Home > Uncategorized > What is (wrong with) mainstream economics?

What is (wrong with) mainstream economics?

from Lars Syll

If you want to know what is neoclassical economics — or mainstream economics as we call it nowadays — and turn to Wikipedia you are told that

fundneoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.

The basic problem with this definition of neoclassical (mainstream) economics — arguing that its differentia specifica is its use of demand and supply, utility maximization and rational choice — is that it doesn’t get things quite right. As we all know, there is an endless list of mainstream models that more or less distance themselves from one or the other of these characteristics. So the heart of mainstream economic theory lies elsewhere.

The essence of mainstream economic theory is its almost exclusive use of a deductivist methodology. A methodology that is more or less used without a smack of argument to justify its relevance.

The theories and models that mainstream economists construct describe imaginary worlds using a combination of formal sign systems such as mathematics and ordinary language. The descriptions made are extremely thin and to a large degree disconnected to the specific contexts of the targeted system than one (usually) wants to (partially) represent. This is not by chance. These closed formalistic-mathematical theories and models are constructed for the purpose of being able to deliver purportedly rigorous deductions that may somehow be exportable to the target system. By analyzing a few causal factors in their “laboratories” they hope they can perform “thought experiments” and observe how these factors operate on their own and without impediments or confounders.

Unfortunately, this is not so. The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in economic models are rather based on formalistic mathematical tractability. In the models they appear as unrealistic assumptions, usually playing a decisive role in getting the deductive machinery to deliver “precise” and “rigorous” results. This, of course, makes exporting to real-world target systems problematic, since these models – as part of a deductivist covering-law tradition in economics – are thought to deliver general and far-reaching conclusions that are externally valid. But how can we be sure the lessons learned in these theories and models have external validity when based on highly specific unrealistic assumptions? As a rule, the more specific and concrete the structures, the less generalizable the results. Admitting that we can move from (partial) falsehoods in theories and models to truth in real-world target systems does not take us very far unless a thorough explication of the relation between theory, model and the real world target system is made. If models assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. To have a deductive warrant for things happening in a closed model is no guarantee for them being preserved when applied to an open real-world target system.

Henry Louis Mencken once wrote that “there is always an easy solution to every human problem – neat, plausible and wrong.” And mainstream economics has indeed been wrong. Its main result, so far, has been to demonstrate the futility of trying to build a satisfactory bridge between formalistic-axiomatic deductivist models and real-world target systems. Assuming, for example, perfect knowledge, instant market clearing and approximating aggregate behaviour with unrealistically heroic assumptions of representative actors, just will not do. The assumptions made, surreptitiously eliminate the very phenomena we want to study: uncertainty, disequilibrium, structural instability and problems of aggregation and coordination between different individuals and groups.

The punch line is that most of the problems that mainstream economics is wrestling with, issues from its attempts at formalistic modelling per se of social phenomena. Reducing microeconomics to refinements of hyper-rational Bayesian deductivist models is not a viable way forward. It will only sentence to irrelevance the most interesting real-world economic problems.

If the ultimate criterion of success of a deductivist system is to what extent it predicts and coheres with (parts of) reality, modern mainstream economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in models is a gross misapprehension of what an economic theory ought to be about. Deductivist models and methods disconnected from reality are not relevant to predict, explain or understand real-world economic target systems. These systems do not conform to the restricted closed-system structure the mainstream modelling strategy presupposes.

Mainstream economic theory still today consists mainly of investigating economic models. It has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in mainstream economic theory, where models largely function as substitutes for empirical evidence.

What is wrong with mainstream economics is not that it employs models per se, but that it employs poor models. They are poor because they do not bridge to the real-world target systems in which we live. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on mathematical deductivist modelling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

  1. EDWARD K ROSS
    December 3, 2019 at 12:44 am

    Ii my humble 0pinion well said Lars. TED

  2. December 3, 2019 at 6:53 am

    It also seems futile to find a spot on Lars’s arguments. :-)

    Let me nevertheless add an observation I regular make when discussing the issue with mainstreamers. I have more often than not been confronted with this line of reasoning: neoclassical models are models and therefore not representative for reality which means that neoclassical models do not strive for external validity and cannot be judged by it. Instead, models have to be rigorous. In the end, neoclassical economics can inform policy nonetheless.

