by From Lars Syll In a discussion today on twitter one discussant was questioning if economics really could be considered a science, adding that in physics — contrary to economics — “there are no different school of thoughts on ‘Newton’s Laws of Motion’. To this Simon Wren-Lewis answered: Exactly the same is true of mainstream economics. There are also groups who cannot live with the mainstream who form schools of thought, like MMT. But mainstream economics is a science, like medicine. But that is simply not true as Steve Keen also notes in a reply to Wren-Lewis. Economics is in no way a science similar to physics, Newtonian mechanics or medicine! ‘Laws’ in economics only hold ceteris paribus. That fundamentally means that these laws/regularities only hold when the right conditions are at
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from Lars Syll
In a discussion today on twitter one discussant was questioning if economics really could be considered a science, adding that in physics — contrary to economics — “there are no different school of thoughts on ‘Newton’s Laws of Motion’. To this Simon Wren-Lewis answered:
Exactly the same is true of mainstream economics. There are also groups who cannot live with the mainstream who form schools of thought, like MMT. But mainstream economics is a science, like medicine.
But that is simply not true as Steve Keen also notes in a reply to Wren-Lewis. Economics is in no way a science similar to physics, Newtonian mechanics or medicine!
‘Laws’ in economics only hold ceteris paribus. That fundamentally means that these laws/regularities only hold when the right conditions are at hand for giving rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But, really, since these laws/regularities do not exist outside these ‘socio-economic machines,’ what’s the point in constructing these non-existent laws/regularities? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?
Take ‘The Law of Demand.’
Although it may (perhaps) be said that mainstream economics had succeeded in establishing The Law – when the price of a commodity falls, the demand for it will increase — for single individuals, it soon turned out, in the Sonnenschein-Mantel-Debreu theorem, that it wasn’t possible to extend The Law to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.
This could only be conceivable if there was in essence only one actor – the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!
How has mainstream economics reacted to this devastating finding? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.
Modern mainstream textbooks try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And – worse still – something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (197), Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equilibrium solution.
Of course one could say that it is too difficult on undergraduate levels to show why the procedure is right and to defer it to masters and doctoral courses. It could justifiably be reasoned that way – if what you teach your students is true if The Law of Demand is generalizable to the market level and the representative actor is a validmodellingg abstraction! But in this case, it’s demonstrably known to be false, and therefore this is nothing but a case of scandalous intellectual dishonesty. It’s like telling your students that 2 + 2 = 5 and hope that they will never run into Peano’s axioms of arithmetics.
Or take ‘Revealed Preferences.’
The experiment reported here was designed to reflect the fact that revealed preference theory is concerned with hypothetical choices rather than actual choices over time. In contrast to earlier experimental studies, the possibility that the different choices are made under different preference patterns can almost be ruled out. We find a considerable number of violations of the revealed preference axioms, which contradicts the neoclassical theory of the consumer maximising utility subject to a given budget constraint. We should therefore pay closer attention to the limits of this theory as a description of how people actually behave, i.e. as a positive theory of consumer behaviour. Recognising these limits, we economists should perhaps be a little more modest in our ‘imperialist ambitions’ of explaining non-market behaviour by economic principles.
Reinhard Sippel’s classic experiment showed considerable violations of the revealed preference axioms and that from a descriptive point of view — as a theory of consumer behaviour — the revealed preference theory was of a very limited value.
Mainstream theory of consumer behaviour has been developed in great part as an attempt to justify the idea of a downward-sloping demand curve. What forerunners like e.g. Cournot (1838) and Cassel (1899) did was merely to assert this law of demand. The utility theorists tried to deduce it from axioms and postulates on individuals’ economic behaviour. Revealed preference theory — in the hands of Paul Samuelson and Hendrik Houthakker — tried to build a new theory and to put it in operational terms but ended up with just giving a theory logically equivalent to the old one. As such it also shares its shortcomings of being empirically non-falsifiable and of being based on unrestricted universal statements. The theory is nothing but an empty tautology.
These were just two examples exemplifying the non-science character of mainstream economics. Comparing economics to real sciences like physics or medicine is nothing but an insult!