Economics departments — breeding generation after generation of idiot savants

10 Aug, 2015 at 10:25 | Posted in Economics | 5 Comments

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 eighteen 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.

Already back in 1991, Journal of Economic Literature published a study by the Commission on Graduate Education in Economics (COGEE) of the American Economic Association (AEA) — chaired by Anne Krueger and including people like Kenneth Arrow, Edward Leamer, Robert Lucas, Joseph Stiglitz, and Lawrence Summers — focusing on “the extent to which graduate education in economics may have become too removed from real economic problems.” The COGEE members reported from own experience “that it is an underemphasis on the ‘linkages’ between tools, both theory and econometrics, and ‘real world problems’ that is the weakness of graduate education in economics,”  and that both students and faculty sensed “the absence of facts, institutional information, data, real-world issues, applications, and policy problems.” And in conclusion they wrote (emphasis added):

The commission’s fear is that graduate programs may be turning out a generation with too many idiot savants skilled in technique but innocent of real economic issues.

Sorry to say, not much is different today. Economics education is still in dire need of a remake. How about bringing economics back into some contact with reality?


  1. Secular intellectual stagnation
    Comment on ‘Economics departments — breeding generation after generation of idiot savants’
    Lars Syll gives word to most people’s impression after a close encounter with economics: “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.”
    The simple reason is that, first of all, the representative student does not really care about internal or external validity. Indeed, what always mattered more in the history of economic thought was the underlying intuition of the argument.

    “But he [A. Smith] had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter, 1994, p. 185)
    Not much has been changed in the interim.
    “A story about Adam Smith, the invisible hand, and the merits of markets pervades introductory textbooks, classroom teaching, and contemporary political discourse. (Ackerman, 2004, p. 21)

    It is the underlying story that sells.

    “It’s an appealing intuitive story that the majority of economists are reasonably comfortable with. It also meets an important teaching criterion: the majority of students can relate to it and say, ‘Yeah, it makes sense’.” (Colander, 1995, p. 169)
    The core of the story is: no matter what economic reality looks like at the moment, all will turn out for the best eventually and all alternatives are even worse.
    “The long run, in economic thought, plays a role similar to the belief in life after death in many religions. Its role is one of a compensatory fantasy gratification.” (Weisskopf, 1955, p. 219)
    It is the constant talk about the blissful future reality that decouples economics from actual reality. Economics was fictional long before formalization started in earnest. As a matter of fact, formalization forced economists to become explicit about the working of the invisible hand and to spell out the hidden assumptions — with unintended results.
    “I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. … Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. … In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial.” (Suppes, 1968, pp. 654-655)
    Formalization worked its magic and the translation of the underlying story into a rigorous formal model made, lo and behold, the fictionality clearly visible to everyone.
    “The economists of the twentieth century, by pushing the neoclassical model to its logical conclusions, and thereby illuminating the absurdities of the world which they had created, have made an invaluable contribution to the economics of the coming century: they have set the agenda, work on which has already begun.” (Stiglitz, 1991, p. 136)
    Note well that it was formalization and not the simple-minded critique of unrealisticness that brought Orthodoxy finally down.
    “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)
    In view of the gross and well known deficits of Orthodoxy the real question is why has Heterodoxy not developed something better?
    “… we may say that … the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)
    This, and not mathiness, explains the secular stagnation of economics.
    “In other words, the main developments in economics of the twentieth century … had been more a matter of form than of substance. … Little new of any great significance has been learned about the workings of markets since Adam Smith and, as noted above, Smith added much less to the discussion than most economists have commonly supposed.” (Nelson, 2006, p. 298)
    So the question ‘Why anyone should be interested in that kind of theories and models’ gets a new answer: the representative economist never could get out of the original pious belief in the benevolent invisible hand because of a lack of scientific instinct, creativity, imagination and — last not least — serendipity.
    Egmont Kakarot-Handtke
    Ackerman, F. (2004). Still Dead After All These Years: Interpreting the Failure of
    General Equilibrium Theory. In F. Ackerman, and A. Nadal (Eds.), The Flawed
    Foundations of General Equilibrium, pages 14–32. London, New York, NY:
    Colander, D. (1995). The Stories We Tell: A Reconstruction of AS/AD Analysis.
    Journal of Economic Perspectives, 9(3): 169–188. URL
    Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge
    University Press.
    Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue:
    The Crisis in Economic Theory, pages 123–138.
    Nelson, R. H. (2006). Economics as Religion: From Samuelson to Chicago and
    Beyond. Pennsylvania, PA: Pennsylvania State University Press.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
    University Press.
    Stiglitz, J. E. (1991). Another Century of Economic Science. Economic Journal,
    101(404): 134–141. URL
    Suppes, P. (1968). The Desirability of Formalization in Science. Journal of
    Philosophy, 65(20): 651–664.
    Weisskopf, W. A. (1955). The Psychology of Economics. Chicago, IL: University
    of Chicago Press.

  2. excellent

  3. “Why anyone should be interested in that kind of theories and models is beyond my imagination.”

    It is indeed very puzzling. It must have something to do with a certain culture in American universities at a certain critical time, because, ironically, it cannot be understood rationally.

    • “Why anyone should be interested in that kind of theories and models is beyond my imagination.”

      I think it is an interesting question.

      It looks like to me that the development of the REH and New Classical economics is largely a US phenomenon. If this is true, what is it about the US milieu that has fostered these developments? I would suggest there are two factors and both are related.

      The first has to do with the way university academic positions are funded. It seems a large number of them are funded by bequests by wealthy people. Wealthy people generally have a common view of the world based on conservative values. Perhaps this is two general a view, I don’t know. I am suggesting that people taking these positions are possibly influenced in their work by the values of their benefactors.

      The second is the American value system seems to be steeped in individualism (almost to the point of brutalism), freedom and independence. I would suggest these values are entirely consistent with the precepts that seem to be encapsulated in the classical mindset, going back to Smith.

      It is interesting to view Tom Sargent’s Nobel Laureate speech. He begins with a talk about developments around the US constitution in post revolutionary America. He is obviously very proud of his heritage. It would not not have been surprising to see him march up to the podium sporting a tricorne and shouldering a musket.

      Robert Lucas’s way of thinking on a range of issues is clear in a Friedman Forum talk before Univ. Chicago undergraduates. It is interesting that questions (last 30 mins) from the student audience dealt with issues Lucas would probably not normally address.

      • Interesting thoughts Henry, but I don’t think it can be entirely explained by a conservative agenda. One of the worst offenders was Samuelson, whose political economy instincts (if not his methodological ones) were Keynesian. While in contrast Friedman was an historian and empiricist par excellence – A Monetary History is 800 page tome thick in historical content. He said himself that Keynes’ (that’s Keynes, not Samuelson and Hicks) methodology was right, but not his conclusions. I think the problem is that Samuelson by adopting a methodology which at its core is based on a Victorian philosophical foundation of optimising individuals and social systems, aggregations of individual units, let the cat out of the bag and the system ended up serving neo-liberalism.

        I think Thornton was on to something earlier when he said that the problem was not maths, but not maths nerds. We need an explanation of why people think you should seek answers to problems making a dubious core assumption about how the world works, using ad hoc modifications to introduce something that looks realistic and aim for theoretical consistency for the sake of producing a ‘sophisticated’ mathematical model and ignore large amounts of knowable and verifiable information and accumulations of knowledge across disciplines that would help you put the pieces together and get you closer to the true story.

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