Home > Uncategorized > Economic reality — a virulent virus afflicting mainstream economics

Economic reality — a virulent virus afflicting mainstream economics

from Lars Syll

The WHO today warned of a virulent new virus affecting vulnerable groups in the Mid‐West and Eastern USA. The outbreak, which began in the Mid‐West’s extensive Great Lakes “Freshwater” river system, has recently jumped the “Saltwater” barrier, meaning that the entire population of its target species—“Mainstream” economists—is now at risk.

suzukiSpeaking on behalf of the WHO, Dr Cahuc explained that the virus works by turning off the one genetic marker that distinguishes this species from the rest of its genus, the Human Race. This is the so‐called “Milton” gene (Friedman, 1953), which goes dormant in other Humans as they pass through puberty. Its inactivity reduces their imaginative capacity, making it impossible for them to continue believing in such endearing infantile fantasies as the Tooth Fairy and Santa Claus. While regrettable, this drop in imagination is necessary to prepare Humans for the adult phase of their existence.

“Professor Milton Friedman found a way to re‐activate this gene during PhD training, using his ‘as if’ gene splicing technique”, Dr Zylberberg elaborated. “This enabled a wonderful outpouring of imaginative beliefs by Mainstream Economists, which gave birth to concepts like NAIRU, Money Neutrality, Rational Expectations, and eventually even DSGE models. This wealth of imagination was regarded by Mainstream Economists as a more than sufficient compensation for returning to the child‐like phase of the Human species.”

Steve Keen

Looking at what famous mainstream economists — like e.g. Paul Samuelson and Gerard Debreu — have come up with, there is no indication at all they produce rigorous and successful explanations or predictions of real-world phenomena. In physics, it’s all different. There one has often been able to, by the use of mathematics, to produce both rigorous and successful explanations and predictions. But then, of course, the material world is something quite different from the social world …

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This mathematical modelling activity is considered useful and essential. Since fully-fledged experiments on a societal scale, as a rule, are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build mathematical models and make things happen in these ‘analogue-economy models’ rather than engineering things happening in real economies.

Formalistic mathematical-deductive ‘Glasperlenspiel’ can be very impressive and seductive. But in the realm of science, it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

Mainstream economists love to depict heterodox economists’ views on the use of mathematics as coming from sadly misinformed and misguided people who dislike and do not understand much of it. This is really a gross misapprehension. We do not misunderstand the crucial issues at stake — and many of us have spent decades on using mathematics and statistics in our research and teaching.  To be careful and cautious is not the same as to dislike. Quite the contrary. We know the crucial issues all too well — and are not satisfied with the validity and philosophical underpinning of the assumptions made for applying mathematical methods in economics.

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science.  Let us not forget what Paul Romer — someone I guess not even the most outré mainstreamer would call a heterodox economist — said in his masterful attack on ‘post-real’ economics a couple of years ago:

Math cannot establish the truth value of a fact. Never has. Never will.

We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule, none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become the standard modelling assumption made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth.

So — let’s hope the reality virus will keep on infecting mainstream economics!

  1. Edward K ross
    October 30, 2018 at 7:51 pm

    Once again Ted from the real world Lars Syll’s above comments make an awful lot of sense to me, thank you Lars.

  2. Helge Nome
    October 30, 2018 at 8:19 pm

    Empire has always been about manipulating the public mind. What’s new pussycat?

    • Garrett Connelly
      October 30, 2018 at 10:31 pm

      Friction from a full world.

  3. Frank Salter
    October 31, 2018 at 9:06 am

    I agree with all the sentiments expressed by Lars Syll. However. he continues to ignore the unconventional analysis of “Transient Development” which does NOT follow established economic thinking. However many times I have pointed this out on these blogs, he has failed to engage with the one example of real economic science which meets all the requirements of being a VALID (i.e NOT invalidated by the empirical evidence — Popper) PROGRESSIVE (predicts previously unrecognised empirical facts — Lakatos ) theory.

    Nelson had good reason for putting his telescope to his blind eye. What is yours Lars? As it has been pointed out frequently on these pages, it takes valid theory to overturn bad theory.

    Reference:
    F. M. Salter (2017), Transient Development, RWER-81, pp.137−165.

