by From Michael Hudson If mathematics is deemed to be the new language of economics, it is a language with a thought structure whose semantics, syntax and vocabulary shape its user’s perceptions. There are many ways in which to think, and many forms in which mathematical ideas may be expressed. Equilibrium theory, for example, may specify the conditions in which an economy’s public and private-sector debts may be paid. But what happens when not all these debts can be paid? Formulating economic problems in the language of linear programming has the advantage of enabling one to reason in terms of linear inequality, e.g., to think of the economy’s debt overhead as being greater than, equal to, or less than its capacity to pay. An array of mathematical modes of expression thus is
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from Michael Hudson
If mathematics is deemed to be the new language of economics, it is a language with a thought structure whose semantics, syntax and vocabulary shape its user’s perceptions. There are many ways in which to think, and many forms in which mathematical ideas may be expressed. Equilibrium theory, for example, may specify the conditions in which an economy’s public and private-sector debts may be paid. But what happens when not all these debts can be paid? Formulating economic problems in the language of linear programming has the advantage of enabling one to reason in terms of linear inequality, e.g., to think of the economy’s debt overhead as being greater than, equal to, or less than its capacity to pay.
An array of mathematical modes of expression thus is available to the economist. Equilibrium-based entropy theory views the economy as a thermodynamic system characterized by what systems analysts call negative feedback. Chaos theories are able to cope with the phenomena of increasing returns and compound interest, which are best analyzed in terms of positive feedback and intersecting trends. Points of intersection imply that something has to give and the solution must come politically from outside the economic system as such.
What determines which kind of mathematical language will be used? At first glance it may seem that if much of today’s mathematical economics has become irrelevant, it is because of a fairly innocent reason: it has become a kind of art for art’s sake, prone to self-indulgent game theory. But almost every economic game serves to support an economic policy. Broadly speaking, policies fall into two categories: laissez faire or interventionist public regulation. Each set of advocates has its own preferred mode of mathematical treatment, choosing the approach that best bolsters their own conclusions. In this respect one can say that mathematics has become part of the public relations apparatus of policy-makers.
The mathematics of socialism, public regulation and protectionism view the institutional environment as a variable rather than as a given. Active state policy is justified to cope with the inherent instability and economic polarization associated with unregulated trade and financial markets. By contrast, opponents of regulation select a type of equilibrium mathematics that take the institutional environment for granted and exclude chronic instability systems from the definition of economic science, on the ground that they do not have a singular mathematical solution. Only marginal problems are held to be amenable to scientific treatment, not quandaries or other situations calling for major state intervention.
Marginalist mathematics imply that economic problems may be solved merely by small shifts in a rather narrow set of variables. This approach uses the mathematics of entropy and general equilibrium theory to foster the impression, for instance, that any economy can pay almost all its debts, simply by diverting more income from debtors to creditors. This is depicted as being possible without limit. Insolvency appears as an anomaly, not as an inevitability as in exponential growth models.
Looking over the countries in which such theorizing has been applied, one cannot help seeing that the first concern is one of political philosophy, namely, to demonstrate that the economy does not require public regulation to intervene from outside the economic system. This monetarist theory has guided Russian economic reform (and its quick bankruptcy) under Yeltsin and his oligarchy, as well as Chile’s privatization (and early bankruptcy) under Gen. Pinochet, and the austerity programs (and subsequent bankruptcies and national resource selloffs) imposed by the IMF on third world debtor countries. Yet the reason for such failures is not reflected in the models. Empirically speaking, monetarist theory has become part of the economic problem, not part of the solution.
from
Michael Hudson, “The use and abuse of mathematical economics”, real-world economics review, issue no. 55, 17 December 2010, pp. 2-22,
http://www.paecon.net/PAEReview/issue55/Hudson255.pdf