Economic theory has been hollow for a long long time

The secret is getting out. Modern economic theory is a pseudo-science. So let me give you some recent discussions of what ought to be obvious to anyone living in an economy in which economists are advising governments. First this: The new astrology: By fetishising mathematical models, economists turned economics into a highly paid pseudoscience. From which:

The economist Paul Romer at New York University has recently begun calling attention to an issue he dubs ‘mathiness’ – first in the paper ‘Mathiness in the Theory of Economic Growth’ (2015) and then in a series of blog posts. Romer believes that macroeconomics, plagued by mathiness, is failing to progress as a true science should, and compares debates among economists to those between 16th-century advocates of heliocentrism and geocentrism. Mathematics, he acknowledges, can help economists to clarify their thinking and reasoning. But the ubiquity of mathematical theory in economics also has serious downsides: it creates a high barrier to entry for those who want to participate in the professional dialogue, and makes checking someone’s work excessively laborious. Worst of all, it imbues economic theory with unearned empirical authority. . . .

Romer is not the first to elaborate the mathiness critique. In 1886, an article in Science accused economics of misusing the language of the physical sciences to conceal ‘emptiness behind a breastwork of mathematical formulas’. More recently, Deirdre N McCloskey’s The Rhetoric of Economics (1998) and Robert H Nelson’s Economics as Religion (2001) both argued that mathematics in economic theory serves, in McCloskey’s words, primarily to deliver the message ‘Look at how very scientific I am.’ . . .

Romer believes that fellow economists know the truth about their discipline, but don’t want to admit it. ‘If you get people to lower their shield, they’ll tell you it’s a big game they’re playing,’ he told me. ‘They’ll say: “Paul, you may be right, but this makes us look really bad, and it’s going to make it hard for us to recruit young people.”’

There was then this in The Wall Street Journal a couple of days ago: The Great Economics Debate. Here is the bit before the paywall.

Friedrich Hayek and John Maynard Keynes worked at a time when the study of economics was concerned with society and its values. Richard Vedder reviews ‘Hayek vs Keynes’ by Thomas Hoerber. By Richard Vedder

Today economics is a fundamentally quantitative pursuit, dominated by abstract mathematics and complex modeling, largely removed from the realities of human interaction. But it was not always thus. Economic theory . . .

You can undoubtedly guess the rest. Meanwhile, here at RMIT, Imad Moosa, one of my professorial colleagues, has just had a book published with the quite direct title: Econometrics as a Con Art. Here is a summary of the book:

Imad Moosa challenges convention with this comprehensive and compelling critique of econometrics, condemning the common practices of misapplied statistical methods in both economics and finance.

After reviewing the Keynesian, Austrian and mainstream criticisms of econometrics, it is demonstrated that econometric models can be manipulated to produce any desired result. These hazardous analyses may then be relied upon to support flawed policy recommendations, ideological beliefs and private interests. Moosa proposes that the way forward should instead be to rely on clear thinking, intuition and common sense rather than to continue with the reliance upon econometrics. The mathematization of economics has limited the accessibility of and participation in economic discussion by converting the area into a complex ‘science’ when it should not be.

Economic theory has been hollow for a long long time, but good economics exists. Unfortunately you would have to go back near a hundred years to find a time when economic theory was consistently sound. Nor is it just the maths that has ruined theory but the diagrams as well. That, however, is for another day.

In the meantime, I have just sent out a final draft of an article I have written to a number of colleagues and friends with this note attached.

I have written that it is almost impossible for an economist raised on Keynesian models and presuppositions to understand how classical economists approached economic issues. I also say, which is a bit more provocative, that they understood the processes of an economy better than we do, which of course implies that I think I understand how an economy works better than most economists today. Which, to tell the truth, I do. This is the article in which I try to explain why I think that in less than 2000 words. It is therefore not long, and I also think not very hard to understand, but then I think that about everything I write on classical theory which turns out to be immensely difficult.

I will just bring this joke out of the paper since I think it’s clear what I’m saying, but perhaps it is a bit too enigmatic. In any case, I think this is also true if you see my meaning:

Grieve mentions that I must think of myself as the only one in step. The joke I actually see myself in the midst of is about the impossibility that there could be a twenty dollar bill on the ground because if there were someone would already have picked it up. But there are others [who understand Say’s Law and classical theory], with Bylund (2017) a particularly fine example.

And if you would like to look at Bylund’s article, you will find it here: Rick Perry — and His Critics — Still Don’t Understand Say’s Law.”

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19 Responses to Economic theory has been hollow for a long long time

  1. True Aussie

    You have thoroughly convinced me Steve. Economics is as worthless as sociology. Time to scrap all arts and humanities (including economics) from publicly funded universities.

  2. Economics is the science of predicting what already happened . . .
    . . . and still getting it wrong.

  3. Good (correct?) economics gets in the way of the redistributionists…..can’t have that.

  4. max

    Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousand fold by a factor that is insignificant in, say, physics, mathematics or medicine—the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

    In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

    In this lies almost the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.

    Yet when we enter the field of public economics, these elementary truths are ignored. There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation; and when anyone points to what the consequences of these policies will be in the long run, they reply flippantly, as might the prodigal son of a warning father: “In the long run we are all dead.” And such shallow wisecracks pass as devastating epigrams and the ripest wisdom.

  5. sdfc

    The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

    Keynes arguing that money isn’t neutral in the short run and to assume so is pointless.

  6. Sparkle Motion

    It’s certainly earned its epithet as “the dismal science”. Although it’s not a science.
    Economics is one of the most intellectually bankrupt disciplines taught at university. Full of people with 20/20 hindsight generating predictions that are rarely tested or insightful. Until after the fact.

  7. RobK

    Some harsh but probably fair comments. Whilst not an economist, I would have thought focusing on the history of economic affairs and the application of logical thought should give a hint of how policy choices will likely unfold. Some maths can be descriptive but modelling is fraught.
    Back in the mid seventies in did an economics unit at high school whilst spending most of my effort on maths chemistry and physics. I did find economics frustrating. Not difficult to get reasonable marks, just frustrating because the parameters seemed vague which made reason and logic a bit of a moving feast.
    I do enjoy reading many of the posts and comments on this site, thanks to all for that.

  8. Graeme

    In 1973 I wasted a semester of Economics at ANU doing Econometrics 101. All we did was copy formulae off the board and at the end of the lecture, the lecturer would say the model was wrong and rub it off the board. To top it off, there was no Econometrics in the end of semester exam!

  9. Rafe Champion

    Against the trend of the comments, you can learn a great deal from good economics. It is mostly a matter of costs and incentives including the “vote-buying motive” of politicians which Bill Hutt identified as the potentially fatal flaw of democracy.
    You can also predict what will happen when bad economics is put into practice.
    The problem is to explain it and to lift the level of economic literacy. Which brings us to the text books that school students are supposed to learn from.
    Would people with children doing HSC Economics like to comment on the contents of the course, if they been interested enough to find out?

  10. closeapproximation

    Econometrics is just applied time series analysis of course. Perfectly legitimate for answering targeted questions like; is this process stationary? Are these quantities cointegrated?

    We only have a problem when modelers get carried away, cook up some playstation dynamic model with a gazillion degrees of freedom and spruik it as “proof” of anything at all (climate science, I’m looking at you too!!).

  11. Cannibal

    The next three generations will lead absolutely miserable lives, and they won’t even know why.

  12. alexnoaholdmate

    Economics is not maths. It just happens to have maths in it.

    Economics is the study of humam beings and why they make the choices they make.

    Human beings do not behave like double-entry bookkeeping. That’s why the models are so often wrong, or fail to predict something.

    Remember the seventies, when it was the received wisdom that you could have inflation or unemployment, but not both – because they had an inverse relationship?

    Then suddenly there was stagflation and everyone had their minds blown.

    And Jimmy Carter lost his job.

  13. jonesy

    That was a very loud penny!

    Economistic bulls hit is like calculating the winning numbers in tonight’s lotto draw, always thought it!
    In reality, the RET is a very real definition of economics driving our society to destruction. The total unreality of climate change due to a trace gas. The idea that a reliable power generation system that produces a trace gas can be taxed into unreliability then replace with an unreliable power source that relies on unpredictable events….sounds like something only an economist mainlining on futures market outcomes could come up with.

  14. Ray

    I just love the way extremists pursue an argument. Redefine what your opponents believe in as narrow a form as possible and then rip it apart. That is what Keynes did to Alfred Marshall, Arthur Pigou and Jean-Baptiste Say and it is what Kates is now attempting to do to the entire economics profession.

    I believe that Kates is never shy to condemn Keynes for his simplistic renderings of Say’s Law and it is thus a touch hypocritical for him to engage in the same tactics.

    The problem is that economics is not a science, either pseudo or otherwise, and it is certainly not dominated by mathematics. Instead, mathematics is a tool which we can employ to validate economic theory.

    Sure there are good economists and bad economists, good theory and bad theory, good empirical studies and bad empirical studies. The important thing is that we do not throw out an important means of testing hypotheses simply because it is misused by some weak practitioners, or misunderstood by those who would prefer that their preferred ideologies are never exposed to impartial empirical analysis.

    The vast bulk of economists know that empirical studies do not, of themselves prove anything. They allow us to make inferences based upon observations in the real world, nothing more. We may never know how close to the truth those inferences may be, but one thing is for certain, we have a better chance of getting to the right answer if we employ a rigorous approach to validating research than we would if we just divorced ourselves from people and markets.

  15. max

    John Maynard Keynes was a crackpot. So are his followers. All of them.

    Keynes was a crackpot. That is why he wrote pages 220-21.

    This is the economics of ZIRP.

    It took longer than one generation to achieve it. It took a little over 70 years.

    It took central bank counterfeiting.

  16. max

    Professors do not go out of their way to point out to their students that Keynes did not earn a degree in economics. He earned a B.A. in math. He never received a graduate degree.

    They cover up the fact that he got his job in the economics department at Cambridge because of nepotism. His father, J. N. Keynes, was on the faculty. The head of the department, Alfred Marshall, put up the money to give him a lectureship. He was 27 years old. They made him a fellow in 1911, at the age of 29.

  17. Gorky

    We only have a problem when modelers get carried away, cook up some playstation dynamic model with a gazillion degrees of freedom and spruik it as “proof” of anything at all “
    With four parameters I can fit an elephant, and with five I can make him wiggle his trunk. – John von Neumann
    You see a lot of it in physical sciences and not just climatology. Its a priori so the projects are good even if hardly ever correct.

  18. Gorky

    Bloody phone – projections

  19. Nerblnob

    It’s discussions like this that I come to the Cat for – thanks all. I do enjoy the “shit-stained toiletry” banter but that’s just icing on the cake.”

    I have no prior knowledge of economics other than working through several business cycles, from shop (or rig in my case) to floor to independent management. In resources, oil & gas, especially, the business cycles are extreme and brutal so you learn in 5 or 10 years what most people maybe never do in a lifetime.

    I’m not interested in following ideology but just seeing what works. That’s 75%-90% true for the industry and my colleagues from top to bottom. The Per Bylund link and most of the comment on that Mises site is about the most accurate description of events I’ve seen.

    There is so much government intervention in resources and energy, possibly more than any other market, that there will always be some who have their hand out for the free money sloshing around , especially when they suffer consequences of a downturn. If you can’t beat ’em, join ’em. Those people are baffled at the resilience of the industry .

    Mainly influenced by what I’ve seen over forty years, but definitely influenced by readings on here, I found myself arguing hesitantly to a bunch of renewables proponents* recently that subsidy and other market distortions such as hostile regulation, taxes and penalties are actually decreasing the chances of the fossil-fuel-free future they desire . Why? because they are diverting entrepreneurial and engineering efforts to government selected “winners” such as wind and and solar and stifling the emergence of genuine alternatives.

    *this was at a drilling conference, FFS, but many even here have succumbed to the “inevitability ” argument and decided to jump on the renewables bandwagon/gravy train.their desired outcome either.

    Argument went well. We do have a higher percentage of realists than most industries.

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