June 27, 2017

Empiricism, or looking through the microscope at the universe

Comment on Mark Thoma on ‘An Empirical Turn in Economics Research’

Blog-Reference

This is what empiricists overlook or ignore: “Indeed, there is no such thing as an uninterpreted observation, an observation which is not theory-impregnated.” (Popper)

Now, the fact of the matter is that theoretical economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. What we actually have is the pluralism of provable false theories.

A theory is the best possible mental representation of reality. If the theory is false empirical tests either lead to a refutation or to inconclusive results. And this is exactly what happened: “… suppose they [the economists] did reject all theories that were empirically falsified … Nothing would be left standing; there would be no economics.” (Hands)

Economics is a failed science and the lethal methodological blunder happened at the level of theory. Accordingly, what is needed is nothing less than a paradigm shift: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman)

In order to avoid the reproach of being lost in vacuous theorizing economists escape to empiricism, in the extreme case to “measurement without theory”. But without the true theory at the back of their minds empiricists cannot rise much about the trivial, commonsensical, and the spatio-temporal particular that defies generalization. Thus, economics degenerates to folk psychology, folk sociology, folk history, and number crunching. The press and the general public likes this stuff very much because it is “realistic”. But storytelling decorated with suggestive facts/data is not science, it is what Feynman called cargo cult science.

All economic schools have one thing in common: they do not understand the scientific method. Their approach can roughly be characterized as microfoundations and bottom up: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

This, in a nutshell, is the lethal defect of economics because methodologically it holds that (i) there is NO such thing as an invariant of human behavior, and (ii), NO way leads from the explanation of Human Nature/motive/behavior/action to the explanation of how the economic system works. In other words, microfoundations and bottom-up never leads to an understanding of how ‘the economy’ works.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was, in principle, the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations.#1

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations which define ‘the economy’, down through intermediate levels (sectors, branches, firms, households) to the individual. What empiricists do not understand is that NO amount of microeconomic research ever leads to the understanding of ‘the economy’.

The microfoundations approach had been doomed to failure already 140+ years ago. The current empirical turn in economic research does not help much as long as the defective theoretical foundations are still in place. The correct sequence is: before the empirical turn comes the theoretical turn, that is, the paradigm shift.#2

What the representative economist still does not understand is that economics is NOT a social science but a system science and that if it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 See ‘The unfinished Keynes
#2 For details see ‘First Lecture in New Economic Thinking