AXECwiki
Various Delusions
Were we seriously, by a single phrase, to attempt to characterize the modern age, — the age of Keynes, Samuelson, Hicks, Arrow, Debreu, and so on — we should call it the age of delusion, because it seems to involve nothing so much as a generalized delusion that sheer analytical technique might somehow permit us to resolve most of our problems. (Clower and Howitt, 1997, p. 31)
All to often researchers, referees and editors fail to ask these scientific questions. Instead, they ask the same questions that jugglers' audiences ask — Have virtuosity and skill been demonstrated? Was something difficult done? Often these questions can be answered favorably even where no substantive contribution is being made. It is much easier to demonstrate technical virtuosity than to make a contribution to knowledge. (Summers, 1991, p. 146)
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Methodology:
It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. (Arrow, 1994, p. 1)
Acceptance, though, is more an insistent autosuggestion.
But just as in the past, the economists' claim of ‘doing science’ hardly convinced their contemporaries outside of a very limited circle of followers. (Benetti und Cartelier, 1997, p. 204)
Equilibrium:
Whatever the source of the concept [equilibrium] the notion that a social system moved by independent actions in pursuit of different values is consistent with a final coherent state of balance, and one in which outcomes may be quite different from those intended by the agents, is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes. (Arrow and Hahn, 1991, p. 1)
Economic equilibrium, though, is a nonentity like absolute space, the ether, epicycles or the perpetual motion machine.
If economists find it difficult to free themselves from the commitment to equilibrium explanations, the reason is not really hard to understand. When it comes to explaining change there are few more appealing stratagems than reducing change to stasis. The commitment to equilibrium explanation is metaphysically if not empirically as well grounded in economics as it is in physics or biology. The trouble is that the appeal to equilibrium is not well-founded in economic data the way it is in evolutionary or mechanical dynamics. (Rosenberg, 2001, p. 180)
But there is something scandalous in the spectacle of so many people refining the analysis of economic states which they give no reason to suppose will ever, or have ever, come about. (Hahn, 1984, p. 88)
Behavioral axioms:
In particular, it is supposed, in the main, that there is perfect competition and that the choices of economic agents can be deduced from certain axioms of rationality. (Arrow and Hahn, 1991, p. v)
I would identify the crucial moment at which we committed ourselves to this rather futile path as coinciding with the appearance of the Theory of Value. (Kirman, 2006, p. 247)
The [neo-Walrasian] program is organized around the following hard core propositions:
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HC1. There exist economic agents.
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HC2. Agents have preferences over outcomes.
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HC3. Agents independently optimize subject to constraints.
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HC4. Choices are made in interrelated markets.
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HC5. Agents have full relevant knowledge.
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HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.
(Weintraub, 1985, p. 109)
One remarkable feat in the foregoing, apart from the untenable behavioral assumptions, is to put equilibrium into the premises and to nourish the self-delusion that this petitio principii contributes to the general understanding of social processes. (Imagine a physicist demanding that all cosmic phenomena must be discussed with reference to an equilibrium state of the universe — no Big Bang, no slow-motion explosion of the universe, no Hubble constant.)
Another failed attempt to axiomatize:
Three fundamental economic axioms underlie any economy, regardless of environment and institutions, whether it be present-day America, Europe, Communist countries, or tribal organizations. These are truths that cannot be repealed by governments and they cannot be ignored with impunity. ... These axioms of economics are:
a) Pursuit of Self-interest
b) Imputation of Values
c) Time-discount
(Piquet, 1978, p. 21), original emphases
In fact, the attempts to axiomatize human behavior can be traced back to Hutcheson, Hume and Smith's celebrated teacher:
In the first equation, Hutcheson equates the “moral Importance of any Character, or the Quantity of publick Good produc'd by him” with the “compound Ratio of his Benevolence and Ability”. With the use of the variables
M=the moral impact of the agent's action on the public,
B=the benevolence of the agent, and
A=the ability of the agent,
Hutcheson obtains Axiom 1: M=BxA. (Redman, 1997, p. 116)
Behavioral axiomatization is deeply ingrained in economics, that is to say, with the Scottish School's focus on the "mysteries in the mind of man" economics started off on the wrong foot. Rather, it is the "mysteries of the economic system" that economists have to resolve.
Throughout its history, the idea of some "Fundamental Assumption", some basic "Economic Principle" about human conduct, from which much or most of economics can ultimately be deduced, has been deeply rooted in the procedure of economic theory. Some such notion is still, in many quarters, dominant at the present time. For example, it has recently been stated that the task of economics is "to display the structure and working of the economic cosmos as an outgrowth of the maximum principle.” (Hutchison, 1937, p. 636)
No way leads from some principle about human conduct to the understanding of the working of the economic cosmos. The proof is in the current state of conventional economics.
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A mistake often made is to improvidently mingle axiom (logical/mathematical sphere) and law (physical sphere) or, what Aristotle called, causa formalis and causa efficiens. The locus classicus of outright confusion is Jevons:
The science of Economics, however, is in some degree peculiar, owing to the fact ... that its ultimate laws are known to us immediately by intuition, or, at any rate, they are furnished to us ready made by other mental or physical sciences. That every person will choose the greater apparent good; that human wants are more or less quickly satiated; that prolonged labor becomes more and more painful; are a few of the simple inductions on which we can proceed to reason deductively with great confidence. From these axioms we can deduce the laws of supply and demand, the laws of that difficult conception, value, and all the intricate results of commerce, so far as data are available. (Jevons, 1911, p. 18)
For Evans economists, even mathematical economists like Jevons, Walras, and most certainly Marshall, were on the wrong track and had little useful to contribute if they believed in the analysis of value or utility. (Weintraub, 2002, p. 61)
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The intellectual heirs are even farther on the wrong track.
