January 9, 2016

Bagehot’s wisdom and the silliness of modern economists

Comment on Nanikore on ‘Krugman on models (II)’

Blog-Reference

You say “Chomsky basically sums up the problem I have with modern economics: Too much abstraction.”

As a matter of fact, the problem with abstraction and empiricism is very old and it has been settled long ago. Methodological news, though, travel with glacial speed in economics.

Bagehot observed 130 years ago “There is no doubt a strong tendency to revolt against abstract reasoning. Human nature has a strong ‘factish’ element in it. The reasonings of Principia are now accepted. But in the beginning they were ‘mere crotchets of Mr. Newton’s;’ Flamstead, the greatest astronomical discoverer of his day — the man of facts, par excellence — so called them; they have irresistibly conquered; but at first even those most conversant with the matter did not believe them.” (1885, PE. 23)

It did not go unnoticed that the best-known champion of empiricism had been empirically refuted “And it is very remarkable that he should not have remembered it as he speaks of Lord Bacon, for the method which he suggests is exactly that which Lord Bacon himself followed, and owing to the mistaken nature of which he discovered nothing. The investigation into the nature of heat in the Novum Organum is exactly such a collection of facts as Mr. Cohn suggests; — but nothing comes of it.” (Bagehot, 1885, PE. 21)

One can gauge the stagnation of economic methodology by a comparison of Nanikore’s arguments with Bagehot’s description “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ — that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark — sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them. (1885, PE.13)

It is true, of course, that modern economics is scientific nonsense. However, the problem is not ‘too much abstraction’ but moronomic abstraction. Clearly, utility maximization is not an abstraction of anything, it is simply a silly hypothesis about human behavior. No theory that is based upon it can be taken seriously. Thus far the critique of so-called empiricists is valid.

Empiricists, though, cannot get their head around the fact that there is, strictly speaking, no such thing as empiricism “Indeed, there is no such thing as an uninterpreted observation, an observation which is not theory-impregnated.” (Popper, 1994, p. 58)

Because of this, theory comes first and observation (in contrast to mere perception) comes second.* Most heterodox economists do no understand this and still argue as Hume argued “Geometry assists us in the application of this law, by giving us the just dimensions of all the parts and figures which can enter into any species of machine; but still the discovery of the law itself is owing merely to experience, and all the abstract reasonings in the world could never lead us one step towards the knowledge of it. When we reason a priori, and consider merely any object or cause, as it appears to the mind, independent of all observation, it never could suggest to us the notion of any distinct object, such as its effect; much less, show us the inseparable and inviolable connexion between them.” (2011, 27)

This is patently false. To recall, the atom is not something that had been observed by the ancient Greeks. To the contrary, it had been a product of pure abstract reasoning and it has been ‘observed’ only 2500 years later.

The great economist and methodologist J. S. Mill understood this very well “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’." (1874, V.55)

This, clearly, has never been meant as a license for the application of green cheese assumptions like constrained optimization, rational expectation, or equilibrium. The methodological defect of this kind of assumptions is not that they are abstract or that they have been formalized, the fatal defect is that they are silly.** Empiricists have not and cannot in principle save the situation — only a paradigm shift can. An empirical turn without a preceding theoretical turn is as smart as putting on the boots before the trousers.

Egmont Kakarot-Handtke


References
Bagehot, W. (1885). The Postulates of English Political Economy. Library of Economics and Liberty. URL
Hume, D. (2011). An Enquiry Concerning Human Understanding. Project Gutenberg EBook. 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
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111. London, New York, NY: Routledge.

* See also ‘Buddha on the microeconomic men in the dark
** See also ‘How the intelligent non-economist can refute every economist hands down