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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.

  6. November 18, 2018 at 8:55 am

    Economics as you describe it is just one of the “results” of a movement in
    knowledge, political standardization, and social organization that began in the
    18th century and expanded rapidly after WWII. Where science flourished the
    appeal of numbers, which could be and were converted into objective facts
    allowed the construction of civilizations where decisions could be made
    scientifically and endorsed democratically. Such decisions appeared fair and
    impersonal and thus impartial. So while democracy ensured all had a voice,
    science in numbers ensured certainty about the actions needed to carry out
    democratically made decisions. In the words of Theodore Porter, “Quantification
    is a way of making decisions without seeming to decide. Objectivity lends
    authority to officials who have very little of their own …. Knowledge, then does
    not diffuse uniformly outward from the place of its discovery. It travels along
    networks to new nodes, and what appears as universal validity is in practice a
    triumph of social cloning.” After WWII science is the most powerful, admired,
    and envied way of life on earth. So economists wanting to copy it is not
    surprising. Historians, sociologists, psychologists, and even that staunch
    member of the humanities, Anthropology took the leap as well. Now after 60
    years History, sociology, and the others have reached a balance so that
    numbers and “objective facts” are only parts of diverse fields of knowledge.
    Economics did not reach such a balance. It is wholly and fully dominated by the
    cult of numbers and objective facts. For those of us who study science, including
    economics the research is focused on answering why economics remains
    situated so. One explanation offered is the limited understanding of mathematics
    by economists. Another is the desire of economists to distinguish themselves
    from the other sciences which seemed to already cover everything proposed for
    inclusion in economics. My own view is that the prime motivation was the same
    as voiced by the 1960s founders of quantitative history (cliometrics), “…to establish history
    as a social science dedicated to the rigorous, consistent, and precise application
    of social theory and social scientific methods in the study of past human
    behavior.”(Robert Fogel)

    • Craig
      November 18, 2018 at 6:38 pm

      Science has been applied, albeit primarily to human consciousness, for over 7000 years. It and technology have arisen as the primary thrust over the last 300 years, that is true.

      The most subtle and consequently unperceived problem of economics is its mistaken notion that either private or public finance can be harnessed and made to serve humanity….unless the domination of its paradigm of Debt Only is integrated into and primarily replaced by Monetary Gifting….which is an aspect of the natural philosophical concept of grace….which being nothing more dogmatically and certainly nothing less than love in action in the temporal universe where we all exist….is therefore the supreme expression of ethics, and so the only concept able to balance the supreme power of the economic factor of money.

      Resolve this philosophical and ethical problem and utilize the well known simplifying concept of Occam’s Razor to create a publicly administered national banking system guided by the above concept of grace instead of the destabilizing coterie of dominating and ethically conflicted private banks….and the leading edge economic insights of Keen’s financial instability, Hudson’s financial parasitism and MMT’s money mechanics will fall back into and fit seamlessly within the new paradigm theory of Wisdomics-Gracenomics and the philosophical concept behind it.

      • November 19, 2018 at 7:30 am

        Craig, science is the result of human imagination and creativity. It can certainly be used to consider human consciousness. But it has been more frequently used to deal with human problems and as a way for humans to create an understanding via models of what they are and what the world around them is. Gifting as a form of economic arrangement has a long history among humans. In the west of today it is seldom used to organize anything larger than a birthday or retirement party. As you suggest the west today is dominated by financial capitalism which bases all economic arrangements on debtor/creditor actions which are kept as detached (impersonal) as possible, except among the wealthiest members of society. No adequate arrangement of economic actions can be effectively carried out with such a limited structure. The structure is limited, I suspect primarily because of who it mostly benefits, the lenders in any society. I agree about a publicly owned and operated banking system. Although I suspect most private banks would not. If you mean by grace kindness, courtesy, and helping others have a better life, we’re together. This is quite normal in human evolution. But right now, some human cultures are opposing this evolutionary result. That’s a major concern that must be dealt with.

  7. November 18, 2018 at 11:47 am

    Lars citing Mark Blaug: “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”.

    Ken citing Theo Porter: “Knowledge, then does not diffuse uniformly outward from the place of its discovery. It travels along networks to new nodes, and what appears as universal validity is in practice a triumph of social cloning.”

    Craig summing up: “Abstraction reigns in economics and direct present time observation has atrophied in same”.

    What I’ve contributed is an abstract version of Blaug’s map showing Ken’s network. Craig is rightly pursuing an integrative wisdom, but his Blaugian imagery and seeing it in accountancy and “morals also known as ethics” shows why he hasn’t found it. He doesn’t understand it lies in learning to read abstract maps (Graph Theory) and taking in the implications of the abstract Four Colour Theorem (that only four colours are needed in a map for all adjacent areas to be of different colour). He doesn’t understand the difference between ‘generalisation’ (leaving arbitrary characteristics out) and ‘abstraction’ (leaving everything out, so Ten Commandments – the specific prohibitions of a morality – hardly need spelling out if one’s ethic is love).

    Not abstraction but generalisation reigns in modern economics: what one can leave out (or put in) for convenience is arbitrary. That is why – abstractly – modern economics is sick.

