arrow 1991, p. 201). This assumption of perfectly homogeneous agents is the theoretician’s equivalent of the Stalinist dream. Alan Kirman, in his analysis of the cynical expediency of this approach, notes that “the assumption of a representative individual is far from innocent; it is the fiction by which macroeconomists can justify equilibrium analysis and provide pseudo-microfoundations” (Kirman 1992, p. 125).

[2] The economic psychologist Peter Lunt describes the situation as follows.

“For work to be credible in economics, it has to work in principle, formally stated in terms that are usable in relation to the expected utility model. The validity of the data, indeed, the psychological plausibility of the account, is not quite but almost irrelevant. . . . [Economists] use selected propositions encoding specific effects as labels for putative psychological processes in rational decision making under uncertainty” (Lunt 1996, p. 280).

pp. 96-97 Narrative Fixation in Economics

  1. Frank Salter
    November 14, 2017 at 7:08 am

    A succinct description of the problem. The solution is equally clear. To generate meaningful hypotheses, it is necessary to base analysis on axioms actually drawn from the problem space — not some convenient fiction. That is the forward direction. So it is necessary for all to be dedicated to this approach. However, criticism is frequently muted. Some journals will not publish critical analyses of other papers. That is a major difference between real science and economic “so-called” science. Real science welcomes critical analysis.

    A egregious example of backwards models is conventional production theory. Exponential growth is assumed. To be genuine theory, exponential growth should emerge logically from the mathematical relationships — not be imposed. This reveals another major problem of economic understanding and description. Models of themselves can never be theory! They can be an expression of theory. In economics, where curve-fitting abounds, they are only descriptions of empirical data. Scientifically, they are exactly what their name implies, models. To suggest other than this, demonstrates a lack of understanding of the hard fact — correlation does not imply causation! This is the ubiquitous error of how economic theorists attempt to derive theory from fact.

    Which can be summarised — for theory to progress, its axioms must start from first principles. A fact well-understood in the physical sciences, but virtually unknown and apparently not understood in economics.

    • Erward K Ross
      November 14, 2017 at 11:19 pm

      I am only an average working class citizen of the real world, who as Joan Robinson once famously said “the reason to take an interest in economics is to avoid being duped by economists”. Hence from real world experience Frank Slater’s comments chapter one on the importance of beginning the economics conversation with meaningful hypotheses, and base axioms on real experience and clear observation is in my opinion the only way to approach problem solving in any situation, and yet most theorists in economics ignore this basic requirement in their blind support for the neoliberal economic rationalist model that is the tool of the already wealthy elite. On this basis in my humble opinion this chapter needs to be considered before debating theory.

  2. November 19, 2017 at 5:52 am

    Correct! Most economists begin their work, using the slang, bassackwards. Since no one knows when and if s/he is observing “reality” each of us, scientist or not, begins with their own and others’ questions and uncertainties. As social scientist the economist begins by asking others about their answers to such questions as: what is economic, which actions are economic, what are the benefits of economics and to whom? And then by questioning the answers to uncover uncertainties and ambiguities. The results are then shared and discussed in the scientific community to separate facts (shared understandings or lack of understanding) from unintended or coincidental understandings. These “facts” are reality. However, humans always answer the questions in multiple ways, or even change the questions. Thus, creating multiple realities.

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