Anchored in neoclassical theory
Despite growing diversity in research, the theory flow of economics, often referred to as neoclassical, continues to dominate teaching and politics. It developed in the 19th century as an attempt to apply the methods of the natural sciences and especially physics to social phenomena, In the search for an “exact” social science, social relationships are abstracted to such an extent that calculations are possible. The neoclassical economics department primarily poses a question: How do rational actors optimize under certain circumstances? This approach in itself is not a bad thing. However, in view of the ecological crisis, we have to ask ourselves completely different questions in society: How can the planetary collapse be prevented? What can an economic system look like that is social, fair and ecological?
The necessary emission reduction should always be achieved by pricing CO2 – other control options remain subordinate to this approach.
The dominance of neoclassical can be seen, among other things, from the fact that these questions are structurally marginalized in the current debate. The societal discussion about dealing with climate change is dominated by market economy instruments. Be it the demands of Fridays for Future, the recommendations of the special report of the Council of Experts on the assessment of macroeconomic developments or the legislative proposal by Alexandria Ocasio-Cortez known as Green New Deal : The necessary emission reduction should always be achieved by pricing CO2. Other control options, such as regulatory law, remain subordinate to this approach.
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Real-World Economics Review Blog 
Despite growing diversity in research, the theory flow of economics, often referred to as neoclassical, continues to dominate teaching and politics. It developed in the 19th century as an attempt to apply the methods of the natural sciences and especially physics to social phenomena, In the search for an “exact” social science, social relationships are abstracted to such an extent that calculations are possible. ~ Links Included
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Mirowski’s More Heat than Light is a classic. But the attempt to mimic the natural sciences and especially physics (e.g., econophysics) is not just neoclassical issue. It is also a heterodox issue as in Complexity Economics and Evolutionary Economics as well. Anytime “social relationships are abstracted to such an extent that calculations are possible,” whether heterodox or mainstream, they both leave out the human side of economics (social relationships, power relationships, institutions, historical path dependencies, etc.).
It is quite true that if you believe no social relationships can be abstracted usefully to the point that calculations are possible, then you will regard much economics as nonsense. Any generalisation, even if not quantified, requires some abstraction so perhaps economics is not possible at all? I’m glad no-one told Adam Smith, Keynes or Kalecki.
Anyway, path dependency does not eliminate quantification; you are allowed to put lagged terms in equations and you are not obliged to impose homogeneity. Nor do power or other relationships prevent quantification if observable proxies for them can be identified.
There is so much bad economics to criticise. I suppose you hit it if you fire at everybody. But, dare I say, that doesn’t seem a very economical way to proceed.
You toss out Adam Smith Gerald but forget he had another and more important book on Moral Sentiments that addressed the human side of economics (social relationships, power relationships, institutions, historical path dependencies, etc.). You ignore the “to such an extent” which qualifies the statement. Why? Do you have no place in your theorizing for the human side of economics (social relationships, power relationships, institutions, historical path dependencies, etc.). That is what I find grossly missing from your comments on this forum and your dismissal of all other ways of addressing knowledge other than econometrics and “anecdote and literature.” I have vast quantities of business literature (case studies) that supply knowledge other than what your very narrow definition of knowledge of is (as far as I can tell by your comments) that tell us real valuable things about how businesses and firms behave and how managers behave and many other things. Your take is very one sided it seems.
You say, “path dependency does not eliminate quantification.” Of course it doesn’t, but then it doesn’t mean only those things that can be quantified are important either or can be ignored, which is what it seems as best I can read between the lines of your comments you are sometimes implying. Where in your econometrics only approach Gerald are those things that have a causal effect on economics but are not quantifiable play a role? In reality they have huge impacts on the world we live in including our economies. Yet you seem at times (not always, you have now and then) of acknowledging them. When the fetish of quantification leads a researching to ignore and overlook what Robert Locke calls “soft variables” I see a weakness, a problem, a critical oversight that a true scientist in my view would not ignore.
What i am saying Gerald is we must use the whole toolbox (all our experience) and not just a subset; there is a vast difference between statistical significance and what is truly significant human individual and social life, including economics. I sometimes wonder if those who focus so narrowly on only those things which are quantifiable are like one eyed archers aiming for statistical significance but missing the bulls-eye of the truly significant things in human experience.
