Home > Uncategorized > Economists assumed that the economic process happens in an abstract, no-space and no-time historical void.

Economists assumed that the economic process happens in an abstract, no-space and no-time historical void.

from Andri Stahel  and RWER current issue 

What does modern economics have in common with medieval theology? At a first glimpse, very little. After all, economics presents itself as a science, based on the same mathematical principles and ideals of objectivity and empiricism on which mechanical physics is grounded and which, as is known, replaced medieval theological description of reality. Moreover, they apply to different subjects: heavenly, spiritual matters for theology, earthly matters for economics. Notwithstanding, if we look at how modern economics is practised nowadays and its ideological role in supporting free markets and the hegemonic social and political practices, striking similarities emerge.

In terms of method, since at least the end of the 19th century and early 20th century, the mathematical, model-based approach to economics has become hegemonic to the point of baring from its practice all dissenting or different methods. Unlike other social and historical sciences, modern economics was built around the idea that the economic reality can and indeed had to be approached in the same way natural scientists approach simple, repeatable phenomena like the movement of inertial bodies in physics or chemical reactions in chemistry.

. . . . . .

Thus, neoclassic economics has been modelled on the image of Newtonian physics, which it seeks to resemble, despite looking at a living, historical reality and not passive objects’ behaviour as physics did. Indeed, to do so, it had to take Newton’s standard assumptions like inertial movement assuming that objects move friction-free or the total elasticity of colliding bodies – thus, that no energy is lost at the collision – to a completely different level. Just like Newton’s laws of movement apply to frictionless inertial movement, the equations of the economist’s models require linear, predictable behaviour to be the norm. Thus, it had to assume not just the nonexistence of minor factors affecting the observed real-world behaviour of objects, but also the nonexistence of central aspects of the economic process like the inexistence of technological change, changing political, institutional and cultural factors, as well as the inherent plasticity and unpredictability of human behaviour. Just as Newton described celestial bodies’ behaviour, economists assumed that the economic process happens in an abstract, no-space and no-time historical void. Thanks to the ceteris paribus assumption, all qualitative change and non-mathematically depictable factors can be ignored.

By doing so, as I argued elsewhere (Stahel, 2020a), economics effectively placed itself out of any attempt of empirical refutation once any deviation of observed facts from the predicted outcomes in the model had to be necessarily attributed to the excluded, so-called exogenous variables of the model. But, unless physics, where the deviations observed due to the letting out of real-world frictions are usually minor and predictable, in economics, the variations are entirely different in nature and scale. Real-world frictions like political, technological, cultural, or environmental factors like the present Covid-19 epidemic or climate change affect real-world economic dynamics in complex and often unpredictable ways, with different feedback-loops phase-transitions and emergent properties happening all the time. And they are central to the process, unlike air friction which is just a relatively small and minor aspect affecting the fall of a billiard ball from the heights of the Pisa tower or the trajectory of a cannon-ball. Physicians would certainly not dare to predict the course of a falling feather on a windy day or that of a falling leaf in an autumn storm using Newton’s equations. Nevertheless, economists do not shy back from predicting the outcome, in numerical and precise terms, of Greece applying the IMF backed and imposed “structural adjustment plan” on its economy. Although no cultural, political, historical and environmental context has been taken into account by the models.  read more

  1. September 28, 2021 at 9:14 pm

    If anyone is interested, here is a Political Economy Research Institute Working Paper on how mainstream economists completely distort Smith’s use of the INVISIBLE HAND concept. This article very appropriately shows the “nationalistic” approach to trade which — as the writer points out — is completely out of date in today’s world.


  2. Ken Zimmerman
    September 29, 2021 at 12:03 pm

    When one claims that “…neoclassic economics has been modelled on the image of Newtonian physics…” the focus is immediately shifted to the foundation of science in beliefs. And this is, of course the only foundation there can be for science. Then the struggle begins over facts to confirm the beliefs, the places and ways to find these facts, and finally, and most importantly how and who interprets the meaning of these facts. The result can be a universally accepted set of beliefs about, for example, the causes of poverty, prosperity, or wealth accumulation, or about war, crime, or government, or about, the nature of gravity, mass, or magnetism. The first two are tested by lay persons and social scientists regularly, with the latter supposedly using more universal and precise methods. The final set of beliefs are tested by lay persons for practical purposes and by physical scientists for theoretical purposes. We must be careful not to mix up these. Which economists often do. Also, we must not forget all this process is culturally and historically grounded. Mathematics added if believed useful or just attractive for beguiling the public or acquiring grants.

  3. Craig
    September 29, 2021 at 8:28 pm

    “Economists assumed that the economic process happens in an abstract, no-space and no-time historical void.”

    Real world temporal universe fact: Retail sale is the terminal ending point of the economic process, that is, it is where production exits the economy and becomes consumption. That economists have missed this shows how overly abstract and theoretical they have become. It also explains why they have not recognized the incredibly powerful potential for policy at that point. Thirdly, it explains how they have failed to see how private for profit money creation is a wholly exterior, parasitical, incredibly expensive POST retail sale set of costs and hence logically not a legitimate business model.

