Why most economists don’t know what they’re doing

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Lars Pålsson Syll
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Why most economists don’t know what they’re doing

As a subject, economics seems to have a fear and disgust of thinking about philosophy and methodology that might be described as Freudian.

While other social scientists’ obsession with minute discussions of their methods and rhetoric, standards of proof and what they hope to achieve might be thought of as pathological in another way, the economists’ determination to sideline methodological discussion has observable bad effects.

The vast majority of economists literally don’t know what they’re doing.

Dan Davies is not the first economist to notice economists’ rather debonair attitude toward discussing their own methods and rhetoric. Many have over time tried to diagnose what’s the problem behind the ‘intellectual poverty’ that characterizes modern mainstream economics. The questionable reduction of uncertainty into probabilistic risk, rationality postulates, rational expectations, market fundamentalism, general equilibrium, atomism, and over-mathematisation, are some things one has been pointing at. But although these assumptions/axioms/practices are deeply problematic, they are mainly reflections of a deeper and more fundamental problem.

The main problem with mainstream economics is its methodology.

The fixation on constructing models showing the certainty of logical entailment has been detrimental to the development of relevant and realist economics. Insisting on formalistic (mathematical) modelling forces the economist to give up on realism and substitute axiomatics for real-world relevance. The price for rigour and precision is far too high for anyone who is ultimately interested in using economics to pose and answer real-world questions and problems.

This deductivist orientation is, as argued by Lawson, the main reason behind the difficulty that mainstream economics has in terms of understanding, explaining and predicting what takes place in our societies. But it has also given mainstream economics much of its discursive power — at least as long as no one starts asking tough questions on the veracity of — and justification for — the assumptions on which the deductivist foundation is erected. Asking these questions is an important ingredient in a sustained critical effort to show how nonsensical the embellishing of a smorgasbord of models founded on wanting (often hidden) methodological foundations is.

The mathematical-deductivist straitjacket used in mainstream economics presupposes atomistic closed systems — i.e., something that we find very little of in the real world, a world significantly at odds with an (implicitly) assumed logic world where deductive entailment rules the roost. Ultimately then, the failings of modern mainstream economics have their roots in a deficient ontology. The kind of formal-analytical and axiomatic-deductive mathematical modelling that makes up the core of mainstream economics is hard to make compatible with a real-world ontology. It is also the reason why so many critics find mainstream economic analysis patently and utterly unrealistic and irrelevant.

Although there has been a clearly discernible increase and focus on “empirical” economics in recent decades, the results in these research fields have not fundamentally challenged the main deductivist direction of mainstream economics. They are still mainly framed and interpreted within the core ‘axiomatic’ assumptions of individualism, instrumentalism and equilibrium that make up even the ‘new’ mainstream economics. Although, perhaps, a sign of an increasing — but highly path-dependent — theoretical pluralism, mainstream economics is still, from a methodological point of view, mainly a deductive project erected on a foundation of empty formalism.

If we want theories and models to confront reality there are obvious limits to what can be said ‘rigorously’ in economics. Although it is generally a good aspiration to search for scientific claims that are both rigorous and precise, we have to accept that the chosen level of precision and rigour must be relative to the subject matter studied. An economics that is relevant to the world in which we live can never achieve the same degree of rigour and precision as in logic, mathematics or the natural sciences. Collapsing the gap between model and reality in that way will never give anything else than empty formalist economics.

In mainstream economics, with its addiction to the deductivist approach of formal-mathematical modelling, model consistency trumps coherence with the real world. That is surely getting the priorities wrong. Creating models for their own sake is not an acceptable scientific aspiration — impressive-looking formal-deductive models should never be mistaken for truth. It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in those kinds of 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.

When applying deductivist thinking to economics, economists usually set up “as if” models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is of course that if the axiomatic premises are true, the conclusions necessarily follow. The snag is that if the models are to be relevant, we also have to argue that their precision and rigour still hold when they are applied to real-world situations. They often don’t. When addressing real economies, the idealizations necessary for the deductivist machinery to work, simply don’t hold.

So how should we evaluate the search for ever greater precision and the concomitant arsenal of mathematical and formalist models? To a large extent, the answer hinges on what we want our models to perform and how we basically understand the world.

To search for precision and rigour in such a world is self-defeating, at least if precision and rigour are supposed to assure external validity. The only way to defend such an endeavour is to turn a blind eye to ontology and restrict oneself to proving things in closed model worlds. Why we should care about these and not ask questions of relevance is hard to see. We have to at least justify our disregard for the gap between the nature of the real world and our theories and models of it.

If economics is going to be useful, it has to change its methodology. Economists have to get out of their deductivist theoretical ivory towers and start asking questions about the real world. A relevant economics science presupposes adopting methods suitable to the object it is supposed to predict, explain or understand.

Methodology is about how we do economics, and how we evaluate theories, models and arguments. To know and think about methodology is important for every economist. Without methodological awareness, it’s really impossible to understand what you are doing and why you’re doing it. Dismissing methodology is dismissing a necessary and vital part of science.