The ‘laws of economics’
from Lars Syll
What we discover is that the cash value of these laws lies beneath the surface — in the extent to which they approximate the behaviour of real gases or substances, since such substances do not exist in the world …
Notice that we are here regarding it as grounds for complaint that such claims are ‘reduced to the status of definitions’ … Their truth is obtained at a price, namely that they cease to tell us about this particular world and start telling us about the meaning of words instead …
The ultimate reduction to triviality makes the claim definitionally true, and obviously so, in which case it’s worth nothing to those who already know the language …
One of the main cruxes of economics laws — and regularities — is that they only hold ceteris paribus. That fundamentally means that these laws/regularites only hold when the right conditions are at hand for giving rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But, really, since these laws/regularities do not exist outside these ‘socio-economic machines,’ what’s the point in constructing these non-existent laws/regularities? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?
Take ‘The Law of Demand.’
Although it may (perhaps) be said that neoclassical economics had succeeded in establishing The Law – when the price of a commodity falls, the demand for it will increase — for single individuals, it soon turned out, in the Sonnenschein-Mantel-Debreu theorem, that it wasn’t possible to extend The Law to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.
This could only be conceivable if there was in essence only one actor – the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!
How has neoclassical economics reacted to this devastating findig? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.
Modern mainstream neoclassical textbooks try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And – worse still – something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equlibrium solution.
Of course one could say that it is too difficult on undergraduate levels to show why the procedure is right and to defer it to masters and doctoral courses. It could justifiably be reasoned that way – if what you teach your students is true, if The Law of Demand is generalizable to the market level and the representative actor is a valid modeling abstraction! But in this case it’s demonstrably known to be false, and therefore this is nothing but a case of scandalous intellectual dishonesty. It’s like telling your students that 2 + 2 = 5 and hope that they will never run into Peano’s axioms of arithmetics.
As Hans Albert has it:
The neoclassical style of thought – with its emphasis on thought experiments, reflection on the basis of illustrative examples and logically possible extreme cases, its use of model construction as the basis of plausible assumptions, as well as its tendency to decrease the level of abstraction, and similar procedures – appears to have had such a strong influence on economic methodology that even theoreticians who strongly value experience can only free themselves from this methodology with difficulty …
Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …
Leave a comment
—– look inside —– $5.94 / $20.00
—– look inside —– $4.90 / $8.00
—– look inside —– $15.99
—– look inside —– $5.99 / 12.99
—– look inside —– $5.93 / $12.99
—– look inside —– $4.97 / $9.90
—— Ugarteche, Puyana and Madi ——
Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
————— Michael Hudson ————–
Maria Alejandra Madi / Jack Reardon
————- Edward Fullbrook ————-
—————— Steve Keen —————–
————— Richard Smith —————
————– Gustavo Marques————
– Victor Beker and Beniamino Moro –
————– Lars Pålsson Syll ————-
—————– Stuart Birks —————-
Edward Fullbrook and Jamie Morgan
———— Armando Ochangco ———-
Shimshon Bichler / Jonathan Nitzan
————— Mauro Gallegati ————–
————— Herman Daly —————-
————— Asad Zaman —————
—————– C. T. Kurien —————
————— Robert Locke —————-
Real-World Economics Review Blog 
I agree with the entire direction of Lars Syll’s thinking. Even in physics, the mathematical treatment of the 3-body or n-body problem is fraught with difficulties. I am not an advanced mathematician so I can only understand English language explanations of the issues. Quotes below from Wikipedia.
“There is no general analytical solution to the three-body problem given by simple algebraic expressions and integrals.[1] Moreover, the motion of three bodies is generally non-repeating, except in special cases.[5]
On the other hand, in 1912 the Finnish mathematician Karl Fritiof Sundman proved that there exists a series solution in powers of t1/3 for the 3-body problem. This series converges for all real t, except for initial conditions corresponding to zero angular momentum. (In practice the latter restriction is insignificant… ”
“Four-body problem
Inspired in the circular restricted three-body problem, the four-body problem can be greatly simplified by considering a smaller body to have a small mass compared to the other three massive bodies, which in turn are approximated to describe circular orbits. This is known as the bicircular restricted four-body problem (also known as bicircular model) and it can be traced back to 1960 in a NASA report written by Su-Shu Huang. This formulation has been highly relevant in the astrodynamics, mainly to model spacecraft trajectories in the Earth-Moon system with the addition of the gravitational attraction of the Sun. The former formulation of the bicircular restricted four-body problem can be problematic when modelling other systems that not the Earth-Moon-Sun, so the formulation was generalized by Negri and Prado[ to expand the application range and improve the accuracy without loss of simplicity. ”
End of Wikipedia Quotes.
