February 20, 2015

Educating economists? Yes, but where is the scientific stuff?

Comment on Simon Wren-Lewis on 'Greece and educating economists'


First of all, one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem of economics is that many economists are not scientists but agenda pushers of one sort or another.

The theoretical economist who understands his scientific mission and knows that J. S. Mill was not only an economist but a great methodologist (Popper, 1980, p. 19) simply keeps out of politics.

“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

But should economists not bring in their expertise? This seems to be a question that has only one answer: “To be able to say intelligent stuff about what is going on at the moment (which you would hope an economics education would enable you to do), you need to know quite a lot of economic theory. A lot of macro of course, but quite a bit of finance, and also at least some game theory.” (see intro)

And here the problem begins because economists do not understand how the economy works.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Economists lack true theory. And they are only dimly aware of this. Here is a simple self-test.

You apply one of these items
• supply-demand-equilibrium,
• general equilibrium,
• marginal utility,
• well-behaved production functions,
• total income = value of output,
• total income = wages + profits,
• I=S,
• behavioral axioms?
Then you are outside of science because of unnoticed material or formal inconsistency.

Make no mistake, economists have a lot of interesting things to tell, but the informative description of various economic institutions and phenomena, unsubstantiated modeling, psychologism, biologism, physicalism, sheer mathematical toolism, plain observationism, myopic empiricism, historicism, exegesis, rhetoric, or metaphor do not make a consistent and empirically valid theory. Storytelling is not science.

What, then, is the state of theoretical economics?

Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014). This is like pre-Newtonian physics before the elementary concepts of force and mass were properly defined and clearly understood.

As professionals, economists cannot be compared to doctors, they are more like the barber surgeons of the Middle Ages.

Because economists fail to capture the essence of the market economy they have not much to offer in the way of scientifically founded economic policy guidance. This is publicly known since Napoleon and there has been no real progress since then: “Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists if listened to, would suffice to reduce it to dust.” (Viner, 1963, p. 1)

Early in his academic life Greece's new Finance Minister Varoufakis, too, has said a lot of intelligent stuff about the practical irrelevance of neoclassical economics in particular (Arnsperger and Varoufakis, 2006).

Egmont Kakarot-Handtke

Arnsperger, C., and Varoufakis, Y. (2006). What Is Neoclassical Economics? The Three Axioms Responsible for its Theoretical Oeuvre, Practical Irrelevance and, thus, Discursive Power. Paneconomicus, 1: 5–18.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp. 1–22. URL