May 5, 2015

From PsySoc to SysHum

Comment on Lars Syll on ‘Rational expectations — totally incredible bogus’


The student of economics either understands at his very first encounter with Econ 101
• that behavioral assumptions like utility, optimization, rational expectation, supply/ demand functions, and equilibrium are NONENTITIES;
• that in mathematics there exists a ‘whole crop of monster-structures, entirely without application’ (Bourbaki, 2005, p. 1275, fn. 9);
or unfortunately not.

The student with a modicum of scientific guts becomes by logical necessity a heterodox economist. He will avoid NONENTITIES and inapplicable monster structures and debunk them wherever they appear.

This is right and good, but it is not good enough.

What everybody wants and needs are the correct theory and congenial math. What nobody needs is another surrealistic discussion about rational expectations, ergodicity, the fixpoint theorem, or multiple equilibria.

The reason why Heterodoxy has only been marginally successful is that it shares the foundational blunder with Orthodoxy.

The crucial point is that economics deals — in the first place — not with individual human behavior or society at large. This is the realm of psychology, sociology, anthropology, history, political science, etcetera. Insofar as economics deals with behavioral assumptions like utility maximization, greed, power-grabbing, etcetera, it is a dilettantish variant of Psycho-Sociology or PsySoc.

What is the real subject matter of economics?

As a first approximation, one can agree 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 obvious fact that humans are an essential component of the economic system, the market economy should be characterized more precisely as a complex hybrid system/human entity or SysHum (Luhmann, 1995).

The scientific method is straightforwardly applicable to the sys component but not to the hum component. 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 system component.

In gestalt-psychological terms, the economic system is the foreground, and individual behavior is in the background. Common sense wrongly insists that the hum component must always be in the foreground. This fallacy compares to geocentrism. The economic system has its own logic which is different from the behavioral logic of humans. Systemic logic is what Adam Smith called the Invisible Hand.

Heterodoxy will be inextricably tied to failed Orthodoxy as long as it is content with making homo oeconomicus ‘more realistic.’ The student with a modicum of scientific guts goes beyond flat behavioral common sense, quits PsySoc altogether, and turns to SysHum.#1

Egmont Kakarot-Handtke

Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Vol. II, 1265–1276. Oxford, New York,  Oxford University Press.
Luhmann, N. (1995). Social Systems, Stanford, Stanford University Press.