## Why ‘Economics and Reality’ is on my top 10 list

7 May, 2016 at 17:11 | Posted in Economics | 2 CommentsFor 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.

Economics, 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.”

Controlledexperiments 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

deductivismin 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.

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.

To many mainstream economists, Tony Lawson is synonymous with anti-mathematics. But I think reading what Tony Lawson or yours truly have written on the subject, shows how unfounded and ridiculous is the idea that many mainstream economists have that because heterodox people often criticize the *application* of mathematics in mainstream economics, we are critical of math *per se*.

Indeed.

No, there is nothing wrong with mathematics *per se*.

No, there is nothing wrong with applying mathematics to economics.

Mathematics is one valuable tool among other valuable tools for understanding and explaining things in economics.

What is, however, totally wrong, are the utterly simplistic beliefs that

• “math is the *only* valid tool”

• “math is *always and everywhere* self-evidently applicable”

• “math is all that really counts”

• “if it’s not in math, it’s not really economics”

*• *“almost *everything* can be adequately understood and analyzed with math”

What is wrong with these beliefs is that they do not — as forcefully argued by Tony Lawson — reflect an ontological reflection on what can be rightfully expected from using mathematical methods in different context. Or as Knut Wicksell put it already a century ago:

One must, of course, beware of expecting from this method more than it can give. Out of the crucible of calculation comes not an atom more truth than was put in. The assumptions being hypothetical, the results obviously cannot claim more than a vey limited validity. The mathematical expression ought to facilitate the argument, clarify the results, and so guard against possible faults of reasoning — that is all.

It is, by the way, evident that the

economicaspects must be the determining ones everywhere: economic truth must never be sacrificed to the desire for mathematical elegance.

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

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From Chapter 19

“In consequence, there arises the question of whether it is even meaningful

to talk of economic change in this context (see Chapter 12 above) and so

whether there is any point to the activity of policy prescription. It is true that

if we look back to formulation (A) there appears to be some scope for change

of sorts if (at least some of) the exogenous variables (the z’s) are interpreted as

choice variables, as instruments of government control or whatever. That is,

if such exogenous variables are really instruments in the control of policy

makers it would appear that an element of choice is afforded in affecting their

values, allowing the possibility of some influence over y. But any such

separation between, on the one hand, the inability of lay agents to choose

and, on the other, the real possibility of government policy formulators to

make a difference, is hardly credible, as we have seen.

Of course, from the perspective of contemporary orthodox economics, with

its emphasis on ever-rational, near omniscient, individuals, the obvious

anomaly here is the supposition that the variables treated as exogenous, the

apparent instruments of government policy, are in fact unpredictable. Put

differently, the noted dualism is inconsistent with the mainstream belief that

everything can ultimately be endogenised, that everything can be deduced

from some ‘whenever this then that’ formulation. And as we saw in Chapters

1 and 7 certain advocates of the influential rational expectations hypothesis

have recently asserted explicitly that changes in government policy

instruments are indeed predictable, so that any real choice in that department

is assumed away after all. But then we are returned to the question of whether

there is any point to policy analysis—or indeed to any other activity which is

premised on the belief that things could have been otherwise? We have seen

that this is a question or puzzle which mainstream economists themselves

frequently raise, albeit without achieving any satisfactory answer. To repeat

Reder’s (1982) conundrum addressed in Part I: ‘To the extent that variables

are endogenized—choice is explained—society’s freedom of choice is seen as

illusory’ (1982:35).”

Comment by Fred Welfare— 7 May, 2016 #

Reality, as a scientist appreciates it, is a very individual response to what is being examined. It is so subjective, even for an exact-science subject, that the people involved need to draw diagrams and use a short-hand system for representing variables called mathematics, in order to communicate and better understand what is going on. Consequently for us to embrace a degree of reality in economics means to introduce a personal symbolism in order to understand the subject in human terms. We tend to do this whenever we communicate, whether we are aware of it or not.

When the subject is complex, indefinite and sensitive to intuitive feelings, etc., as is the case in economics, this makes the situation seemingly almost impossible to properly understand, unless the people involved have first begun to build axioms, make assumptions and cast definitions about the matter in hand.Thus to become closer to reality in economics we badly need to pass the various steps of deciding about how we are to understand our subject in the most realistic way first and by implication to make good axioms, assumptions and definitions first.

It gets harder because we as individuals do not have the same definitions etc, in mind and as a result economics has not yet come of ages as an exact science. It could be, if and when we can agree of these 3 kinds of initial steps.

Comment by David Chester— 8 May, 2016 #