July 27, 2017

Why economists have not been effective in economics

Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’

Blog-Reference and Blog-Reference and Blog-Reference on Jul 31

Mathematics has not been effective in economics because economics is a cargo cult science. Feynman defined it as follows: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing among economists is a proper understanding of what science is all about. Aristotle gave a working definition 2300+ years ago: “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.”

Economists apparently followed this methodology. Walrasian economics is axiomatized, the hardcore premises are verbally given as follows: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

It should be pretty obvious that the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. And this is why economics is a cargo cult science. Economists do all the things scientists are supposed to do but it does not work.

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this, the Walrasian axioms are methodological madness, to begin with.

Economics suffers from the fact that the subject matter is ill-defined. Economists think that they are doing economics while they bungle amateurishly in sociology and psychology. What economists overlook is that their subject matter is the structure and behavior of the economic system and that all questions about Human Nature/motives/behavior/action are NOT their business.

The task of economics is to figure out how the economy works. Economics is a systems science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1

What we have at the moment are Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency. Economists are provably false with regard to the two most important features of the market economy: (a) the profit mechanism, and (b), the price mechanism. Let this sink in: the profit theory is false since Adam Smith. Instead of having clarified their foundational concepts of profit and income, economists have wasted their time fooling around with NONENTITIES.

Economics needs a Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations. Economics is NOT a social science but a systems science. A system can be objectively and precisely defined. This is the very condition for the application of mathematics.

When the premises are not correctly defined mathematics cannot work its magic and as collateral damage econometrics becomes a senseless exercise.#3 When utility maximization is put into the premises no testable proposition ever results. Scientifically incompetent economists do not understand this elementary methodological fact for 150+ years. And this is why mathematics has not been effective in economics.

Egmont Kakarot-Handtke

#1 New Economic Thinking: the 10 crucial points
#2 Profit theory in less than 5 minutes
#3 Morons on math

For details of the big picture see cross-references Math/Mathiness.

Immediately following Economists: just too stupid for counting.