Economics — an axiomatically based science doomed to fail

22 Jul, 2019 at 21:35 | Posted in Economics | 2 Comments

A modern economy is a very complicated system. Since we cannot conduct controlled experiments on its smaller parts, or even observe them in isolation, the classical hard-science devices for discriminating between competing hypotheses are closed to us. The main alternative device is the statistical analysis of historical time-series. But then another difficulty arises. The competing hypotheses are themselves complex and subtle. We know before we start that all of them, or at least many of them, are capable of fitting the data in a gross sort of way. Then, in order to make more refined distinctions, we need long time-series observed under stationary conditions.

fellaUnfortunately, however, economics is a social science … Much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity. Moreover, all narrowly economic activity is embedded in a web of social institutions, customs, beliefs, and attitudes. Concrete outcomes are indubitably affected by these background factors, some of which change slowly and gradually, others erratically. As soon as time-series get long enough to offer hope of discriminating among complex hypotheses, the likelihood that they remain stationary dwindles away, and the noise level gets correspondingly high. Under these circumstances, a little cleverness and persistence can get you almost any result you want. I think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief. Indeed, some of Fortune’s favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices.

Robert Solow

Yours truly has for many years been urging economists to pay attention to the ontological foundations of their assumptions and models. Sad to say, economists have not paid much attention — and so modern economics has become increasingly irrelevant to the understanding of the real world.

an-inconvenient-truth1Within mainstream economics internal validity is still everything and external validity nothing. 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!

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, as Solow says, doomed to fail.

2 Comments

  1. I’m getting more and more uncomfortable with Micro theory and the supposed basis for Macro theory.
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    I believe that If you look at societies as a network (not as a hierarchy) of systems and within as a hierarchy of functions where the top function is for the system to keep existing, you will find that society always change with the systems and it’s connections, it adapts to pressure like competition within a market, a system in itself, it changes with believes, visions, ideology, theory created within systems and passed between systems by individuals. Within systems you will find regulatory functions and systems that regulate other systems as well. I believe social systems are identifiable as having mission, organisation, people and technology and clear boundaries though open in distinguishable ways. These systems are objective social constructions. These constructions are not law bound in the way they are constructed but bound by human psychology, individual and social psychology.
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    To me it seems that Macro theory should be looked upon as aggregated resulting behaviour of society and concentrate on regulating systems and institutions like government, central banks, export/import, current account etc. and maybe on sectoral, historically informed analysis.
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    To use time series it would be necessary to incorporate as explaining variables some measure of the major changes of the system structure or regulatory functions within society.

    Comment by Lars Berggren— 23 Jul, 2019 #

  2. The main alternative device is the statistical analysis of historical time-series.
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    I confess I have never understood why economists think this approach at all attractive. Solow is pretty clear: the actual political economy is a richly complex set of phenomena to observe and interpret. So, why exactly would you want abstract away from that reality gross statistical aggregates and, as if that is not bad enough, arrange them as time-series!?! History is always only going to happen one way: an aggregate time-series has something close to zero degrees of freedom, by design you might say, and auto-correlation in the sequence is going to explain most of what happens — the weather today is usually a pretty good prediction of the weather tomorrow without being very enlightening meteorology. By the time a researcher has constructed an aggregate time-series, she has squeezed most of the information out of the data. Does that concern anyone, the loss of information?

    Comment by Bruce Wilder— 23 Jul, 2019 #


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