March 4, 2016

Lawson’s fundamental methodological error and the failure of Heterodoxy

Comment on Lars Syll on ‘Critical realism and scientific explanation’

Blog-Reference and Blog-Reference on Mar 5

As far as the critique of orthodox economics is concerned, critical realism is correct. Yet, the fundamental error of critical realism is to assume that economics is about ‘how society works’. No! This is the subject matter of sociology. Economics is about ‘how the economy works.’ Society and economy are intertwined but must be separated analytically.

Since Adam Smith, economics claims to be a science. Methodologically, it started as a mixture of sociology and political science: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.” (Mill, 1874, V.39)

With respect to the subject matter there is no difference between Mill and Marx “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, ...” (Marx, 1906, M.9)

With Jevons/Walras/Menger the focus shifted to methodological individualism and economics became a mixture of dilettantish psychology, sociology, and political science. This approach has failed abysmally.

Economics is NOT a science of individual/social/political behavior but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/ structural/systemic: “Economics is the science which studies how the monetary economy works.”

As a consequence, the overdue Copernican turn in economics consists in the methodological switch from behavior-centered bottom-up, i.e. subjective microfoundation, to structure-centered top-down, i.e. objective macrofoundation, of the world economy. All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/Darwinism, political science, history, philosophy, etcetera) and are taken in from these by way of multidisciplinary cooperation. To paraphrase J. S. Mill: ‘Economics as a system science presupposes all the physical and social sciences; it takes for granted all such of the truths of those sciences as are concerned with the working of the economic system.’ (cf. Mill 1874, V.29)

Lars Syll summarizes Tony Lawson: “We have to maintain the Enlightenment tradition of thinking of reality as principally independent of our views of it and of the main task of science as studying the structure of this reality. Perhaps the most important contribution a researcher can make is reveal what this reality that is the object of science actually looks like.”

Exactly so.

Therefore, economics has to drop these axioms:
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)

Lawson’s critique fully applies to the theoretical superstructure that has been built upon HC1 (= methodological individualism) to HC6 (= closure).

The proper object of economics is neither the individual nor society but the economy. So we have to move on and to first of all describe the structure of the monetary economy.

The 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 and is given by three objective structural axioms:
A1. Yw=WL wage income Yw is equal to wage rate W times working hours L,
A2. O=RL output O is equal to productivity R times working hours L,
A3. C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These premises are certain, true, and primary, and therefore satisfy perfectly all methodological requirements (2014). In the words of Lars Syll: “Science is made possible by the fact that there are structures that are durable and are independent of our knowledge or beliefs about them. There exists a reality beyond our theories and concepts of it. It is this independent reality that our theories in some way deal with.”

Society has no durable structures but the monetary economy has and they are given in the most elementary case by A1 to A3. Economics is not a social science but a system science and it deals not with the defects of society but with systemic defects which produce what every superficial observer can see but not understand (2015).

The fundamental flaw of Lawson’s methodology is that he defines economics as social science.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. 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
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

Related 'Economists’ three-layered scientific incompetence'. For details of the bigger picture see cross-references.