    Empirical fact: Up to 97% of our money is created by accounting entries, i.e debits and credits. As Steve Keen has correctly bemoaned, “Economists can get their PhD in economics without taking so much as an elementary course in accounting.” This shows how ignorant they are of the most significant fact about money creation, namely it is most BASICALLY accounting

    Given these facts, it is not surprising that economists and economic pundits are missing the temporal universe problem resolving and efficacious accounting implementation reality of a 50% Discount/Rebate policy at the point of retail sale.

    Economists and economic pundits can run from/refuse to confront, confirm or engage these facts, but they cannot hide from them.

  4. Gerald Holtham
    October 3, 2021 at 6:12 pm

    It would be really useful to distinguish between the practice of economists and economic theory. Andre Stahel writes of “economics” and I am not sure which he means. You can criticise either but if you don’t distinguish them you may miss the mark. Just as no engineer would think Newton’s equations were sufficient when designing a car or ship, not many economists would approach a real-world problem armed with an undergraduate text book and think they didn’t need to know any more or take other things into account.
    I am no fan of contemporary macroeconomic theory, which has gone down a rabbit-hole but I don’t believe even its advocates try to apply it, to forecasting for example, without adding lots of empirical fudge factors to try and take better account of some aspects of reality. Neo-classical theory describes a world that does not exist. The question is: does it afford any useful intuitions when one is thinking about a complex reality? Economists work, for example, on bodies regulating monopolies. They do not believe in “perfect competition” but does game theory or the theory of monopoly give them any insight at all? The real situation they face will not be quite like any abstract model – but they generally know that.
    Economics has proceeded by assembling bits of logic about abstract or stylized situations. In practice these are complemented by empirical studies of real complex situations. Policy analysis for businesses or governments then uses a messy mixture of the two to try to come to an understanding. This is no doubt unsatisfactory but it is not self-evident how else to proceed. And the process is not understood by looking at what’s in text books of theory. Economic theory is not descriptive but is it useful? My own opinion is that quite a lot is and some isn’t. But it is all capable of abuse and it is all dangerous if applied without awareness of its limitations.

    • October 4, 2021 at 11:00 am

      “Just as no engineer would think Newton’s equations were sufficient when designing a car or ship, not many economists would approach a real-world problem armed with an undergraduate text book … But [economic theory] is all capable of abuse and it is all dangerous if applied without awareness of its limitations”.

      The problem surely lies deeper than economics, i.e. in the way we interpret the same words, symbols and numbers in different ways, and don’t state what we want others to take for granted, notably the axiom of the logic which claims “money is valuable”. How can a holographic carrot be valuable, unless the purpose is tempting donkeys to work?

      A much more generally relevant axiom would be “People and the resources they need should be valued”: because of their potential as babies, for reproducing and recycling care in adult life and as case studies in old age of experiencing what is valuable and what is not. As a human oldie myself I have found that valuing people positively makes them happy, while ingratitude, self-depreciation and injustice are the biggest sources of unhappiness and enmity. The vegetables we eat show their gratitude by thriving where we care for both them and the soil they feed on.

  5. Craig
    October 4, 2021 at 3:16 am

    Realizing that rational expectations is a false assumption, and instantaneously inverting monetary scarcity into abundance and integrating beneficial price and asset deflation into profit making economic systems is the difference between a 25 cent/hr. raise and being promoted to CEO.

  6. pfeffertag
    October 6, 2021 at 5:24 am

    I agree with Gerald. Well expressed.

    This approach – stylized theory – is the approach of science. Science has been stunningly successful. Economics is harder than physics because to match real-world concepts and relationships to the idealised concepts and relationships is more difficult. So its success is not so stunning. But it does work to some extent.

    Compare with the other social sciences which do not do the stylized theorising. They have nothing. No body of theory. Perhaps the fields of law and linguistics are partial exceptions but elsewhere in social science (psychology, sociology, anthropology, political science): zilch. Scholars in those fields do not have the sort of conversation that takes place in economics. They cannot.

    So I think that economists should be glad to have a winning approach and that to attack the basic method is misguided. I say it is not the method but the premises which need attention. The basic premise of self-interest is not wrong but is incomplete. It seems to me that for economics to advance, working out stylized theoretical relationships premised on other social assumptions is necessary.

    Altruism, for example, is as genuine a human motivator as self-interest. Economics ignores it. Yet it exists and has economic consequences. So the task would be to theorise altruism in the stylised way. I think that until this happens economics will not break out of its theoretical stasis.

    • Craig
      October 6, 2021 at 6:15 pm

      Precisely. And what is a more altruistic concept than Monetary Grace as in Gifting? The real problem isn’t just the fallacious theoretical assumptions of neo-liberal economics it’s the current problematic monopolistic monetary and financial paradigm concept that hasn’t changed for the entire course of human civilization.

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