February 22, 2016

Economics — the fly that cannot see the glass

Comment on ‘On the non-existence of economic laws’

Blog-Reference

Hans Albert is, of course, right. Economists copied physics and produced what Feynman called a cargo cult science. The latter is roughly defined as: the outer form looks like science, but it is not science, and it does not work (see also Mirowski, 1995).

What went badly wrong is that economists tried to find laws where there are none. A case in point is the law of supply and demand. The methodological crux is that there is no such thing as a behavioral law.

Hans Albert is, of course, wrong. He sees economics as a social science. This error he shares with orthodox economics. To recall: “The [neo-Walrasian] program is organized around the following hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

Except for HC6, all hard core propositions, a.k.a. axioms, are behavioral assumptions. From these proposition the so-called law of supply and demand is derived. Now the iron methodological rule holds: garbage in, garbage out. Because HC3 and HC5 are patently false no such thing as a behavioral law of supply and demand exists. Equilibrium, too, is an inadmissible premise. The whole construct is cartoon science.

Now, the foundational mistake is to fancy that economics is a science of behavior. It is not (Hudík, 2011). Human behavior is the subject matter of psychology and sociology. Economics is a system science.

Because of this, the green cheese assumptions HC1 to HC6 have to be fully replaced by something rock-solid. First of all, one has to do away with methodological individualism, i.e. HC1. Ergo:
(0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(i) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(ii) O=RL output O is equal to productivity R times working hours L,
(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X (for the graphs see 2012).

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimalist, that is, it cannot be reduced further, only expanded. The set contains NO nonentities like maximization or equilibrium and NO normative assertions, and this is exactly how it should be.

The whole theoretical superstructure, which includes the evolution of the economic system in historical time, real capital formation, profit and income distribution, money, land, resources, the financial sector etcetera has to be reconstructed starting with the absolutely transparent set (i) to (iii). This minimalist foundational set has to be consistently expanded.

With the correct objective (= behavior-free) premises we arrive at the SYSTEMIC Law of Supply and Demand (2014). This law is one of a whole series of systemic laws which are composed of measurable variables and therefore testable.

So, Albert’s assertion that there are no behavioral laws is true, but his generalization that there are no economic laws is false.

Conclusion: Economics is caught in the social science trap and senselessly bangs its head since more than 200 years against the glass.* To second-guess human behavior is gossip, not science.

Egmont Kakarot-Handtke


References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2012). Geometrical Exposition of Structural Axiomatic Economics (I): Fundamentals. SSRN Working Paper Series, 2060073: 1–22. URL
Kakarot-Handtke, E. (2014). The Law of Supply and Demand: Here it is Finally. SSRN Working Paper Series, 2481840: 1–17. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

* See also ‘The existence of economic laws and the nonexistence of behavioral laws

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