    So, you cannot nail down mainstreamers with reference to lack of external validity. Isn’t this brilliant?

    • Meta Capitalism
      December 3, 2019 at 1:06 pm

      I have more often than not been confronted with this line of reasoning: neoclassical models are models and therefore not representative for reality which means that neoclassical models do not strive for external validity and cannot be judged by it. Instead, models have to be rigorous. In the end, neoclassical economics can inform policy nonetheless. ~ Christian Mueller-Kademann

      Christian, those who make this self-serving argument are actually pounding the nail in their own coffins. They have admitted their models have no basis in reality and their claim that they can inform policy is a lie, propaganda, and self-deluded wishful thinking. The younger generation is waking up (at least those who educated and will be he next generation of leaders) and will laugh with derision at such self-deluded pseudo-intellectuals who espouse such nonsense. To claim that economic models tell us nothing about reality yet claim they can be used to make real policy decisions that impact reality in real peoples lives begs the question why politicians listen to such nonsense. Well, they do because they are either ignorant and blindly believe economics is a science (many have fell for this on both sides of the political divide), or have some economic vested interest in perpetrating the fraud. This state of affairs won’t last another the critical eye of the next generation.

  3. Alonso
    December 3, 2019 at 12:53 pm

    What is (wrong with) mainstream economics? Everything. Economics takes the point of view of an external observer of a system, that does not depend on us, but has its own “natural laws”. Then it faces the contradiction, that we, the people with our free will, do the economy. To solve it,economics tries to reduce the human behavior to some simple set of actions, like “rational choices” and utility or profit maximization. That of course does not work. But it does not need to work. The reasons for economics to take the point of view of an external observer is, that it comes from and works for the investor or producer, for the one who sells goods. They stay “outside” of the economy and look for methods to manipulate it for better own profits. If you read economics fairly you will find too much class bias. Thus economics is a class ideology, rather than science. Its aim is not to discover scientific truth, but to promote politics in favor of the big profiteers (formerly capitalists). The economic modeling, as described in the post above best serves this aim. From that point of view, there is nothing wrong with mainstream economics. Just the declared aim differs the real aim.

    • Frank Salter
      December 3, 2019 at 3:06 pm

      I agree with the sentiment of class war as a realistic interpretation of economic understanding but I doubt this is the intent of academics.

      There are two aspects of an economy which interact with each other. The first may be human decision making but decisions are made in a universe which has physical laws which can not be avoided. How these interact for manufacturing production may seen in Figures 2(a) and 2(b) of my paper, Transient Production RWER-81 p. 151. The x-axis shows the full range of human effort applied to tool making and maintenance. The maximum output from applying minimal effort to tool making, maintenance and production is clearly visible. To compete successfully requires the appropriate tool making effort to produce maximum output. Human choice is constrained by physical reality, which in essence leaves no choice at all. The maximum is only available with the same quantity of tools to be used by everyone.

      • Alonso
        December 4, 2019 at 8:44 am

        Yes I agree that this is not the intent of the academics. They either do not understand it, or do not care. The rest is done by the project principle of financing the science.
        The paper you cite is relevant, but the question here is not the physical laws, but the “laws” of economics, that are of completely social nature, i.e. result of collective human behavior, but not physical or “natural”. Collective human behavior is changeable, especially due to learning and creativity. That is why there are no such “laws” of economics. But it is exactly these artificial laws that are used for policy making in favor of the rich. They concern mostly the redistribution, but not the production. And it is exactly the economics, that “leaves no alternative to capitalism”, which is the essence of the class warfare. I have not seen an economic discussion on alternative economic system, though there are such outside economics.

  4. December 3, 2019 at 5:17 pm

    “From that point of view, there is nothing wrong with mainstream economics. Just the declared aim differs the real aim”.

