January 6, 2016

Buddha on the microeconomic men in the dark

Comment on ‘Krugman on models (II)’

Blog-Reference

“... a group of blind men (or men in the dark) touch an elephant to learn what it is like. Each one feels a different part, but only one part, such as the side or the tusk. They then compare notes and learn that they are in complete disagreement.

The stories differ primarily in how the elephant’s body parts are described, how violent the conflict becomes and how (or if) the conflict among the men and their perspectives is resolved. ...

It [the parable] has been used to illustrate a range of truths and fallacies; broadly, the parable implies that one’s subjective experience can be true, but that such experience is inherently limited by its failure to account for other truths or a totality of truth.” (Wikipedia)

From the standpoint of economic methodology this is a perfect description of the inherent defect of Marshallian partial analysis which has long been dominant and, for all practical/empirical purposes, still is. The fatal defect of the method is not partial analysis itself, which normally leads to quite satisfactory empirical results, but the generalization of partial results beyond the original tight limits of space and time. This methodologically inadmissible transgression is known since antiquity as fallacy of composition.

Economics is a failed science, and the ultimate methodological cause is that the fallacy of composition is literally built into the very definition of standard economics.

“It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

Now we know from Buddha that, as a matter of principle, no way leads from the understanding of a tiny part, i.e. the behavior of the individual, to the understanding of the whole, i.e. the behavior of the economy.

The moral of the parable is that the ‘group of blind men’ is inextricably caught in what is in effect an epistemological trap. A telling example from economics is the invention of the representative agent which is the most ridiculous fallacy of composition in the long history of green cheese assumptionism.

As a result of their methodological incompetence economists do not have the true theory, they merely have a heap of incoherent models. These models are partial constructs, each built upon an idiosyncratic set of premises.* Because of this, economic debates do not progressively solve problems but circle endlessly around indissoluble differences. Scholarship consists in the main of exegesis and comparison of theories that have never been anything other than scientific garbage.

To the group of blind men that are among themselves ‘in complete disagreement’ belong Walrasians, Keynesians, Marxians, and Austrians. What all have in common is substandard scientific abilities which manifests itself in gross methodological blunder and confusion (2013).

“The picture that emerges is thus one of serious methodological fragmentation in mainstream economics. Theorists, experimentalists, and empiricists are all pulling in different directions, while hopes are expressed for developments which would fundamentally alter the methodological foundation of mainstream economics.” (Dow, 1997, p. 84)

It is pretty obvious that economics needs a paradigm shift. The crucial methodological consequence is that all of economic analysis must start with the most elementary objective and formally consistent representation of the whole economy (2014).

When you want to understand the universe it is of no use to thoroughly examine your backyard; when you want to understand the elephant it is of no use to feel up his tusk; when you want to understand the economy it is of no use to bother with individual or social behavior, much less with constrained optimization.

Since Jevons/Walras/Menger, the blind men of economics have not found this out. Worse, they hallucinate that it is their mission to help the blind men of politics with their advice. Worst, in their self-deception and lack of sound theoretical foundations economists in effect have become the very promoters of economic crises.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Dow, S. C. (1997). Mainstream Economic Methodology. Cambridge Journal of Economics, 21: 73–93.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL

* See ‘How economists became the scientific laughing stock

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