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Modern economics is sick

from Lars Syll

mark-blaug-900pxModern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing …

If there is such a thing as “original sin” in economic methodology, it is the worship of the idol of the mathematical rigour invented by Arrow and Debreu in 1954 and then canonized by Debreu in his Theory of Value five years later, probably the most arid and pointless book in the entire literature of economics.

The result of all this is that we now understand almost less of how actual markets work than did Adam Smith or even Léon Walras …

Indeed, much of modern microeconomics might be fairly described as a kind of geography that consists entirely of images of cities but providing no maps of how to reach a city either from any other city or from the countryside.

Mark Blaug

Mark Blaug (1927-2011) did more than any other single person to establish the philosophy and methodology of economics a respected subfield within economics. His path-breaking The methodology of economics (1980) is still a landmark (and the first textbook on economic methodology yours truly ever read). 

Mainstream economics has become increasingly irrelevant to the understanding of the real world. The main reason for this irrelevance is the failure of economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models — as long as mainstream economists do not come up with any export licenses for their theories and models to the real world in which we live — is beyond comprehension. Stupid models are of no help in understanding the real world.

  1. Tom Welsh
    November 2, 2018 at 6:38 pm

    “Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world”.

    I respectfully beg to disagree. Economics is not played for its own sake. Practical men and women who have invested heavily in their education and careers do nothing for its own sake. Economics is “played” in return for large sums of money, reputation, position and security. Economists are the witch-doctors and high priests of today, proving by means that are far too abstruse for the ordinary citizen to understand that the political, economic and financial order must not be challenged.

    When people give incorrect change in shops, most often the error is in favour of the one who makes it. Purely coincidence, of course!

    When economists babble utter bullshit, curiously enough their conclusions align perfectly with what the rich and powerful would wish to hear. Ever since David Ricardo – a bankers’ economist, so to speak – the great majority of economists (so-called) have been mere apologists for the status quo, whose job is to explain (with suitably impenetrable mathematics) that “we live in the best of all possible worlds”.

    Surely economists, of all people, do not need to be told to ask “cui bono?”

    • Frank Salter
      November 3, 2018 at 9:39 am

      Actually the mathematics is not impenetrable.
      In many cases, it is merely wrong:
      There is one paper cited some twenty thousand time which contains an elementary mathematical mistake. One must conclude that economists do not check the mathematics they appear to be copying. As I showed in “Transient Development”, the Verdoorn coefficient’s empirical values can only be the reciprocal of the mathematical representation universally used. Again this implies copying without understanding.
      One other major error is the assumptions used describe a parallel universe with physical laws which differ from the one in which we live — the second law of thermodynamics does NOT exist. While the logic may be impeccable, the results are irrelevant. Zambelli (2018) shows that the neoclassical assumptions do not correspond to our reality — another example of impeccable but irrelevant logic.

      Until we understand and call out the wrong and irrelevant mathematics, the teflon coating to conventional analysis will remain intact. Valid analysis will continue to be rejected by the “prestigious” economic journals.

      Reference:
      Zambelli, Stefano (2018). “The aggregate production function is NOT neoclassical”. In:
      Cambridge Journal of Economics 42, pp. 383–426. doi: 10.1093/cje/bex011.

  2. Edward K ross
    November 2, 2018 at 8:11 pm

    Yes from my experience in the real world Mark Blaug says it all. So why do so many economists ignore his comments? Here it seems obvious to me that they live in an ivory tower mentality that isolates them from real people in the real world. Thus the solution has to start with removing the blinkers from their eyes and mind so that they are able to experience the real world, before they accept theories that may have no relevance to real people in the real world.Ted

  3. Craig
    November 2, 2018 at 11:39 pm

    Contemplate the immediate and strikingly beneficial real world monetary, economic and financial results of a universal dividend of $1000/mo., a 50% discount/rebate policy at the point of retail sale and the creation of a publicly administered national banking system and central bank:

    Everyone’s purchasing power is immediately doubled.

    The amount of readily available income for every enterprise is immediately doubled.

    The absolute end of price inflation and the painless and beneficial integration of price deflation into profit making systems because retail sale is the terminal ending point of the legitimate economic/productive process as well as the terminal expression point for all forms of inflation.

    The immediate end to poverty with the $1000/mo dividend and 50% discount/rebate enabling everyone 18 and older to have $24,000/yr in purchasing power.

    Everybody employed is upper middle class. A one income household with a $9/hr job makes $18,720 x 2 = $37,440 + 2 $1000/mo dividends = $24,000 x 2 with the 50% dividend = $48,000 or a total of $85,440/yr of potential purchasing power.

