Economics — an axiomatically based science doomed to fail

25 Jan, 2024 at 15:58 | Posted in Economics | 1 Comment

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.

Unfortunately, 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.

Within mainstream economics, internal validity is still everything and external validity is nothing. Why anyone should be interested in its 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!

Studying mathematics and logic is interesting and fun. It sharpens the mind. We do not have to worry about external validity in pure mathematics and logic. But economics is not pure mathematics or logic. It’s about society. The real world. Forgetting that, economics is really, as Solow says, doomed to fail.