Deductivism — the original sin of ‘modern’ economics

30 September, 2015 at 12:57 | Posted in Economics | 3 Comments

For many people, deductive reasoning is the mark of science: induction – in which the argument is derived from the subject matter – is the characteristic method of history or literary criticism. But this is an artificial, exaggerated distinction. Scientific progress … is frequently the result of observation that something does work, which runs far ahead of any understanding of why it works.

aimageNot within the economics profession. There, deductive reasoning based on logical inference from a specific set of a priori deductions is “exactly the right way to do things”. What is absurd is not the use of the deductive method but the claim to exclusivity made for it. This debate is not simply about mathematics versus poetry. Deductive reasoning necessarily draws on mathematics and formal logic: inductive reasoning, based on experience and above all careful observation, will often make use of statistics and mathematics …

The belief that models are not just useful tools but are capable of yielding comprehensive and universal descriptions of the world blinded proponents to realities that had been staring them in the face. That blindness made a big contribution to our present crisis, and conditions our confused responses to it.

John Kay

Kay’s article is essential reading for all those who want to understand why mainstream – neoclassical – economics actively have contributed to causing todays’s economic crisis rather than to solving it.

Perhaps this becomes less perplexing to grasp when considering what one of its main proponents today – Robert Lucas – maintained already in 2003:

My thesis in this lecture is that macroeconomics in this original sense has succeeded: its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

And this comes from an economist who has built his whole career on the assumption that people are hyper rational “robot imitations” with rational expectations and (stochastically) perfect ability to process information. Mirabile dictu!

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  1. How Orthodoxy buffaloed Heterodoxy
    Comment on ‘Deductivism — the original sin of ‘modern’ economics’
    .
    “The tension between deductive and inductive modes of scientific inquiry is at least as old as written history.” (Clower and Howitt, 1997, p. 21)
    .
    In economics this tension has often been misinterpreted as alternative. “Is it better to start deductively from axioms or inductively from facts? When the time comes to choose between internal consistency and consistency with observations, which side should we take?” (Blinder, 1987, p. 135)
    .
    Wrong question! There is nothing to chose! Science is defined by both material AND formal consistency. It was already clear to Bacon that science moves forward on two legs, that is, by the alternating interaction of facts and axioms.
    .
    “There remains simple experience; which, if taken as it comes, is called accident, if sought for, experiment. The true method of experience first lights the candle [hypothesis], and then by means of the candle shows the way [arranges and delimits the experiment]; commencing as it does with experience duly ordered and digested, not bungling or erratic, and from it deducing axioms [theories], and from established axioms again new experiments.” (Novum Organum, 1620; quoted in Wikipedia*)
    .
    For economics, Schumpeter has settled the question: “… there is not and cannot be any fundamental opposition between ‘theory’ and ‘fact finding,’ let alone between deduction and induction.” (1994, p. 45)
    .
    Why, then, is there still a discussion between Orthodoxy and Heterodoxy about deduction and induction? Because BOTH have not really got the point.
    .
    Orthodoxy explicitly lays down its premises: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. ‘Taken to be true’ means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, p. 147)
    .
    Where does the fundamental error/mistake of Orthodoxy come in? Quite simple: HC2, HC4 and HC5 are inadmissible as axioms.
    .
    Where does the error/mistake of Heterodoxy come in? Quite simple: instead of replacing the defect orthodox axioms by correct heterodox axioms Heterodoxy argues against the axiomatic-deductive method as such.
    .
    By giving the silly behavioral assumption of constrained optimization the status of an axiom Orthodoxy triggered in Heterodoxy the outsized Pavlovian reflex to abhor axiomatization as such. This, unfortunately, amounts to methodological self-mutilation.
    .
    The original sin of modern economics is that Orthodoxy got the axiomatic foundations wrong and Heterodoxy has none at all. By no strech of the imagination has economics solved the ‘central problem of depression-prevention’. The manifest failure of economics is not explicable by Deductivism but is the result of pervasive methodological incompetence.
    .
    Egmont Kakarot-Handtke
    .
    References
    Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic
    Review, 77(2): 130–136. URL http://www.jstor.org/stable/1805440.
    Clower, R. W., and Howitt, P. (1997). Foundations of Economics. In A. d’Autume,
    and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, pages 17–34.
    Cheltenham, Brookfield, VT: Edward Elgar.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
    University Press.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal.
    American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    http://www.jstor.org/stable/1805586.
    .
    * https://en.wikipedia.org/wiki/Scientific_revolution

    • I almost always agree with you, Egmont, but this zeros in on the most important point: the heterodox critique can never succeed because its supporters share the same bizarre beliefs about how science works as the orthodox do.
      .
      It’s like “Hey guys, how do we attack the evil and wrong Neoclassicals?”
      “I know, let’s start by accepting their view of how science works as well as their arrogant stance that declares their undergraduate physics classes to be all the exposure to real science that they need to understand how all of science works.”
      .
      Inductively, this is likely to be true because generations of heterodox economists have produced exactly zero progress in the field as a whole. The best explanation is that the heterodox are doing it wrong. The living embodiment of this is Lars Syll who demonstrates the near infinite number of three paragraph italicized critiques that have failed.

      • Clueless at the dead spot
        Comment on Thornton Hall on ‘Deductivism — the original sin of ‘modern’ economics’
        .
        There can be no disagreement about the plain fact that standard economics as codified in peer-reviewed texts is a failed approach. This leaves every serious student of economics with the question of how to deal with the mess. Orthodoxy frankly admits its weaknesses and is open to improvements — within the given paradigm, that is. And this is the crux. Corrections at the margin are not sufficient when the paradigm itself is methodologically defective.
        .
        “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao and Israel, 1990, p. 362)
        .
        From the perspective of Heterodoxy the situation is this: “… there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)
        .
        Or, as Keynes famously summed up the most devastating empirical refutation ever: “… there is no remedy except … to work out a non-Euclidean geometry. Something similar is required to-day in economics. (Keynes, 1973, p. 16)
        .
        Yet, the paradigm shift has not happened until this very day. Orthodoxy and Heterodoxy consists of a heap of models that do not satisfy the scientific criteria of formal and material consistency.
        .
        Economics is still at the proto-scientifc level. The last thing needed is methodological shoptalk. For Heterodoxy there is only one way to demonstrate superiority: “Doubtless, the most effectual mode of showing how the sciences … may be constructed, would be to construct them …” (Mill, 2006, p. 834)*
        .
        Everything else is a continuation of the silly filibuster with which economists have much too long degraded their discipline.
        .
        Egmont Kakarot-Handtke
        .
        References
        Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
        Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
        Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
        Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY, Melbourne: Cambridge University Press.
        * For a start see cross-references
        http://axecorg.blogspot.de/2015/04/new-curriculum-cross-references.html


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