October 14, 2015

The irrelevance of economics

Comment on Lars Syll ‘On the irrelevance of formal logic in economics’

Blog-Reference and Blog-Reference

See also the almost identical post ‘Scientifically incompetent’
Comment on ‘In Search of the Science in Economics’


(i) Since the ancient Greeks it is known that science is about knowledge and that politics is about opinion/belief/second guessing/filibustering. “There are always many different opinions and conventions concerning any one problem or subject-matter .... This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other ...” (Popper, 1994, pp. 39-40)
Accordingly, there is political economics and theoretical economics. The political economist cranks out opinions, the theoretical economist contributes to knowledge.

(ii) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. In political economics anything goes, in theoretical economics scientific standards are observed.

(iii) Scientific standards are well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

(iv) Most economists are political economists: “However much economists may evoke their purity, they want to change the world. They want to contribute to the solution of urgent practical problems. ... Of course, they also pursue the consistency of the theories they make, for he who contradicts himself proves nothing.” (Klant, 1988, pp. 112-113)

(v) As Klant makes it clear, to be a political economist does not involve a license to suspend the rules of logic. Toulmin is utterly wrong when he speaks of the irrelevance of formal logic. He is right only insofar as formal logic is vacuous if the basic/primitive/elementary concepts have no empirical content. Formal logic is necessary, but not sufficient.

(vi) It is important to distinguish between method and actual application. Spinoza, for example, used the axiomatic-deductive method to rigorously prove the existence of God. This, obviously, is a misapplication. In general terms, the methodological blunder consists in applying formal logic to nonentities.

(vii) This is the correct understanding of the scientific method: “When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts .... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ... The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge — a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability. (Hilbert, 2005, pp. 1107-1109)

(viii) Neither Orthodoxy nor Heterodoxy has hitherto produced an economic theory that fits Hilbert’s description. Economics is a failed science. We are left with political economics, which is scientifically worthless.

(ix) The first step of the student of economics is to realize that all theories/models are false that are built upon the following concepts: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities. The second step is to replace nonentities with concepts that have a counterpart in reality (2014).

(x) Economics is not even a plausible myth; the fundamental defect is that it deals with nonentities. Because of this, all formalization has hitherto been without effect. This is not the fault of formalization but of the scientific incompetence of the representative economist.

Egmont Kakarot-Handtke

Hilbert, D. (2005). Axiomatic Thought. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, volume II, pages 1107–1115. Oxford, New York, NY: Oxford University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1988). The Natural Order. In N. de Marchi (Ed.), The Popperian Legacy in Economics, pages 87–117. Cambridge: Cambridge University Press.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York, NY: Routledge.

For details of the bigger picture see cross-references Incompetence


ICYMI (comment on Sandwichman of October 14, on October 15)

Georgescu-Roegen is one of the few economists who grasped what science is all about and he settled the ridiculous mathiness filibuster before it even occurred. “Lest this position is misinterpreted again by some casual reader, let me repeat that my point is not that arithmetization of science is undesirable. Whenever arithmetization can be worked out, its merits are above all words of praise. My point is that wholesale arithmetization is impossible, that there is valid knowledge even without arithmetization, and that mock arithmetization is dangerous if peddled as genuine.” (1971, p. 15)

Long before DSGE he arrived at the conclusion that economists are scientifically incompetent. “Knight lamented that there are many members of the economic profession who are "mathematicians first and economists afterwards." The situation since Knights time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists.” (1979, p. 317)

The same holds for Schumpeter. “At all times, including the present, in judging from the standpoint of the requirements of each period ... the performance of economic theory has been below reasonable expectation and open to valid criticism.” (Schumpeter, 1994, p. 19)

Time to make economics a science.*

Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge, MA: Cambridge University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

 *See also here.