November 23, 2016

Economics for philosophers

Comment on David Ruccio on ‘Richard Rorty, postmodernism, and Trump’


Currently, economists are in the mode of conspicuous self-critique: Yes, we have done too much math, yes, our reduction of multi-dimensional homo sapiens to one-dimensional homo oeconomicus has been rather one-sided, yes, the Chicago free-market philosophy has gone over the top, yes, there has been too much abstract model building and too little empirics, yes, something has gone badly wrong with the distribution of income and wealth, yes, free trade is not the summum bonum. Paul Romer even characterized macroeconomics as a math-obsessed pseudoscience.#1

This is rather spooky because economists normally do not admit failure but simply explain it away. They have even convinced the general public that the worst social catastrophe in history, the Great Depression, had nothing to do with their abysmally crappy economic theory and policy guidance but that it was all the Fed’s fault.

The question is, what is going on in economics?

As it happens, philosophers ― the specialists for making sense of everything in this universe and all parallel universes ― have conveniently come up with an explanation. It carries the label postmodernism: “Me, I think Rorty should remain on our reading lists, if only because postmodernism has been blamed ... for a wide range of recent disasters, from 9/11 to Donald Trump.” (See intro)

How did postmodernism achieve such a breathtaking overdose of disasters?

“This equaling out of truth and falsehood is both informed by and takes advantage of an all-permeating late post-modernism and relativism, which has trickled down over the past thirty years from academia to the media and then everywhere else. This school of thought has taken Nietzsche’s maxim, there are no facts, only interpretations, to mean that every version of events is just another narrative, where lies can be excused as ‘an alternative point of view’ or ‘an opinion’, because ‘it’s all relative’ and ‘everyone has their own truth’ (and on the internet they really do).”#2

Does anyone remember among these half-witted philosophers that the ancient Greeks started science with the distinction between doxa (= opinion) and episteme (= knowledge)? And that scientific knowledge is well-defined as material and formal consistency. And that Aristotle was quite clear about how science works: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Wikipedia, Posterior Analytics)

The fact of the matter is that economics has not been undermined by postmodernism but that it has been postmodern since the founding fathers.

The state of economics is this: there are political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda-pushing).

To speak of economics without qualification is misleading. It is of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, scientific standards are observed.

So, there are the hard rocks of true and false and the bottomless swamp between them where “nothing is clear and everything is possible” (Keynes). The swamp is the natural habitat of blathering economists, of which there are four main schools: Walrasianism, Keynesianism, Marxianism, Austrianism. None of these has achieved anything of scientific value, all four approaches are axiomatically false.

To proceed from failed political economics to scientifically valid economics requires a Paradigm Shift from Walrasian microfoundations and Keynes’ flawed macrofoundations to entirely new macrofoundations.

This is achieved with the following set of objective-systemic foundational propositions: (A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.#3

These premises are certain, true, primary, entirely free of green cheese behavioral assumptions, and therefore perfectly suited as the foundations of an “edifice that one wishes to expand and to build higher while preserving its stability.” (Hilbert)

To do the Paradigm Shift, i.e. to fully replace the obsolete Orthodoxy, is normally the mission of Heterodoxy. In economics, traditional Heterodoxy has failed because it sits in the proto-scientific swamp of political economics just like Orthodoxy but only in another corner.#4

Political economics, postmodern philosophy, and Trump have, indeed, one thing in common: all lack the concept of truth.

Egmont Kakarot-Handtke

#1 The economist as stand-up comedian and How to get rid of the silly Queen
#2 Peter Pomerantsev
#3 Objective Principles of Economics
#4 For details of the big picture see cross-references Heterodoxy.

Related 'Economists: the Trumps of science' and 'Orthodoxy vs. Heterodoxy: the squabbling of quacks' and 'When proto-scientific Heterodoxy calls Orthodoxy pseudo-scientific' and 'Heterodoxy’s scientific self-deception' and 'Economics: a science without scientists'