December 29, 2014

Time to get out of gossip economics

Comment on Asad Zaman on ‘The failure of economics is due to the use of axiomatic method’


There are political economics and theoretical economics. Only the latter satisfies scientific standards: “... it is a central aim of science to come to knowledge of how the world really is, that correspondence between theories and reality is a central aim of science as an epistemic enterprise and crucial to whatever objectivity scientific knowledge enjoys ...” (Suppe, 1977, p. 649)

As a first approximation, one can agree on the general characteristic that the economy is a complex system. Under this perspective, theoretical economics is a variant of General Systems Theory (G.S.T):  “To argue that G.S.T. is inapplicable to economics is to negate claims that economics is a science.” (Weintraub, 1979, p. 72)

However, with the term system, we usually associate a structure with components that are non-human. In order to stress the fact that humans are an essential component of the economy we could perhaps better say that the economy is a complex hybrid human/system entity.’ This balanced view given, however, there are still different views about primacy.

The subjectivists hold: “It is evident, that all the sciences have a relation, greater or less, to human nature: and that however wide any of them may seem to run from it, they still return back by one passage or another. Even. Mathematics, Natural Philosophy, and Natural Religion, are in some measure dependent on the science of MAN; since they lie under the cognizance of men, and are judged of by their powers and faculties.” (Hume, 2012, Introduction)

“And as the science of man is the-only solid foundation for the other sciences, so the only solid foundation we can give to this science itself must be laid on experience and observation.” (Hume, 2012, Introduction)

The objectivists hold: “Perhaps it is because their horizons are limited in this way that some people are able to imagine that the centre of the universe is man.” (Feynman, 1992, p. 58)

“Like Plank, Einstein viewed the human element of any physical theory as essentially arbitrary, something that should be purged on realization of the final true theory.” (Mirowski, 2004, p. 159)

With regard to physical reality, objectivity is rather convincing, with regard to social reality most people intuitively subscribe to subjectivity. Even some methodologists do: “... since we are all humans everything reduces to psychology.” (Boland, 2003, p. 107)

Psychologism is the most congenial mode of explanation. The ancient Greeks regarded myths as ‘true stories’ and distinguished them from fables as ‘false stories’. Xenophanes made his contemporaries aware that their true stories were what is now called a projection.

With this, the problem of demarcation between science and non-science arose for the first time. And it was easily solved. The Pre-Socratics rejected the mythological explanations of the world because they saw that EVERYTHING could be explained by the human-like actions of almighty gods which meant on closer inspection: nothing. This methodological insight set science on its track.

Myth, well told, is still the most convincing way to explain how the world and humankind came to be in their present form. To recall, Zeus was the god of sky and thunder. He oversaw the universe, assigned the various gods their roles, and was known for his erotic escapades. Zeus was emotional, spontaneous and had a lot of trouble with other gods, goddesses, and humans. At Prometheus, for example, he was angry for three things: being tricked on sacrifices, stealing fire for man, and for refusing to tell him which of his children would dethrone him. To handle his problems, Zeus regularly fell back to chicanery, force, and violence (for an overview see Wikipedia). Since antiquity, everybody "understands" Zeus and he easily provokes like/dislike. Replace his name with a real-world head of state and the story fits by and large.

Purified from all religious connotations, Greek myth is the stuff psychology, literature, soap operas, blogs, newspapers, and history are made of until today. Let us call this all-embracing panorama of human motives and actions the gossip model of the world. It affords immediate access to subjective understanding which, however, is barely distinguishable from a projection. With the gossip model, everything and its opposite can be explained. That makes it both popular and preposterous.

Science started the very day when Greek philosophers threw the gossip model out of the window.

The subjectivist methodology is commonsensical. The problem is: compared to the objectivist methodology it has achieved nothing: “... 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)

Second-guessing human behavior and storytelling are entertaining but pointless: “... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung.” (Morgenstern, 1941, p. 381)

This explains the failure of psychological/sociological approaches.

“Now, at any rate, we have an explanation for why the assumptions of economic theory about individual action have not been improved, corrected, sharpened, specified, or conditioned in ways that would improve the predictive power of the theory. None of these things have been done by economists because they cannot be done. The intentional nature of the fundamental explanatory variables of economic theory prohibits such improvement.” (Rosenberg, 1992, p. 149)

Science deals only with propositions that can in principle be decided by objective means. The rest is opinion, faith, second-guessing, phantasy, motive speculation, allegation, interpretation, hallucination, myth, paranoia, suspicion, ink-blot association, vituperation, philosophy, storytelling, etcetera.

There is only one way to get out of the scientific slums of political economics, and that is: to move from subjective to objective axiomatic foundations. Click here for a preview. But consider first the possibility that your ideas about what a set of economic axioms should look like could be far off the mark. To check this, some testing is needed.

Egmont Kakarot-Handtke

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Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
Mirowski, P. (2004). The Effortless Economy of Science? Durham, London: Duke University Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago: University of Chicago Press.
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