  4. October 31, 2018 at 12:38 pm

    Yes indeed, “it takes valid theory to overturn bad theory.” But you don’t start looking for valid/good theories as long as you think the ones that are out there are valid/good. Like the little boy pointing to the emperor and telling people he is naked, we do have a legitimate role for SCIENCE THEORETICIANS and METHODOLOGISTS to play. Showing that the models and theories out there really is no good at all from a real-world perspective, is a good starting point for ECONOMISTS to start developing new and more relevant and realistic economic theories.

    • Frank Salter
      October 31, 2018 at 3:15 pm

      While I accept the truth of what you say, you have failed to address what I said. I contend that in “Transient Development” I have introduced a major theoretical contribution in production theory. The paper’s conclusion is very simple —
      “Transient mathematical relationships, derived from first principles, provide a parsimonious quantitative description of the development histories of manufacturing projects and industries.”
      I believe that it behoves you to examine, applying scientific standards, my claim that the analysis is NOT invalidated by the empirical evidence. As such it is a step forward towards a more complete analysis.

      By the way your final sentence, directly above, is consistent with my next paper “Scientific Economics” with which I hope to clear away some of the cobwebs in current analysis.

  5. November 2, 2018 at 12:48 am

    Lars & allies. After my long sabbatical from RWER blogging, I appreciate returning to find your response. Yet, the content by SK and DS, and the replies remind me of why I sincerely appreciate the fact that I became an accidental metatheoretician of meta-economics. I wish that I could share the link to my as yet unupgraded blogpages on my theory and metatheory (the woefully flawed earlier work), but I am concluding final work for forthcoming publication. Anyway, Lars, Steve, David et al, I am sincerely grateful for your contributions and inspiration. Without the likes of you and your sane, humane colleagues my endless evolutionary mission might be unaccomplished.
    Still, I must congratulate Helge for recalling a key ingredient of the remedy: a valid monetary system.
    Now, though I consider any theoretical analysis or resolution incomplete or incompetent without a viable cure, I realize that a theoretical system without a metatheoretical foundation is a toothless paper tiger, or worse, a blight upon the reality of human being. In other words, as Suzuki et al long ago made clear, anything less than compassionate response is a symptom of ethicide. I consider that a basic symptom of normative ecocidal mania.
    As the unsung genius of Leopold Kohr revealed, until we replace mainstream economics and econometrics with cultural holonomics and ethical ecometrics, there will be no real, biocentric solution. Without considering and assessing all the qualitative issues and principles critical for healthy, sane, humane lives and cultures, there will be no realistic analysis or solution.

  6. Helen Sakho
    November 4, 2018 at 12:06 am

    Let us all hold our hands and breaths together and pray for that day that will never come.
    But, yes — thank you all.

  7. November 13, 2018 at 2:23 pm

    Lars, science is often mischaracterized and sometimes, as often in this blog inaccurately depicted. Above all science is a faith, an imaginary faith. One of the great physicists of the 20th century, J.C. Polkinghorne explained science as a “Quest for Natural God” in a 1983 Times Higher Educational Supplement, 10 June 1983. He said, “Twentieth-century science has a grand and impressive story to tell. Anyone framing a view of the world has to take account of
    what it has to say … It is a non-trivial fact about the world that we can understand it and that mathematics provides the perfect language for physical science: that, in a word, science is possible at all.” So, science is storytelling. Using mathematics and observation. It is about “framing a view of the world.” An accurate view is the scientist’s goal. But scientists don’t use the term reality. It has no significance in science. The theoretical physicist might begin her work with observation or with “assuming a universe of some specific form.” But from either beginning point the process continues the same. Compare observational data with other observational data. After hundred or thousands of comparisons the scientist hopes to see patterns of relationships that can be expressed mathematically, if possible. From the other direction the assumed universe is compared with observational data. Again, searching for patterns of relationships that can be if possible, expressed mathematically. But even if the scientist comes to believe she sees patterns of relationship, this conclusion remains always uncertain, never final or fixed. Over time the scientist might develop faith in the belief. But a faith that can be discarded.

    It’s also important to recognize that the process just described in not logical, clean, and tidy. Rather, it’s messy, uncertain, and often filled with strong and disruptive emotions. Depicted graphically, it often seems confused, going nowhere, and not able to accomplish anything of significance.

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