    • November 18, 2018 at 2:04 pm

      Dave, I don’t believe it’s quite that simple in all situations. Where it’s not nodes are being created and destroyed as the knowledge moves, and actors in moving the knowledge sometimes add to, subtract from, or in some other alter the knowledge. But otherwise you’re correct. Despite what theory says, not all clones are equal.

      • November 18, 2018 at 9:40 pm

        Of course I agree, Ken: reality isn’t as simple as a map of it. The point of a map is give you some idea of where to look without losing your bearings. However, the abstract map is of developments in time, not space, so its entities are not physical cities and roads but processes and their time-ordered inter-relations. Wheatstone’s Bridge and Leavitt’s Diamond look like the same map, but the former suggests a physical homeostat (a device achieving equilibrium automatically by balancing forces) and the latter cybernetics (the method of navigation using information from sensors, which reaches equilibrium of aim and destination indirectly by staying on course, correcting directional errors and deviations as they are detected). My argument is simply that an economy is more like a million ships steering independently for their own ports and purposes than a centralised room thermostat trying to control just temperature.

      • November 19, 2018 at 7:00 am

        Dave, cities and roads are processes, as are ideas and codes of conduct. With each there is no certainty that it will follow the path expected or end in a formal and identifiable way. Also, distinguishing between paths and between results is not always easy or simple. Sometimes is so difficult that it’s impossible. Also, we cannot assume any equilibrium can be achieved, or that we could recognize if it were. To put this succinctly, knowing is not easy or simple. Often more confusing than anything else. Take your example of navigation. No matter how exact our instruments or our maps (electronic and other) reaching our expected destination generally requires the unspoken understandings of equipment and techniques that come from being an “experienced” navigator. Ditto for steering an economy or any other large portion of society.

      • November 19, 2018 at 11:03 am

        Ken, are you a twit? I’m a realist. I don’t have to imagine (as apparently you do) that navigation is useless unless every ship gets safely to port. Staying with the analogy (the point of which is to illustrate the logic), far better every ship being able to navigate effectively than being “lost at sea without a rudder” and at the mercy of pirates. On this basis, governments should be ministering to the needs of navigation, not trying to keep their money-grubbing pirate friends warm.

      • November 19, 2018 at 12:55 pm

        Dave, with all due deference, I believe it is the reverse. I never take navigating to safety, or just out of danger for granted. I know how uncertain and dangerous it is. Rules are always incomplete, blurry, and require interpretation almost every time used. Though never wholly clear and fixed, we can only learn to make the rules work better by using them. You are correct that governments have a big part in this work that they are failing because some members of our society are selfishly diverting them from it with clever logic and mathematics “proving” capitalist societies don’t need such work.

    • Craig
      November 18, 2018 at 11:35 pm

      Dave,

      As the process of wisdom is the INTEGRATION of truths etc. how can I be anything but advocating the integration of the abstract and the temporal? And if the natural philosophical concept of grace is the pinnacle integrative truth/concept of wisdom how can its aspects expressed in policy not be the object and goal of economics and undoubtedly every other of humanity’s systems?

    • November 21, 2018 at 8:20 am

      Craig, did I not agree, saying “Craig is rightly pursuing an integrative wisdom”?

      Apologies for the time it has taken me to respond answer you: I’ve found it difficult. What you say looks to me as though it is significant, but I’m left guessing. Though we can use the same words, I don’t know what you mean by them because you never tell or show us. Googling “the natural philosophical concept of grace” did at least take me into my own territory, defining grace as either a noun or a verb (though the examples given looked more like adjectives and adverbs). So yes, ‘grace’ is a noun in that it refers to a concept, but what is the concept?

      My problem was that you are not showing us how you are trying to integrate wisdom, i.e. what you mean by those words (and others like ‘grace’, ‘abstract’ and temporal). Your repeatedly using these words without attempting to define them doesn’t help – in fact it irritates.

      In mathematics, ‘integration’ means adding a dimension and ‘differentiation’ means subtracting one (or using clock numbers, rotating forwards or backwards a quarter hour). Mathematically, then, one abstracts whole dimensions of meaning by differentiation, and integrates by adding whole dimensions to the space available for containing meaning. Your Blaugian list, accounts and mores suggest to me that in practice you are filling a bucket rather than adding a dimension, i.e. mistaking generalisation for integration. My reference to the Four Colour Theorem is about complete abstraction to the structure of the language needed to characterise reality, i.e. four degrees of freedom (the choice of noun, adjective, verb and adverb form) which characterisation will constrain.

      You come very close to what I am saying when you advocate “the integration of the abstract and the temporal”. If your ‘abstract’ is empty three-dimensional space then I need only ask you WHAT is ‘temporal’? Is it a substance called [God’s] grace, or is it the physical energy we find captured in sub-atomic particles? Or both: is ‘grace’ a metaphor for the motivation or the effects of the unseen energy?

      Perhaps likewise you can explain what you mean by your concept of ‘wisdom’. I find it characterised in a well-known prayer:

      God, grant me the serenity to accept the things I cannot change, the courage to change the things I can and the wisdom to know the difference.

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