Thinking about thinking

7 Feb, 2021 at 15:42 | Posted in Economics | 6 Comments

Unfortunately, the greater part of economic controversies arise from confronting dogmas. The style of argument is that of theology, not of science … In economics, new ideas are treated, in theological style, as heresies and as far as possible kept out of the schools by drilling students in the habit of repeating the old dogmas, so as to prevent established orthodoxy from being undermined …

On the plane of academic theory, the importance of the Keynesian revolution was to show that all the familiar dogmas are set in a world without time and cannot survive the simple observation that decisions, in economic life, are necessarily taken in the light of uncertain expectations about their future consequences.

Orthodox theory reacted to this challenge, in true theological style, by inventing fanciful worlds in which the difference between the past and the future does not a rise and devising intricate mathematical theorems about how an economy would operate if everyone in it had correct foresight about how everybody else was going to behave.

Mainstream — ‘orthodox’ — economists extensively exploit ‘rational choice’ assumptions in their explanations. That is probably also the reason why the theory has not been able to accommodate well-known anomalies in its theoretical framework. That should hardly come as a surprise to anyone. Mainstream theory with its axiomatic view on individuals’ tastes, beliefs, and preferences, cannot accommodate very much of real-life behaviour. It is hard to find really compelling arguments in favour of us continuing down its barren paths since individuals obviously do not comply with, or are guided by, ‘orthodox’ theory.

Looking, e.g., at the special branch of mainstream theory called game theory, it is — apart from a few notable exceptions — difficult to find really successful applications of the theory. Why? To a large extent simply because the boundary conditions of game theoretical models are false and baseless from a real-world perspective. And, perhaps even more importantly, since they are not even close to being good approximations of real-life, game theory is lacking predictive power. This should come as no surprise. As long as mainstream economic theory sticks to its ‘rational choice’ foundations, there is not much to be hoped for.

Game theorists can, of course, marginally modify their tool-box and fiddle with the auxiliary assumptions to get whatever outcome they want. But as long as the ‘rational choice’ core assumptions are left intact, it seems a pointless effort of hampering with an already excessive deductive-axiomatic formalism. If you do believe in a real-world relevance of game theoretical ‘science fiction’ assumptions such as expected utility, ‘common knowledge,’ ‘backward induction,’ correct and consistent beliefs etc., etc., then adding things like ‘framing,’ ‘cognitive bias,’ and different kinds of heuristics, do not ‘solve’ any problem. If we want to construct a theory that can provide us with explanations of individual cognition, decisions, and social interaction, we have to look for something else than — as Robinson eloquently puts it — “invented fanciful worlds.”

Building theories and models on unjustified patently ridiculous assumptions we know people never conform to, does not deliver real science. Real and reasonable people have no reason to believe in ‘as-if’ models of ‘rational’ robot-imitations acting and deciding in a Walt Disney-world characterised by ‘common knowledge,’ ‘full information,’ ‘rational expectations,’ zero  transaction costs, given stochastic probability distributions, risk-reduced genuine uncertainty, and other laughable nonsense assumptions of the same ilk. Science fiction, with its “invented fanciful worlds,” is not science.

Much work done in mainstream theoretical economics is devoid of any explanatory interest. And not only that. Seen from a strictly scientific point of view, it has no value at all. It is a waste of time. And as so many have been experiencing in modern times of austerity policies and market fundamentalism — a very harmful waste of time.