What went wrong with economics

4 Jan, 2020 at 16:28 | Posted in Economics | 13 Comments

To be ‘analytical’ is something most people find recommendable. The word ‘analytical’ has a positive connotation. Scientists think deeper than most other people because they use ‘analytical’ methods. In dictionaries, ‘analysis’ is usually defined as having to do with “breaking something down.”

anBut that’s not the whole picture. As used in science, analysis usually means something more specific. It means to separate a problem into its constituent elements so to reduce complex — and often complicated — wholes into smaller (simpler) and more manageable parts. You take the whole and break it down (decompose) into its separate parts. Looking at the parts separately one at a time you are supposed to gain a better understanding of how these parts operate and work. Built on that more or less ‘atomistic’ knowledge you are then supposed to be able to predict and explain the behaviour of the complex and complicated whole.

In economics, that means you take the economic system and divide it into its separate parts, analyse these parts one at a time, and then after analysing the parts separately, you put the pieces together.

The ‘analytical’ approach is typically used in economic modelling, where you start with a simple model with few isolated and idealized variables. By ‘successive approximations,’ you then add more and more variables and finally get a ‘true’ model of the whole.

This may sound like a convincing and good scientific approach.

But there is a snag!

The procedure only really works when you have a machine-like whole/system/economy where the parts appear in fixed and stable configurations. And if there is anything we know about reality, it is that it is not a machine! The world we live in is not a ‘closed’ system. On the contrary. It is an essentially ‘open’ system. Things are uncertain, relational, interdependent, complex, and ever-changing.

Without assuming that the underlying structure of the economy that you try to analyze remains stable/invariant/constant, there is no chance the equations of the model remain constant. That’s the very rationale why economists use (often only implicitly) the assumption of ceteris paribus. But — nota bene — this can only be a hypothesis. You have to argue the case. If you cannot supply any sustainable justifications or warrants for the adequacy of making that assumption, then the whole analytical economic project becomes pointless non-informative nonsense. Not only have we to assume that we can shield off variables from each other analytically (external closure). We also have to assume that each and every variable themselves are amenable to be understood as stable and regularity producing machines (internal closure). Which, of course, we know is as a rule not possible. Some things, relations, and structures are not analytically graspable. Trying to analyse parenthood, marriage, employment, etc, piece by piece doesn’t make sense. To be a chieftain, a capital-owner, or a slave is not an individual property of an individual. It can come about only when individuals are integral parts of certain social structures and positions. Social relations and contexts cannot be reduced to individual phenomena. A cheque presupposes a banking system and being a tribe-member presupposes a tribe.  Not taking account of this in their ‘analytical’ approach, economic ‘analysis’ becomes uninformative nonsense.

Using the ‘analytical’ method in social sciences means that economists succumb to the fallacy of composition — the belief that the whole is nothing but the sum of its parts.  In society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori cannot proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

Mainstream economics is built on using the ‘analytical’ method. The models built with this method presuppose that social reality is ‘closed.’ Since social reality is known to be fundamentally ‘open,’ it is difficult to see how models of that kind can explain anything about what happens in such a universe. Postulating closed conditions to make models operational and then impute these closed conditions to society’s real structure is an unwarranted procedure that does not take necessary ontological considerations seriously.

In face of the kind of methodological individualism and rational choice theory that dominate mainstream economics we have to admit that even if knowing the aspirations and intentions of individuals are necessary prerequisites for giving explanations of social events, they are far from sufficient. Even the most elementary ‘rational’ actions in society presuppose the existence of social forms that it is not possible to reduce to the intentions of individuals. Here, the ‘analytical’ method fails again.

The overarching flaw with the ‘analytical’ economic approach using methodological individualism and rational choice theory is basically that they reduce social explanations to purportedly individual characteristics. But many of the characteristics and actions of the individual originate in and are made possible only through society and its relations. Society is not a Wittgensteinian ‘Tractatus-world’ characterized by atomistic states of affairs. Society is not reducible to individuals, since the social characteristics, forces, and actions of the individual are determined by pre-existing social structures and positions. Even though society is not a volitional individual, and the individual is not an entity given outside of society, the individual (actor) and the society (structure) have to be kept analytically distinct. They are tied together through the individual’s reproduction and transformation of already given social structures.

Since at least the marginal revolution in economics in the 1870s it has been an essential feature of economics to ‘analytically’ treat individuals as essentially independent and separate entities of action and decision. But, really, in such a complex, organic and evolutionary system as an economy, that kind of independence is a deeply unrealistic assumption to make. To simply assume that there is strict independence between the variables we try to analyze doesn’t help us the least if that hypothesis turns out to be unwarranted.

