December 31, 2014

Moral incompetence or scientific incompetence?

Comment on Editor on 'University economics departments must share the blame'


Hugh Goodacre blames academic economics for its indirect or even direct justification of the financial sector's culture of ruthless money-making. And he gives weight to his argument by quoting Krugman stating that 'the economist is a maximizing-minimizing kind of guy.'

It is simply naive to suggest that people in the financial sector (i) need a justification for money-making, and (ii) that they need academic economics for that purpose.

History shows that for any ruthless person in whatever walk of life Darwinism delivers a far stronger justification than the extremum principle. Economics has copied this principle simply from physics and physics ultimately had it from religion.

“Already Maupertuis considered his minimum principle as proof that the world, where among many virtual movements the one leading to maximum effect with minimum effort is realized, is the ‘best of all worlds and work of a purposeful creator. Euler made a similar remark: ‘Since the construction of the whole world is the most eminent and since it originated from the wisest creator, nothing is found in the world which would not show a maximum or minimum characteristic.’ ...” (von Bertalanffy, 1969, p. 75)

Nobody blames physics or religion for the latest financial crisis.

The extremum principle is an almost instinctive and tautological way of explanation: “Throughout its history, the idea of some ‘Fundamental Assumption’, some basic ‘Economic Principle’ about human conduct, from which much or most of economics can ultimately be deduced, has been deeply rooted in the procedure of economic theory. Some such notion is still, in many quarters, dominant at the present time. For example, it has recently been stated that the task of economics is ‘to display the structure and working of the economic cosmos as an outgrowth of the maximum principle’.” (Hutchison, 1937, p. 636)

When Krugman states that 'the economist is a maximizing-minimizing kind of guy' he affirms the trivial fact that he has studied economics and that he thinks that he has understood what economics is all about. And here the problem begins.

Let us make it short: No way leads from a behavioral assumption (optimization or otherwise) to the understanding of how the economy works (2014). The crucial point is that standard 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)

Economists owe the world the true economic theory, that is, a theory that satisfies the scientific standards of material and formal consistency and that explains how the economy works.

Economists have not delivered. That economics is not yet science is the only fact that university departments justly can be blamed for.

Egmont Kakarot-Handtke

Hutchison, T. W. (1937). Expectation and Rational Conduct. Zeitschrift für Nationalökonomie / Journal of Economics, 8(5): 636–653. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. 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.
von Bertalanffy, L. (1969). General Systems Theory. New York: Braziller.