Key Issues: Euclid and economic methodology

We are therefore justified in saying that with Euclid's Elements the causa materialis of geometry underwent a radical transformation; from a more or less amorphous aggregate of propositions it acquired an anatomic structure. Geometry itself emerged as a living organism with its own physiology and teleology, .... And this true mutation represents not only the most valuable contribution of the Greek civilization to human thought but also a momentous landmark in the evolution of mankind comparable only to the discovery of speech or writing. (Georgescu-Roegen, 1966, p. 9)

***

In political economy, Ricardo and James Mill compared the certainty of the propositions they were advancing to the certainty of the propositions of Euclid. (Halévy, 1960, p. 494)

In the definition which we have attempted to frame of the science of Political Economy, we have characterized it as essentially an abstract science, and its method as the method à priori. Such is undoubtedly its character as it has been understood and taught by all its most distinguished teachers. It reasons, and, as we contend, must necessarily reason, from assumptions, not from facts. It is built upon hypotheses, strictly analogous to those which, under the name of definitions, are the foundations of other abstract sciences. (Mill, 2004, p. 110)

To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis. (Schumpeter, 1994, p. 575)

... the theory here given may be described as the mechanics of utility and self-interest. Oversights may have been committed in tracing out its details, but in its main features this theory must be the true one. Its method is as sure and demonstrative as that of kinematics or statics, nay, almost as self-evident as are the elements of Euclid, when the real meaning of the formulæ is fully seized. (Jevons, 1911, p. 21)

Holbach put it thus: 'Morality is the science of the relations which exist between the minds, wills and actions of men, in the same manner as geometry is the science of the relations that are found between bodies. What is the geometry of ethics? What is the geometry of politics? How are we to reduce these sciences to the same degree of certainty and clarity as physics and geometry?' (Berlin, 2002, pp. 12-13)

 ***

The impression that one could build price theory up from basics in the image of Euclid was much more important than commitment to any particular proposed formalization. (Mirowski, 2004, pp. 348-349)

These economists were implicitly treating microeconomics as a pure axiomatic system, whose terms may or may not be instantiated in the real world, but which is of great interest, like Euclidean geometry, whether or not its objects actually exist. (Rosenberg, 1994, p. 229)

The essence of neoclassical economic theory is its exclusive use of a deductivist Euclidean methodology. A methodology – which Arnsperger & Varoufakis calls the neoclassical meta-axioms of “methodological individualism, methodological instrumentalism and methodological equilibration” – that is more or less imposed as constituting economics, and, usually, without a smack of argument. (Pålsson Syll, 2010, p. 24)

The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. (Keynes, 1973, p. 16)

The discipline of economics has so far successfully resisted all efforts to alter its character as an exercise in how to reason deductively from axiomatic principles. That is, it has insisted on remaining the Euclidean geometry of the social sciences. (Eichner, 1979, p. 172)

***

Like mathematics and physics, economics is proud of having an axiomatic foundation, and rightly so. (Helbing, 2013, p. 4)

The core problem is: conventional economics is based on behavioral axioms and that cannot work. This, clearly, is not a fault of the axiomatic method. Orthodoxy misuses Euclid and Heterodoxy refuses him for the wrong reasons. Ultimately, this is why conventional economics lacks the 'intellectual miracle of a logical system' (Einstein) with an identifiable counterpart in reality.

It is silly to be proud of behavioral axioms.

***

To Plato’s question, “Granted that there are means of reasoning from premises to conclusions, who has the privilege of choosing the premises?” the correct answer, I presume, is that anyone has this privilege who wishes to exercise it, but that everyone else has the privilege of deciding for himself what significance to attach to the conclusions, ... (Viner, 1963, p. 12)

The criteria are material and logical consistency. Ultimately, these criteria drive out all arbitrariness in the selection and acceptance of axioms. However, ...

... we cannot over-emphasize the fundamental role played in his research by a special intuition, which is not the popular sense-intuition, but rather a kind of direct divination (ahead of all reasoning) ... (Bourbaki, 2005, p. 1272)

Divination is quite different from the green cheese assumptionism of conventional economics. Subjective-behavioral axiomatization is a deterrent example of popular sense-intuition. Conventional economists, though, have been perfectly satisfied with this Euclidean look-alike.


References
Berlin, I. (2002). Freedom and Its Betrayal. London: Chatto Windus.
Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, volume II, pages 1265–1276. Oxford, New York: Oxford University Press.
Eichner, A. S. (1979). A Look Ahead. In A. S. Eichner (Ed.), A Guide to Post- Keynesian Economics, pages 165–184. London, Basingstoke: Macmillan.
Georgescu-Roegen, N. (1966). Analytical Economics, chapter General Conclusions for the Economist, pages 92–129. Cambridge: Harvard University Press.
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston: Beacon Press.
Helbing, D. (2013). Economics 2.0: The Natural Step towards A Self-Regulating, Participatory Market Society. EconoPhysics Forum, pages 1–29. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Mill, J. S. (2004). Essays on Some Unsettled Questions of Political Economy, chapter On the Definition of Political Economy; and the Method of Investigation Proper to It., pages 93–125. Electronic Classic Series PA 18202: Pennsylvania State University. URL (1844).
Mirowski, P. (2004). The Effortless Economy of Science?, chapter Smooth Operator: How Marshall’s Demand and Supply Curves Made Neoclassicism Safe for Public Consumption but Unfit for Science. Dunham, London: Duke University Press.
Pålsson Syll, L. (2010). What is (Wrong With) Economic Theory? real-world economics review, (55): 23–57. URL
Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 216–235.
London, New York: Routledge.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): 1–22. URL


See also Newton and Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist URL and Objective Principles of Economics URL



The icon above represents the special case of the golden ratio consumption economy with market clearing and budget balancing. The market clearing price is in this case equal to phi, the wage rate is equal to phi times the productivity. The three coloured rays from the origin represent the first three structural axioms for the simplest case DN=0. The three angles represent wage rate, price and productivity. With the real variables employment and productivity given all other variables are then determined by the golden ratio condition which can be read off from the segments on the x-axis. This geometrical condition, though, has no specific economic content. Economically it is one feasible configuration among others. For the general case see Geometrical Exposition of Structural Axiomatic Economics URL. The relevant aspect of Euclid with regard to economics is methodological and relates to axiomatization and not to geometry. The latter is here applied for the visualization of elementary economic relations.


