June 13, 2015

A farewell to PsySoc economics

Comment on Rhonda Kovac on ‘The Context-Dependency of Human (Economic) Behaviour’


You say: “The claim that psychology/sociology/etc. is irrelevant in economics is an assertion that economic processes are basically self-contained, the internal variable set sufficient to account for the behavior of any of the variables within it.”

This conclusion has obviously not much to do with the argument of my post. Alone from the fact that my proposal for a new heterodox curriculum* includes a paper with the title ‘Essentials of Constructive Heterodoxy: Behavior’ (2015) you can safely conclude that my argument does not amount to the claim that psychology/sociology/etc. is irrelevant. So let us first put aside this windmill.

My core assertions are (i) the task of theoretical economics is to explain how the monetary economy works, and (ii), no way leads from the understanding of individual human behavior to the understanding of the behavior of the economic system.

From this follows that Orthodoxy is a failed approach because it has been built upon a set of behavioral premises. It follows in addition that Heterodoxy is bound to fail if it merely replaces constrained optimization, rational expectations and other green-cheese premises with some behavioral assumptions that are more realistic. With this one remains trapped within the confines of psycho-sociology. What is needed is a radical methodological turnaround.

First of all, it is advisable that economics gets as far away as possible from the so-called social sciences which Feynman has debunked as cargo-cult sciences (see Wikipedia). Their track record has been abysmal and will remain so.
“... there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman, 1992, p. 320), (Rosenberg, 1980, p. 2)
The social sciences cannot, as a matter of principle, rise above the level of storytelling.

From all this follows: As a first approximation, one can agree on the general characteristic that the monetary 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 sys-hum.

While it is clear that the economy always has to be treated as an indivisible whole, for compelling methodological reasons the analysis has to start with the objective system-component.

Common sense wrongly insists that the hum-component 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 has called the Invisible Hand.

What the agents subjectively think or expect about the relationship of economic variables is immaterial for the understanding of the whole. The agents are caught in parochial realism and have no idea about how the whole fits together. What really counts are the objective structural properties of the economic system. When human behavior and system behavior are not aligned crises result.

Because of this, it is of utmost importance to know how the monetary economy works. Let us face the facts: neither Orthodoxy nor Heterodoxy has a clue. This is the result of more than two hundred years of PsySoc.

Nothing short of a paradigm shift will bring economics out of the dead end. To debunk Orthodoxy is one thing, to successfully replace it with the correct economic theory is quite another thing.

Egmont Kakarot-Handtke

Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.

* See cross-references New curriculum