February 24, 2016

How to creatively destruct Orthodoxy

Comment on Robert Locke on ‘The problem of postmodernism in American economics: an historian’s perspective’

Blog-Reference

1. Avoid all political distraction

Political issues are about good/bad or like/dislike, that is, they invite moralizing, guesswork, and the parading of opinions. Now, science is about knowledge and not about opinion. Opinion embraces all issues that have not yet been decided by objective means or cannot in principle be decided. Therefore, the defining characteristic of genuine scientists is to first of all put aside all issues that cannot be decided by objective means. Non-scientists, to the contrary, are irresistibly attracted by issues that have no clear-cut true/false answer but can be waffled about inconclusively until the end of days. All Human-Nature issues belong to this category.

All questions that cannot be answered by scientific means fall into the realm of politics in the widest possible sense and are answered by storytelling. Each culture consists to the greater part of incoherent narratives which are reinforced by subjective emotions and to the smaller part of objective scientific knowledge which is established by proof (logical and empirical). Most of what people experience as reality in their lifetime is a contingent social construct.

So, basically, politics (= opinion, belief, faith, philosophy, common sense, delusion) and science are the great antagonists. As Aristotle put it: “There cannot be both opinion and knowledge of the same thing at the same time.” (Posterior Analytics)

Scientific knowledge does not and, as a matter of principle, cannot come from political debate. Here is how science is done: “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)

2. Spot the fatal disconnect

The first thing to notice is that economics has started as Political Economy and never really got out of it. As a result, economics has not produced much of real scientific value since Adam Smith.

This has never been a disadvantage because the general public is satisfied with narratives and opinions and can neither realize nor establish whether the assertion of an economist about the economy is well-founded or not.

Because economists have failed to develop the true theory their economic policy advice has, as a rule, no sound scientific foundation. This applies to Walrasianism, Keynesianism, Marxianism, and Austrianism.

The situation, then, is this: Whether economic advice or an economic argument is derived from interpreting a model or from reading tea leaves makes no real difference. Because of the vacuousness of the model the scientific content is zero in both cases.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Because economists do not have the true theory all their political arguments are hanging in the air. Neither the arguments for nor against the market economy have a scientific foundation. What instead has been produced is storytelling and political blather.

Orthodox economics is provable false and heterodox economics has not developed a superior alternative. After more than 200 years economics is a failed science. Economists know many isolated practical details but have no idea of how the economic system works. They are like astronomers before the concept of gravity was understood and written down in a neat formula.

3. Go to the roots

Theories have an architectonic structure. A well-formulated theory is built upon a small set of premises, a.k.a. axioms. In most cases it is here where errors and mistakes reside: “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)

What, then, are the premises of orthodox economics? “The 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 the so-called law of supply and demand is derived and so on. The whole of marginalism depends on HC3. Now the iron methodological rule says: 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. Therefore, the whole theoretical superstructure of orthodox economics falls apart.

The crucial methodological 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, it does not belong at all to the so-called social sciences.

Because of this, the green cheese assumptions HC1 to HC6 have to be fully replaced by something rock-solid. This is called a paradigm shift and this is the proper task of Constructive Heterodoxy.*

4. Declaration of Incompetence

Boiled down to the essentials, Orthodoxy’s methodological position is “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)

These premises are provable false. Because of this, the whole theoretical superstructure from Jevons/Walras/Menger to DSGE is false. Not to realize the axiomatic falsity of standard economics is the ultimate scientific incompetence of proponents and opponents alike. It should be obvious that there is no place for the scientific incompetent in academia, neither in postmodern America nor elsewhere.

Economists owe the general public the information that they cannot be taken seriously until further notice.

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

* For an overview see cross-references

***

REPLY  to Robert R Locke on Feb 25

You write: “When the neo-classical economist states that ‘demand for labor varies inversely to wages,’ he uses a neutral ‘scientific’ language, a principle of economics.” (See intro)

You treat the statement ‘demand for labor varies inversely to wages’ as part of a meta-narrative which is told by the dominant group in order to ‘send actual working people on a race to the bottom in their competition with each other.’

This is the paradigmatic explanation pattern of myth/religion/politics: Some powerful group (gods/elite) has good/bad intentions/temper and sends goodies/badies to humankind or a subgroup thereof. Clearly, every event in the world can be ‘explained’ with such a narrative. People like this stuff because it gives them the feeling of understanding how the world works.

The scientific way is to avoid all speculation about what goes on in the heads of some real or imaginary agenda pushers and to focus on the statement under discussion.

And, lo and behold, when we stop storytelling and start thinking we find out that the statement ‘demand for labor varies inversely to wages’ is provable false.

The correct employment equation says: Overall employment increases if the average wage rate increases relative to average price and productivity.* This relationship is testable, which means that there is no need at all to waffle about it.

The correct employment equation holds, no matter what silly narratives are told and believed by different social groups — or by scientifically incompetent economists, for that matter.


* See the post ‘Have data, lack theory’ and the working paper ‘Essentials of Constructive Heterodoxy: Employment

Related 'Scientists do not predict' and 'Going beyond sitcom economics'.