© 2013_11, 2014_05_27 EKH, except original quotes

Key Issues: Newton and economic methodology

... Newton had insisted on the certainty of an approach founded on rigorous method. (Westfall, 2008, p. 346)

***

Like most of his fellow moral philosophers, Hume thought it was worth a try to make all sciences as rigorous as Newtonian physics ... (Redman, 1997, p. 111)

But what is important is that the entire topic had become a scandal in the eighteenth century. If scientific method could institute some degree of order in chemistry, in physics, in astrophysics, in astronomy and so forth, why did we have to be plunged into this dreadful chaos of conflicting opinions, with not a thread to guide us? ... so that nobody is able to institute the kind of order which Newton established in the great realm of nature? Naturally enough, men’s wishes began to move towards the delineation of some simple single principle which would guarantee just such order and yield truths of just such an objective, general, lucid, irrefutable kind as had so successfully been obtained concerning the external world. (Berlin, 2002, p. 9)

So impressive were the accomplishments of Newtonian physics that eighteenth-century philosophers, including the founders of political economy, never questioned the suitability of transferring Newton's methods to moral philosophy. After all, as they saw it, philosophy, science, social science, and ethics were all the same kind of activity. (Redman, 1997, p. 109)

His [Adam Smith’s] method is always the method of Newton, which we have already seen applied to psychology and morals: to attain, by generalization, certain simple truths, from which it will be possible to reconstruct, synthetically, the world of experience. (Halévy, 1960, p. 100, 494), see also (Hollander, 1977)

For Edgeworth, to apply mathematical reasoning to the science of political economy is to look to mathematical physics to see how mathematics can aid in the construction of propositions within the science. ... In the land of Newton, and in the century of science, how could it be otherwise? (Weintraub, 2002, p. 30)

Walras’s early reading consolidated his boundless admiration for Newtonian astronomy and the solid edifice of classical mechanics, which he regarded as unequaled models of scientific knowledge throughout his life. (Ingrao and Israel, 1990, p. 88)

Now there is simply no doubt that whatever was the source of inspiration for Jevons, Menger and Walras, all three invoked whatever physics they knew to lend prestige to their theoretical innovations. Unfortunately, with the exception of Jevons, that was the physics of Newton, not the physics of Helmholtz, Joule and Maxwell; Adam Smith, Ricardo, James Mill and McCulloch had been just as eager in earlier days to invoke the name of Newton to legitimise their theoretical claims. (Blaug, 1989, p. 1226)

Today's economics, in fact, comes closer to using Newton's approach than Smith's did: his system neither strived for logical consistency nor boasted a fancy axiomatic foundation. (Redman, 1997, p. 357)

***

Could all the phaenomena of nature be deduced from only thre [sic] or four general suppositions there might be great reason to allow those suppositions to be true. (Newton, quoted in Westfall, 2008, p. 642)

This, then, is the Newtonian style:

The Principia begins with an idealized world, a simple mental construct, a “system” of a single mathematical particle and a centrally directed force in a mathematical space. Under these idealized conditions, Newton freely develops the mathematical consequences of the laws of motion that are the axioms of the Principia. At a later stage, after contrasting this ideal world with the world of physics, he will add further conditions to his intellectual construct – for example, by introducing a second body that will interact with the first one and then exploring further mathematical consequences. ... In this way he can approach by stages nearer and nearer to the condition of the world of experiment and observation, introducing bodies of different shapes and composition and finally bodies moving in variant types of resistant mediums rather than in free space. (Cohen, 1994, p. 77)

Economics, too, starts with an idealized world, but then it does not move nearer and nearer to the world of experiment and observation, but in the opposite direction to rationalize an unsuccessful initial idealization. Thus, idealization, which is indispensable, becomes counterproductive. There is only a thin line between fruitful abstraction and barren absurdity. To assume that the moon is a mass point is unrealistic but fruitful; to assume that it is made of green cheese is unrealistic but nothing else. Most assumptions of conventional microeconomics fall into the green cheese category.

In the most fruitful applications of mathematics to the physical world, some nonmathematical axioms also enter. The Newtonian system of mathematical mechanics depends as much on the Newtonian laws of motion and gravitation as it does on the axioms of mathematics. (Kline, 1981, p. 469)

It is often said that axioms must be self-evident. This is a slight misunderstanding. Axioms may turn common sense on its head:

We may, therefore, agree with Ernst Mach, who very wisely pointed out that the law of inertia could hardly be “obvious” or “self-evident” since throughout most of recorded history men believed in a quite different law and would have denied the Cartesian-Newtonian inertial principle. (Cohen, 1977, p. 328 fn. 57)

As clueless epigones the social scientists, and economists in particular, borrowed a lot from Newton but did not grasp the Newtonian style. By consequence, it cannot be said that Newton's method has failed in the social sciences. It has never been applied properly but was soon made redundant by Hamilton’s reformulation of rational mechanics (Cohen, 1994, pp. 71-75). With this, if anything, the misunderstandings grew even worse (Mirowski, 1995).

***

The crucial point of the Newtonian style is the undissolvable combination of axiomatics and empiricism. Despite heavy borrowing, this point never got across:

Did anyone ever attempt to found a system of social science or economics on the level of identity with Newtonian rational mechanics or the Newtonian system of the world? In my research I have never found such an example. (…) In the Newtonian system, furthermore, there is no equilibrium, no balancing of contrary forces as in the case of a lever. (Cohen, 1994, p. 61)

An amusing point is that Newton was not Newtonian. He, on the contrary, believed in an evolving world. The world would go into ‘confusion’ and the ‘agent’ (God?) would have to repair it. (Prigogine, 2005, p. 63).

According to one widely held viewpoint in the history of ideas, eighteenth-century thought was dominated by the concept of the "Newtonian world-machine". God had been assigned the role of master clockmaker who designed a universe so perfect that it could run indefinitely without any need for divine tinkering. Closer inspection of Newton's own writings shows that he was actually quite firmly opposed to this concept, which had been popularized by earlier writers such as Robert Boyle. Newton's objections were both physical and moral: he pointed to the existence of irreversible processes tending to dissipate motion and gravitational perturbations that seemed to threaten the stability of the solar system, and he warned that restricting God to the creation and design of the world while denying His continual supervision was a step on the road to atheism. (Brush, 1976, p. 605)

Equilibrium theorists completely missed the point:

As we shall see, general economic equilibrium theory originated and developed in the context of a project put forward in varying forms by different scholars to repeat Newton’s titanic achievement – i.e., the fulfillment of Galileo’s program for a quantitative (mathematical) study of physical processes – in the field of the social sciences. (Ingrao and Israel, 1990, pp. 33-34)

Newton was quite explicit about the difference between theory (hypotheses non fingo) and storytelling (assumptions don't matter):

Those who take the foundations of their speculations from hypotheses, even if they then proceed most rigorously according to mechanical laws, are merely putting together a romance, elegant perhaps and charming, but nevertheless a romance. (Roger Cotes, Preface to the second edition of Newton’s Principia, Newton, 1999, p. 386)

***

From the perspective of Newton's methodology, utility maximization, equilibrium, or diminishing returns, for instance, are feigned hypotheses.