Gerald, you are talking such nonsense about quantification here that it really is time you got your head round how a feedback based control system works. As a first approximation you don’t need to know how much in error you are, merely in which direction you need to go to achieve your aim, as in the comic bus-driver scene with the assistant saying, “left hand down a little…”. To do something you need to end up in the right place at the right time, but to avoid making a mistake you need sufficient foresight to change course before it happens.
Meta, than you for quoting Norman Roth at us. He seems to have got the right idea. If he had referred to aims and feedbacks instead of Telos and Technos I might perhaps have recognised that earlier. Much the same can be said of Keynes, though he wrote before control theory had been worked out. As econometrics does not distinguish between aims and feedbacks I do regard economics based on it as nonsense.
“Sometimes it comes down to the choice between two seemingly equally valid critical assumptions both of which cannot be factually correct”? Yes, and a “big bang” assumption which worked was changed to “an always existing infinity” which didn’t by Adam Smith’s solipsistic mentor Hume. Start from a Big Bang and the evidence points to entities with new capabilities emerging from PID control.* The “laws” of navigation apply just as much to part of as the whole of a journey. Right now they are warning us to change course and replace our captains with trained navigators.
* My most relevant reference seems to be Arthur M Young’s “The Geometry of Meaning”, 1976, Robert Briggs Associates, in particular Chapter IV, “Generating Other Measure Formulae”. Frank Salter might enjoy this. PID is more recent, but I am happy to acknowledge that most of my thinking is anticipated in this, which I acquired c.1997 on the recommendation of a friend in the G K Chesterton society, whose father had been the first publisher of it.
I am really enjoying Roth’s book. I should have picked it up and started reading it sooner.
The purpose of production is most basically…consumption. You can’t get any more a part of the woof and warp of economics than that point because its occurrence satisfies the intents and purposes of both commercial and individual agents. It is also an ultimate systemic ending/cost summing/purpose levering/pivoting/turning point for integrating and guiding rational and ethical human intentions/significances into the economy.
Put together the above, and the facts that it is a monetary economy, the two over riding problems are individual & systemic monetary scarcity and price and asset inflation, the current monetary paradigm is monopolistic-ally Debt ONLY…and a direct and reciprocal monetary gifting policy at the ultimate point of exchange…seems to be the logical path to take.
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I am not against abstraction or modeling or quantitative analysis. These are essential for doing science when done in context and recognizing there limits and the entire gestalt of the scientist qua human being making judgments. Abstraction and modeling and quantitative analysis can either shed light or obscure causal reality depending on context.
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Sometimes it comes down to the choice between two seemingly equally valid critical assumptions both of which cannot be factually correct. Depending on a myriad of factors, including the scientists own philosophical bias and beliefs, one critical assumption is chosen rather than another.
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As far as I can discern Gerald, reading carefully your omissions and you would not agree with the following (I could be wrong, as I am basing this on only a couple comments):
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Telos has no place in econometrics it seems. I know we can use behavioral experiments to uncover cognitive biases and such that tell us something important about human behavior and therefore economic behavior. And this is important. We are both rational (in a limited way) and irrational (also in a limited way, at least hopefully). We also can reflect on values (moral agency and value-discernment). We can be both creative in our thinking and behaving and rather routine habitual thinking and behavior. But to pluck a number out of thin air, say, 99% as Shiozawa does in his book and claim we are behaving as routine and simplistic as a social insect 99% of the time (without a single citation or evidence to support this rather critical assumption) is not science, but pseudo-science.
Telos should have a place; but it is denied by those who cannot quantify it.
Whoa, I never said that econometrics was the only way to proceed or that the only knowledge was quantitative. You are wishing on me views I do not hold. Nearly all the useful empirical literature in economics is non-quantitative.
I entirely accept that most economic processes are hysteretic. Economies to the extent that they can be abstracted from social relations are evolutionary organisms. I also accept, and have argued for years, that macro phenomena are emergent and often cannot be understood by looking at micro phenomena.
I have been pushed into a defence of econometrics on this blog because it has been subject to ill-founded criticism, not of the practice (which is often abominable), but of the methodology itself. Those criticisms have simply misrepresented what best practice is. The fact that I defend an approach does not mean I think it is the only approach or even the most important one.
You know what’s irritating about this blog? Offer the most measured defence of any school or part of economics at all and people start assuming you are a paid-up member of the Robert Lucas appreciation society. The reason I made a career outside academic economics is that I got fed up of arguing that representative agents were useless fictions, that rational expectations was incoherent, , that money could not possibly be neutral, that most realistic macro models were necessarily hysteretic that economies were evolutionary and that Herb Simon with bounded rationality was the forgotten prophet. Meanwhile the most useful economics has been done by people like John Kay in his qualitative work on companies.
