Original sin in economics

1 Aug, 2020 at 10:01 | Posted in Economics | 5 Comments

Mathematics, especially through the work of David Hilbert, became increasingly viewed as a discipline properly concerned with providing a pool of frameworks for possible realities. No longer was mathematics seen as the language of (non-social) nature, abstracted from the study of the latter. Rather, it was conceived as a practice concerned with formulating systems comprising sets of axioms and their deductive consequences, with these systems in effect taking on a life of their own. The task of finding applications was henceforth regarded as being of secondary importance at best, and not of immediate concern.

willard-van-orman-quine-quote-lbj1q8qThis emergence of the axiomatic method removed at a stroke various hitherto insurmountable constraints facing those who would mathematise the discipline of economics … In particular it was no longer regarded as necessary, or even relevant, to economic model construction to consider the nature of social reality, at least for the time being. Nor, it seemed, was it possible for anyone to insist with any legitimacy that the formulations of economists conform to any specific model already found to be successful elsewhere (such as the mechanics model in physics). Indeed, the very idea of fixed metaphors or even interpretations, came to be rejected by some economic ‘modellers’ (albeit never in any really plausible manner).

The result was that in due course deductivism in economics, through morphing into mathematical deductivism on the back of developments within the discipline of mathematics, came to acquire a new lease of life, with practitioners (once more) potentially oblivious to any inconsistency between the ontological presuppositions of adopting a mathematical modelling emphasis and the nature of social reality. The consequent rise of mathematical deductivism has culminated in the situation we find today.

Tony Lawson

To be ‘analytical’ and ‘logical’ is something most people find recommendable. These words have a positive connotation. Scientists think deeper than most other people because they use ‘logical’ and ‘analytical’ methods. In dictionaries, logic is often defined as “reasoning conducted or assessed according to strict principles of validity” and ‘analysis’ 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 ‘logical’ and ‘analytical’ methods 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

To have ‘consistent’ models and ‘valid’ evidence is not enough. What economics needs are real-world relevant models and sound evidence. Aiming only for ‘consistency’ and ‘validity’ is setting the economics aspirations level too low for developing a realist and relevant science.

Economics is not mathematics or logic. It’s about society. The real world.

Models may help us think through problems. But we should never forget that the formalism we use in our models is not self-evidently transportable to a largely unknown and uncertain reality. The tragedy with mainstream economic theory is that it thinks that the logic and mathematics used are sufficient for dealing with our real-world problems. They are not! Model deductions based on questionable assumptions can never be anything but pure exercises in hypothetical reasoning.

The world in which we live is inherently uncertain and quantifiable probabilities are the exception rather than the rule. To every statement about it is attached a ‘weight of argument’ that makes it impossible to reduce our beliefs and expectations to a one-dimensional stochastic probability distribution. If “God does not play dice” as Einstein maintained, I would add “nor do people.” The world as we know it has limited scope for certainty and perfect knowledge. Its intrinsic and almost unlimited complexity and the interrelatedness of its organic parts prevent the possibility of treating it as constituted by ‘legal atoms’ with discretely distinct, separable and stable causal relations. Our knowledge accordingly has to be of a rather fallible kind.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? Even if there always has to be a trade-off between theory-internal validity and external validity, we have to ask ourselves if our models are relevant.

‘Human logic’ has to supplant the classical — formal — logic of deductivism if we want to have anything of interest to say of the real world we inhabit. Logic is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap. In this world, I would say we are better served with a methodology that takes into account that the more we know, the more we know we do not know.

Mathematics and logic cannot establish the truth value of facts. Never has. Never will.

5 Comments »

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  1. I will say again that I do not think slandering analysis as by its nature “atomistic” is an accurate assessment of what analysis properly seeks to do. Analysis, classically, seeks to establish necessary and sufficient conditions. This entails a focus on relations among elements in producing phenomena.
    .
    Mainstream economists do not do analysis properly and their pretensions of rigor are false as a consequence. Take them to task for that.
    .
    Take them task, for example, for using production functions as a theory of production without energy, waste or error, just because they stubbornly want to focus on allocative efficiency in a world of complete information as if allocative efficiency is all that matters, and complete information is possible, and all because such wilful stupidity is congenial to their ideological prejudices.
    .
    Anyway, carry on.

  2. Very interesting. In my view a possible solution is to look at the individual as a system of it’s own relating to social system recognized as having tasks and organisation, people in roles and technology but seen funcionally as handling material and information, holding it’s recognizable borders to other systems and main function to remain in existence and then analytically decomposed in different functions to do so. That is not looking for componens to define a system but functionality. Making profit is obviously necessary for enterprices, but a funktion on the second level in the funtion tree and systems not hiearkally definiable as subsystems if not self contained and in different degree independendent of a main system, but relating to other systems.. Such a dual look on individual and systems I think make such things as plurality and individual freedom and dynamism possible to see as necessary parts of the economy and the concept of markets a system in itself for exchange of different produkts and different markets for different product, so e.g. a labour market exists, but when employed the social structure of the system where employed matters more and within the systems competition is not very relevant but positioning and teamwork. A function tree is not the same as an organizational chart but implementing that is organizing the fuctions may take many different paths like procedural organisation, matrix organizations etc but where you decide to perform the functions, in sequence etc is not given, but the functions recognizable. Change may be perceived as dynamic adptation to different environment, outside preasure, guided by the demad to maintain the system.

    But this defintion of systems concern social systems as man is a social creature and constructs socials systems, but it has implication on pshycology, where a systems aproach has prevailed in some form like in systemic therapy and on sociial pschycology where the growing notion of social motivation as driving factors could be the force driving people to work together and create families and tribes and organisazion and as well a hypothesis could be build that motivation and interaction with others have profound konsequenses even for psychic healt. But from an economic perspective a Deep dive in pshycology maybe is not necessary but the Connection between social systems and individuals? But behavioural economics might be a road to nowhere if the relation and analytical division between social systems and individuals are not taken in.

    Long discussion, but at least a hypothesis on how economics could proceed. Looking on system levels in society it obviously would be natural to study systems in them selfes like the financial industry, eduation systems, central banks, industry, public sector and study the relationsships to other systems. Macro economics like demand and supply would be a macro relation on different markets not possible to reduce to individual behaviour,.

  3. I might as well state that such an analysis of families, interaktion with others and with systems must stay on a conceptional level. I don’think its possible to dig to deep into how e.g. a family works this way, not possible to linearly descibe everything that happens or how individuals perceive and react and understand as man is not a derivate of systems or heritage och behaviourly consistent. A basic stand looking on social systems could be “follow the money”. Thinking on income distribution, trade balances, structural questions of the society regardin production are all relevant questions.

  4. But for exampel MMT thinking on a basic work schedule cannot be kept on a level presuming everything runs by itself if the organization is set up but must delve into the particularities of consequenses on a personal and societal level. How to handle differet people, different background, different possibilities, different qualifications, how to qualify, how to preserve qualifications and develop them and not only look on the situation of ordinary working man, but take in people as middle management etc. A sacced professor, what to do with him?

  5. I made a textual error. I should have stated that a criteria for a subsystem is that it can only exist as long as the overarching system exists, but a system in it’s own may exists without being part of another system, but having relations with other systems that is with the environment.made up of individuals and other systems (like theoretical or religios och ideological or media or political parties or public service systems etc). Classes may be seen as systems in some respects e.g. more or less organized activities.

    But it’s a sketch.


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