August 9, 2015

Economics: the honeypot for know-nothings

Comment on ‘Kahneman on the Chicago school of libertarian economics’

Blog-Reference

The core problem of the so-called social sciences is that they cannot rise above the level of gossip, storytelling, and second-guessing other agents’s inaccessible ulterior motives. Thus, subjective belief is substituted for unattainable objective knowledge.

“By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can't be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

This was already clear to the early Chicago school but later on forgotten or ignored. “Human psychology is not available for inductive study, because of the differences between individual minds, the immense multitude of the influencing circumstances, the practical difficulty of experiment upon human beings.” (Viner, 1917, p. 243)

The foundational error of the social sciences can be traced back to Hume. “And as the science of man is the-only solid foundation for the other sciences, so the only solid foundation we can give to this science itself must be laid on experience and observation.” (Hume, 2012, Introduction)

With Hume and Newton before his eyes, Adam Smith conceived economics as hybrid creature of science of man and natural science. “His [Adam Smith’s] method is always the method of Newton, which we have already seen applied to psychology and morals: to attain, by generalization, certain simple truths, from which it will be possible to reconstruct, synthetically, the world of experience.” (Halévy, 1960, pp. 100, 494)

The simple truth economics was finally built upon was the rationality principle. “Its [the rationality principle's] adoption reduces considerably the arbitrariness of our models, an arbitrariness which becomes capricious indeed if we try to do without this principle.” (Popper, 1994, p. 181)

It was always clear to methodologists that the rationality principle was a makeshift. “Nevertheless, there is mounting evidence that economic behaviour frequently violates any and all senses of ‘rationality’ and it has been argued that economic explanations involving rational choice are a species of ‘folk psychology’, explaining actions in terms of beliefs and desires, variables that cannot be measured independently of the actual choices we want to predict, so so that these are no genuine explanations at all.” (Blaug, 1994, p. 113)

The discovery that the rationality principle is vacuous has been made over and over again. However, most discoverers, including Kahneman, draw the wrong conclusion. They ‘reject the extreme form of the rational-agent model’ (see intro) and try to make homo oeconomicus more ‘realistic’.

Behavioral economists have not yet realized that economics is not a science of behavior (Hudík, 2011). What the behaviorists are talking about belongs entirely to the realm of sociology, psychology, anthropology, political science, history, etcetera. What most behavioral economists are practicing is a dilettantish variant of Psycho-Sociology which is not good enough for science but good enough for political economics.

In marked contrast, theoretical economics deals exclusively with the systemic behavior of the actual monetary economy. Theoretical economics is objective. There are systemic laws but no behavioral laws. Systemic laws, for instance the Profit Law (2015), have the same methodological status as physical laws. The Profit Law holds always and everywhere. The economist's task is to find these systemic laws and this implies to leave all speculations about human behavior to the yellow press, talk shows, and sitcoms.

Does the world expect from economists to find out how people behave? No, this is the proper job of psychology, sociology, anthropology, political science, history, etcetera. Does the world expect from economists to figure out what profit is? Yes, of course, no philosopher, physicist, biologist, or sociologist will ever try to figure this out. Have economists done their proper job? No. They have wasted more than 200 years with second-guessing their fellow men’s behavior and telling stories that have less real-world content than Greek mythology.

Egmont Kakarot-Handtke


References
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepetant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pages 109–136. London, New York, NY: Routledge.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.
Viner, J. (1917). Some Problems of Logical Method in Political Economy. Chicago Journals, 25(3): 236–260. URL