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Rethinking economics

from Lars Syll

marquesThe incorporation of new information makes sense only if the future is to be similar to the past. Any kind of empirical test, whatever form it adopts, will not make sense, however, if the world is uncertain because in such a world induction does not work. Past experience is not a useful guide to guess the future in these conditions (it only serves when the future, somehow, is already implicit in the present) … I believe the only way to use past experience is to assume that the world is repetitive. In a non-repetitive world in which relevant novelties unexpectedly arise testing is irrelevant …

Conceiving economic processes like sequences of events in which uncertainty reigns, where consequently there are “no laws”, nor “invariants” or “mechanisms” to discover, the kind of learning that experiments or last experience provide is of no use for the future, because it eliminates innovation and creativity and does not take into account the arboreal character and the open-ended nature of the economic process … However, as said before, we can gather precise information, restricted in space and time (data). But, what is the purpose of obtaining this sort of information if uncertainty about future events prevails? … The problem is that taking uncertainty seriously puts in question the relevance the data obtained by means of testing or experimentation has for future situations.

Marqués’ book is a serious challenge to much of mainstream economic thinking and its methodological and philosophical underpinnings. A must-read for anyone interested in the foundations of economic theory, showing how far-reaching the effects of taking Keynes’ concept of genuine uncertainty really are.

treatprobScience according to Keynes should help us penetrate to “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts.” Models can never be more than a starting point in that endeavour. He further argued that it was inadmissible to project history on the future. Consequently, we cannot presuppose that what has worked before, will continue to do so in the future. That statistical models can get hold of correlations between different ‘variables’ is not enough. If they cannot help us get at the causal structure that generated the data, they are not really ‘identified.’

How strange then that economics textbooks do not even touch upon these aspects of scientific methodology that seems to be so fundamental and important for anyone trying to understand how we learn and orient ourselves in an uncertain world! An educated guess on why this is a fact would be that Keynes’ concepts are not possible to squeeze into a single calculable numerical ‘probability.’ In the quest for quantities one puts a blind eye to qualities and looks the other way and hopempeople will forget about Keynes’ fundamental insight

Robert Lucas once wrote — in Studies in Business-Cycle Theory — that “in cases of uncertainty, economic reasoning will be of no value.”  Now, if that was true, it would put us in a tough dilemma. If we have to consider — as Lucas — uncertainty incompatible with economics being a science, and we actually know for sure that there are several and deeply important situations in real-world contexts where we — both epistemologically and ontologically — face genuine uncertainty, well, then we actually would have to choose between reality and science.

That can’t be right. We all know we do not know very much about the future. We all know the future harbours lots of unknown unknowns. Those are ontological facts we just have to accept — and still go for both reality and science, in developing a realist and relevant economic science.

  1. November 15, 2021 at 10:10 pm

    Hooray! I did have a fairly good idea of Keynes discussion of probability. Perhaps that is why I read Nicholas Georgescu-Roegen as prose, especially where he got sticky and complex.

  2. November 15, 2021 at 11:27 pm

    This is interesting, but I slightly disagree with your interpretation of what Lucas says. I never thought I’d express this thought, but: I think Lucas is right! – as long as “economic reasoning” in that quote is read as being *orthodox* economic reasoning, i.e. the sort of thing that Lucas and his associates do. And textbooks and all the rest of that.
    I interpret him as saying that that whole apparatus is inapplicable to situations of uncertainty. Given the ubiquity of uncertainty in economic life, he is admitting that the whole tradition of that sort of economics has limited use. I agree! It is a modeling approach and a set of models, but not a theory applicable to anything in the real world that departs from the world imagined by such theorists, i.e. to most of the real world.
    But uncertainty does not make scientific method useless for understanding the economy and how it works. On the contrary, it implies that a scientific approach is superior to Lucas’s type of theorizing for this reason. Needless to add, that is true for other reasons as well. But it would be too much to expect Lucas to admit that …
    So it’s not a question of choosing between reality and science, rather it’s a choice between reality and scientific study of it on the one hand, and Lucas-type theory on the other. By the way, by “science” here, I mean the search for evidence-based causal theories.
    Science is eminently compatible with uncertainty in the sense of open-endedness: look at the theory of biological evolution (Darwin and Wallace). Evolution is unpredictable, to an extent that goes well beyond probabilities etc. But it is the cornerstone of biology – as Dobzhansky the famous geneticist said, “nothing in biology makes sense except in the light of evolution”.

  3. Dave Raithel
    November 16, 2021 at 1:13 pm

    “[W]e actually know for sure that there are several and deeply important situations in real-world contexts where we — both epistemologically and ontologically — face genuine uncertainty…” So, what kind of knowledge is that?