Premises:
... a commodity is a good or a service completely specified physically, temporally, and spatially. ... It is also assumed that the quantity of any one of them can be any real number. (Debreu, 1959, p. 32)
The real-number assumption makes sense only with regard to the intended proof of existence, not with regard to the quantities actually bought and sold in any real-world market. The chosen mathematical tool requires to distort reality (see Nadal, 2004, p. 36). Hence its application cannot be justified in theoretical economics. To shape reality in order to make a tool applicable is more than a delusion, it is a blatant methodological blunder (for details see Toolism! A Critique of Econophysics URL and Objective Principles of Economics URL).
In any case, I cannot see any role for real numbers in quantitative economics and, hence, none whatsoever for real analysis and the proof techniques allied to it. (Velupillai, 2005, p. 867)
Mathematics:
The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round. (Wittgenstein, quoted in Schmiechen, 2009, p. 368), original emphasis
Economists habitually borrow prefabricated mathematics and tailor the theory. Debreu is a case in point. This wrong sequence makes mathematics ineffective.
Mathematics is not really of much fundamental use in a science unless that science is able to constitute its basic concepts with “exact axioms” and precise numerical results. (Weintraub, 2002, p. 26)
Root structure:
But this [establishing the analytic mother-structure] required one very crucial maneuver that was nowhere stated explicitly: namely, that the model of Walrasian general equilibrium was the root structure from which all further work in economics would eventuate. (Weintraub, 2002, p. 121)
This, unfortunately, was the wrong answer to Mill's key question:
What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy. (Mill, 2006, p. 746)
Neither Orthodoxy nor Heterodoxy has hitherto provided an acceptable set of hard core propositions, a.k.a root structure, a.k.a set of axioms. This set cannot possibly be subjective-behavioral. While it is true that axiomatization is indispensable, it is equally true that a behavioral assumption cannot take the role of an economic axiom. Heterodoxy has not got the first point, Orthodoy not the second. Economic axioms deal only with economic magnitudes. Neither utility, equilibrium, force, nor ergodicity, for example, are proper economic concepts and are therefore unfit to make an appearance in a set of economic axioms.
Formal axiomatic systems must be interpreted in some domain ... to become an empirical science. (Boylan and O'Gorman, 1995, p. 198)
It is of some importance to keep the domains apart at the axiomatic level, in particular economics and psychology.
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To think that the formal basis of standard economics is sound has been part and parcel of the widespread self-delusion among economist. Without correct conceptual foundations, though, the most powerful analytical technique cannot achieve much. The criteria of science are formal and material consistency. Conventional economics does not satisfy these criteria. Some economists even entertain the methodological delusion that there is something to choose:
Is it better to start deductively from axioms or inductively from facts? When the time comes to choose between internal consistency and consistency with observations, which side should we take? (Blinder, 1987, p. 135)
No side at all! Again, it is both: formal and material consistency. This synthesis is still outstanding. Conventional economics is many things to many people but not science to scientists.
References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Arrow, K. J., and Hahn, F. H. (1991). General Competive Analysis. Amsterdam, New York, NY, etc.: North-Holland.
Benetti, C., and Cartelier, J. (1997). Economics as an Exact Science: the Persistence of a Badly Shared Conviction. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, pages 204–219. Cheltenham, Brookfield, VT: Edward Elgar.Boylan, T. A., and O’Gorman, P. F. (1995). Beyond Rhetoric and Realism in Economics. Towards a Reformulation of Economic Methodology. London: Routledge.
Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic Review, 77(2): 130–136. URL
Clower, R. W., and Howitt, P. (1997). Foundations of Economics. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, pages 17–34.
Cheltenham, Brookfield, VT: Edward Elgar.
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge, MA: MIT Press.
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition.
Kirman, A. (2006). Demand Theory and General Equilibrium: From Explanation to Introspection, a Journey down the Wrong Road. In P. Mirowski, and D.W.
Hands (Eds.), Agreement on Demand: Consumer Theory in the Twentieth Century, pages 246–280. Durham, NC, London: Duke University Press.
Hutchison, T. W. (1937). Expectation and Rational Conduct. Zeitschrift für Nationalökonomie / Journal of Economics, 8(5): 636–653. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund. (1866).
Nadal, A. (2004). Behind the Building Blocks. Commodities and Individuals in General Equilibrium Theory. In F. Ackerman, and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, pages 33–47. London, New York, Ny: Routledge.
Piquet, H. S. (1978). The Economic Axioms. Their Bearings on Inflation, Interest Rates and Unemployment. New York, Ny: Vantage.
Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and the Classical Economists. Cambridge, MA, London: MIT Press.
Rosenberg, A. (2001). The Metaphysics of Microeconomics. In U. Mäki (Ed.), The Economic World View. Studies in the Ontology of Economics, pages 174–188. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
Summers, L. H. (1991). The Scientific Illusion in Empirical Macroeconomics. Scandinavian Journal of Economics, 93(2): 129–148. URL
Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics. Cambridge Journal of Economics, 29: 849–872.
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, NC, London: Duke University Press.
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© 2013 EKH, except original quotes up