January 1, 2015

Lacking the Midas touch of science

Comment on Lars Syll on 'Real world filters and economic models'

Blog-Reference

The characteristic capability of science — to turn whatever it might touch into knowledge — obviously has eluded economics. Currently, economists do not understand how the economy works. And there is no real difference between Orthodoxy and Heterodoxy despite much discussion about secondary points. The differences between the schools only demonstrate that there are many ways to get it wrong.

J. S. Mill excused economics in the inescapable benchmark comparison with physics as separate and inexact science. Indeed, when one compares the respective starting points — Newton and Smith — and the actual state of the fields then one is driven to the conclusion that in the course of time economics has fallen behind even farther.

Economics has always taken its inspirations from the real sciences. This includes methodology and theory design (Mirowski, 1995). It did not escape economists that the simplicity argument played a great role in physics.

“... in my opinion there is the correct path and, moreover, that it is in our power to find it. Our experience up to date justifies us in feeling sure that in Nature is actualized the ideal of mathematical simplicity.” (Einstein, 1934, p. 167)

As untalented plagiarists economists used this argument and abused it for the justification of their cargo cult science.

This is the correct way of simplification, abstraction and idealization:
The Principia begins with an idealized world, a simple mental construct, a “system” of a single mathematical particle and a centrally directed force in a mathematical space. Under these idealized conditions, Newton freely develops the mathematical consequences of the laws of motion that are the axioms of the Principia. At a later stage, after contrasting this ideal world with the world of physics, he will add further conditions to his intellectual construct — for example, by introducing a second body that will interact with the first one and then exploring further mathematical consequences. ... In this way he can approach by stages nearer and nearer to the condition of the world of experiment and observation, introducing bodies of different shapes and composition and finally bodies moving in variant types of resistant mediums rather than in free space. (Cohen, 1994, p. 77)

Standard economics, too, starts with an idealized world but then it does not move nearer and nearer to the world of experiment and observation but in the opposite direction in order to rationalize an unsuccessful initial idealization. Thus idealization, which is indispensable, becomes counterproductive. There is only a thin line between fruitful abstraction and barren absurdity. To assume that the moon is a mass point is unrealistic but fruitful, to assume that it is made of green cheese is unrealistic but nothing else. Most assumptions of conventional microeconomics fall into the green cheese category.

While science turns the junk of ignorance into the gold of knowledge, economics merely turns common sense junk into rigorous junk. Newton's most important methodological message was: hypotheses non fingo. Economists have done the opposite with much alacrity but little success.

Now, what is the fundamental error that unites Orthodoxy and Heterodoxy? It is psychologism: “Psychologism is the view that in any explanation (individualist or otherwise) the only exogenous givens other than natural constraints allowed are those representing psychological states of either individuals or groups.” (Boland, 1992, pp. 147-148)

To paraphrase H. L. Mencken: Psychologism is commonsensical, convincing, and wrong.

“The notion that microeconomics is a branch of applied mathematics does economists more credit than several possible alternative explanations for its empirical weakness. ... It isolates the limitations of the theory in a factual supposition about the determinants of human behavior, one that economists share with all of us. But the supposition we all share is false, and so economics rests on a purely contingent, though nevertheless central, mistaken belief ....” (Rosenberg, 1992, p. 247)

As a matter of fact, no way leads from psychologism of any sort to the understanding of how the actual economy works. The solution does not consist in replacing the unrealistic homo economicus by the realistic homo socialis. The solution consists in replacing behavioral axioms by objective structural axioms.

It is as simple as that:
“The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein, 1934, p. 165)

There is only one scientific method. And, in its present state, economics is not a separate and inexact science but a failed science.

Egmont Kakarot-Handtke


References
Boland, L. A. (1992). The Principles of Economics. Some Lies my Teacher Told Me. London, New York, NY: Routledge.
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago, IL: University of Chicago Press.