Neoclassical economics – updating a debate

17 Jun, 2013 at 22:04 | Posted in Economics, Theory of Science & Methodology | Comments Off on Neoclassical economics – updating a debate

Noah Smith has an update today on his blog responding to my critique of his post on what neoclassical economics is.

Noah starts by citing the following part of my article:

The basic problem with this definition of neoclassical economics – basically arguing that  the differentia specifica of neoclassical economics is its use of demand and supply, utility maximization and rational choice – is that it doesn’t get things quite right. As we all know, there is an endless list of mainstream models that more or less distance themselves from one or the other of these characteristics. So the heart of neoclassical economic theory lies elsewhere.

He then says:

This is exactly the claim that “neoclassical” = “mainstream”. The clear implication of Syll’s syllogism is that no matter what sort of innovations mainstream economic theory embrace, no matter what old methods it discards, no matter what revolutions it undergoes, whatever it produces will be defined as “neoclassical” simply because it is in the mainstream. To me, that is clearly a counterproductive way of thinking about the world.

However, I would maintain, it is a rather unwarranted conclusion, since in the section directly after the one Smith cites, I expressly write:

The essence of neoclassical economic theory is its exclusive use of a deductivist Euclidean methodology. A methodology  that is more or less imposed as constituting economics, and, usually, without a smack of argument.

The theories and models that neoclassical economists construct describe imaginary worlds using a combination of formal sign systems such as mathematics and ordinary language. The descriptions made are extremely thin and to a large degree disconnected to the specific contexts of the targeted system than one (usually) wants to (partially) represent. This is not by chance. These closed formalistic-mathematical theories and models are constructed for the purpose of being able to deliver purportedly rigorous deductions that may somehow by be exportable to the target system. By analyzing a few causal factors in their “laboratories” they hope they can perform “thought experiments” and observe how these factors operate on their own and without impediments or confounders.

Unfortunately, this is not so. The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in economic models are rather based on formalistic mathematical tractability. In the models they appear as unrealistic assumptions, usually playing a decisive role in getting the deductive machinery deliver “precise” and “rigorous” results. This, of course, makes exporting to real world target systems problematic, since these models – as part of a deductivist covering-law tradition in economics – are thought to deliver general and far-reaching conclusions that are externally valid. But how can we be sure the lessons learned in these theories and models have external validity, when based on highly specific unrealistic assumptions? As a rule, the more specific and concrete the structures, the less generalizable the results. Admitting that we in principle can move from (partial) falsehoods in theories and models to truth in real world target systems does not take us very far, unless a thorough explication of the relation between theory, model and the real world target system is made. If models assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. To have a deductive warrant for things happening in a closed model is no guarantee for them being preserved when applied to an open real world target system.

So my argumentation is not that everything that mainstream economists do have to be neoclassical simply because it is in the mainstream. My argumentation is about trying to delineate what is the core of  a tenable scientific definition of neoclassical economics. And as long as mainstream economists – of whatever ilk – more or less – explicitly or not – subscribe to this core, I can’t see why it should be considered wrong to continue labeling them neoclassical economists.

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