June 16, 2015

Lost between pure fiction and parochial realism

Comment on ‘Why economic models constantly crash’


Think for a second of an apple tree. Each falling apple is a unique historical event. There are arbitrary many causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. In almost all cases the singular event is uncertain and unpredictable. That is so obvious that no physicist ever lost much thought about the historicity and uncertainty of falling apples.

What scientists figured out instead was the Law of gravity. This Law does not predict when a concrete apple falls but is rather abstract and predicts the exact position and velocity of any mass m at some time t and applies also admirably to apples.

It is obvious that the scientist and the layperson have different modes of looking at reality. The layperson never gets above parochial realism, historicity, uncertainty, and storytelling about this or that apple.

Economists are different from both the scientist and the layperson. They ask the wrong questions, formulate the wrong hypotheses, and build the wrong models.

Orthodox economists simply hypothesize uncertainty away.
“The hypothesis that all markets for all future times exist today is, of course, unrealistic, but is equivalent to the assumption that all individuals correctly anticipate all future prices, the so-called rational-expectation hypothesis.” (Arrow, 1988, p. 276)

Heterodox economists are glued to the historical surface and endlessly reiterate the obvious.
“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.” (Keynes, 1937, p. 214)

It was J. S. Mill who draw the right methodological conclusion.
“Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (Mill, 1874, V.55)

Curiously, it were physicists and not economists who successfully applied Mill's methodology.

There is uncertainty, but there are also economic laws. Economic laws relate to the economic system and they have the same methodological status as physical laws (see for example the Profit Law: 2015, eq. (29)). Because of the reasons given by Mill they are not immediately recognizable. Traditionally, economists have not looked for them because both orthodox and heterodox economists have a distorted view of reality. This is the ultimate reason why their models crash.

Egmont Kakarot-Handtke

Arrow, K. J. (1988). Workshop on the Economy as an Evolving Complex System: Summary. In P. W. Anderson, K. J. Arrow, and D. Pines (Eds.), The Economy as an Evolving Complex System, pages 275–281. Redwood City, CA, Menlo Park, CA, etc.: Addison-Wesley.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL