April 27, 2015

Make no mistake: there can be only one true theory

Comment on Simon Wren-Lewis on ‘Received wisdom in macroeconomics’


Once upon a time in Vienna, what set Popper's young brain in motion was that he stumbled upon the curious fact that psychoanalysis could explain everything including its own failure. From this, he famously derived the basic rule of science that a theory must be refutable in principle. Or, to put it the other way round, a theory that explains everything explains nothing.

We know that economists never understood this methodologically crucial point because they were and still are very proud that they can explain everything — if only with some tweaking after the fact. One of the great methodologists told economists in no uncertain terms that this is always a red-hot indicator of scientific dilettantism.

“Everything can be ‘explained’ if we place no restrictions on what we mean by ‘explanation’.” (Blaug, 1994, p. 123)

Wren-Lewis, for one, is entirely unaware of his methodological self-debunking: “Yet as anyone who is involved in modern macro knows, pretty well whatever X is, there are models that have those things. If you want chapter and verse on this, see Tony Yates. Indeed, one of the characteristics of modern macro, as opposed to the stuff I dimly remember from my youth, is the huge variety of approaches on offer. In that sense, academic macro is flourishing.” (See thread intro)

Yes, but only in that senseless sense. Just imagine you ask a physicist how the lever works and he answers: “Oh, physics is flourishing, there is a huge variety of approaches on offer.”

From the fact that you can construct a model about everything follows only one thing for sure: that you know NOTHING.

Let us become concrete. Here is the scientific 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,
• microfoundations?

Then your received wisdom is for the birds #1 and you have nothing of scientific value to offer.

“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)

For 200+ years now, received wisdom has been far off the true theory.

Egmont Kakarot-Handtke

Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepentant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 109–136. London, New York: Routledge.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

#1 For the axiomatically correct approach see cross-references Refutation of I=S and cross-references Paradigm Shift.