July 4, 2016

Refocusing economics

Comment on Asad Zaman on ‘ET1% — Economic Theory of the top 1%’


All heterodox economists are agreed that orthodox economics is false — but for wildly different reasons. Roughly speaking we have two categories of critique: scientific and politic. When politics is taken out of the picture for a moment then the situation is as depicted on the left panel of the following chart.

At the moment we have no true economic theory, i.e. a theory of how the monetary economy works which satisfies the well-defined scientific criteria of formal and material consistency. All other aspects of the situation put aside, the task of Heterodoxy is to move straightforwardly from false to true as indicated by the arrow A. This is called a paradigm shift.

However, if we add the political dimension we complicate the situation and in effect make it INSOLUBLE. Simply put: when we combine the scientific binary true/false with the political binary good/bad and the three main political positions then the matrix of issues explodes as shown in the right panel. By not keeping the scientific and the political sphere properly apart economic discussion got lost in cross-talk as indicated by the cloud B.

All heterodox economists agree that Orthodoxy is false. Now, it is obvious from the history of science that scientists have produced theories that have later turned out to be false or only partially true. Among scientists this has always been regarded as a regrettable lack of serendipity: "A new idea is extremely difficult to think of. It takes a fantastic imagination." (Feynman) “But it is all a matter of chance: in order to solve a difficult problem one needs not only understanding but also luck.” (Popper)

With his claim that orthodox economists INTENTIONALLY produce false theories, Asad Zaman leaves the scientific discourse, distracts from the point at issue, confuses the discussion, and in effect prevents problem-solving. As Schumpeter put it: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

Every heterodox student needs to be fully aware that economics has always been a mixture of political and theoretical economics. Economists have on the average been more committed to political agenda pushing than to proper scientific research and this is why economics has not produced much if anything, of real scientific value in more than 200 years. This applies to BOTH orthodox and heterodox economists.

What is needed is the strict separation of science and politics. There is NO other way out of the proto-scientific cul-de-sac of economics: “It is only our inability to divorce research from politics, or our suspicion, all too often justified, that the other fellow cannot analyze with single-minded devotion to truth, which makes problems and party issues out of decisions that do not excite anyone in more fortunate fields of research.” (Schumpeter)

Egmont Kakarot-Handtke

Immediately preceding Politics, storytelling, and science.
Immediately following The economist as second-guesser, mind reader, and folk psychologist.

REPLY to Michael Kowalik on Jul 4

You say: “The moment one defines what the term ‘scientific’ entails, and what are the ‘conditions’ of scientific truth, one are already in the realm of the social, and therefore of the political also.”

This is the Science-of-Man fallacy and it has been made explicit by Hume: “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)

The Science-of-Man fallacy is the methodological foundation of the so-called social sciences which Feynman aptly characterized as cargo cult sciences. Therefore, it is no accident that it is propagated by social philosophers like Polanyi, McLuhan, Lyotard etcetera. Genuine scientists are well aware of the subjective/social element and, because it is a well-known scientific nuisance, they try to minimize it: “Like Planck, 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)

Science is (starting with the ancient Greeks) well-defined by material and formal consistency and scientists judge and are judged according to these criteria. These criteria are OBJECTIVE to the highest humanly possible degree. Genuine scientists have NO problem with these methodological essentials but the storytellers of the so-called social sciences always had.

The crucial point is that economics deals not primarily with individual human behavior or society at large (Hudík, 2011). This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory etcetera. Insofar as economics deals with behavioral assumptions like utility maximization, greed, power grabbing etcetera, it is a dilettantish variant of Psycho-Sociology.

This PsySoc stuff, though, has been built into the axioms of Orthodoxy (methodological individualism, constrained optimization, rational expectation and so on). And this explains why economics has never risen above the proto-scientific level.

Economics has to be redefined as systems science. Methodologically, the economic system as a whole has to be moved into the foreground. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the Invisible Hand. Economic analysis has to make the Invisible Hand visible, that is, it has first of all to uncover the objective systemic laws of the monetary economy (2014).

It should be obvious to every heterodox economist that the Science-of-Man methodology has not produced much of scientific value but a lot of sitcom entertainment. As far as economics is concerned McLuhan’s dictum ‘The medium is the message’ certainly applies because the scientific content of economics is zero or close to zero.

Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Mirowski, P. (2004). The Effortless Economy of Science? Durham, London: Duke University Press.

REPLY to Asad Zaman on Jul 5

You say: “As ‘blocke, the’ put succinctly, there is a huge difference between social science and physical science which EKH completely fails to understand.”

Yes, there is a huge difference between social science and physical science. The difference is that the social sciences are cargo cult sciences (Feynman) and therefore have to be expelled from the sciences. The term social “science” is a misnomer insofar as the greater part of the social sciences does not satisfy the criteria of formal and material consistency.

The curious thing is, as far as economics is concerned, that beginning with Smith and including Marx economists insist on doing science. This is either self-delusion or an abuse of the reputation of science as a highly successful producer of objective truth.

The economist and methodologist J. S. Mill was well aware of the ‘huge difference’ and he papered it over by euphemizing economics as ‘inexact and separate science’. And this goes on to this day whenever economists are confronted with the proof that what they do is storytelling but not science. There is NO such thing as an inexact and separate science. There are only science and non-science.

For everyone who can read, my argument is that the definition of economics as social science is the foundational error/mistake. See above: “The crucial point is that economics deals not primarily with individual human behavior or society at large. This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/ Darwinism/evolution theory etcetera.”

So, do not pester me further with bottomless trivialities like: “However, economic systems which deal with production, distribution, and consumption of goods and services are INTIMATELY tied to the socio-cultural norms, which vary by time and by geography.”

Yes, Si, Ja, Oui ... BUT these socio-cultural norms are the subject matter of sociology, anthropology, history etcetera and NOT of economics. The first task of economics is to figure out what profit is and the fact of the matter is that NO socio-cultural economist has figured it out until this day. This includes blocke and Asad Zaman and Michael Kowalik and Ken Zimmerman. It is a bit surrealistic when economists who cannot tell what profit is, philosophize about economic methodology.

You say: “There are no non-trivial economic axioms which would be equally true in British Colonial India in the 19th century, Nigeria in the 21st, Brazil in late 20th, and France during the World Wars. By ‘non-trivial’ I mean axioms which provide some insight in the functioning of the economy at the time and place specified.”

I do not make such a brain-dead claim.#1 What I say is this:
(i) The subject matter of economics is the monetary economy. The exchange of cowrie shells for bananas and ALL other precursors of the monetary economy are left to anthropologists/historians.
(ii) The theory of how the monetary economy works is based upon a set of three almost self-evident axioms to which every student with average intelligence can tentatively agree.#2 These axioms are objective-structural and entirely FREE of behavioral assumptions or socio-cultural specifics.
(iii) From this minimalist formal core follow in consistent logical steps theorems, e.g. the Profit Law or the structural Phillips Curve. These (behavior-free/structural/objective) theorems hold for monetary economies of ALL times and places and all variants of property rights. All theorems are readily TESTABLE.
(iv) In these three steps and subsequent differentiation, formally and materially consistent economics is built up. Insights about human nature/behavior/action are taken in from the so-called social sciences IF NEEDED.

Given the failure of Orthodoxy, what Heterodoxy has to do is to come forward with testable propositions about how the economic system works. What neither Heterodoxy nor Orthodoxy can do is to continue storytelling and philosophizing about methodology and to claim that this is science.

The claim that Orthodoxy is pro-capitalist and anti-worker and that Heterodoxy is pro-worker and anti-capitalist is a political argument. But politics and science are different and incommensurable things. Even if the claim is perfectly true it is IRRELEVANT because it tells us nothing about whether orthodox economic theory or heterodox economic theory is true. In fact, BOTH are logically and materially INCONSISTENT. The proofs are on the table.

Egmont Kakarot-Handtke

#1 Check my blog or my working papers first before making a fool of yourself.
#2 How to get rid of the silly Queen

REPLY to Michael Kowalik on Jul 5

You say: “I am totally for making theories and empirical research based on consistent axiomatic foundations, but scientific and logical rigour demands disclosure of axioms and not their merely intuitive assumption. This, I believe is the weakest link in the ‘science’ of economics, ...”

It seems that you are not aware that the axioms ARE disclosed see ‘How to get rid of the silly Queen’. See also my reply to Asad Zaman.

The point is that both the Walrasian and the Keynesian axiom set is provably false. This is why economics has to move from traditional microfoundations and Keynesian macrofoundations to entirely new macrofoundations.