Twenty years ago

19 October, 2017 at 10:07 | Posted in Economics | 4 Comments

5112X+PoJkLModern 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 twenty years ago.

It is still a fact that within mainstream economics internal validity is what really counts and external validity is only rarely discussed. Why anyone should be interested in that kind of theories and models is beyond 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!

Using mathematics and logic is interesting and fun. It sharpens the mind. In pure mathematics and logic, we do not have to worry about external validity. But economics is not pure mathematics or logic. It’s about society. The real world. Forgetting that, economics becomes irrelevant pseudo-science.

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.

tonyThe 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.” Controlled experiments 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 deductivism in 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.

Axel Leijonhufvud

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

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4 Comments

  1. “Macroeconomists, in particular, never have the privilege of dealing with systems that are closed in this controlled experiment sense.”
    .
    Although they could get close with decent game based simulation systems. It amazes me that we can simulate racing car games and space trading in amazing details, but apparently modelling the actual world more closely so you can actually see what individual actors are doing is too difficult.

    • And the answer probably has to do with the essential difference between open and closed systems …

      • Tony Lawson: “What is Wrong with Modern Economics? Why did economists not see the financial crisis coming? Has modern economics lost touch with reality and instead lost itself in fancy mathematic models? These are questions that have thrown the economic discipline into turmoil and (hopefully) self-reflection. ” https://www.youtube.com/watch?v=8k56pqyPkP0

    • I just came across Varoufakis’s blog while he was at Valve. Very interesting.

      Sample from http://blogs.valvesoftware.com/economics/to-truck-barter-and-exchange-on-the-nature-of-valves-social-economies/#more-175

      “Thus, to understand the exchanges we observe on Steam, it is crucial that we grasp the network of social relations within which they are embedded. The prevalence of gifting and the fact that no specific item has emerged as a form of money in trades of TF2 items should alert us to the intriguing social conventions that are part and parcel of our community’s trading decisions.”


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