According to his [Helvétius's] principle, the only thing which men wish is pleasure, and the only things which men wish to avoid are pains. The pursuit of pleasure and the avoidance of pain are the only motives which in fact act upon men, as gravitation and other physical principles are said to act on inanimate bodies. (Berlin, 2002, pp. 12-13)

Generally speaking, “equilibrium” is simply the solution of a system of equations. (Ingrao and Israel, 1990, p. 263)

Virtually every concept in neoclassical microeconomics depends on diminishing marginal productivity for firms on the one hand, and diminishing marginal utility for the community on the other. If both these foundations are unsound, then almost nothing else remains standing. (Keen, 2011, p. 127)

As a consequence

... we know little more now about "how the economy works," or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations. (Clower, 1999, p. 401)

Newton's method works, of course, but only with an applicable set of axioms. After a long detour, this becomes progressively clear:

To repeat, starting from individuals with standard preferences and adding them up allows one to show that there is an equilibrium but does not permit one to say that it is unique nor how it could be attained. With such severe drawbacks, one might wonder why we have persisted with our models based on the General Equilibrium approach. The idea that the economy is essentially in an equilibrium state or on an equilibrium path from which it is sometimes perturbed seems simply to be the wrong departure point. (Kirman, 2010, p. 511)

***

Newton's most important methodological message is: hypotheses non fingo. Economists have done the opposite with much alacrity but little success. To criticize economics as Newtonian is a gross unfairness towards Newton. Despite incessant copying, there is not one iota of Newton's scientific spirit in economics. His axioms have nothing in common with the green cheese assumptionism of conventional economists.

References
Berlin, I. (2002). Freedom and Its Betrayal. London: Chatto Windus.
Blaug, M. (1989). Review. Economic Journal, 99(398): 1225–1226. URL
Brush, S. G. (1976). Irreversibility and Indeterminism: Fourier to Heisenberg. Journal of the History of Ideas, 37(4): 603–630. URL
Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post Keynesian Economics, 21(3): 399–414. URL
Cohen, I. B. (1977). History and the Philosopher of Science. In F. Suppe (Ed.), The Structure of Scientific Theories, 308–349. Urbana, Chicago:
University of Illinois Press
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the
Missing Paradigm, 55–90. Cambridge: Cambridge University Press.
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston: Beacon Press.
Hollander, S. (1977). Adam Smith and the Self-Interest Axiom. Journal of Law and Economics, 20(1): 133–152. URL
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Kirman, A. (2010). The Economic Crisis is a Crisis for Economic Theory. CESifoEconomic Studies, 56(4): 498–535. DOI
Kline, M. (1981). Mathematics and the Physical World. New York: Dover.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Newton, I. (1999). The Principia: Mathematical Principles of Natural Philosophy. Berkeley, Los Angeles, London: University of California Press.
Prigogine, I. (2005). The Rediscovery of Value and the Opening of Economics. In K. Dopfer (Ed.), The Evolutionary Foundations of Economics, 61–69, Cambridge: Cambridge University Press.
Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and the Classical Economists. Cambridge, London: MIT Press.
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, London: Duke University Press.
Westfall, R. S. (2008). Never at Rest. A Biography of Isaac Newton. Cambridge: Cambridge University Press, 17th edition.

See also Euclid and NONENTITY.


© 2013_11 EKH, except original quotes

Key Issues: Heterodoxy: Promising or hopeless?

Edward Fullbrook has undertaken the task of distilling from numerous contributions to the real-world economics review a synopsis of the core tenets of present-day Heterodoxy (2013, p. 129). This is a good thing. However, he unfortunately characterizes a motley of opinions as NPE, New Paradigm Economics. There exists at the moment nothing that deserves the title of a heterodox paradigm in the sense of Kuhn. What is more, Kuhn has argued “that there are no, nor can there be any, paradigms in the social sciences.”

What we have before us resembles more a manifesto than anything else. The first item in the compilation, "pluralism (as in modern physics)," confirms this impression.

A paradigm/theory/model makes assertions about the world (is deterministic, consists of atoms, expands inflationary, etcetera) or parts of it (society consists of antagonistic classes, of utility maximizing individuals, is ruled by an invisible hand, etcetera) and implicitly or explicitly insists that this view is the correct one. A paradigm/theory/model without a truth claim is a contradiction in terms.

Hence, pluralism is a meta-claim that cannot be used by any specific paradigm. Heterodoxy is not the arbiter and by no means in the position to decide that, for example, classical, Marxian, neoclassical or Keynesian approaches are, in the name of pluralism, legitimate constituents of economics – understood as a science. Just like astrology, geo-centrism, or creationism cannot claim to be part of a pluralistic physics or biology. Note that Dawkins refuses to discuss with creationists about evolution, and physicists are not very much inclined to dispute about perpetual motion machines. Science constitutes itself by proper demarcation from nonscience (cf. Popper, 1980, p. 34).

Physics is pluralist at the cutting edge of research as long as the matter has not been settled according to accepted criteria (logical and material consistency, cf. Klant, 1994, p. 31). There is no pluralism, though, with regard to the Law of the Lever. To compare economics, which has not yet got hold of something analogous to the Law of the Lever, with cutting-edge physics is preposterous. Confusion cannot be legitimized as pluralism.

The defining characteristic of Heterodoxy is, trivially, the rejection of the neoclassical approach. The rejection is borne either by a well-founded conviction or at least the distinct feeling that there must be something better. Hence, Heterodoxy epitomizes the promise to eventually come up with a superior alternative. This is what makes Heterodoxy attractive. In Lakatos's terms, Heterodoxy is to be understood as the progressive research programme and Orthodoxy as the degenerate research programme.

Heterodoxy, therefore, consists of a destructive and a constructive part. However, both parts are not symmetric:

... there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction. (Nell, 1980, p. 1)

Heterodoxy was very successful with clearing the ground (cf. Fullbrook, 2004; Keen, 2011), but it cannot be said that it was equally successful with construction:

There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy. (Hausman, 1992, p. 255)

To explain this unacceptable Orthodox/Heterodox cliffhanger at least in part, it is useful to study New Paradigm Economics in more detail. The methodological comment starts with a noncontroversial assertion:

Whether you can observe a thing or not depends on the theory which you use. It is theory which decides what can be observed. (Einstein, quoted in Fullbrook, 2013, p. 130)

However, this consensus is immediately contradicted in Section 3 with the assertion that Heterodoxy “priorizes the empirical over apriorism.” Einstein, to be sure, was as clear as possible that this is the wrong priority:

... any attempt logically to derive the basic concepts and laws of mechanics from the ultimate data of experience is doomed to failure. (Einstein, 1934, p. 166)

This is exactly what J. S. Mill said with regard to economics:

Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of “abstract speculation.” (Mill, 2004, p. 113-114)

Being apriorists, Mill and Einstein, on the other hand, never denied the crucial role of the empirical:

Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics. In a certain sense, therefore, I hold it to be true that pure thought is competent to comprehend the real, as the ancients dreamed. (Einstein, 1934, p. 167)

Is there any indication that physicists will abandon the deductive method in the future and instead turn to pluralism?

Some day, when physics is complete and we know all the laws, we may be able to start with some axioms, and no doubt somebody will figure out a particular way of doing it so that everything else can be deduced. (Feynman, 1992, p. 50)

Was Einstein blind to the pitfalls and limitations of the deductive method, which indeed have stymied the neoclassical approach?

If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way? (Einstein, 1934, p. 167)

Conventional economists have not found the correct way. This misfortune is not attributable to the deductive method but to its inept application.

As always, when they are clueless, economists turn to physics (Mirowski, 1995), and, again and again, they miss the point. Heterodox economists are no exception; they start with a methodological assertion about the inevitable theory-ladenness of observation and end with this:

... progress entails a movement away from faith-based to empirical-based economics. (quote from Fullbrook, 2013, p. 130)

What is here negatively characterized as faith-based has been positively characterized by Einstein as a freely invented axiomatic basis. Real progress, therefore, would entail that the neoclassical axioms be fully replaced by heterodox axioms. This is a constructive task that amounts to a paradigm shift in the original sense.

... at no stage of scientific development do we begin without something in the nature of a theory, ... (Popper, 1960, p. 134)

And each theory starts with axioms — this also holds for Heterodoxy.

The impression from the NPE compilation is that Edward Fullbrook is currently too much occupied with a rather hopeless rearguard of Heterodoxy:

Many people have a passionate hatred of abstraction, chiefly, I think, because of its intellectual difficulty; but as they do not wish to give this reason, they invent all sorts of others that sound grand. They say that all reality is concrete, and that in making abstractions we are leaving out the essential. ... Those who argue in this way are, in fact, concerned with matters quite other than those that concern science. (Russel, 1961, p. 626)

An axiomatized approach is not necessarily true, but an unnaxiomatized approach is certainly false. A paradigm manifests itself in the set of axioms. There is no such thing as a new heterodox paradigm. Heterodoxy is one crucial step ahead of Orthodoxy, that is much but it does not suffice.


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Fullbrook, E. (Ed.) (2004). A Guide to What’s Wrong With Economics. London: Anthem.
Fullbrook, E. (2013). New Paradigm in Economics. real-world economics review, 65: 129–131. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Mill, J. S. (2004). Essays on Some Unsettled Questions of Political Economy, chapter On the Definition of Political Economy; and the Method of Investigation Proper to It., 93–125. Electronic Classic Series PA 18202: Pennsylvania State University. URL. Online-version URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, 1–16. Cambridge, New York,
Melbourne: Cambridge University Press.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
Russel, B. (1961). The Basic Writings of Betrand Russel, chapter Limitations of Scientific Method, 620–627. London: Routledge.

***

See also the initial post on RWER-Blog


© 2013_10 EKH, except original quotes

Key Issues: Formalization, empty formalism, common sense, nonsense

It would be amusing to put the question whether formalization in science is desirable to Archimedes in Sicily or some three hundred years later to Ptolemy in Alexandria. I can imagine Archimedes, in a characteristic turn of phrase, saying that no man of eminence in philosophy would ask such a question. (Suppes, 1968, p. 651)

***

Formalization will not answer all questions nor solve all problems, but there is a very instructive lesson to be found in the philosophy of mathematics. Over the past hundred years, methods of formalization have been applied extensively to the foundations of mathematics. It is fair to say that during that period, there has been more discernible progress in our understanding of the foundations of mathematics and in the depth of the problems that are considered important than in any other branch of philosophy. (Suppes, 1968, p. 653)

Formalisation was not to be merely a mechanical check on the integrity of scientific reasoning, but through the process of axiomatisation, mathematics was to be an engine of discovery. (Weintraub, 1998, p. 1844)

***

Now ‘formalism’ is not the same thing as ‘formalization’ or ‘mathematization’ because it is possible to express a theory mathematically and even axiomatically without necessarily degenerating into ‘formalism’, which simply means giving top priority to the formal structure of modelling irrespective of its content; ... (Blaug, 1994, p. 131)

***

Economics for Marshall was the perfection of common sense. (Hoover, 1998, p. 243)

Formalization of even a part of what goes into our common sense understanding of society would be, as he [Keynes] said, “prolix and complicated to the point of obscurity.” Theories constructed with vague concepts paradoxically can maximize precision and economy. (Coates, 2007, p. 8)

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, in 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. (Bagehot, 1885, PE.13)

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors among themselves. This is the nature of economic thinking. (Keynes, 1973, p. 297)

In the early thirties he [Keynes] confessed to Roy Harrod that he was “returning to an age-long tradition of common sense.” (Coates, 2007, p. 11)

*** 

People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ..., should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought. (Mill, 2006, p. 783), original emphasis

Aristotle builded upon a few deliberately chosen concepts – such as matter and form, act and power – very broad, and in their outlines vague and rough, but solid, unshakable, and not easily undermined; and thence it has come to pass that Aristotelianism is babbled in every nursery, that "English Common Sense," for example, is thoroughly peripatetic, and that ordinary men live so completely within the house of the Stagyrite that whatever they see out of the windows appears to them incomprehensible and metaphysical. (Peirce, 1931, 1.1)

I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... (Galileo, quoted in Popper, 1994, p. 84)

Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis. Don't theorize, he said, but open your eyes and observe without prejudice, and you cannot doubt that the Sun moves and that the Earth is at rest. (Popper, 1994, p. 84)

... it is precisely the task of science to supersede crude common-sense notions by critical analysis, and further that it is the unsatisfactory state of the foundations beneath the common-sense surface which is the most serious and crippling deficiency of contemporary economic science, ... (Hutchison, 1960, p. 18)

The truth is that common-sense, or thought as it first emerges above the level of the narrowly practical, is deeply imbued with that bad logical quality to which the epithet metaphysical is commonly applied; and nothing can clear it up but a severe course of logic. (Peirce, 1992, p. 113)

***

Economics inevitably goes beyond common sense and intuition. (Dow, 2006, p. 15)

A formal approach gives the opportunity to make assumptions explicit and to prove results which may previously have been perceived intuitively, or even to deduce conclusions from self-evident truths. These results can then be communicated unambiguously, because they are obtained within a system of agreed rules. There can only be disagreement about the assumptions or the chosen method itself. (Chick, 1998, p. 1867)

... Suppes sees formalization as having the following pay-offs: (1) formalizing a connected family of concepts is one way to bring out their meaning in an explicit fashion; (2) formalization results in the standardization of terminology and the methods of conceptual analysis for various branches of science; (3) the generality provided by formalization enables us to determine the essential features of theories; (4) formalization provides a degree of objectivity which is impossible without formalization; (5) formalization makes clear exactly what is being assumed, and thus is a safeguard against ad hoc and post hoc verbalizations; (6) formalization enables one to determine what the minimal assumptions are which a theory requires. (Cohen, 1977, pp. 111-112)

***

... it is important to understand that what is put in question by recent destructive results is not formalization in general but rather the particular formalization generally employed in economic theory. That a paradigm should be shown to be deficient does not imply that one should cease to search for a paradigm. (Kirman, 1997, p. 97)

Formalization is necessary in order to achieve objective resolution of conflict. There is no other general means of resolving conceptual conflict in science. (Suppes, 1968, p. 664)

Until recently, students of economics had only the choice between the empty formalism of Orthodoxy and the platitudinous common sense of Heterodoxy. Formalization is not a major problem of economics. Economists are the main problem because they have been chronically incapacitated for proper formalization. There is no prospect for the existing orthodox and heterodox formalisms to pass the double consistency test. Their acceptance by quite a number of economists does not lend them weight but has to be taken as an indicator of the pervasiveness of gullibility and sloppiness.


References

Bagehot, W. (1885). The Postulates of English Political Economy. Library of Economics and Liberty. URL
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepentant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pages 109–136. London, New York: Routledge.
Chick, V. (1998). On Knowing One’s Place: The Role of Formalism in Economics. Economic Journal, 108(451): 1859–1869. URL
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Cohen, I. B. (1977). History and the Philosopher of Science. In F. Suppe (Ed.), The Structure of Scientific Theories, 308–349. Urbana, Chicago: University of Illinois Press.
Dow, S. C. (2006). Economic Methodology: An Inquiry. Oxford: Oxford University Press.
Hoover, K. D. (1998). Comment: Keynes, Marshall and Involuntary Unemployment. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),
Economics and Methodology. Crossing Boundaries, 236–247. Houndmills, Basingstoke, London: Palgrave.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Kirman, A. (1997). The Evolution of Economic Theory. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, 92–107. Cheltenham, Brookfield: Edward Elgar.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. (1843).
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce, Vol. I. Cambridge: Harvard University Press.
Peirce, C. S. (1992). The Fixation of Belief. In N. Houser, and C. Kloesel (Eds.), The Essential Peirce. Selected Philosophical Writings, Vol. 1, 109–123.
Bloomington: Indiana University Press. (1877).
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality, chapter Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.
Weintraub, E. R. (1998). Controversy: Axiomatisches Mißverständnis. Economic Journal, 108(451): 1837–1847. URL

***

See also Objective Principles of Economics URL


© 2013 EKH, except original quotes

Key Issues: Axiomatization is still stuck at Keynes' juncture

My way is to begin with the beginning. (Lord Byron)

Beginnings are always difficult in all sciences. (Marx, 1990, p. 89)

There is no more fertile source of error than apparently trivial premisses. (Schumpeter, 1994, p. 269)

In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most. (Georgescu-Roegen, 1970, p. 9)

If we open any book, even of mathematics or natural philosophy, it is impossible not to be struck with the mistiness of what we find represented as preliminary and fundamental notions, and the very insufficient manner in which the propositions which are palmed upon us as first principles seem to be made out, contrasted with the lucidity of the explanations and the conclusiveness of the proofs as soon as the writer enters upon the details of his subject. Whence comes this anomaly? Why is the admitted certainty of the results of those sciences in no way prejudiced by the want of solidity in their premises? (Mill, 1874, V.4)

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. (Aristotle, Analytica, Wikipedia)

For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations. (Hutchison, 1960, p. 5)

Whenever arithmetization [= axiomatization] can be worked out, its merits are above all words of praise. (Georgescu-Roegen, 1971, p. 15)

​Ein System von Gedanken muß allemal einen architektonischen Zusammenhang haben, d.h. einen solchen, in welchem immer ein Theil den andern trägt, nicht aber dieser auch jenen, der Grundstein endlich alle, ohne von ihnen getragen zu werden, der Gipfel getragen wird, ohne zu tragen. (Schopenhauer, 2016, p. 5)

***

What particular reality is described by a given theory can be ascertained only from that theory's axiomatic foundation. Thus, Standard theory describes the economic process of a society in which the individual behaves strictly hedonistically, where the entrepreneurs seek to maximize his cash-profit, and where any commodity can be exchanged on the market at uniform prices and none exchanged otherwise. (Georgescu-Roegen, 1966, p. 361)

Macroeconomic theory took a major turn when it was argued that models of aggregate phenomena had to be based on ‘sound micro foundations’. In other words, the basic building blocks have to be agents, each of whose behaviour is based on the classical axioms of rationality which we impose on those agents in standard theory. (Kirman, 2010, p. 507)

..., before accepting the conclusions of any economist’s model as applicable to the real world, the careful student should always examine and be prepared to criticize the applicability of the fundamental postulates of the model; for, in the absence of any mistake in logic, the axioms of the model determine its conclusions. (Davidson, 2002, p. 41)

... one can axiomatize, without being committed to a formalist reading of the axiomatic system. Axiomatization is as old as Euclid, whereas formalism is a much later development. ... Poincaré, the most outstanding mathematician at the turn of the twentieth century, while acknowledging the value of axiomatic systems, rejected Hilbert’s formalism. Similarly, Frege, the leading logician of the period, while rejecting Hilbert’s formalism, extensively used the AA [Axiomatic Approach]. (Boylan and O'Gorman, 2007, pp. 430, 432)

The axioms that are used to define “rationality” are based on the introspection of economists and not on the observed behaviour of individuals. Economists from Pareto through Hicks to Koopmans have long made this point. Thus, we have wound up in the weird position of developing models that unjustifiably claim to be scientific because they are based on the idea that the economy behaves like a rational individual, when behavioural economics provides a wealth of evidence showing that the rationality in question has little or nothing to do with how people behave. (Kirman, 2009, p. 81)

But a principle that is not universally true is false. Thus the rationality principle is false. I think there is no way out of this. (Popper, 1994, pp. 172-173)

... General Equilibrium Theory has never justified its pricing axiom and certainly has not given any account of how wages are set when the economy is out of equilibrium. (Hahn, 1980, p. 135)

For instance, economists bend their research toward axiomatic theories that are almost embarrassing in their pre-scientific naiveté. Consider utility theory, for instance, which is now taking a drubbing at the hands of experimental psychology and neurophysiology. A scientific orientation would free us of such vestigial dogmas. (Dorman, 2008, p. 170)

***

Any concept can be faultily used. (Schumpeter, 1994, p. 111)

My opinion continues to be that axiomatics, like every other tool of science, is no better than its user, and not all users are skilled. (Clower, 1995, p. 308)

... axiomatization facilitates the detection of logical errors within the model, and perhaps more importantly it facilitates the detection of conceptual errors in the formulation of the theory and in its interpretation. (Debreu, quoted in Ingrao and Israel, 1990, p. 362)

I am of the opinion that, certainly, for the purposes of research, it is always necessary to combine the intuition with the axioms. (Felix Klein, quoted in Weintraub, 2002, p. 25)

If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way? (Einstein, 1934, p. 167)

As far as economics is concerned, only if we look for non-behavioral axioms.

