What went wrong with economics?

21 September, 2015 at 10:35 | Posted in Economics | 5 Comments

realty-check-aheadInternal coherence is one way of adjudicating among theories, but so is correspondence to everyday life. Too much realism may kill analysis, but too little realism is unscientific. If theoretical coherence alone were all that mattered, then the only constraint on theoretical exercises would be the human imagination. Interesting
puzzles would replace pragmatic solutions to problems encountered in the world — arguably, an accurate characterization of most contemporary economic theory. Economists must steer a course between (allegedly) pure description and the mere recording of events, on the one side, and self-indulgent mental gymnastics on the other …

Parsimony won out over thoroughness … By myopically pursuing only the formal aspects of the discipline, economics was reduced to its present state, in which we continually know more and more about less and less.

Peter Boettke

Mainstream economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality. Although the deductivist mathematical modeling method makes conclusions follow with certainty from given assumptions, that should be of little interest to scientists, since what happens with certainty in a model world is no warrant for the same to hold in real world economies.

Mainstream economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

To have valid evidence is not enough. What economics needs is sound evidence. Theories and models being “coherent” or “consistent with” data do not make the theories and models success stories.



  1. Lars, it seems to me that the problem is not so much the use of mathematical modelling as in the odd notion of coherence, which supposes that economies operate according to universal laws, and are not – for example – significantly influenced by our ideas about them. This odd view is not limited to economics.

  2. Economics is an abysmal failure of reason
    Comment on ‘What went wrong with economics?’
    There can be only one answer to this question: economists are scientifically incompetent. Since more than two centuries Orthodoxy is unacceptable because of material and formal inconsistency,* and Heterodoxy failed to produce a superior alternative: “… 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)
    Of course, ‘economies operate according to universal laws’ but they do not operate according to behavioral laws because something like a behavioral law does not exists to begin with. Standard economics has been built upon the green cheese behavioral assumption of constrained maximization and from there onwards all went wrong.
    Economists never understood what science is all about and this is why they never secured correct premises. “To Plato’s question, ‘Granted that there are means of reasoning from premises to conclusions, who has the privilege of choosing the premises?’ the correct answer, I presume, is that anyone has this privilege who wishes to exercise it, but that everyone else has the privilege of deciding for himself what significance to attach to the conclusions, and that somewhere there lies the responsibility, through the choice of the appropriate premises, to see to it that judgment, information, and perhaps even faith, hope and charity, wield their due influence on the nature of economic thought.” (Viner, 1963, p.12)
    The whole of economics is built upon inappropriate premises. What is needed is a paradigm shift, that is, a move from subjective behavioral premises to objective structural premises (2014).**
    Because of scientific incompetence, the present generation of economists has not get the point and will not get it. There is no hope, all that can be done is a dishonorable discharge of these people from science.
    Egmont Kakarot-Handtke
    Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge
    University Press.
    Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working
    Paper Series, 2418851: 1–19. URL
    Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp.
    1–22. URL http://www.jstor.org/stable/1823845
    * Watch Feynman on material consistency

    ** See cross-references Paradigm shift

  3. Economics used to be about the real world. Smith, Marx, Veblen, Keynes and Schumpeter all wrote about the real world, whatever their conclusions were. This present sophistry is a rather new phenomenon, contemporary with the domination of financial capitalism and probably caused by the same.

  4. Somewhat surprisingly to see Peter “The Keynes of the GT was never right” Boettke here :

    “The resurrection of Keynes among professional economists…….. In the wake of the global financial crisis of 2008 has been one of the most disappointing developments I have witnessed in mij career as an economist” (Boettke)

    According to Boettke:
    “The soul of economics as a scientific discipline is ultimately what we are discussing. Perhaps someday, if we economists who sit in the seat of Adam Smith and practice mainline economics are successful, then Fred Block, Alice Amsden and Lance Taylor’s fears will be a reality, and the research program as developed by Mises and Hayek (as well as the other more recent figures I mentioned) will be accepted as the standard bearer for scientific progress in economics.  On that day, the mainline will be the mainstream.  But until that day, the mainline remains outside of the mainstream, and only acts of scientific entrepreneurship will shift that reality.”
    (Boettke, coordinationproblem /01/2015 )

    The research program as developed by Mises cum suis, hmm..
    Is LvM’s praxeology more true-to-nature then a formalist axiomatic-deductive approach because he builds upon a rather cryptic “verstehen” and avoids math by using instead his own particular version of logic in an almost endless stream of boring, long spun out trivial tautologies?
    “Outdated scholastic metaphysics”, even according to ( Austrian) Gottfried Haberler:
    “Wenn man sich entschliessen könnte, diesen Reste einen veralteten scholastische Metaphysik,die glaubt aus tautologischen Sätze Aussagen über die Wirklichkeit machen zu können, über Bord zu werfen” (1)

    Mises “research program” looks to me, above all, a political agenda: an elaboration of his almost obsessive fear that politicians would allow the working class,” the inferior people” in Misesean terminology (2) to claim too large a part of the economic surplus and what to do against that.
    So he states that only complete submission to his idea of the ‘market’, “das Befehlsmechanismus des Marktes” as Hayek called it, will make us free and prosperous and ,as a welcome epiphenomenon, would make inequalities as large as possible.(3)
    Nevertheless, in special circumstances , as a “Notbehelf des Augenblicks”, other command mechanisms are allowed, ie when the ” inferior people ” would not be prepared to appreciate their misery as an inevitable result of a natural order: “Es kan nicht geleugnet werden das der Fascismus und ahnlichen Diktaturbestrebungen voll von den besten Absichten sind….” (3)
    A standard bearer for scientific progress?
    “Mainliner” Boettke is a pugnacious ” Austrian”,( although not of the most extreme kind) and apparently a dedicated follower of Misesian/Hayekian fashion.
    Almost all Austrians tend to see Keynes as a disturber of the cosmic order as well as the root of all evil in the world of economics and many hold him personally responsible for their marginalization in academia.
    They therefore seem to be in a constant state of anger and astonishment about the fact that the rest of the world not immediately accepts their (anti Keynes) ideas, that appear so obvious to them.
    And what are these “acts of scientific entrepeneurship” anyway. Being on the payroll of people like Rockefeller, Luhnow, Koch, Thiel etc.?
    (1)Haberler, Festschrift fur Arthur Spiethof 1933 94
    (2) “You have the courage to tell the people what no politician told them: you[they] are inferior…..”
    L. von Mises (letter to A.Rand) Burns, Goddess of the Market 177
    (3) “Inequality of wealth and incomes is the cause of the masses’ well‑being, not the cause of anybody’s distress. Where there is a ‘lower degree of inequality’, there is necessarily a lower standard of living of the masses” (von Mises 1955).
    (4) LvM Liberalismus

    • As I’ve written on this blog repeatedly — there is much bad Austrian economics, but also some that is really good.
      Do not throw the baby out with the bath water!

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