August 11, 2015

Secular intellectual stagnation

Comment on Lars Syll on ‘Economics departments — breeding generation after generation of idiot savants’


Lars Syll gives word to most people's impression after a close encounter with economics: “It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond my imagination.”

The simple reason is that, first of all, the representative student does not really care about internal or external validity. Indeed, what always mattered more in the history of economic thought was the underlying intuition of the argument.

“But he [A. Smith] had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter, 1994, p. 185)

Not much has been changed in the interim. “A story about Adam Smith, the invisible hand, and the merits of markets pervades introductory textbooks, classroom teaching, and contemporary political discourse. (Ackerman, 2004, p. 21)

It is the underlying story that sells. “It's an appealing intuitive story that the majority of economists are reasonably comfortable with. It also meets an important teaching criterion: the majority of students can relate to it and say, ‘Yeah, it makes sense’.” (Colander, 1995, p. 169)

The core of the story is: no matter what economic reality looks like at the moment, all will turn out for the best eventually and all alternatives are even worse.

“The long run, in economic thought, plays a role similar to the belief in life after death in many religions. Its role is one of a compensatory fantasy gratification.” (Weisskopf, 1955, p. 219)

It is the constant talk about the blissful future reality that decouples economics from actual reality. Economics was fictional long before formalization started in earnest. As a matter of fact, formalization forced economists to become explicit about the working of the Invisible Hand and to spell out the hidden assumptions — with unintended results.

“I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. ... Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. ... In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial.” (Suppes, 1968, pp. 654-655)

Formalization worked its magic and the translation of the underlying story into a rigorous formal model made, lo and behold, the fictionality clearly visible to everyone.

“The economists of the twentieth century, by pushing the neoclassical model to its logical conclusions, and thereby illuminating the absurdities of the world which they had created, have made an invaluable contribution to the economics of the coming century: they have set the agenda, work on which has already begun.” (Stiglitz, 1991, p. 136)

Note well that it was formalization and not the simple-minded critique of unrealisticness that brought Orthodoxy finally down.

“The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)

In view of the gross and well-known deficits of Orthodoxy, the real question is why has Heterodoxy not developed something better?

“... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

This, and not mathiness, explains the secular stagnation of economics.

“In other words, the main developments in economics of the twentieth century ... had been more a matter of form than of substance. ... Little new of any great significance has been learned about the workings of markets since Adam Smith and, as noted above, Smith added much less to the discussion than most economists have commonly supposed.” (Nelson, 2006, p. 298)

So the question ‘Why anyone should be interested in that kind of theories and models’ gets a new answer: the representative economist never could get out of the original pious belief in the benevolent Invisible Hand because of a lack of scientific instinct, creativity, imagination and — last not least — serendipity.

Egmont Kakarot-Handtke

Ackerman, F. (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. In F. Ackerman, and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, 14–32. London, New York, NY: Routledge.
Colander, D. (1995). The Stories We Tell: A Reconstruction of AS/AD Analysis. Journal of Economic Perspectives, 9(3): 169–188. URL
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, pages 123–138.
Nelson, R. H. (2006). Economics as Religion: From Samuelson to Chicago and Beyond. Pennsylvania: Pennsylvania State University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Stiglitz, J. E. (1991). Another Century of Economic Science. Economic Journal, 101(404): 134–141. URL
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.
Weisskopf, W. A. (1955). The Psychology of Economics. Chicago: University of Chicago Press.

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