Economics is not studying all the secrets of the human heart. It is studying what large numbers of people do in the aggregate in those specific activities that relate to making a living and achieving material comfort. I don’t care whether you call it a science or not; that depends on how you define science. The subject matter is interesting and if we learn something it is likely to be useful – at least for a time.
Okay, but if economics is ” studying what large numbers of people do in the aggregate” then it is way out of date and the aggregation is in any case impossible. It should be studying what needs not doing as well as doing (not just to enable us to live comfortably without warring but to regenerate the natural environment); and how to motivate and enable individuals to do it without getting in each others’ way
I think Dave is making some good points here. In fact I would agrue they are the most important point of economics rather than some alchemical hunt for Holy Grails of
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And there are many world-class economists doing just this right now. Some have already been discussed on this blog (Kate Raworth). There are many more, to many for a comment on a blog.
… hunt for Holy Grails of hidden patterns.
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Ok, I’ll take your word on that, but I don’t see how the your comment above can be seen as implying anything else when “Everything else is anecdote and literature”. I don’t with you to hold that view, I just don’t see much nuance in “everthing else” on the comment above.
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To misplace the locus of organism (other than as a metaphor) from the actual organism to an abstraction called “economies” is to engage in the ‘Fallacy of Misplaced Concreteness.’ (here)
Living, feeling, thinking human beings are evolutionary organisms using their cognitive abilities to create things, meanings, and values; They do so both individually and socially. Economies are the consequence of those interactions.
Meant to write, “I don’t wish you to hold that view …”
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I can feel great empathy for your words above. I left the accounting field completely when I realized that what was taught in theory was not what was happening in reality. I went into computer science and got a first hand seat observing how knowledge (Telos) and technology (Technos) merged in a collaboration between Microsoft and Arthur Anderson that led to the monstrosity of Enron. I have not read John Kay but would be interested in a good reference so I can see what you mean.
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I will take some time to reply carefully.
Gerald, I have learned a lot from your comments. I actually study what you have said on this blog to learn from the best of them. Sometimes your comment has brought clarity. I would, if you have the time or inclination, to hear you shed some light on exactly what you refer to as “qualitative work” (aka qualitative methodologies) and how John Kay has used qualitative methodologies to shed light in economics. What qualitative methodologies do you find useful in the field of economics?
Messrs. Gerald Holtham and ‘Meta Capitalism’. Both of you have really grasped the direction of Economic thought that TELOS & TECHNOS generates. ‘Meta-Capitalism’. You ought not “to hide your light under a bucket’. You’ve got first class common sense & scholarly judgment. As does Mr. Holtham. And I’m sure no harm would come to you if you disclosed your name. Unless…? I am especially impressed by your {plural} grasp of the complexity issue in Economic thought & analysis. And your understanding that it is anything bur ‘insolvable’. In this regard, I highly recommend the work of the great but unjustly ignored, but not forgotten, Ludwig Von Bertallanfy . Whom I neglectfully, forgot to put into my bibliography. And I emphasize the comparability of his Ontological grasp with that of Michael {not Karl} Polanyi. I have at least another 1000-1,500 pages of boxed material for an updated second edition. It will require an astute team of dedicated & diversely talented scholars to put together. Which I fear, may get lost or otherwise vanish, by the time this old boy gets to “meet his maker” or is otherwise mounted on the “wheel of {eternal} life. With, respect to you both & thanks to the editors of RWER: I remain {For the time being}
GOOGLE: {1} Norman L. Roth {2} Norman L. Roth, Technological Time {3} Norman L. Roth, Economics of Work
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I would love to see a second edition Sir! Publish it on Kindle please! Do you have an electronic version of your text?
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Ludwig Von Bertallanfy sounds like a brilliant scientist. No doubt in my evolutionary theoretical library back in the US I have books that contain something on him (his name is familiar). I spent many decades deeply immersed in the history, philosophy, and theory of theoretical biology. I see many parallels between the history of biology and the history of economics today. The history of the debates between the biometricians and the embryologists (e.g., comparative embryology, Entwicklungsmechanik, and morphogenesis). It is simplly to complex to explain in a comment though.