    Spot on, if a little cryptic. The name “economics” (meaning household management) was first reapplied to capitalism (investing in mass production for both real and monetary profit) and has now been further reduced to what Aristotle called chrematism (money making, long ago ridiculed in the story of “The Midas Touch”).

  5. December 3, 2019 at 5:26 pm

    What is wrong with ‘economics’ is that it’s nothing to do with economics and is nothing but a pseudoscience for gamblers trying to predict where the next safe bet is going to be.

    It needs to drop the pursuit of ‘growth’, and concentrate on tailoring the World human population to the World’s annual supply of renewable resources, in the most equitable way possible, so that everyone has everything they need for a comfortable and fulfilled life, and other species are left to live there lives as Nature intended too.

    The rest is all gobbledegook.

    • Alonso
      December 4, 2019 at 11:06 am

      Yes, you are right, but this is exactly the class problem. Behind “growth” is hidden “growth of private profit”, and is a class warfare question (beside being national question). The class of the rich, those living on profit, is the major obstacle for solving the most important world problems. But the mass opinion is just the opposite – make the rich richer and everyone will get it better. And the economics has major role in this lie.
      Something has to be done with the economics.

      • December 4, 2019 at 10:53 pm

        Yes indeed! In fact I had signified this with the correct spelling *oeconomics* [sic] as a reminder that it really is about ‘house keeping’–making ends meet–but somebody ‘corrected’ it back to the mutant version that is consuming the planet just to support a handful of the most successful social parasites.

        If the wealthiest people can think of nothing useful to do with ‘their’ (really the game’s) accumulated ‘billions’ (milliards), but will only ‘invest’ in order to extract yet more for themselves, then they simply must be made to put the money back in the ‘Monopoly’ box, so that the game can start again, with a full complement of players, each with equal prospects. The ‘winners’ of each game may keep the things they used money to cause to be created, but the money itself belongs in the game: not in the mattress.

        People have to be properly taught that money is the lifeblood of an economy, and it must be kept circulating or death will result. Hoarded money prevents necessary but unprofitable projects that could now, literally, save the Human race. It must be put back and *used*–not ‘invested’–to finance the transition to sustainable living. Spending for our survival: not creating yet more inequality, and yet more wealth for those who don’t need it.

  6. Gerald Holtham
    December 4, 2019 at 7:29 pm

    Understanding the behaviour of a system of a myriad individuals or small decision groups who are very disparate in their attitudes, endowments of wealth and the information they possess is evidently very difficult indeed. It gets even harder if the system is evolving. It seems to me that the methodological division in macroeconomics is as follows. One group assumes that the individuals are self-interested, works out how they can be expected to respond on that assumption and then further supposes that the aggregate will behave “as if” it is a representative individual. This fails, for me, for at least two reasons. One, there is no single answer to the question how even self-interested people will behave in conditions of uncertainty; two, the aggregates we observe cannot be inferred from the behaviour of individuals anyway – the rules of aggregation forbid it.

    The second approach is to say we don’t know how individuals will behave – they are almost like the random motion of atoms in a gas. Nonetheless if numbers of individuals are big enough stable patterns can emerge through the effects of statistical mechanics. Gases obey certain laws though gas molecules don’t. Quantum effects are largely unobservable in the visible world where the laws of identity and the excluded middle work well enough. Give an individual more money and who knows what she will do – go shopping, give it to charity, treat Aunt Hilda or leave it in the bank. But give a few million people more money and you can bet that consumer spending will increase. How much? All we can do is measure the effect in the past and hope the future won’t be too different. That is not grand theory so dissatisfies the theoreticians. They complain that policy interventions will change the system and so their effects cannot be predicted. True up to a point, but if the intervention has be been tried before somewhere, we have some idea of the effect. The system has a lot of inertia.

    Of course the regularities we see are not purely a matter of observation. While we don’t know what an individual will do there is a range of possible behaviours consistent with sanity and self preservation. When hypothesising what an aggregate behaviour might be we expect it to fall in that broad range. But the data must decide.

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