Mainstream macroeconomics distorts our understanding of economic reality

11 november, 2014 kl. 12:05 | Publicerat i Economics | 3 kommentarer

For a good many years, Tony Lawson has been urging economists to pay attention to their ontological presuppositions. Economists have not paid much attention, perhaps because few of us know what “ontology” means. This branch of philosophy stresses the need to “grasp the nature of the reality” that is the object of study – and to adapt one’s methods of inquiry to it.

5112X+PoJkLEconomics, it might be argued, has gotten this backwards. We have imposed our pre-conceived methods on economic reality in such manner as to distort our understanding of it. We start from optimal choice and fashion an image of reality to fit it. We transmit this distorted picture of what the world is like to our students by insisting that they learn to perceive the subject matter trough the lenses of our method.

The central message of Lawson’s critique of modern economics is that an economy is an “open system” but economists insist on dealing with it as if it were “closed.” Controlled experiments in the natural sciences create closure and in so doing make possible the unambiguous association of “cause” and “effects”. Macroeconomists, in particular, never have the privilege of dealing with systems that are closed in this controlled experiment sense.

Our mathematical representations of both individual and system behaviour require the assumption of closure for the models to have determinate solutions. Lawson, consequently, is critical of mathematical economics and, more generally, of the role of deductivism in our field. Even those of us untutored in ontology may reflect that it is not necessarily a reasonable ambition to try to deduce the properties of very large complex systems from a small set of axioms. Our axioms are, after all, a good deal shakier than Euclid’s.

The impetus to “closure” in modern macroeconomics stems from the commitment to
optimising behaviour as the “microfoundations” of the enterprise. Models of “optimal choice” render agents as automatons lacking “free will” and thus deprived of choice in any genuine sense. Macrosystems composed of such automatons exclude the possibility of solutions that could be “disequilibria” in any meaningful sense. Whatever happens, they are always in equilibrium.

Axel Leijonhufvud

Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality (1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — as relevant today as it was seventeen years ago.

It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond my imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world. Forgetting that, economics is really in dire straits.

Economics and Reality was a great inspiration to me seventeen years ago. It still is.

3 kommentarer

  1. Economics and Reality (Economics as Social Theory)
    Tony Lawson ,1997

    • Already downloaded, thanks much Jan Milch!

  2. Ontology began with the quest of the ancient Greeks to replace mythological explanation with rational explanation. There were two principal methods resulting from this quest that shaped the development of the Western intellectual tradition.

    The first was Plato’s idealism, which held that knowledge is of universals and these universals are metaphysical ideas (eide) or forms in which individual things ”participate.” These metaphysical ideas in terms of which reality is constructed are resident in mind and can be known through introspection. This is called Platonic idealism.

    The second method was Aristotle’s realism. Aristotle held that knowledge is of causes (aitia), and he distinguished the four causes that Plato used but did not distinguish specifically — form as the formal cause of universality, matter as the material cause of particularity, agency as the efficient cause, and purpose or end as the final cause (telos). Aristotle held that mind is a blank slate that can potentially (passively) receive knowledge in terms of causes, but knowledge of causes requires active observation not only by the sense, which provide sense intuition, but also intellect, which provides intellectual intuition of essences, that is, universals (eide).

    The developers of the scientific method agreed more with Aristotle, whereas logicians and mathematicians agreed more with Plato. This created somewhat of a problem since the language of science is logic and mathematics. So there has been an implicit conflict in the development of science that emerged in modern times as the empiricist and rationalist traditions.

    Economic methodology can be viewed in this light as a continuance of the dialectic between Plato and his student Aristotle through many pathways that interweave but can be traced to these sources. It’s not difficult to identify which economists and economic schools are on which side of the controversy.

    But in the development of the Western intellectual tradition, both side have made momentous contributions. Often this happened with they cooperated rather than contested. Perhaps economists who believe that the methodological debate has been won by their side should take notice.

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