From Meta’s link to Brauckmann’s survey of Bertalanffy:
“As a methodology, applicable to all sciences, the GST encompasses the cybernetic theory of feedback that represents a special class of self-regulating systems (1964:15). According to Bertalanffy, there exists a fundamental difference between the GST and cybernetics since feedback mechanisms are controlled by constraints whilst the dynamical systems are showing the free interplay of forces. Moreover, the regulative mechanisms of cybernetic machines are based on pre-determined structures. In short, the GST is a regulative instruction that, for instance, synthesizes the data, or even laws, of the natural sciences, applicable to all the other sciences”.
My copy of LvB’s GST is the 1972 edition. There won’t be a second edition, because LvB died in 1972. However, the “theory of all theories” claim in the last sentence of the quote was exactly what I saw in a Leavitt’s Diamond diagram (a communications version of Wheatstone’s Bridge) in my friend’s MSc thesis c.1982, i.e. it is what my “Complex Truth” is all about. On p. 104 (criticizing Ashby’s Cybernetics), LvB shows he doesn’t understand Shannon (the error correction logic in a computer involving parallel processing of errors that have already happened), but on p.105 he warns against seeing too early the theoretical model as being closed and definitive – “a danger particularly important in a field like general systems which is still groping to find its correct foundations”. As a basis for discussion of CT, then, this is a worthy classic. What Brauckmann’s survey helped me see was the difference between kinetic (closed), dynamic (force) and general (information) theories.
Apologies for a typo! My edition of GST was 1971, not 1972.
. . . the legislative proposal by Alexandria Ocasio-Cortez known as Green New Deal : The necessary emission reduction should always be achieved by pricing CO2. Other control options, such as regulatory law, remain subordinate to this approach.
False. One of the Green New Deal FAQs explicitly addresses this point and says that pricing would be a secondary and peripheral measure, direct regulation primary.
It’s a good rule of thumb that ANY unsupported statement like this about the FDR New Deal or the modern Green New Deals is false, the opposite of the truth. That’s how bad the history and commentary is.
Economics has treated the economy as an open system. Things are drawn from the physical substratum and waste is ejected and we don’t worry about it. This was understandable when people thought that economic activity would not have first order effects on the environment of the open system. Now we know that is not true, we do indeed have to broaden the scope of economics and Kate Raworth has made a first stab at doing that. Note that economics was bound to be reactive in this. The fact that human activity was changing the global environment to the extent it was had to be a finding of physical sciences, Once made though, it is incumbent on economics to react. It’s activities are still covered by my description. Evidently you cannot be living comfortably if you are destroying the basis of that life.
Meta, I stand by the statements you quote. The most useful work done in economics has been qualitative and produced generalisations that have proved true and useful up to a point. To get past that and identify the limits of the generalisations and the qualifications to which they would be subject – to promote them to something nearer to law-like statements – would require much more data and statistical testing. But I acknowledge that in very many cases that is not possible. The theory may not be specifiable with the necessary precision and we just don’t have the data. And perhaps no valid law-like statements exist in economics. Unlike Lars Sylls, I don’t believe in making the best the enemy of the good. Most useful generalisations in economics are qualitative and based on unsystematic evidence. When we can push further, we should try.
“Most useful generalisations …”. Useful to whom? Narcissistic elites who want economists to provide excuses for them, or the people they seek to ignore or dominate rather than govern? That’s harsh, I know, but compare Jevons’ reaction to Ruskin’s “Unto This Last”.
Harsh but true.
When I asked for examples of the scientific accomplishments of economics (econometrics) you cited, among other things, GDP and “Comparative Advantage. One of the first books I read on economic theory was
Rod Hill and Tony Myatt’s “The Economics Anti-Textbook: A Critical Thinker’s Guide to Microeconomics”:
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My youngest daughter was just nominated for a Rhodes Scholarship at Oxford University by her Professors at York University in Toronto. She knows full well that economics has failed as a so-called science and largely been the hand-maided of an ideology that is leading the world to the precepice of a global crisis that only radical reevaluation of goals, ends, and values can prevent. Econometrics is utterly useless in this as you have pretty much said in your comment to Asad Zaman’s post.
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It is long past the time we should give up quoting Adam Smith I think. I am sick and tired of the same old same old nonsense. Econometrics (and economics) has an abysmal track record predicting anything. History bears this assertion out. Economics is not a science and as long as those practitioners who seek to slavishly imitate physics continue down the same dismally misguided path it will increasingly lose relevance to the younger generation who are not fooled by it’s pseudo-science.
