Are methodological discussions risky?

14 July, 2017 at 13:53 | Posted in Economics | 2 Comments

Most mainstream economists are reluctant to have a methodological discussion. They usually think it’s too ‘risky.’

Well, maybe it is. But on the other hand, if we’re not prepared to take that risk, economics can’t progress, as Tony Lawson forcefully argues in his Essays on the Nature and State of Modern Economics:

Twenty common myths and/or fallacies of modern economics

1. The widely observed crisis of the modern economics discipline turns on problems that originate at the level of economic theory and/or policy.

onedoesIt does not. The basic problems mostly originate at the level of methodology, and in particular with the current emphasis on methods of mathematical modelling.The latter emphasis is an error given the lack of match of the methods in question to the conditions in which they are applied. So long as the critical focus remains only, or even mainly, at the level of substantive economic theory and/or policy matters, then no amount of alternative text books, popular monographs, introductory pocketbooks, journal or magazine articles … or whatever, are going to get at the nub of the problems and so have the wherewithal to help make economics a sufficiently relevant discipline. It is the methods and manner of their use that are the basic problem.

If scientific progress in economics – as Robert Lucas and other latter days followers of Milton Friedman seem to think – lies in our ability to tell ‘better and better stories’ one would of course expect economics journal being filled with articles supporting the stories with empirical evidence confirming the predictions. However, I would argue that the journals still show a striking and embarrassing paucity of empirical studies that (try to) substantiate these predictive claims. Equally amazing is how little one has to say about the relationship between the model and real world target systems. It is as though thinking explicit discussion, argumentation and justification on the subject isn’t considered required.

If the ultimate criteria of success of a deductivist system is to what extent it predicts and coheres with (parts of) reality, modern mainstream economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in models, is a gross misapprehension of what an economic theory ought to be about. Deductivist models and methods disconnected from reality are not relevant to predict, explain or understand real world economies.

No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in modern mathematical form, they do not push economic science forwards one millimeter if they do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside these models are, they do not per se say anything about real world economies.

keynes-right-and-wrong

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2 Comments

  1. I am not clear exactly what is being criticised here. If it is the way that mainstream economists use mathematical models, then I agree with that. But I worry about your “To focus scientific endeavours on proving things in models, is a gross misapprehension of what an economic theory ought to be about. ”

    At my https://djmarsay.wordpress.com/2017/07/14/mathematical-modelling-2/ I informally sketch out a model that seems useful to critique the mainstream assumptions. (You may recognize it from Keynes.)

    My own view is that any field that has pretensions to be ‘scientific’ ought to have mathematical modelling as one focus, with a healthy interchange between the models and the experiences that ought to be informing the models. I agree with Lawson that economics is failing here. But the problem is not an undue emphasis on modelling, but on inappropriate and ill-informed modelling.

  2. I think you start Economic modeling with balance sheets because market players use them. Then you look at the math quants are using. Their models broke in 2007-2008, but the Fed proved that the risk the private trading models had neglected was wholly psychological: traders arbitrarily devalued Mortgage-Backed Securities based on rumor and wild mood swings. The Fed proved it could supply as much liquidity as desired to fix the broken insurance piece.

    The conclusions of real-world, quant models are that prices are arbitrary and the Fed has unlimited liquidity. The Fed increased US Dollar reserves by trillions and the dollar got stronger.


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