  4. November 16, 2021 at 1:27 pm

    Past experience evidences all those excessive exposures that became dangerous to bank systems, were built-up with assets perceived as safe, not with assets perceived as risky.
    That’s the past experience the Basel Committee’s bank regulators ignored.
    And, in a world of uncertainty, it decreed it risk weighted bank capital requirements, based on the certainty of perceived credit risks.
    And the Academia said nothing.

  5. Dominique
    November 16, 2021 at 3:18 pm

    In other words, Lars, this is the reason why economics is not an ergodic process. The only way out for the economic priesthood is to turn the page to multifractal analyses. Multifractal analysis is a recent and important concept that has found application in numerous fields, such as statistical mechanics, medicine, geophysics, probability theory, strange attractors of dynamical systems, stock market analyses, etc, etc.

  6. Orkun Baysal
    November 17, 2021 at 12:12 pm

    Dear Lars Syll,

    The reason uncertainty prevails in economy is the way it is practised. We have a fundamentally flawed economic model. This economic model has no equilibrium point. It creates constantly changing disequilibrium. The level of uncertainty increases and decreases from time to time. However, long term uncertainty and unpredictability do not disappear.
    Given the uncertain situation of economy, economics has contradictory and inconsistent assumptions about the way economy works. Such as perfect competition, flexible wages and prices, converging trade so on and so forth… This irrelevancy and inconsistency make economics a pseudo science.
    After having made the criticism this way, I would want to emphasise my contribution.
    I believe I constructed a relevant economic analysis which connects the monetary system with the real economy. It explains how the economy works with a causal relationship order.
    I would like to hear the thoughts of other economists for a new economic thinking.


  7. Gerald Holtham
    November 19, 2021 at 6:04 pm

    Lars writes: “Science according to Keynes should help us penetrate to “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts.”
    What is this “science” that enables us to find the true process of causation where the system and the data it generates are non-ergodic, the past is no guide to the future, uncertainty is total and cannot be reduced to probabilities? The Lucasian approach of assuming certainty-equivalence and a near-omniscient representative agent is obviously hopeless but “multifractal analysis” still requires some deterministic pattern in events, even if chaotic, with some strange attractors. Lars rejects what he sees as the deductive elements in economic theorising. This post now rejects induction. Doesn’t leave you many places to go, does it? The word abduction gets bandied about but it is a synonym for magically arriving at the truth via intuition. How can that truth be tested? Not by statistical analysis or randomized controlled tests – both apparently too fallible. Perhaps Lars can explain the “science” whereof he speaks. It is becoming increasingly mysterious as he closes all doors out of the trap.
    The fact is we can’t do better than the best we can do. It will always be fallible and whether you call it science or not is semantics. I think social reality is a bit more ordered than this post implies so some understanding is possible but I could be wrong, in which case all we have is literature

  8. Edward Ross
    November 20, 2021 at 11:51 pm

    In reply to Gerald Holtham,” think social reality is a bit more ordered than this post implies so some understanding is possible but I could be wrong , in which case all we have is literature”.
    As a non academic it amazes me that economists do not study people before they theorize about how they think and and act in the social Melua. therefore i think anthropology has an important part to play in connecting economic thinking to the real world.eg “the inextricable connections between knowledge and power, between social control and systems of meaning, between domination and structure’s of discourse, , are now so well established that complete escape from entanglements is clearly self-deception. On the other hand, rather than running away from such a past deliberately to explore the the various ramifications of such involvement’s perhaps allows us to incorporate into our present sensibility an understanding of those entanglements in a way which may allow us a somewhat different style of discourse, representation and practice in contemporary circumstances(Kahn 1993,p.14;Fox1991 p. 13;Scott 1992.p.388). cited Malcolm Crick. cited in Global forces , local realities, Anthropological perspectives. on change in the Third world by Bill Geddes and Malcolm Crick. My point here is that certainly anthropology not only deals with the past, but also with the present here and now Ted

  9. Edward Ross
    November 21, 2021 at 12:04 am


  10. Edward Ross
    November 21, 2021 at 12:09 am

    An interesting point the above book was published in 1997 and Bill Geddes at that time was openly critical of neoliberalism. Ted

  11. Gerald Holtham
    November 21, 2021 at 10:30 pm

    Competent empirical economists do study people before addressing concrete issues. How theory is generated is a different matter. Some of it is based on observation but some is deriving the consequences of a priori assumptions. Not all of the latter type of theorising is useless, though some may be. I don’t know what people Ricardo studied before proposing the theory of comparative advantage as the basis for trade but it was a useful insight, as was his notion of economic rent. But I agree there has been relatively too much a priori thinking and not enough looking in neo-classical economics.