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I took up the study of economics for my children and have distilled what I can for their benefit. What is clear that it is not economics (or econometrics) that will solve the crisis that our generation has thrust upon our children’s generation by our arrogance, blindness, and self-interest. It will be their moral and ethical awakening that will kick over the institutional blindness that engages in useless methodological debates while real world problems need solved.
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As for me, I am turning my energies to brewing beer and baking bread, something every neighbor can appreciate, and cycling across Japan.
Meta
Comparative advantage is a useful concept. It does not provide a justification for “free trade” without a host of other conditions. That point has been made for about one and half centuries. And everybody at some point has said or written incredibly stupid things. I don’t know what your point is.
Dave,
you write as if all economists were lackeys of the ruling class. Marx, Veblen, Kalecki, Meade, Minsky? Marshall’s theory of the declining marginal utility of money was an early justification for progressive taxation on utilitarian grounds. Piketty is arguing for a wealth tax now, as Little and Fleming did back in the 1970s. Is that a chip I see on your shoulder?
So Meta was refuting your examples of GDP and comparative advantage as achievements of economic “science”. GDP having been refuted often enough, his point concerned Smith’s view of the comparative advantage of eating oats, wheat and potatoes. I don’t know what Scots girls looked like in 1760, but these days they are as pretty as any. Being from Lancashire myself, I would have read Smith as arguing against feeding mill workers on the cheapest food available and recommending a potato diet. (This some 75 years before its vulnerability to blight became apparent). See “Lancashire”, the characterisation of its early industrial culture in Walter Greenwood’s book in Robert Hale’s ‘County Book series’, 1951.
As for me, thanks for the warning about “chips on shoulders”, though I’m not a self-centred Humean and more inclined to admiring the gift of the gab than being jealous of those who have it and talk their way into positions beyond their competence. (See the Cummings link I’ve posted recently, or before that, the Fulton Report, 1967). As for the associated elite incomes, I’ve always been satisfied to have enough. Far from wishing to tax the elite, I have proposed a credit-worthiness based economy which doesn’t need to: in which our accounts remind us of our current environmental responsibility for spending no more than we need. As for Marx, Veblen etc, aren’t their views “anchored in neo-classical theory” by addressing its problems rather than our human needs?
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It is questionable whether the theory of comparative advantage can really be considered an example of a scientific discovery emerging from economics and not just another example of assumptions meant to serve a powerful class of the wealthy seeking to exploit cheap labor. Walmart loves the theory but it has not been good for Americans and small businesses in communities in which Walmart opens its stores. The deeper question given the history of the theory of comparative advantage is advantageous for whom and at what cost to whom else? I am reminded of the age of colonialism and even of the recent rust belts and economic disenfranchisement created in the US and globally by the insidious fictitious economic theory meant to serve the special interests of one class at the expense of another class.
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Martin Wolf of the Financial Times was equally robust in his condemnation of the financial sector: ‘The UK has a strategic nightmare: it has a strong comparative advantage in the world’s most irresponsible industry.’ The influence of the sector, with its ‘light-touch’ approach, was ‘surely malign’. Echoing John Gieve’s less-appealing avian metaphor, he wrote that Britain needs to ask itself a ‘painful question: how should the country manage the cuckoo sitting in its nest?’ Given that financial capital can extract wealth from other economies than those in which it is resident, it is possible that some parts of the UK may indeed share some of the benefits of this global wealth extraction. In so far as this is true, or governments believe it is, financial institutions may win concessions from the host government by threatening to move elsewhere. (Sayer, Andrew. Why we can’t afford the rich (p. 227). Policy Press. Kindle Edition.)
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Economics as Fraud Science of assumptions: An oxymoron in which the criterion for deeming a discipline scientific is simply whether its assumptions are logically consistent, not necessarily realistic. The result tends to be circular reasoning based on tautological definitions. (See Junk Economics and Neoclassical Economics.) (Hudson, Michael. J IS FOR JUNK ECONOMICS: A Guide To Reality In An Age Of Deception (Kindle Locations 6615-6618). ISLET/Verlag. Kindle Edition.)
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GDP, Comparative Advantage, and almost all other economic terms are loaded with hidden assumptions that when closely examined are empty of real scientific meaning and more ideology than anything else.
What are the specific policies everyone here suggest as remedies for economics/the economy? Come on, you can do it. All that can happen is they can be shown to be mere palliatives or already included in a broader and deeper analysis of the actual problem….but what the hell, it’s only in the interest of avoiding economic and social collapse and likely ecological collapse as well.
Who’s got the guts and who doesn’t?