October 3, 2015

Coming to terms with formalization (II)

Comment on ‘Limits of formalization in economics’

Blog-Reference (extended version of Post-Reference)

(i) First of all, one has to differentiate between formalization and formalism: “Now ‘formalism’ is not the same thing as ‘formalization’ or ‘mathematization’ because it is possible to express a theory mathematically and even axiomatically without necessarily degenerating into ‘formalism’, which simply means giving top priority to the formal structure of modelling irrespective of its content; ...” (Blaug, 1994, p. 131). Orthodoxy is a failed approach because of its conceptual vacuousness, that is, because it deals with nonentities. Utility, clearly, is a nonentity, and because of this utility maximization is pure formalism.

(ii) It is not admissible, to begin with, to take a specific behavioral assumption as an axiom. For example: “... HC2 agents individually optimize subject to constraints; ...” (Weintraub, 1985, p. 147). The only acceptable general proposition about human behavior is that it is target-oriented (2015). It should be clear that if the formal foundations (=HC=hard core propositions=axioms) of an approach are defective then formalization becomes a pointless exercise. For good methodological reasons no behavioral proposition whatsoever can be taken into the formal foundations of a theory. In other words: there is no such thing as a behavioral axiom. With the rejection of HC2 on cogent methodological grounds the whole formal superstructure of Orthodoxy breaks down.

(iii) Keynes's approach is methodologically superior because it had not been based upon a green cheese behavioral assumption but upon objective structural relationships. The formal core of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (Keynes, 1973, p. 63). This formalization, though, contains a conceptual error/mistake that relates to profit (2011). Without realizing it, Keynes implicitly formalized a zero profit economy. No such thing exists. Thus, Keynes, too, and the Hicksean IS-LM followers later on dealt with pure nonentities. Krugman propagates this braindead stuff until this very day.

(iv) Both, the Walrasian and the Keynesian approach, got formalization wrong, albeit in different ways. From this does not logically follow that formalization is wrong, just the contrary: “I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. ... Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. ... In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial.” (Suppes, 1968, pp. 654-655)

(v) Both, Orthodoxy and Heterodoxy, got the most elementary concepts of economics, i.e. income and profit, badly wrong. Faulty conceptualisation, not formalization, is the ultimate cause of failure: “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (Georgescu-Roegen, 1970, p. 9)

(vi) Formalization has worked everywhere, except in economics. Why? “My opinion continues to be that axiomatics, like every other tool of science, is no better than its user, and not all users are skilled.” (Clower, 1995, p. 308)

The original methodological blunder of Orthodoxy has been that it attempted to axiomatize human behavior. This is a fine example of what Feynman called cargo cult science, i.e. ‘The form is perfect. But it doesn't work.’ The correct approach consists in formalizing the objective structural relationships of the monetary economy (2014).

Orthodoxy has been built upon nonentities like utility and equilibrium. To formalize nonentities, clearly, is a senseless exercise. Since Jevons, Walras, Menger economists have not grasped the salient point of methodology.

Egmont Kakarot-Handtke

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.
Clower, R. W. (1995). Axiomatics in Economics. Southern Economic Journal, 62(2): 307–319. URL
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

Relates to Mathiness see cross-references.