***

Economics still stands at what may be called Keynes' juncture:

The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. (Keynes, 1973, p. 16)

This insight is Keynes' most valuable methodological contribution. In practice, non-Euclidean translates to non-behavioral. Structural axiomatization is, in a sense, the realization of Keynes' methodological program as stated above. What his followers put into practice was his political program, which indeed has a weak theoretical foundation because Keynesians never came forth with the non-Euclidean axioms. Since the days when Keynes saw more clearly than his fellow economists that the 'classical' axioms had been refuted once and for all by the Great Depression, economics is in dire need of new formal foundations. There is no way back before Keynes, and to stay any longer at Keynes' juncture is equally impossible. New Classicals have not got the first point, New Keynesians not the second (cf. Quiggin, 2010). Lacking correct formal foundations, both approaches are agonizing detours.

Axiomatization is the prime task of theoretical economics. Without correct axioms, no correct theory. Without a correct theory, no understanding of how the monetary economy works. Without an empirically corroborated understanding, no useful economic policy advice. Without effective economic advice, no good reputation: "Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust" (Viner, 1963, p. 1). This was long before the Great Depression's fatal dustification. However, the opinion of any political executive is, in the last instance, not decisive. Nor is public opinion.

Much more important than any political reputation of economics is: Without correct axioms, no acceptance as science. There is no way around it, neither for Orthodoxy nor for Heterodoxy.

The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience. (Einstein, 1934, p. 165)

Einstein's First Imperative of Scientific Inquiry applies to structural axiomatization. Compliance with the First Imperative, though, does not guarantee that the correct set of axioms emerges automatically. The Second Imperative demands formal and material consistency. Both imperatives taken together rule conventional approaches out.


References
Boylan, T. A., and O’Gorman, P. F. (2007). Axiomatization and Formalism in Economics. Journal of Economic Surveys, 21(2): 426–446.
Clower, R. W. (1995). Axiomatics in Economics. Southern Economic Journal, 62(2): 307–319. URL
Dorman, P. (2008). What Would a Scientific Economics Look Like? real-world economics review, 47: 166–172. URL
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Davidson, P. (2002). Financial Markets, Money and the Real World. Cheltenham, Northampton: Edward Elgar.
Georgescu-Roegen, N. (1966). Analytical Economics, chapter Economic Theory and Agrarian Economics, 359–397. Cambridge: Harvard University Press.
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge: Cambridge University Press.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Kirman, A. (2009). Economic Theory and the Crisis. real-world economics review, (51): 80–83. URL
Kirman, A. (2010). The Economic Crisis is a Crisis for Economic Theory. CESifo Economic Studies, 56(4): 498–535. DOI
Marx, K. (1990). Capital, Vol. I. London: Penguin Classics. (1876).
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York: Routledge.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Schopenhauer, A. (2016). Die Welt als Wille und Vorstellung, German Edition, Zenodot Verlagsgesellschaft. Kindle-Version.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): 1–22. URL
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, London: Duke University Press.


Related 'Euclid and Keynes's Missing Axioms URL' and 'Why Post Keynesianism is Not Yet a Science URL or URL' and 'Walras's Law of Markets as Special Case of the General Period Core Theorem URL'


© 2013 EKH, except original quotes

***

AXEC172

Key Issues: Demarcation and the Midas Touch of science

 . . . since we are all humans everything reduces to psychology.  (Boland, 2003, p. 107)

 

We content ourselves therefore with the following simple psycho-economic postulate: Each individual acts as he desires. (Fisher, 2006, p. 11)

Mises' contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do. (Foreword, von Mises, 2007, p. v)

But a method that can explain everything that might happen explains nothing. (Popper, 1960, p. 154)

Psychologism is the most congenial mode of explanation. The ancient Greeks regarded myths as ‘true stories’ and distinguished them from fables as ‘false stories’. Xenophanes made his contemporaries aware that their true stories were what is now called a projection (cf. Popper, 1994, p. 39).

With this, the problem of demarcation arose for the first time. And it was easily solved. The Pre-Socratics rejected the mythological explanations of the world because they saw that everything could be explained by the human-like actions of gods, which meant, on closer inspection, nothing. This methodological insight set science on its track.

Rejecting gods as a valid explanation, however, caused an obvious problem. If myth is not truth, what then is truth? And to this question, the Pre-Socratics could not offer an immediate answer but only a vague research program. They sought the material principle of things, and they came up with different answers. This was not an entirely satisfactory outcome because, as a matter of principle, only one of the answers could be true. The demarcation problem appeared in a new form within the compass of the infant science.

All finer points of methodology are derivatives of the primordial demarcation.

The finer points arose quite naturally. It is easy to keep Zeus out of the discussion. But what about notions like the Absolute, the One, Logos, and what about the invisible atom or the somewhat fantastic harmony of numbers, music, and celestial spheres? Demarcation became more subtle. Basically, however, it remained a purely methodological question.

The problem of finding a criterion which would enable us to distinguish between the empirical sciences on the one hand, and mathematics and logic as well as ‘metaphysical’ systems on the other, I call the problem of demarcation. This problem was known to Hume, who attempted to solve it. With Kant, it became the central problem in the theory of knowledge. (Popper, 1980, p. 34), original emphasis

Being humans, ‘a muddled horde of erring mortals, always in two minds about things’ (Parmenides), it was inevitable that demarcation eventually became a social issue. The early philosopher-scientists organized themselves in schools, and this brought with it the necessity to define their relations towards their social and political surroundings. This they did. The Pythagoreans preferred to keep their thoughts and findings for themselves. Others spoke on the agora to their fellow citizens. Demarcation was a real issue.

In our day, McCloskey, among others, solved the demarcation problem by simple deconstruction, that is, by muddling the epistemic and the social. After all, the pursuit of scientific truth, whatever that may be, is undeniably a social activity and, as things are, ultimately boils down to the usual social status quarrels:

In practice, methodology serves chiefly to demarcate Us from Them, demarcating science from nonscience. Once the modernists have found a Bantustan for nonscience such as astrology, psychoanalysis, acupuncture, nutritional medicine, Marxist economics, spoonbending, or anything else they do not wish to discuss, they can get on with the business at hand with a clear head. Methodology and its corollary, the Demarcation Problem (What is Science? How is It to be distinguished from nonscience?), are ways at stopping conversation by limiting conversation to people on our side of the demarcation line. (McCloskey, 1998, p. 161)

Popper, for one, was as clear on the difference between epistemic demarcation and social discrimination as anyone could wish. And he was quite explicit that he was not much interested in the latter:

And my doubts increase when I remember that what is to be called a ‘science’ and who is to be called a ‘scientist’ must always remain a matter of convention or decision. (Popper, 1980, p. 52)

Within McCloskey's framework of rhetoric, the demarcation problem is correctly perceived as a conversation-stopper. And that is meant as a denial because, for the socio-psychological mindset, communication is the summum bonum. However, conversation per se is the ideal of the talk show, not of science. Here, the regulative idea is quite different:

