June 25, 2017

Economics and the Fallacy of Insufficient Abstraction

Comment on Sandwichman on ‘”If There Is Any Such Thing”: Why read Hoxie on theory?’


What is the core problem of economics? Bagehot made it clear back in 1885: “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ ― that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark ― sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.”

This, though, was not news because J. S. Mill reported already in 1874 about the two classes of inquirers.

“It has been again and again demonstrated, that those who are accused of despising facts and disregarding experience build and profess to build wholly upon facts and experience; while those who disavow theory cannot make one step without theorizing. But, although both classes of inquirers do nothing but theorize, and both of them consult no other guide than experience, there is this difference between them, and a most important difference it is: that those who are called practical men require specific experience, and argue wholly upwards from particular facts to a general conclusion; while those who are called theorists aim at embracing a wider field of experience, and, having argued upwards from particular facts to a general principle including a much wider range than that of the question under discussion, then argue downwards from that general principle to a variety of specific conclusions.”

Bottom line: there are two types of economists, the upwarders and downwarders. This distinction overlaps with the distinction between induction and deduction which in turn overlaps with the distinction between practitioners and theoreticians.

The core problem of economics is that neither upwarders nor downwarders were particularly successful. After 200+ years economics is still at the proto-scientific level.

Methodologically, unionists are upwarders: “Unionists are not theorists; unionism is an eminently practical thing.” (Hoxie). “Theory and trade unionism are almost contradictory terms.” (Arnos) As a result, unionists have no true theory of how the economy works and how the aggregate labor and product markets interact. In other words, union policy never had sound scientific foundations but always remained glued to the phenomenological surface. Unionists did not realize what Marx already clearly saw: “That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.”

Because they have always been glued to the immediately practical of the here and now unionists have never figured out what profit is.#1 As a collateral damage, they got stuck at the naive concept of exploitation and never arrived at the concept of crossover exploitation.#2

Fact is that the myopic upwarders, i.e. ‘these people who live and move among the facts’, i.e. labor and business, never arrived at a consistent profit and employment theory. But, and this is one of the worst scientific scandals in human history, neither did Walrasians, Keynesians, Marxians, and Austrians.#3

Both, the upwarders and downwarders fell victim to the Fallacy of Insufficient Abstraction and failed to explain how the actual economy and the labor market works. Time to throw Hoxi’s and Marshall’s and Walras’ and Keynes’ employment theories on the big heap of proto-scientific garbage.#4

Egmont Kakarot-Handtke

#1 Profit for Marxists
#2 The thing with profit and exploitation
#3 Unemployment ― the fatal consequence of economists’ scientific incompetence and Have data, lack theory
#4 For the correct approach see The role of labor and business in a well-organized society

Related 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Economic bungee jumping without cord'. For details of the big picture see cross-references Employment.

ADDENDUM to Sandwichman on Jun 26

It is a characteristic trait of economics that problems are never solved but endlessly recycled. This explains why economics made no progress since Adam Smith: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower).

Economics is a bit like Nietzsche’s Éternel Retour de la pensée la plus lourde. Among the best-known examples are capital theory, I=S, Lump of Labor Theory, Say’s Law, Profit Theory. These are monuments of the scientific incompetence of economists.

Your recycling of these issues is a waste of time. Obviously, it escaped your attention that the correct profit and employment theory is available on EconoSpeak and elsewhere. For analytical entry points see:
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society
Essentials of Constructive Heterodoxy: Say's Law
The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment