by The Pygmalion syndrome and the failings of modern economics As Lars Syll wrote here last month, too much of the profession “has since long given up on the real world” and is happy to investigate the “thought-up worlds” of unrealistic economic models. Too much attention is focused on how the parts of the model fit together, rather than on how well the models fit with reality. But how can critics communicate these problems effectively? Especially to those who will be intimidated or turned off by a phrase like ‘ontological foundations’? In my new book Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray I unpack the problem and suggest an answer. One that uses a 2,000-year-old story of a lonely sculptor from Greek myth … It’s the
Topics:
Lars Pålsson Syll considers the following as important: Economics
This could be interesting, too:
Lars Pålsson Syll writes Best advice to an aspiring economist — don’t be an economist!
Lars Pålsson Syll writes Models and evidence in economics
Lars Pålsson Syll writes Keynes and Knight on uncertainty
Dean Baker writes Businesses and DEI: Corporations don’t maximize shareholder value
The Pygmalion syndrome and the failings of modern economics
As Lars Syll wrote here last month, too much of the profession “has since long given up on the real world” and is happy to investigate the “thought-up worlds” of unrealistic economic models. Too much attention is focused on how the parts of the model fit together, rather than on how well the models fit with reality.
But how can critics communicate these problems effectively? Especially to those who will be intimidated or turned off by a phrase like ‘ontological foundations’?
In my new book Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray I unpack the problem and suggest an answer. One that uses a 2,000-year-old story of a lonely sculptor from Greek myth …
It’s the story of Pygmalion from Ovid’s Metamorphoses which has inspired Hollywood classics such as My Fair Lady and the recent movies AI fantasy Her. The myth is a vivid analogy for how too many mainstream economists today are more content to interact with their models of the economy than the real thing. This problem has a name … It was coined by Irish mathematician and physicist John Lighton Synge, who wrote in 1970: “I have invented the name Pygmalion syndrome for that disease of the mind which blurs the distinction between R[eal]-world and M[odel]-worlds”. A disease, he confessed, that he suffered from.
In Ricardo’s Dream, I argue that a virulent strain of the Pygmalion Syndrome was widespread in the classical economics of David Ricardo’s time and the neoclassical economics of ours – and draw the links between this intellectual tragedy and real-world suffering …
But, hold on a minute. Models aren’t meant to capture every aspect of reality. That’s part of their design. Just as a map that tried to include every flower would be useless for navigating between two cities, a model needs to focus only on what is essential and leave the rest aside. Models are useful because they are simple. This is the gist of the famous quote – thrown back at critics – from British statistician George Box: ‘all models are wrong, but some are useful’.
What is almost never mentioned, however, is that the original paper from 1976 in which George Box wrote “all models are wrong” is not a full-throated defence of simple models. Box wrote that good statisticians were absolutely essential to the future of humanity and therefore needed to learn how to be good scientists. The scientist should not ignore what is wrong with a model, he wrote, but focus on what is importantly wrong …
One step towards healing our broken economic and political system would be if economists – and those policy makers and professions in thrall to their vision – would fall out of love with harmful, unreal economic models. They should do what Pygmalion was not able to do: go back out into the street and start interacting once again with flesh-and-blood humans.
Scientific theories are theories that ‘refer’ to the real world, where axioms and definitions do not take us very far. To be of interest to an economist or social scientist who wants to understand, explain, or predict real-world phenomena, the pure theory has to be ‘interpreted’ — it has to be an ‘applied’ theory. An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and does not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.
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 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.
The final court of appeal for economic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, economic modelbuilding is little more than “hand waving” that gives us rather little warrant for making inductive inferences from models to real-world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.
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. And that kind of reasoning cannot establish the truth value of facts. Never has. Never will.
Sometimes we must acknowledge that the ability for theoretical abstraction and model-building, rather than being something positive, can become a burden. Especially when one ‘forgets’ that the theories, at some point during the approach to reality, must also be confronted with it. Social science theory without empirical testing is nothing but speculation. It looks so impressive, but it is often nothing more than a house of cards based on utterly ridiculous unrealistic assumptions. Simply settling for constructing all sorts of Walt Disney worlds without a connection to the world we live in is not science. From a scientific point of view, this is certainly ‘risk-free,’ but at the cost of the evidential weight being non-existent. It is science fiction.
Using false assumptions, mainstream modellers can derive whatever conclusions they want. Wanting to show that ‘free trade is great’ just e.g. assume ‘all economists from Chicago are right’ and ‘all economists from Chicago consider free trade to be great’ The conclusions follow by deduction — but are factually totally wrong. Models and theories building on that kind of reasoning are nothing but a pointless waste of time.
What mainstream economics took over from Ricardo was not only the theory of comparative advantage. The whole deductive-axiomatic approach to economics that is still at the core of mainstream methodology was taken over from Ricardo. Nothing has been more detrimental to the development of economics than going down that barren path.
Ricardo shunted the car of economic science onto the wrong track. Mainstream economics is still on that track. It’s high time to recover from the Pygmalion syndrome and make economics a realist and relevant science.