Modelling consistency and real world non-coherence in mainstream economics

18 May, 2015 at 19:12 | Posted in Economics | Leave a comment

In those cases where economists do focus on questions of market or competitive equilibrium etc., the formulators of the models in question are often careful to stress that their theorising has little connection with the real world anyway and should not be used to draw conclusions about the latter, whether in terms of efficiency or for policy or whatever.

In truth in those cases where mainstream assumptions and categories are couched in terms of economic systems as a whole they are mainly designed to achieve consistency at the level of modelling rather than coherence with the world in which we live.

9781138851023This concern for a notion of consistency in modelling practice is true for example of the recently fashionable rational expectations hypothesis, originally formulated by John Muth (1961), and widely employed by those that do focus on system level outcomes. The hypothesis proposes that predictions attributed to agents (being theorised about) are treated as being essentially the same as (consistent with)
those generated by the economic model within which the same agents are theorised. As such the proposal is clearly no more than a technique for (consistency in) modelling, albeit a bizarre one. Significantly any assertion that the expectations held (and so model in which they are imposed) are essentially correct, is a step that is additional to assuming rational expectations.

It is a form of modelling consistency (albeit a different one) that underpins the notion of equilibrium itself. In modern mainstream economics the category equilibrium has nothing to do with the features of the real economy … Economic models often comprise not single, but sets of, equations, each of which is notoriously found to have little relation to what happens in the real world. One question that nevertheless keeps economists occupied with such unrealistic models is whether the equations formulated are mutually consistent in the sense that there ‘exists’ a vector of values of some variable, say one labelled ‘prices’, that is consistent with each and all the equations. Such a model ‘solution’ is precisely the meaning of equilibrium in this context. As such the notion is not at all a claim about the world but merely a (possible) property that a set of equations may or may not be found to possess …In short, when mainstream economists question whether an equilibrium ‘exists’ they merely enquire as to whether a set of equations has a solution.

Modern economics has become increasingly irrelevant to the understanding of the real world. Tony Lawson traces this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — 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.

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