    Cost savings to both businesses and individuals via the complete elimination of then redundant transfer taxes for welfare, unemployment insurance and social security.

    With the end of inflation, the establishment of a national banking system and direct financing of government, any worthy, constructive and/or necessary project (think research and innovation for more production with less resource usage and the off planeting of production) becomes completely doable. As the government can now fund itself income taxes for individuals and businesses could come down to between 5-10% simply to establish the government as benevolently but unmistakably sovereign.

    The end of the dominance of everyone and everything by private finance and the seeming implacable force of financialization of the economy and the re-retailization of it instead because as the government does not need to make a profit the national bank could loan at 0% and finance could actually become a beneficial aspect of the economy instead of the exogenous parasite it has come to be by becoming the new terminal ending point for the legitimate economic/productive process enabling it to participate in the 50% discount rebate policy. Thus a $200k house becomes $100k at retail sale and $50k at the halving of the note.

    Both Conservative and Liberal politicians and economic pundits would lose the ability to flim flam the issues of inflation and government spending and so concentrate on integrating their agendas on other issues.

    Liberal economists and pundits would be able to drop the idea of the necessity of re-distributive taxation to prevent inflation and to fund the welfare bureaucracy.

    Super power empires could drop their aggressive foreign policies and propagandizing because nations implementing the new paradigm policies and aligned regulations would no longer need to capture resources and additional demand in order to try (and still fail) to stabilize the domestic economies.

    Undoubtedly a lot more social, anthropological, artistic, scientific and psychological knock on benefits.

  4. November 3, 2018 at 3:47 am

    This is the good occasion to rethink what Mark Blaug wrote in Chapter 15 Conclusions in his book The Methodology of Economics, 1980, that is nearly 40 years earlier.

    In this chapter, Blaug cites three eminent economists: Wassily Leontief, Henry Phelps Brown, David Worswick who voiced “contestation” against the state of economics around 1972. They were all presidential addresses for most powerful economics associations in the USA and Britain. What they have voiced are not very different from what Lars Syll is saying.

    The fourth person cited under the line head The Crisis of Modern Economics is Benjamin Ward who wrote the book What’s Wrong With Economics. Blaug’s own contention was that

    “central weakness of modern economics is, indeed, the reluctance to produce the theories that yield unambiguously refutable implications, followed by a general unwillingness to confront those implications with the facts.”

    It is evident that Blaug was still believing Popperian idea of scientific progress through falsification and refutation. After about 40 years have passed, we know well that this kind of criticism was in fact useless. Methodology or philosophy of economics had changed a bit. However, I think there is one thing that methodology of economics has not learned through 40 years of economics history. Why could criticisms of late 1960’s to early 1970’s have produced practically no effects in changing mainstream economics to the direction that many methodologists demanded.

    isn’t Lars Syll almost repeating the same thing as the criticism around 1970?

    • Frank Salter
      November 3, 2018 at 10:22 am

      What you have said is absolutely true.

      Unfortunately, economists have failed to separate qualitative from quantitative analysis and appear to apply the same methods of thinking to both. This is inappropriate. In my comment to Tom Welsh above, I have outlined some of this invalid thinking.

      It is the presentation of valid analysis which will move economic thinking forward.

  5. Craig
    November 3, 2018 at 6:13 am

    Yoshi,

    You’re right. And here are the primary reasons nothing has changed:

    The human mind is paradoxically the easiest and most difficult thing in the cosmos to change.

    Unconsciousness of both the current and the new paradigm

    Macro-economics is a very new discipline. Hence its cultural horizon is very short and economist’s perspective on private Finance being a legitimate money creating business model is almost entirely unconscious and accepting.

    Abstraction reigns in economics and direct present time observation has atrophied in same.

    Economists can get their PhD and never take so much as an elementary course in accounting let alone consider the potential beneficial monetary and economic significances to be derived from a study of it’s, the money system’s and the pricing system’s mutually digital natures.

    Wisdom is a neglected/abused mental discipline in the modern world.

    Science has habituated nearly everyone to its fragmentary mindset, and almost everyone is unaware of the fact that what characterizes Wisdom is an integration of a deep and well observed pragmatism (read the book of Proverbs or analyze many of the other scriptures of the world’s major Wisdom traditions if you doubt this), the scientific method rigorously applied to the holistic self actualization process and, if studied with even a modicum of scholarly understanding, the rational consideration of morals also known as ethics.

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