So, even a four body problem in classical gravitational physics is a wicked problem and requires simplifying assumptions. How much more so an n-body problem where n is a number approaching 8 billion (globalized economy) and each body is an independent agent with different perceptions, differing preferences, differing capacity for encoding and decoding social and economic information and differing capacity for autonomous action, independent thought and so on? Then there’s what a single virus mutation (COVID-19) can do to the world economy. That started as one mutated virus particle.
Where do Okun’s Law, Verdoorn’s Law and Kaldor’s stylised facts fit into this discussion. These are empirical descriptions of reality. The fact that conventional and heterodox analyses have been unable to provide a mathematical description does not invalidate these empirical observations?
I have a question. I have read that the Titans of Silicon Valley are experimenting with pricing algorithms for retail goods that charge different individuals different amounts for the same identical item, a standard 50 feet garden hose for instance. The potential buyer does not know what prices others are offered and they do not have an option to haggle. This is predatory price manipulation on a large scale.
Should this extreme form of predatory pricing replace in reality the ages-old fully transparent market-pricing mechanisms of producer set/adjusted prices offered to everyone (as assumed in supply-demand curves), auctions, or haggling (as takes place in venues from local flea markets to the financial sphere) can there be such things as equilibrium prices, or market efficiency (as in allocation of resources that produces societal good)? Would not such predatory price manipulation totally throw out all established economic theory?
I think the whole problem can be “resolved” by considering that modern mainstream neoclassical economics has severed the ties to reality. The object of scientific scrutiny no longer is the economy but the model itself.
Frank Salter,
There is real encouragement in the tail of this post. Please don’t abandon a thorough reading of this post before you reach that tail or coda. I recommend “read on till the end” despite the fact that you will likely find the first part of this post hard to accept, at least at first.
You might have material quantities and notional quantities mixed up in your assumptions; as conventional economics certainly does. This is not the way to develop a consistent ontology, let alone empirical laws. The unemployment number is a number of real, material people; a defined empirical fact if counted against defined criteria for the category “unemployed”. The GDP is a collection of disparate goods and services aggregated and measured in the numéraire. The numéraire is a notional measure, not a real measure of a real material dimension (with “dimension” defined as it is in the SI – International System of Units). Without a real SI dimension “measuring stick” you cannot validly aggregate a collection of disparate objects, at least not in scientific terms. See Blair Fix – “The Aggregation Problem”.
Click to access 20190100_fix_the_aggregation_problem_bpearq_preprint.pdf
I recommend you read up on “Capital as Power”;
Paper
Click to access BichlerNitzan61.pdf
Book
Click to access 20090522_nb_casp_full_indexed.pdf
If we are measuring anything in absolute quantities of money, the numéraire, we have already gone wrong in ontological terms. However, if we measure differential accumulation (differential ratios) it might be a different matter and this insight could rescue your theories. See Bichler and Nitzan.
As an empirical subject economics does not deal in laws but in tendencies. In positive macroeconomics propositions should be understood to be stochastic.. Moreover there are two sorts of uncertainty, internal uncertainty resulting from the stochastic nature of the generalisation in question leading to “normal” variability, and external uncertainty owing to events taking us outside the usual domain of application of the generalisation. It is not possible to prove the law of demand but the fact is demand for standardised commodities usually varies inversely with the price – a well-established tendency, not a law. Price is not the only variable influencing supply and demand, of course, as we currently observe with the oil price. The possibility of a pandemic affecting demand and hence the price is a clear case of external uncertainty.
Frank, My impression is Vedoorn’s Law has held up fairly well but time has not been kind to Kaldor’s stylised facts (factor income shares have not been stable, for example). Okun’s relation has also been affected by changes in the US labour market – casualisation, gig economy etc. Wages have stagnated raising the Okun coefficient, which turns out to be a variable not a parameter. All such “constants” in economics tend to be specific to a place and an era. They are not fundamental parameters and change as society evolves.