  12. Gerald Holtham
    November 21, 2021 at 10:39 pm

    Many social studies, anthropology no doubt, but more surely political science, history and social psychology are necessary to “connect economic thinking to the real world”. Very few situations are purely economic without other influences. When confronted with a practical problem or policy issue the practising economist has to be aware of the important non-economic influences. Theory consists in abstraction, however, where you try to work out the consequences of a few factors, ignoring all the others. When it comes to practice, the theory may be helpful but you have to try and put the other factors back in and take account of them as best you can.. Theory is never more than a starting point.

  13. Edward Ross
    November 23, 2021 at 6:04 am

    I agree with everything you have said except the last line,”Theory is never more than a starting point”. even if i am a bit thick, but my simple point from the real world experience is, you have to identify the cause of the problem before you theorise about how to fix it. Otherwise the theory becomes something like useless hand waving the air. Please note that i respect all those who contribute to the conversation because i believe meaningful conversations can do a lot to find solutions to problems.Ted

  14. Craig
    November 23, 2021 at 4:02 pm

    Re-think the current monetary and financial paradigm and you’ll be able to change economics…in time to save yourself, your progeny and perhaps the planet.

  15. Ken Zimmerman
    November 27, 2021 at 8:14 am

    In his book, Constructing Quarks, physicist and sociologist Andrew Pickering describes “…an archetypal ‘scientist’s account’ of the development of the new physics. This was very simple. It was based upon the assertion that experimental facts obliged particle physicists to adopt the new-physics package of beliefs: the observed hadron spectrum implied the validity of the basic quark concept; the observation of scaling in lepton-hadron scattering supported first the quark-parton model and later QCD; the discovery of the weak neutral current confirmed the intuition of electro weak gauge theorists; and so on. Throughout, experimental ‘facts’ served as an independent check upon theorising. In Chapter 1 I also outlined the philosophical and historiographical objections to the scientist’s account. Philosophically, the key objection was that it obscured the ever-present role of scientific judgments in the research process-judgments relating to whether particular observation reports should be accepted as facts or rejected, and to whether particular theories should be regarded as acceptable candidate explanations of a given range of observations. I noted that the scientist’s account factored such judgments out of consideration by adopting a stance of retrospective realism. Having decided upon how the natural world really is, those data which supported this image were granted the status of natural facts, and the theories which constituted the chosen world-view were presented as intrinsically plausible. The historiographical objection to such retrospective realism is obvious. If one is interested in how a scientific world-view is constructed, reference to its finished form is circularly self-defeating; the explanation of a genuine decision cannot be found in a statement of what that decision was.”

    Once Pickering removes the naïveté of realism from the work of his scientific colleagues we can discern that the operational form basic to their science is inference. Making ‘educated guesses’ based on experience and observations. Guesses that are never final but always renewable. Guesses that help suggest and guide further research and theorizing. Inferences may be quantitative (e.g., statistical) or qualitative (e.g. detailed and recorded contemporaneous or historical observations of a phenomenon). Also, inference may seek to establish causation or not.

    Some examples for social sciences.
    “My grandmother Annie smoked two packs a day and lived until she was 95 years old.” All that the anecdote suggests is that Annie was prone to have a long life The key question for causal inference is about the unobserved counterfactual: how long would Annie have lived had she never smoked a single cigarette? For this question comparative observations in different places and periods may be useful.
    Two excellent historical studies exemplify broad social scientific research. In Coercive Cooperation (1992), Lisa L. Martin seeks to explain the degree of international cooperation on economic sanctions by quantitatively analyzing ninety-nine cases of attempted economic sanctions from the post World War II era. Although this quantitative analysis yielded much valuable information, certain causal inferences suggested by the data were ambiguous; hence, Martin carried out six detailed case studies of sanctions episodes in an attempt to gather more evidence relevant to her causal inference. For Making Democracy Work (1993), Robert D. Putnam and his colleagues interviewed 112 Italian regional councillors in 1970, 194 in 1976, and 234 in 1981-1982, and 115 community leaders in 1976 and 118 in 1981-1982. They also sent a mail questionnaire to over 500 community leaders throughout the country in 1983. Four nationwide mass surveys were undertaken especially for this study. Nevertheless, between 1976 and 1989 Putnam and his colleagues conducted detailed case studies of the politics of six regions. Seeking to satisfy the “inter-ocular traumatic test,” (Does the panel for your actual observation stand out sufficiently that it is obvious? [I.e., does it “hit you right between the eyes”, which is sometimes called an “inter-ocular trauma test”?] If so, then there is something there.) the investigators “gained an intimate knowledge of the internal political maneuvering and personalities that have animated regional politics over the last two decades” (Putnam 1993:190).

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