Deductive models leading us astray

30 April, 2013 at 09:39 | Posted in Economics, Theory of Science & Methodology | 2 Comments

Oxford professor John Kay has a very interesting article on why economists have tended to go astray in their – as my old mentor Erik Dahmén used to say – tool sheds:

grand-theft-autoConsistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms – and whose empirical relevance depends entirely on the universal validity of the axioms. The only descriptions that fully meet the requirements of consistency and rigour are completely artificial worlds, such as the “plug-and-play” environments of DSGE – or the Grand Theft Auto computer game.

For many people, deductive reasoning is the mark of science: induction – in which the argument is derived from the subject matter – is the characteristic method of history or literary criticism. But this is an artificial, exaggerated distinction. Scientific progress – not just in applied subjects such as engineering and medicine but also in more theoretical subjects including physics – is frequently the result of observation that something does work, which runs far ahead of any understanding of why it works.

Not within the economics profession. There, deductive reasoning based on logical inference from a specific set of a priori deductions is “exactly the right way to do things”. What is absurd is not the use of the deductive method but the claim to exclusivity made for it. This debate is not simply about mathematics versus poetry. Deductive reasoning necessarily draws on mathematics and formal logic: inductive reasoning, based on experience and above all careful observation, will often make use of statistics and mathematics.

Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it. Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart.

The article is essential reading for all those who want to understand why mainstream – neoclassical – economists actively have contributed to causing todays’s economic crisis rather than to solving it.

Perhaps this becomes less perplexing to grasp when considering what one of its main proponents today – Robert Lucas – maintained already in 2003:

My thesis in this lecture is that macroeconomics in this original sense has succeeded: its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

And this comes from an economist who has built his whole career on the assumption that people are hyper rational “robot imitations” with rational expectations and next to perfect ability to process information. Mirabile dictu!

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2 Comments »

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  1. 1. I believe the quote by Lucas is from his 2003 AEA presidential address, not 1983.

    2. If modern macroeconomics really was based only on deductive reasoning from apriori axioms, empirical research would play little or zero role. Just a brief look through recent issues of journals would show that’s simply not true. Even in the heyday of calibration, an RBC paper would typically have a section comparing its predictions with the data (even though the standard, matching second moments, was rather low).

    • 2003 it should be. Corrected. Thanks.
      Deductive models is here, of course, shorthand for “models that to a large extent are founded on essentially deductive reasoning.”


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