Reality Check, your scenario is the extreme case of discriminating monopoly, which has been analysed in theory. It is not clear that the situation is sustainable since it requires the monopolist to control information and prevent a secondary market springing up.
I am unable to agree with your opening two sentences and the conclusions you draw. Though I believe that what you have expressed is the widely accepted view. I believe that this arises because of the apparent inability of economists to think beyond linear relationships. Therefore this results in academic economists failing to specify relationships appropriately.
You can see this in the linear relationship seen as Verdoorn’s law. It is equation (38) in Appendix C of Salter(2017) where the inappropriateness of this definition is discussed. The correct specification is shown as equation (32) in section “4.6. First derivative of the productivity definition”. The empirical values of the coefficient in equation (32) are found to be the same as the values predicted by my first principles analysis.
The reason that Kaldor’s facts are drifting is explained by the fact that the limiting values shown in section “4.2.1. The stability of the output:capital ratio” equations 26), (27) and (28) depend upon the level of technical progress. So it is unreasonable to expect the output:capital ratio to be constant.
It is possible to determine the correct Okun relationship from my analysis. It is not linear as implied by conventional analysis. I will publish this derivation when I have the time.
I do not recognise your thinking my analysis is monopolistic. The limiting values I found are reached by competition through technical progress.
Laws, or more precisely legalizations can play a major role in determining winners and losers in an economy. That is, who becomes wealthy and who is poor. Consider this example. In the 1980s, the Turkish state formalized tenure in urban slums (gecekondular) by transferring ownership rights to the individual occupants. This program benefited many owners, the state, and the economy, in general. This led to the land under gecekondular increasing in value. As a result of tenure legalization, many small owners and tenants were subsequently pushed out by wealthier citizens and land speculators. The same law helped urban businesses to convert former gecekondular that previously sheltered thousands of people into shopping malls, business centers, and luxury condominiums and the former residents energized land invasion elsewhere (Uzun & Colak, Providing formal property rights to slum owners through tenure legalization process in Turkey. The Strategic Integration of Surveying Services, FIG Working Week 2007, Hong Kong SAR, China, pp. 1–9.2007). Dispossession by legalization thus overturns the assumption that it is the weak law enforcement that breeds informality. Rather, it supports an understanding that people end up in slums when there is no affordable legal accommodation. For this reason, eviction never helps to control informality: the poor ‘‘are merely shifted elsewhere,’’ as Friedrich Engels observed in England in the late 19th century. ‘‘The same economic necessity which produced them in the first place,’’ he argues about the consequences of a crackdown on working class neighborhoods in Manchester, ‘‘produces them in the next place also’’ (F. Engels, The housing question (Original 1887). 1979, p. 74). The formalization program may carry comparable implications and it often does: the curing of the informality in one place only reproduces it in another. As Harvey (D. Harvey (2006). Spaces of global capitalism: Towards a theory of uneven geographical development, p. 48) argues: ‘‘Even when privatization appears as beneficial to the lower classes, the long-term effects can be negative.’’ He continues: At first blush, for example, Thatcher’s program for the privatization of social housing in Britain appeared as a gift to the lower classes (which could not convert from rental to ownership at a relatively low cost) gain control over a valuable asset and augment their wealth. But once the transfer was accomplished, housing speculation took over … eventually bribing or forcing low income populations out to the periphery in cities like London and turning onetime working-class housing estates into centers of intense gentrification. The loss of affordable housing in central areas produced homelessness for many and extraordinary long commutes for those who did have low-paying service jobs. Similar gentrification has been occurring all over western Europe and America since the 1990s.
Frank, Linearity isn’t the issue Lots of economic relations are understood to be non-linear – e.g. power functions describing income distributions or size distributions of firms etc. The issue is stability of the phenomena under consideration. They tend to depend on technology and social institutions, which are evolving over time. The labour market that Okun knew has gone, changed radically. You can expect a short-term relationship between US growth and unemployment in future but its quantification will always be contingent on the circumstances of the time.
My point about monopoly was addressed to another writer and did not bear on your post.