December 31, 2014

From behavior to structure

Comment on Asad Zaman on  'Why does aggregate demand collapse?'


It is important to distinguish between political and theoretical economics. In political economics 'anything goes'; in theoretical economics, scientific standards are observed. 

The crucial point is: political economics is based on behavioral axioms (McKenzie, 2008) and this is not a solid enough foundation: “. . . if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362)

To start with behavioral assumptions like the profit motive invariably leads to a gossip model of the world. This is not to say that the profit motive is 'unrealistic'. What is said is that second-guessing the agents is a pointless exercise: “... there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman, 1992, p. 320), (Rosenberg, 1980, pp. 2-3)

Many economists tend to think that they are doing science while they never get above the level of gossiping about what the agents want or think or expect.

The upshot is that no way leads from the understanding of how agents behave to the understanding of how the economic system behaves (2014).

This fully explains the failure of behavior-based approaches ― including, of course, the Austrians.

Egmont Kakarot-Handtke

Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
McKenzie, L. W. (2008). General Equilibrium. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–18. Palgrave
Macmillan, 2nd edition. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press. Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.