A critical discussion is well-conducted if it is entirely devoted to one aim: to find a flaw in the claim that a certain theory presents a solution to a certain problem. ... Thus critical discussion is essentially a comparison of the merits and demerits of two or more theories ... The chief demerit is inconsistency, including inconsistency with the results of experiments that a competing theory can explain. (Popper, 1994, pp. 160-161)

Demarcation cannot be debunked as social ostracism, and the demarcation problem cannot be solved once and for all:

... we have seen that a characteristic feature of science is that it develops canons of rationality for evaluating knowledge claims and deciding what to admit into the domain of knowledge. ... these canons of rationality change, evolve, and become more sophisticated as science develops. (Suppe, 1977, p. 724)

The task of methodology is to defend the integrity of science, and this means to demarcate. To preach anything-goes, Verstehen, methodological opportunism, to describe what scientists are actually doing, to certify the ruling paradigm, all this is no part of the methodologist's job description. Methodologists, above all, take care that demarcation is not abused for other purposes. The methodologist who complains that no foolproof criteria to discriminate between science and nonscience are available does not understand his very task. The methodologist's professional risk is to reject the true theory and accept the false theory. This risk is eliminated by reverting to pluralism. Pluralism is the self-abandonment of methodology.

We are in danger of losing our grip on the concepts of truth, evidence, objectivity, disinterested inquiry. (Haack, 1997, p. 1)

To date, the demarcation problem has not been answered satisfactorily for economics:

Economics is a perplexing subject. Though I have spent the better part of my academic career thinking about its aims and methods, I have never been confident that I or anyone else for that matter really understand its cognitive status. ... Without assurance about the cognitive status of the theory; there is no basis of confidence in it.  (Rosenberg, 1994, pp. 216-217)

This neutral resume is, with different accentuation, shared by Blaug, Mirowski, and Klant, to name only a few methodologists who do not see economics on the safe side of the line that demarcates science from nonscience.

***

Modern psychology and psychotherapy have made us familiar with a habit of our mind we call rationalization. This habit consists in comforting ourselves and impressing others by drawing a picture of ourselves, our motives, our friends, our enemies, our vocation, our church, our country, which may have more to do with what we like them to be than with what they are." (Schumpeter, 1994, pp. 34-35)

Rationalization is the most reduced form of psychologism. Psychologism has not achieved much of scientific value in economics.

It is possibly very encouraging for the economist to hear that compared with the natural scientist the psychological method saves him "ages of laborious research” but it is curious and a pity that this huge start has not enabled him to formulate any considerable body of reliable prognoses such as the natural sciences have managed to achieve. (Hutchison, 1960, p. 132) 

***

Why, indeed, is economics not yet a science, in the sense of representing a body of knowledge that grows cumulatively over time and has something of value to teach men and women of practical affairs? (Eichner, 1983, p. 508)

When Galileo stood in the cathedral of Pisa and watched the swinging chandelier, as certainly many had done before him without much reflection, he asked himself: How much time does the pendulum need for a full swing, and what does the period depend on? He did not ask: do my fellow citizens pursue happiness, or do they maximize utility, or who will eventually go to heaven, to hell, or to Bedlam? He somehow felt that the chances were good that he could answer the first question and nil that he could answer the second. As a genuine scientist, he was content with the petty problem of time, length, and weight and left the really big, important, interesting, fateful, and insoluble questions of humankind to the so-called social sciences. And there they remained, after countless promising attempts and the application of the most powerful analytical tools, unsolved up to the present day.

When they founded science and sought the material principle of things, the ancient Greeks in effect excluded psychology. We know today that this was a wise demarcation. Confronted with Boland's, Fisher's, von Mises's or McCloskey's populist trivialities, the founding fathers would find "almost inbelievable the degradation in standards of analysis" over two millenia (cf. Suppes, 1968, p. 660).

Economics could not emancipate itself from the social sciences. The axioms of rationality formalize a rather unconvincing variety of psychology. There is nothing wrong with axiomatization, to be sure, only with psychology. An economist who philosophizes about optimizing human behavior is dislocated — he finds himself on the wrong side of the line that demarcates science from nonscience. Neither naive empirical realism, nor ill-understood formalization, nor rhetoric helps us over to the other side. Demarcation may be difficult in every concrete case, but it is not negotiable. No serious methodologist could ever let standard economics pass as science. The flaws are obvious and numerous.

The role of philosophy in science is to clarify conceptual problems and to make explicit the foundational assumptions of each scientific discipline. The clarification of conceptual problems or the building of an explicit logical foundation are tasks that are neither intensely empirical nor mathematical in character. They may be regarded as proper philosophical tasks directly relevant to science. (Suppes, 1968, p. 653)

Instead:

Much of the work in methodology over the last ten years has thus consisted of methodological analysis of what economists do and how they argue. (Dow, 1997, p. 78)

Economic methodology has given up demarcation, and because of this, economic methodology has to be given up.

***

Psychologism inverts the Midas Touch of science — to turn whatever it might touch into knowledge — into a Midas curse: to turn whatever it might touch into opinion and balderdash.

References
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Dow, S. C. (1997). Mainstream Economic Methodology. Cambridge Journal of Economics, 21: 73–93.
Eichner, A. S. (1983). Why Economics Is Not Yet a Science. Journal of Economic Issues, 17(2): 507–520. URL
Fisher, I. (2006). Mathematical Investigations in the Theory of Value and Prices. New York: Cosimo.
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley.
McCloskey, D. N. (1998). The Rhetoric of Economics. Madison, London: University of Wisconsin, 2nd edition.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York: Routledge.
Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 216–235. London, New York: Routledge.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Suppe, F. (1977). Afterword. In F. Suppe (Ed.), The Structure of Scientific Theories, pages 615–730. Urbana, Chicago: University of Illinois Press.
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. I. Indianapolis: Liberty Fund.


© 2013 EKH, except original quotes

Key Issues: One way to get profit right, many ways to get it wrong

There are two criteria to assess a theory: material consistency and formal consistency. A theory must satisfy both criteria, that is to say, it can be rejected either on empirical or on logical grounds alone.

From the structural axioms and definitions follows the monetary profit for the business sector as a whole in the case of an investment economy

Total monetary profit in period t is given by the difference between the business sector’s investment expenditures and the household sector’s monetary saving plus distributed profits of the business sector. Overall profit is spread among firms in the process of competition.

