February 28, 2015

Questions and answers about economics

Comment on Peter Radford on ‘I am a know-nothing’


First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem of economics is that many economists are not scientists but agenda pushers of one sort or another. This means that economics is exploited for other purposes.

Political economics is essentially moralizing and the explanation consists usually in a good-guy-bad-guy story. In political economics anything goes; in theoretical economics scientific standards are observed.

“Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Theoretical economics starts with ignorance and the attempt to clarify what the subject matter is and how to approach it. As a first approximation, we can agree here on the general characteristic that the economy is a complex system.

However, with the term system one usually associates a structure with components that are non-human. In order to stress the fact that humans are an essential component of the economy we could perhaps better say that the economy is a complex hybrid human/system entity.

The scientific method is straightforwardly applicable to the sys-half but not to the hum-half. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective sys-half.

In gestalt-psychological terms the economic system is the foreground, individual behavior the background. Common sense wrongly insists that the hum-half must always be in the foreground. This fallacy compares to geo-centrism. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the invisible hand.

Whether the outcome of the human/system-interaction is good or bad is a political question that lies outside of theoretical economics. Theoretical economics explains how the actual economy works — no less, no more.

Since Veblen Heterodoxy has been mainly occupied with debunking the assumptions and claims of equilibrium theory. However, the fatal errors/mistakes of Orthodoxy do not lie so much in particular green cheese assumptions but in the complete failure to understand what the scientific method is all about.

Nonentities like equilibrium, rational expectation, constrained optimization, or utility maximization for that matter, are perfectly in line with the accepted methodology.

“It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1); see also (Arnsperger and Varoufakis, 2006)

The fundamental methodological blunder resides in the idea that economics is about human behavior. Let us call this the social science delusion. The irony is that Heterodoxy is even more convinced that economics is essentially a social science. It differs from Orthodoxy only insofar as it claims that their behavioral assumptions are more realistic.

The fact of the matter is that economics is about the behavior of the economic system and not about the behavior of individuals. This, indeed, is the realm of psychology, sociology, anthropology, history, etcetera. To speculate about rational or irrational human behavior is not economic analysis at all (Hudík, 2011).

This means that the subject matter of economics has to be redefined. No way leads from the understanding of human behavior to the understanding of how the actual economy works. This fully explains why economics is a failed science.

You sum up:
“And I remain confused about the purpose of an economist — although I will check with Aristotle to clear that up.”

No need to check it. All answers are in Wikipedia and this is what Aristotle said about how to do science:
“When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Resume of Aristotle's Posterior Analytics)

And from this follows for the economist's job description:
“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

Certainly, this is not what the political economist thinks his true mission is. The problem with political economists, though, is not that agenda pushing is illegitimate. The problem is that the scientific claims are illegitimate. This, unfortunately, is what unites Orthodoxy and Heterodoxy. Both are talking scientific nonsense.

Egmont Kakarot-Handtke

Arnsperger, C., and Varoufakis, Y. (2006). What Is Neoclassical Economics? The Three Axioms Responsible for its Theoretical Oeuvre, Practical Irrelevance and, thus, Discursive Power. Paneconomicus, 1: 5–18.
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.