December 8, 2016

Methodology 101, economic filibuster, and the mother of all excuses

Comment on Noah Smith on ‘More about the Econ 101 theory of labor markets’


The ancient Greeks started science with the distinction between doxa (= opinion) and episteme (= knowledge). And scientific knowledge is well-defined by material and formal consistency.

Obviously, economics is a failed science, that is, there is NO knowledge that satisfies scientific criteria. This means, economists are forced to backpedal methodologically or in Blaug’s words ‘to play tennis with the net down.’

How this is done? Watch Noah Smith: “What falsification really means ― or should mean, anyway ― is that a theory is shown to not work as well as we’d like it to under a well-known set of conditions. So since people have different expectations for a theory ― some demand that theories work with high degrees of quantitative precision, while others only want them to be loose qualitative guides ― whether a theory has been falsified will often be a matter of opinion.”

Here you have it, we are back at opinion and all scientific retards happily agree because opinion means nothing other than (i) anything goes, and (ii), the coexistence of false theories. And this is what we actually have: the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory and axiomatically false.

A scientist is supposed to abandon a falsified theory. This does not happen in economics. Morgenstern reminded his fellow economists long ago: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.”

Walrasianism, Keynesianism, Marxianism, Austrianism is provable false, i.e. materially and formally inconsistent, but they are still around ‘as if nothing had happened’.

Because falsification in the original sense does not happen, the heap of scientific rubbish grows with every peer-reviewed issue of ranked quality journals. All grand debates end where they started, that is, in the morass of conceptual confusion, undecidability, impenetrable mishmash, category error, and inconclusiveness. As Clower put it: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.”

Economists cannot explain how the economy works but they can explain why economics does not work. Here is the mother of all excuses: “Economics is a strange sort of discipline. The booby traps I mentioned often make it sound as it is all just a matter of opinion. That is not so. Economics is not a Science with a capital S. It lacks the experimental method as a way of testing hypotheses. . . . There are always differences of opinion at the cutting edge of a science, . . . . But they last longer in economics . . . and there are reasons for that. As already mentioned, rival theories cannot be put to an experimental test. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once. The inferences that can be made from history are always uncertain, always disputable, . . . You can’t even count on a long and undisturbed run of history, because the ‘laws’ of behavior change and evolve. Excuses, excuses. But the point is not to provide excuses.” (Solow)

Or: “We know all that. Nothing is perfect … The assumptions are reasonable. The assumptions don’t matter. The assumptions are conservative. You can’t prove the assumptions are wrong. The biases will cancel. We can model the biases. We’re only doing what everybody else does. Now we use more sophisticated techniques. If we don’t do it, someone else will. What would you do? The decision-maker has to be better off with us than without us … The models aren’t totally useless. You have to do the best you can with the data. You have to make assumptions in order to make progress. You have to give the models the benefit of the doubt. Where’s the harm?” (Freedman)

Economics could be ignored as Circus Maximus were it not for the fact that the scientific incompetence of economists is the ultimate cause of mass unemployment, deflation, depression, stagnation. No state/society can afford the intellectual deadweight of its economists.

Let us come to the methodological key point. Standard economics is built upon this set of foundational hard core propositions: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

The representative economist has not realized it, but methodologically these premises are forever unacceptable. It should be pretty obvious that the neo-Walrasian hard core contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every model that contains a nonentity is A PRIORI false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the waste basket. The same holds for all other nonentities.

Conclusion: The labor market theory is false in the incarnation as partial supply-demand-equilibrium and a fortiori in the incarnation as general equilibrium.* Methodology 101 tells us: every economist who accepts supply-demand-equilibrium as an explanation of how the market system works disqualifies himself as a scientist.

Egmont Kakarot-Handtke

* See ‘Unemployment is high because economics is false: period, full stop, end of story

Immediately preceding 'Econ 101 is dead ― and now?'