May 4, 2016

How to get out of the Econ 101 PsySoc woods

Comment on Asad Zaman ‘The misconceived project of social science’


The student of economics either understands at his first encounter with Econ 101 that subjective-behavioral concepts like utility, constrained optimization, rational expectation, supply/demand functions, and equilibrium are NONENTITIES or he is lost in the woods. The student with a modicum of scientific guts becomes by logical necessity a heterodox economist, and he will avoid NONENTITIES like the plague.

What everybody wants and needs are the correct theory and the congenial formalization. What nobody needs is another surrealistic discussion about rational expectations, ergodicity, the fixpoint theorem, multiple equilibria, or mathiness.

The reason why Heterodoxy has hitherto only been marginally successful is that it shares the foundational blunder with Orthodoxy.

The crucial point is that economics deals — in the first place — NOT with individual human behavior or society at large. This is the realm of Psychology, Sociology, Anthropology, History, Political Sciences, etcetera. Insofar as economics deals with behavioral assumptions like utility maximization, greed, power-grabbing, etcetera, it is a dilettantish variant of Psycho-Sociology or PsySoc.

What is the real subject matter of economics?

As a first approximation, one can agree on the general characteristic that the economy is a complex system.

However, with the term system, one usually associates a structure with components that are non-human. In order to stress the obvious fact that humans are an essential component of the economic system, the market economy should be characterized more precisely as a complex hybrid system/human entity or SysHum.

The scientific method is straightforwardly applicable to the sys-component but not to the hum-component. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective system component.

In other words, the economic system is the foreground, and individual behavior is in the background. Common sense wrongly insists that the hum component must always be in the foreground. This fallacy compares to geocentrism. The economic system has its own logic which is different from the behavioral logic of humans. Systemic logic is what Adam Smith called the Invisible Hand.

Heterodoxy will be inextricably tied to failed Orthodoxy as long as it is content with a more ‘realistic’ homo oeconomicus and storytelling. The student with a modicum of scientific guts goes beyond flat behavioral common sense, quits PsySoc altogether, and turns to SysHum.#1

Economics is NOT a social science, economics is a systems science.

Egmont Kakarot-Handtke

#1 For details of the big picture see cross-references Paradigm Shift and cross-references New Curriculum.

Related 'Economics is NOT about Human Nature but the economic system' and 'How to overcome the manifest silliness of Econ 101 and save the economy' and 'Feeble minds, shaky assumptions, and the inevitable failure of economics' and 'The economist as second-guesser, mind reader, and folk psychologist' and 'Economics is NOT a science of behavior' and cross-references Not a Science of Behavior.