 

As a consequence, the following statements have to be rejected on purely formal grounds:

Smith: Wages, profit, and rent are the three original sources of all revenue as well as of all exchangeable value. (2008, p. 50)

Ricardo: … profits would be high or low in proportion as wages were low or high. (1981, p. 110)

Senior: In the second class we have the words Capital, Capitalist, and Profit. These terms express the instrument, the person who employs or exercises it, and his remuneration; but there is no familiar term to express the act, the conduct of which profit is the reward, and which bears the same relation to profit which labour does to wages. To this conduct we have already given the name of Abstinence. (1854, 4.9)

Mill: The cause of profit is, that labour produces more than is required for its support. (2006, p. 411)

Marx: Hence, if a commodity is sold at its value, a profit is realized, which is equal to the excess of its value over its cost-price, or equal to the entire surplus-value incorporated in the value of the commodity. (1909, I. I. 31)

Jevons: I think that in the equation Produce=profit+wages, the quantity of produce is essentially variable, and that profit is the part to be first determined. (1911, p. 270)

Marshall: The normal earnings of management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. (2009, p. 508)

Knight: The presence of true profit, therefore, depends on an absolute uncertainty in the estimation of the value of judgment, or on the absence of the requisite organization for combining a sufficient number of instances to secure certainty through consolidation. (2006, p. 285)

Schumpeter: And since the new combinations which are carried out if there is “development” are necessarily more advantageous than the old, total receipts must in this case be greater than total costs. (2008, p. 129)

von Mises: The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply. (2007, p. 293)

Keynes: Thus the factor cost and the entrepreneur’s profit make up, between them, what we shall define as the total income resulting from the employment given by the entrepreneur. (1973, p. 23), original emphasis

Hicks: The curve IS can therefore be drawn showing the relation between Income and interest which must be maintained in order to make saving equal to investment. (1937, p. 153)

Harrod: The relevant propositions may be stated in the form of truisms or tautologies, such as that the price of an article is equal to the sum of rewards to all persons contributing to its production, ... (1938, p. 392)

Shackle: Thus it seems that we might select decision-making and uncertainty-bearing as the economic roles to perform which men come forward because of the prize of profit in the sense we have been discussing. (1955, p. 226)

Samuelson: GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP. (1998, p. 392)

Debreu: … the consumers own the resources and control the producers. Thus, the ith consumer receives the value of his resources … and the shares … of the profit of the 1st, …, jth, …, nth producer. … Consider a private ownership economy E. When the price system is p, the jth producer tries to maximize his profit on Yj. Suppose that yj does this; the profit pj(p) = p • yj is distributed to shareholders. (1959, pp. 78-79)

Arrow and Hahn: Given a set of prices for all commodities, it is possible to calculate for each activity its profit, the excess of the values of its outputs over the value of its inputs; … The assumptions of perfect competition imply that … each firm chooses an activity that yields it at least as much profit as any other possible. (1991, p. 53)

Kaldor: Income may be divided into two broad categories, Wages and Profits (W and P), where the wage-category comprises not only manual labour but salaries as well, and Profits the income of property owners generally, and not only of entrepreneurs. (1956, p. 95)

Kalecki: Gross profits = Gross private investment + Capitalists’ consumption. (1942, p. 259)

Sraffa: This is because the surplus (or profit) must be distributed in proportion to the means of production (or capital) advanced in each industry; and such a proportion between two aggregates of heterogeneous goods (in other words, the rate of profits) cannot be determined before we know the prices of the goods. (1979, p. 6)

Boland: The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. Thus, since in the short-run non-zero profit is possible, the actual short-run prices cannot always be used for aggregation. But, from the macro perspective of Walrasian general equilibrium, the total profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) but this does not preclude the possibility of short-run profits and losses of individual firms canceling each other out. (2003, p. 150), original emphasis

Minsky: The simple equation “profit equals investment” is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure. (2008, p. 161), original emphasis

Barro: Households receive income in four forms: profit …, wage income, rental income, and interest income. (2008, p. 131)

Wickens: Implicit measure of profits Πt = -kt+1 +(1+θ)kt. (2008, p. 82)

Ljungqvist and Sargent: In each period, the representative firm takes (rt, wt) as given, rents capital and labor from the households, and maximizes profits: Π=F(kt, nt)-rtkt-wtnt. (2004, p. 484)

Nadal: ... the budget constraint of consumers may be undetermined because it incorporates their share of firms' profits, which may not be defined. (2004, p. 39)

Keen: … net annual income in this simple model equals the sum of wages plus profits. (2011, pp. 366, 146)

About profit, economists have been groping in the dark since Adam Smith.

At all times, including the present, in judging from the standpoint of the requirements of each period ... the performance of economic theory has been below reasonable expectation and open to valid criticism. (Schumpeter, 1994, p. 19)

Not one of the quoted books contains the correct profit theory, and the compilation is far from complete.


References
Arrow, K. J., and Hahn, F. H. (1991). General Competitive Analysis. Amsterdam, New York, etc.: North-Holland.
Barro, R. (2008). Macroeconomics: A Modern Approach. Mason: Thompson South-Western.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Harrod, R. F. (1938). Scope and Method of Economics. Economic Journal, 48(191): 383–412. URL

Hicks, J. R. (1937). Mr. Keynes and the "Classics": A Suggested Interpretation. Econometrica, 5(2): 147–159. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. Online-version URL
Kaldor, N. (1956). Alternative Theories of Distribution. Review of Economic Studies, 23(2): 83–100. URL
Kalecki, M. (1942). A Theory of Profits. Review of Economic Studies, 52: 258–267. URL
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Knight, F. H. (2006). Risk, Uncertainty and Profit. Mineola: Dover. (1921).
Ljungqvist, L., and Sargent, T. J. (2004). Recursive Macroeconomic Theory. Cambridge, London: MIT Press, 2nd edition.
Marshall, A. (2009). Principles of Economics. New York: Cosimo, 8th edition. (1890). Online-version URL
Marx, K. (1909). Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole. Library of Economics and Liberty. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 2, Books I-II of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. Online-version URL
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago, San Francisco: McGraw-Hill, 2nd edition.
Nadal, A. (2004a). Behind the Building Blocks. Commodities and Individuals in General Equilibrium Theory. In F. Ackerman and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, 33–47. London, New York: Routledge.
Ricado, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, etc.: Cambridge University Press. Online-version URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Schumpeter, J. A. (2008). The Theory of Economic Development. An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. New Brunswick, London: Transaction Publishers. (1934).
Senior, N. W. (1854). Political Economy. Library of Economics and Liberty. URL
Shackle, G. L. S. (1955). Expectation, Income, and Profit. Ekonomisk Tidskrift,57(4): 215–234. URL
Smith, A. (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press. (1776). Online-version URL
Sraffa, P. (1979). Production of Commodities by Means of Commodities. Prelude to a Critique of Economic Theory. Cambridge, London, etc.: Cambridge University Press.
von Mises, L. (2007). Human Action. A Treatise on Economics, Volume II. Indianapolis: Liberty Fund. Online-version URL
Wickens, M. (2008). Macroeconomic Theory. A Dynamic General Equilibrium Approach. Princeton, Oxford: Princeton University Press.

 

Related 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist, Sec. 4 URL' and 'Debunking squared' and 'Profit for Marxists URL'.


The theory of profit affects, first of all, the familiar ideas about the functioning of the market mechanism (for details see 'The Law of Supply and Demand: Here it is Finally' URL).


© 2013 EKH, except original quotes; original notation adapted to HTML code here.

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