To be able to apply the ‘analytical’ approach, economists have to basically assume that the universe consists of ‘atoms’ that exercise their own separate and invariable effects in such a way that the whole consist of nothing but an addition of these separate atoms and their changes. These simplistic assumptions of isolation, atomicity, and additivity are, however, at odds with reality. In real-world settings, we know that the ever-changing contexts make it futile to search for knowledge by making such reductionist assumptions. Real-world individuals are not reducible to contentless atoms and so not susceptible to atomistic analysis. The world is not reducible to a set of atomistic ‘individuals’ and ‘states.’ How variable X works and influence real-world economies in situation A cannot simply be assumed to be understood or explained by looking at how X works in situation B. Knowledge of X probably does not tell us much if we do not take into consideration how it depends on Y and Z. It can never be legitimate just to assume that the world is ‘atomistic.’ Assuming real-world additivity cannot be the right thing to do if the things we have around us rather than being ‘atoms’ are ‘organic’ entities.

If we want to develop new and better economics we have to give up on the single-minded insistence on using a deductivist straitjacket methodology and the ‘analytical’ method. To focus scientific endeavours on proving things in models is a gross misapprehension of the purpose of economic theory. Deductivist models and ‘analytical’ methods disconnected from reality are not relevant to predict, explain or understand real-world economies.

13 Comments

  1. Even the quarks making up the nuclei of atoms appear to weigh — ie have a different mass — when out of the nuclei.

  2. I’m not able to see how Wittgenstein Tractatus has any bearing on the systems approach you wright about. I didn’t actually read all and I forgot most, but essentially it consists of a lot of aforisms that concludes in a thesis that all you may talk about exists outside of your self and the things not possible to point to as an object you should be quite about including such things as abstractions (like God or Psychoanalytic theory about what is contained in what we are not aware of) or basically some of the non observable axioms of The Economic man, the machine you are critical of. Basically its also a fundamental criticism of social construktivism..

    • Not quite but quiet

    • One might be deceived by Wittgenstein talking only about facts, not objects. Some seem to beleive he only writes about psysical objects. But what we conceive as facts is not trivial, Keynes has probably the best interpretation, facts are what we believe with a certain conviction built on individual och statistic probalility of it’s occurence.

  3. Lars Syll, may I ask a question about social systems. Is it only a model, a perspective, or are you able to identify real social systems in the real world? Systems in general, in physics or biology, may not be identified as social systems and it’s obviosly possible to construct system models that are only a perspective on the social world e.g. process industries or plumming or the market (if it’s not to be considered as a social system construucted for exchange of goods an services.)

  4. Social relations and contexts cannot be reduced to individual phenomena. A cheque presupposes a banking system and being a tribe-member presupposes a tribe. Not taking account of this in their ‘analytical’ approach, economic ‘analysis’ becomes uninformative nonsense. ~ Lars on Social Context

    .
    Could I simply replace “cheque” with “money” as both presupposes a banking system? Is it not a fallacy to consider money a “conserved” quantity similar to energy in physics equation?

    • Well, Wittgenstein in his Philosofical Inquirys would say that words are determined by the rules of the language game, so a check is not the same as money as the rules are not the same (money are more liquid and all the other properties of money). This is qurious in my opinion. First the question of how the rules are set. By whom? Why? What purpose? In what way? How is it done?

      Basically I believe in a proposterous thought, language is based on intersubjective relations within systems or relating to systems, a naming and relational device based on human ability to conceive patterns and systems is a natural phenomena organizing humans in families, groups, societies, that is organization ( not the same as a specific organizational structure) based on our limited ability to handle information, we need structure and limitations.

      But it will be interesting to see Lars Sylls response if any.

      • curious (must check my spelling better)

      • Thank you Lars B, I think you are correct to ask how the rules are set, by whom? etc. I am just finishing my first reading of Mirowski’s More Heat than Light, which prompted the question.

    • curious

  5. In this post Prof. Syll alleges that economists commit fallacies of composition. But actually it is he himself who commits this type of error !!
    He tries to criticise and analyse economists’ use of models separately from their interpretation of the results!
    Our very eloquent Prof. claims that:
    “Deductivist models and ‘analytical’ methods disconnected from reality are not relevant to predict, explain or understand real-world economies.”
    But equally:
    “Deductivist philosophy and ‘analytical’ methods disconnected from the reality and totality of what economists do are irrelevant and cannot explain or understand real-world applied economics.”

    • Doesn’t your thinking depend on how you look on systems? If economic theory and professionals are seen as a losely organized system, a discource, the economist build models about other systems, they stand beside the world they are describing? Never mind that theory interrelates with the actual behaviour of different agents, the economic theory stills looks on the world from a position beyond the world. Still the Lucas critique seem in some respects to be valid, but it seems to be a relevant phenomena for study to look into how economic models influences behaviour looked at from a systems perspective? If the efficient market theory exists you might be able to check how it influcenses common education and actual behavior by market participants? (it does not seemd to be the case that Buffet works according to those principals and G soros stets it’s crap), Anyway, how are you to measure if your model is right if you can’t make sence of the causal relations and can’t predict the result of different occurences?

      But anyway, you cannot measure without a model, without a model you don’t know what to look at. Here popper comes in, is the model falsifiable and does it makte relevant predictions?

      Let’s see what professor Syll have to say. Maybe I misunderstood you anyway.

  6. A pitty Lars Syll doesn’t answer the questions posed by different commentators. I’m not afraid of being wrong, I”m interested in what way.


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