March 20, 2015

As Keynes and my taxi driver said: We simply do not know

Comment on ‘Jon Elster on deductivist modeling leading economics astray’

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The secular stagnation of economics proves that there must be something deeply wrong with economic methodology. This, indeed, is not a new insight. Veblen and many other heterodox economists have made the point. Yet, not much has come of it. It cannot be said that Heterodoxy has developed a better economic methodology in the interim. There is a secular stagnation of critique, too. While Orthodoxy is busy with throwing up one green cheese assumption after the other — beginning with utility maximization and culminating in rational expectation — Heterodoxy has not got tired of playing out its three trump cards: unrealism, deductivism, and uncertainty.

Keynes famously set the tone with this irrefutable argument.
“The sense in which I am using the term [uncertainty] is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention … About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (1937, p. 214)

This may seem new to economists but has been found out by physicists long ago: “The future is unpredictable.” (Feynman, 1992, p. 147)

So, what is really the root of all methodological evil? Orthodoxy is quite explicit about its principles.
“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)

Let us call this the PsySoc imperative because it firmly anchors economics in an idiosyncratic mixture of psychology/sociology/anthropology/gossip. Heterodoxy complies with this methodological imperative, albeit with the usual recourse to realism.
“To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational.” (See intro)

How long will it take economists to understand that economics is not about the behavior of agents but about the behavior of the economic system?

The critical methodological point is that no way leads from the understanding of the interaction of individuals to the understanding of the working of the economy as a whole. This has nothing at all to do with the deductive method. As a matter of fact, the breakup of the methodological stalemate consists in moving from subjective-behavioral axioms to objective-structural axioms (2014a).

The result of the PsySoc methodology has been that economists until this day cannot tell the difference between profit and income (2014b) or, as Keynes so aptly resumed the commonality of Orthodoxy and Heterodoxy: We simply do not know.

When will economists stop telling the world what is so obvious and annoying? 

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL