Methodology

The reason for discussing methodology is to explain why we do things differently and to warn readers not to expect to see on this blog, standard methods for investigating economics. Different methods are used here to develop new economic knowledge. For example, the research for a previous post uses a scientific method which differs from the way in which economic research is usually carried out, as we will explain below.

Without this warning, readers might summarily dismiss the unfamiliar methods we use to advance economic knowledge. Much of what economists use routinely has limited validity and will be relegated to minor special applications. A scientific economic paradigm with broadened objectives and few assumptions demands a different approach.

An enormous amount has been written about economic methodology, mostly arguing about the adequacy or the exclusive use of various methods of science, particularly in the critique of positivism. Many of the philosophical generalizations have been misdirected as they miss the simple purpose of the scientific method. Economics, as a science of humans who are complex and reflexive (Soros, 2013), must be different from physics, as a science of objects. Goals, objectives and what are achievable from the two sciences must also be different.

Economics has failed as a science because it is merely a superficial imitation of physics (Mirowski, 1989). Most discussions on economic methodology stem from the failure of economics pursued as a physical science, leading to pluralist proposals for different non-scientific ways to create new ideas and new perspectives. The deprecation of science in heterodox economics has been unwarranted and premature.

Non-scientific Ideas

Without doubt, there are certainly many ways of coming up with new ideas. The act of creation is complex, mystical, transcendental and pluralist. Useful and insightful ideas do not have to come from science.

For example, the Austrian school, which explicitly rejects empirical science in economics, uses the method of praxeology, which consists of a priori deductions of human economic action (Mises, 1949, Ch. 2). Austrian economists, disproportionately to their numbers, warned of the processes which were developing into the global financial crisis well before it occurred. Evidently there is merit in their non-scientific method in producing ideas and insights.

Another obvious example comes directly from orthodox economic textbooks (e.g. Mankiw, 2006) which are used to teach economics as science, with diagrams (Marshall, 1890) of intersecting supply and demand curves to discuss many topical economic issues. The diagrammatic method is suggestive or heuristic, rather than scientific, as neither the supply theory nor the demand theory has been adequately checked with empirical evidence in drawing conclusions. The gremlin of this scientism, often regarded as a standard method, still plagues economics (e.g. Krugman, 2011).

In fact most ideas of great economists, including those of Marx and Keynes, are non-scientific or unscientific. They are important conceptual ideas which have not been adequately tested and therefore have rather hazy domains of validity. Aspects or ideas about humans, such as morality and fairness, may impinge on economics in a normative or transcendental way. Assertions related to these ideas may not be easily tested and some questions may not be answered by science. But there are many other economic questions which can be investigated from scientific observations or answered by logical reasoning.

Scientific Method

The purpose of methodology is not to prescribe how ideas can be created but rather to specify systematically how some ideas can be tested, accepted or rejected, in building a coherent body of scientific knowledge. As a common sense appeal to observational evidence, the scientific method has proven capable of building systematically solid bodies of consensual knowledge in the natural sciences.

The scientific method is useful for defining, enumerating, classifying, analyzing and summarizing validated consensual knowledge in a systematic way (Descartes, 1637). The main reason that the scientific method is being questioned recently is due to the failure of the economic paradigm which, while purporting to be scientific, is actually unscientific (see Post).

By not always applying the scientific method to test and refute theories, economics has many rival schools, representing a dysfunctional body of conflicting knowledge, leading to disunity, chaos and confusion. The existing economic paradigm has not been scientifically derived but politically imposed through preferential research funding.

It is in the nature of the paradigm (see Post) that alternative ideas cannot really incrementally shift the paradigm by being absorbed gradually into the existing paradigm, because a paradigm has no ability to understand or absorb antagonistic ideas. How does the “scientistic” paradigm (Hayek, 1974) actually practise non-science?

Practising Non-science

How does economics practise non-science, while appearing scientific? The scientific method has been schematically illustrated by the diagram in the post on science, where the four essential elements - empirical data, inductive model, causal theory and deductive model - all interact in an iterative, unending way. The more closely all four elements are involved in an investigation, the more scientific is the research.  The discovery of natural laws is not a necessary requirement for, but a possible consequence of, the pursuit of science.

Economics is not a science because most economic knowledge has been derived using only two of the four essential elements, at any given time. Economic theory is more like philosophy. Most economic research has been, and still is, "observation-less theorizing" (Bergmann, 2009), consisting of deductions from theory, with or without mathematical models and without adequate reference to empirical data.

Parallel to this is a separate discipline of econometrics which is "theory-less statistics", consisting of inductive observations from data, drawing fragile inferences (Leamer, 1983; Swann, 2012), without adequate reference to significant theory. Hendry (1980) noted sarcastically:

"Econometricians have found their Philosophers' Stone: it is called regression analysis and is used for transforming data into ‘significant’ results!"

Neither economic theory nor econometrics alone is science, science occurs only when theory interacts with data. By separating journal publications into distinct research areas of economic theory and econometrics, economics has succeeded in preventing the practice of science while maintaining a scientific appearance similar to modern physics.

Unscientific economic theories or econometrics have reached high levels of sophistication. Some mathematical models, attracting significant resources, have many equations with seemingly all relevant economic variables imaginable, purporting to provide detailed forecasts of the economy. In the case of macroeconomics, some of these models even use econometric methods for parameter estimation for empirical realism, completing the scientific illusion (Summers, 1991).

Practising Science

To do real science, it would be necessary to test every assumption and every equation, if possible and preferably one at a time, against the facts of observation.  This Cartesian method has been echoed by Keynes (1936, p.297):

“The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems, and after we have reached a provisional conclusion by isolating the complicating factors one by one, we then go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which we shall be lost in the wood) will lead us into error.”

Most advanced economic theories are machines or methods of “blind manipulation” to prophesize the future course of the economy. Against such sophisticated illusion already accepted as advancement, any real scientific investigation we take by isolating individual factors for economic study would look elementary and simplistic. Superficial peer-review of the journal system would guarantee rejection (Shepherd, 1995), which is the fate of most original contributions to economics.

Creating an economic science is a painstaking process of checking theoretical assumptions against the facts of observations. How do we set some simple rules to recognize whether science is being practised? The answer comes from recognizing the need for sufficient integration of all four essential elements: data, induction, theory and deduction in a coherent scientific paradigm.

To help the practice of science in economics, we break down the scientific method into two sub-methods, each of which helps to ensure a scientific development: empirical theory and theoretical empirics. Empirical theory is defined as theory which is derived from, or motivated by, observed regularities of the empirical data. Most studies of economic data have led only to correlations between economic variables, without any substantive impact on causal economic theory. There has been no invariant fact of observation to found economic theory. By contrast, in physics for example, the observed constancy of the speed of light led to the special theory of relativity.

Theoretical empirics are defined as data analysis which is carried out to test well-developed theories. Most economic theories (e.g. the efficient market hypothesis) are vague, full of unarticulated assumptions and not well enough developed to allow true scientific testing. Forecasts from economic theories often fail in significant ways, without leading to any theoretical modification or future improvements, because those theories are developed in ways which do not allow real scientific testing or procedures for modification.

The full methodological objective of a scientific economic paradigm is empirical theory complemented by theoretical empirics. In any piece of reported research, if we are carrying out empirical theory or theoretical empirics or both, then we would be bringing theory and data together and therefore would be doing science. This method would overcome the “observation-less theorizing” which is still the “leading activity of economists” (Bergmann, 2009). The method would also overcome the “theory-less empirics”, where data are presented then followed by economic conclusions, which are not based on any logical or theoretical reasoning. An example of this is the much praised paper on the relationship between economic growth and debt/GDP ratio by Reinhart and Rogoff (2013), which we will discuss below.

Evidently, few published research papers in economics could be classified as either empirical theory or theoretical empirics. Our proposed method of science means that, initially, only relatively simple and incomplete theories would be tested against empirical data. This foundational research would be rejected by established economic journals as neither advanced theory nor sophisticated data analysis. But gradually over time, our method will build up to more complex and complete theories which would be based on empirically verified assumptions.

Mathematics

Many well-tested tools of science, including mathematics, formalism, logic and rigour have been tainted by the failure of economics as a science. The tools have been disparaged and deprecated by their improper use in economics. For example, Keynes (1936, p.298) said,

“Too large a proportion of recent ‘mathematical’ economics are merely concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols”.

The pretentious use of symbols to obfuscate economic ignorance has been true before and since those words. The economic tradition of philosophizing and “observation-less theorizing” has been modernized in the past several decades to include formal mathematical modelling, which has hindered, rather than helped, economic understanding.

The mathematization of economics should not be about mathematics, but should be about economics. As Debreu (1991) observed, in an analogous relationship between mathematics and physics,

“…physics did not completely surrender to the embrace of mathematics and to its inherent compulsion toward logical rigor. The experimental results and the factual observations that are at the basis of physics, and which provide a constant check on its theoretical constructions, occasionally led its bold reasoning to violate knowingly the canons of mathematical deduction”.

The priority is economic reality, not mathematics which is only the handmaiden and not the queen of the sciences. Mathematics is essential because much of economics is fundamentally quantitative in nature. For example, in economic exchange, individuals do not just choose between goats and cows, they choose between how many goats for how many cows. Comparative concepts such as higher, lower, more, less, growing, contracting, better, worse, etc. are all vague or meaningless unless they are properly quantified.

Mathematics is not just a choice or another method in economics in methodological pluralism; it is indispensable for economics. Without mathematics, economics would be a topic of philosophy. That said, we should be reminded quickly of the quote: “Not everything that can be counted counts and not everything that counts can be counted”, which has been attributed apocryphally to Einstein. Mathematization has had the tendency to lead economics away from science rather than towards it.

Nevertheless, from our perspective, mathematics is even more important and indispensable in economics when our definition of economics requires descriptions of economies which are both dynamic and uncertain. The level of mathematics required to capture the nature of real economic systems goes well beyond the mathematics of static, pseudo-dynamic or random riskiness of orthodox economic systems.

Most economists are ill-prepared in the advanced mathematical concepts (e.g. Lorenz, 1993) potentially required to understand the true nature of economics. Their thinking is often limited by their mathematical abilities.  We need to use advanced concepts in simple ways, rather than use elementary concepts in complicated ways. For example, the apparent sophistication of dynamic stochastic general equilibrium (DSGE) models (Sbordone et al., 2010) comes from having many equations to mask the many simplistic assumptions of equilibrium and rational expectation.

The existence of equilibrium in DSGE theory has to be proven rather than assumed in each individual application, as Arrow-Debreu (1954) has demonstrated that equilibrium is unlikely to exist in the real world due to a large number of unrealistic assumptions required. Those DSGE models are incapable of forecasting because they assume, rather than deduce, convergence to historic trends and they merely provide probable paths to trend based on the assumption of “rational” expectation of all economic agents.

The DSGE models rely on expectation formation and self-fulfilling prophesy to guide the economy back to “equilibrium” trend.  They did not forecast the global financial crisis (the Great Recession) and they cannot forecast any recessions which are all put down to unforeseeable “exogenous shocks”. Those models with many equations have never had adequate contact with reality, neither in the testing of specific assumptions nor in the empirical validation of general predictions.  It is the latest and most sophisticated form of "scientism" or pretence of knowledge (Hayek, 1974).

In conclusion, the mathematics of orthodox economics is based on assumptions which are deep fallacies, including the equilibrium fallacy and the ergodic fallacy. Future posts will discuss these fallacies in greater detail and explain why we have abandoned many assumptions of orthodox economics. Our methodology is to make as few assumptions as possible.

Definitions and Assumptions

Voltaire famously said, “If you want to converse with me, define your terms.” Definitions are even more important in economics than in science, because common usage in everyday life causes many economic words to change, over time, their nuances if not their actual meanings. Many economic controversies arise from the lack of clear definitions of terms.

For example, “money” is clearly not universal and manifests itself differently depending on time and place. Without a clear definition of “money”, most economic discussions have been confusing rather than enlightening. On this blog, we seek to apply rigorously and consistently definitions on key economic terms. To help discipline, we have created a glossary of definitions for reference.

Axioms (or assumptions) also must be clearly stated so that they can be challenged and tested. Assumptions cannot be factually false and they must be evidently true or approximately true. It is only by testing against the facts of observation that we can assess whether a particular assumption is adequately true for the purposes of theory. The validity of an assumption cannot be logically judged from its predictions. We reject the Friedman assertion (1953) that a theory cannot be refuted without assessing its predictions:

“Yet the belief that a theory can be tested by the realism of its assumptions independently of the accuracy of its predictions is widespread and the source of much of the perennial criticism of economic theory as unrealistic”.

The reason for rejecting Friedman is based on standard logic. If an assumption is false or not sufficiently true or insufficiently “real”, then the deductions from the theory are merely arguments from fallacy. The conclusions derived from the theory can be either true or false. Any true conclusion following from the theory would be logically accidental and would not constitute verification or validation of the theory or its assumptions.

Rather than trapped in the quagmire of uncertainty about the validity of assumptions, the preferable approach is to make as few assumptions as possible and to squeeze as many significant propositions as possible from them. Each assumption in a theory represents a source of weakness. Models with a large number of assumptions are virtually impossible to improve theoretically because a potentially large number of combinations of assumptions may be modified and then tested.

Definitions and assumptions are very important as parts of the formalism to enforce rigour, so that theoretical arguments can be clearly followed to detect and to avoid fallacies in logic or in relation to reality.

Formalism and Rigour

By the time a theory reaches a high level of complexity with many interacting factors, economics variables and equations, it is even more important to apply formal procedures to keep track of everything by clear definitions, statements of assumptions and simplification of symbolism, etc. Formalism enables a complex theory to be condensed to its essential elements so that the whole can be grasped more easily. The purpose is not to hide but to expose any potential weakness in the theory, so that future improvements are facilitated. The drive of theory is always towards greater generality and applicability with greater simplicity; a beautiful theory is a simple theory with truth and great generality.

Formalism, where possible and practicable, also helps to maintain logical rigour. Formal logic or symbolic logic has been invented to analyze the logical structure of an argument, free from the content which could distract clear thinking or induce unintended bias. Many flawed economic arguments and conclusions could be more easily detected through a little formalism. Take as an example the recent controversy between Reinhart and Rogoff (RR), and Herndon and his group, on the fiscal expansion, debt and economic growth.

Let us consider propositions:  \displaystyle P= “Economic growth slows when debt/GDP is greater than 90%” and  \displaystyle Q= “Fiscal expansion with public debt is bad”. RR claimed (2013), in a top-ranking economics journal, that they have proved that \displaystyle P is true. Their paper is thought to support the government policy of “austerity”, with \displaystyle P implying \displaystyle Q:

\displaystyle P\Rightarrow Q

It turned out that the statistical proof of \displaystyle P contained serious errors in spreadsheet calculations, which RR later acknowledged and thus have invalidated their claim that they have proved that \displaystyle P is true. But this failure of proof does not imply that \displaystyle P is false either. Like much of econometric research, there is nothing conclusive, only statistical analysis of “doubtful significance” (Swann, 2012). But this did not prevent “significant” economic implications being erroneously drawn by many economists.

Even if \displaystyle P were in fact false, i.e. the negation of \displaystyle P denoted by \displaystyle \tilde{\ }P is true, one cannot logically draw the opposite inference of \displaystyle \tilde{\ }Q or “fiscal expansion with public debt is good”. From his research on RR, Herndon (2013) stated that “the implication for policy is that, under particular circumstances, public debt can play a key role in overcoming a recession.” Herndon was making the invalid logical inference about propositional negation, namely the fallacy that:

\displaystyle If\,P\Rightarrow Q\,\,then\,\,\tilde{\ }P\Rightarrow \tilde{\ }Q\,

In formal logic, this error is called denying the antecedent. Contrary to Herndon, a false premise can imply any arbitrary conclusion, with unknown truth value. This logical fallacy was carried further by Blodget (2013) who claimed that the research has established facts which have “settled the ‘stimulus vs. austerity’ argument once and for all” and that “Paul Krugman has won” the case for stimulus. The true implication of all the research carried out till then was that nothing has been proven about the relation between public debt and economic growth - only the lack of rigour in professional economic discourse has been evidently displayed.

Applying the Method

In summary, our methodology is basically disciplined clear thinking which is anchored to the real world of experience. Mathematics, formalism, logic and rigour are useful tools and the appropriateness of their use depends largely on whether they have been effective in providing greater insight and clarity than otherwise without their use. They are only means to the ends of acquiring sound economic knowledge. To avoid the epistemological errors of economics we have identified, we propose to report only “empirical theory” or “theoretical empirics”, as a method of discipline.

As Leamer (1983) said, "Methodology, like sex, is better demonstrated than discussed, though often better anticipated than experienced." So we conclude this post by explaining how we have applied our scientific method to test Keynesian economics. This work is called immodestly a “scientific revolution”, because we believe we are doing true science and have overturned an important long-held fallacy in macroeconomics.

The paper starts with “theoretical empirics” where the original theory of Keynes is tested empirically for one of its core assumptions, which all subsequent Keynesians accept as foundation for their own work. The idea that increasing consumption demand would necessarily enhance economic growth was significantly refuted in the paper from US empirical evidence. The erroneous Keynesian assumption was traced to an error which came from informal mathematical reasoning in his famous book (Keynes, 1936).

In a new “empirical theory”, we derived from a simple formal model, based on only one material assumption, that the true significance of the Keynesian multiplier is that it is a hurdle, rather than a measure, of economic growth potential. The substantive conclusion which follows from this new approach to macroeconomics is that relentless stimulation of consumption demand would eventually lead to a Keynesian economic collapse. Our new scientific methodology has led to this revolutionary conclusion which contradicts economic ideas widely accepted by academics and much used by governments.

Two heterodox economics establishments have already rejected the paper with general dismissive comments, without bothering with the specifics.  For example, one of the reviewers (RWER) stated that "the author’s approach to what science is could be described as naïve" because

"philosophy of science has long since moved on from these ways of thinking about the process of scientific testing of justification for theory and evidence. For example, falsification is no longer an accepted model of testing in philosophy of science because it implies one counter case or observation invalidates a theory."

Yes, one counter case is almost never sufficient in science for falsification, because the case itself may be false.  But the case may stimulate further work to find countless other cases of falsification.  The reviewer has stopped this process of falsification by rejecting even a first counter case, displaying an appalling ignorance of science.

The reviewer concluded that the empirical refutation of Keynesian economics must be a fallacy, stating that "the theory here does serious violence to Keynes" and therefore "overall the paper seems to be a fallacy rather than exposing a fallacy..."  According to the reviewer, since contrary evidence cannot refute a theory, there was no need to consider or comment on the evidence presented in the paper.  Pluralism is a collection of irrefutable religions.

References and citations

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10 Responses to Methodology

  1. Jeff Z says:

    Good piece - I do my best to work scientifically but I'm sure I miss the mark often enough.

    There is a lot to digest, but I have a comment and a question.

    First the comment. It should hearten you to know that you are not the only one to make the connection between Keynesian spending to get out of a depression and the resulting possible stagnation that you demonstrated in Sy 2014: A Scientific Revolution of Keynesian Economics: U.S. Evidence. My dissertation advisor (among others) arrived at a similar conclusion. On page 418 and 419 of "History of Economic Thought - A Critical Perspective" he has this to say:

    "Although the post-World War II record is certainly less impressive than the optimistic view of many Keynesian economists writing in the 1940s, given the stagnation and near disintegration of capitalism in the 1930s, it may be said that for over six decades Keynesian policies have worked tolerably well. But as is sometimes the case in medicine, a new and previously untried cure has side effects that may be as bad as the original disease. When one looks beneath the surface of the Gross National Product (GNP) and employment statistics, one sees that Keynesian policies mitigated one form of capitalist crisis only to bring on two new forms, namely, a structural change to a permanent military or warfare economy and the creation of a precarious debt structure, on which the entire economy is based, that creates the possibility of an economic collapse more pervasive and sever that that of the 1930s. The Savings and Loan Crisis of 1989-91 is only a small tip of a potentially massive problem of the vulnerability of the debts structure. And the supposed “end of the cold war” has had no effect on the economy’s reliance on military spending." (Hunt 2002, p. 418-419)

    (E.K. Hunt. 2002. History of Economic Thought: A Critical Perspective - Updated Second Edition. M.E. Sharpe: Armonk, New York, United States.)

    Now the question - Reinhardt and Rogoff 90% Debt/GDP claim has been refuted by Herndon et al. However, I am not sure that his words can be interpreted as an absolute claim. The key phrase is " under particular circumstances." If I take the proposition Q as "Fiscal expansion with public debt is bad," I can then take the negation ~Q as "Fiscal Expansion with public debt is not bad" or perhaps as you do ~Q as "Fiscal Expansion with public debt is good." Either way, these seem to me to be absolute claims, while Herndon et. al were making only a conditional clam. If this is true and valid, then the critique you offer seems to apply to Krugman and Blodget, and not so much to Herndon.

    If these propositions are valid, then in the circumstances of the 1930s in the U.S., ~Q "Fiscal Expansion with public debt is good" was true, while ~Q, "Fiscal Expansion with public debt is good" was NOT true in the 1970s in the U.S. That is Q, "fiscal expansion with public debt is bad" WAS true in the 1970s in the U.S.

    I am curious - which journals rejected Sy 2014? If you do not want to answer here, you do have access to my e-mail address as the administrator, and you can reply there.

    Always good to read, and thank you for your time and efforts.

  2. admin says:

    Jeff, Thanks for your comment.

    Many before me have voiced concerns on the possibility of Keynesian economic collapse and their intuition inspired my research which is the scientific refutation based on empirical evidence and theoretical explanation.

    I agree that Herndon made a conditional claim. But that claim - "the implication for policy" - was not an implication justified by his research, because he did not specified the condition - "under particular circumstances" - from his research to claim that "public debt can play a key role in overcoming a recession”. I do not dispute that his claim may be true, only that he has not substantiated his claim merely by refuting RR's research.

    Your question has led me to append some comments of a reviewer of the paper. I have also changed the word "journals" to "establishments", as only an abstract of the paper was submitted to a conference of the Mises Institute.

  3. Jeff Z says:

    Wow. I do not know what to say. I find a great deal of insight and resources at RWER and the associated sites but the reviewer seems to contradict himself with those remarks. Elsewhere in blog and in the associated journals, they are very much concerned with 'refuting' neoclassical economics.

    On a day to day basis, a cursory review of journal articles reveals that in practice, economists may not have stepped beyond the idea that "philosophy of science has long since moved on from these ways of thinking about the process of scientific testing of justification for theory and evidence. For example, falsification is no longer an accepted model of testing in philosophy of science because it implies one counter case or observation invalidates a theory." As noted earlier, a universal claim can be invalidated by a single case.

    I am not even sure that 'the philosophy of science' has moved beyond this itself. There are deep questions about how theory and evidence are to confront one another, and I inevitably turn to a review of methodology. Daniel Hausman, a recognized leader in the field of the philosophy of science as it applies to economics, has this to say in the introduction to the third edition of The Philosophy of Economics: An Anthology.

    "During the same period that grand claims have been made for the economic approach to human behavior, cognitive psychologists and economists impressed by the work of cognitive psychologists have shown that many of the fundamental claims of modern mainstream economics are refuted by economic experimentation."

    (Hausman, Daniel M. Ed. 2008. The Philosophy of Economics: An Anthology. New York: Cambridge University Press.)

    Not to mention the practice of marketing. It then remains for the discipline of economics to settle questions of when and why theories can be rejected. This is an inherently difficult thing for a discipline whose findings tend to be tied to one ideology or another. Even natural sciences are running into this problem as revealed by debates over the teaching of evolution in the public schools and debates over the existence and response to climate change here in the U.S.

    Although I hesitate to say it, since it puts words into the reviewer's mouth and attributes to him ideas which he may not hold, I again reference Hausman, who writes on p 15, with respect to Sir Karl Popper.

    So, the implication is that the reviewer MAY be have in mind a version of what is known as the Duhem-Quine thesis. A theory is generated on the basis of other (tentatively accepted) theories and some observations. I test this theory (make a bold conjecture) in another context, and I find that it doesn't work the way I surmised - logical inconsistency or observational facts seem to contradict the theory. Where does the problem lie - is my theory false? Possibly. Is my data set not representative - is it an anomaly? Also possible. Are there problems with the other (currently accepted) theories? Also possible.

    Any or all of these in combination may be the source of the difficulty, and it COULD be this idea that the RWER reviewer had in mind.

    • admin says:

      Jeff, Thanks for your thoughtful comments.

      RWER is good for tracking what non-orthodox people are talking about. Disappointingly, nothing much (which affects economic policy) has changed in five years. Heterodoxy or pluralism is not a direction for the development of economics. It is a plea for all sorts of "approaches" to be heard and considered on equal status with neoclassical orthodoxy.

      As far as I'm concerned neoclassical economics has already been sufficiently refuted theoretically long ago, with summaries such as Steve Keen's Debunking Economics (Keen, 2011). The reason that it has not been replaced is the lack of a viable alternative. Orthodoxy has at least some structure, whereas heterodoxy or pluralism is amorphous and does not provide an alternative paradigm.

      In creating a viable alternative, it is necessary to avoid the fallacies of past economic theories, including those of "great economists" in heterodoxy. The RWER policy seems to welcome refutation of orthodoxy, but not heterodoxy. RWER has many random ideas, which may appear interesting in themselves, but have little relevance to what is urgently needed. We need new ideas far less than we need to throw out old and flawed ideas, which are doing actual harm everyday. To create, we need to destroy or refute significant fallacies.

      How the reviewer rejected my paper, (without considering my empirical findings and theoretical arguments, as evident by lack of comments) shows the flaws of the anonymous peer review system, which lacks integrity and procedural logic. Economic journals are records of particular confirmation biases, where rivaling journals simply ignore each other, as evident by shying away from criticisms (Coelho et al., 2005). This process leads to neither science nor progress in economics.

      As your remarks imply, the philosophy of science is by no means "done and dusted", which the reviewer seems to think it is. Popper's work (1935) is tedious and like a lot of philosophical work is "thinking out loud", rather than finding the shortest arguments to well-thought-out conclusions. His view of science is flawed committing the universal fallacy, which I will write about in future. But his ideas on refutation and falsification are largely sound. The reviewer and many others have rejected all of Popper even though some of it is still valid.

  4. Jeff Z says:

    Apparently I had a problem with my formatting, and the quote from Hausman did not appear. The actual quote from Hausman is this:

    "According to Popper, what is special about scientists is that they have a 'critical attitude.' They follow methodological rules directing them to make bold conjectures and then seek out the harshest possible tests for them. These rules require that the conjectures fail those tests, scientists do not make excuses. Instead, they should regard those theories as refuted, and they should propose and scrutinize new conjectures. As many have noted, including Thomas Kuhn and Imre Lakatos, it is a good thing that scientists do not follow these rules. Because theories always face unresolved difficulties, these rules demand that they all be rejected. But theories are too important to the practice of science to be surrendered until alternatives are available, and alternatives are not easily generated."

    Hausman later discusses the move toward theory comparison and choice as the more contemporary concern of the philosophy of science. While true, this can't possibly avoid assessment of theory - deciding whether a theory is accepted as true based on the relevant evidence, or not falsified.

    Calls for pluralism, in order to consider approaches that are not neoclassical, probably should not aim for an equal status with the neoclassical view if the neoclassical view is regarded as false. You are right - nothing much has changed with respect to to policy; few non-neoclassical economists have positions as editors of the most prestigious econ journals nor do they have prominent positions in government where policy is formulated and carried out. However, there is not one "theory" that can serve to supplant the neoclassical idea, which helps explain its persistence. Paul Samuelson could both accept that neoclassical economics contain unsolvable logical contradictions, and continue to work with it because in his judgment there were no really viable alternatives.

    It might help if economists could settle some basic ontological questions for themselves. Right off the top of my head, I can cite thinkers that have at heart of their thinking different ideas about what exists. Amartya Sen, a practitioner, yet critic of neoclassical economics, posits human beings and their capabilities and functionings as the basic units of study. John Stuart Mill also saw individuals as the basic unit of study, but Karl Marx (capitalist and worker) explicitly saw systems and classes.

    As an example, of what I consider to be a step in this directions is this article by Geoffrey M. Hodgson: "The Meanings of Methodological Individualism" appearing in The Journal of Economic Methodology .

    http://www.geoffrey-hodgson.info/user/image/meanmethind.pdf

    • admin says:

      Jeff, There is a long history of such debates on epistemology, science, etc. with little visible impact on improving economic knowledge.

      Theories about theories about theories go way past the point of diminishing return for effort. Too much philosophizing in abstract generality is counter-productive because philosophies about theories are no more valid than the theories themselves. Taken to extremes every theory is false.

      No one decides (or has the right to decide) for everyone whether a theory is accepted or rejected. In fact, people accept or reject whatever theory they choose. The real question is whether an individual or a group of individuals finds a particular theory useful. Neoclassical theory is simply not sufficiently useful, except to its practitioners.

      My rejected paper by RWER contains an empirical refutation and a theoretical explanation for the failure of Keynesian economics in the United States. That finding itself is a highly significant for economics - whether it refutes the Keynesian theory generally is an issue to which the reviewer may disagree. But the finding itself, if correct, should be published, if only as a case study.

      As someone who has reviewed (for many journals) many dozens of papers over the years, I would say that the only way my paper could be rejected hypothetically, would be to question the quality of the data analysis or to show that the proof of the Keynesian mathematical error is itself invalid. Nothing like that was attempted by the reviewer. Without a critique of substance, the reviewer had no right to withhold the evidence presented in the paper for publication.

      The editor of RWER should have intervened, after reading the review itself. The reviewer merely asserted that the paper "does serious violence to Keynes" and used some questionable philosophy of science to deny the possible usefulness of empirically testing a core Keynesian assumption.

      The history of economics shows that the individual (too complex) may not be the best place to start for the science of economics. Methodological individualism (however defined) is motivated by the reductionist fallacy of determinism, of which the most extreme example initiated in physics was the Laplace demon (1814):

      "We may regard the present state of the universe as the effect of its past and the cause of its future. An intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom; for such an intellect nothing would be uncertain and the future just like the past would be present before its eyes."

      The idea of a micro-foundation for macroeconomics which is to deduce macroeconomics from the behavior of individuals is just simply laughable. Many systems much simpler than an economy have been shown to be indeterminable with unpredictable properties in aggregate. It is just another example of a superficial understanding of science. The lack of deterministic aggregation and the priority of economics investigation could be subjects for future posts.

  5. gmps2011 says:

    The more I think about Friedman's (1953) assertion:

    “Yet the belief that a theory can be tested by the realism of its assumptions independently of the accuracy of its predictions is widespread and the source of much of the perennial criticism of economic theory as unrealistic.”

    the stranger it seems.

    First of all, realism of assumptions and accuracy of predictions are not independent of each other - or not over an unrestricted domain, at any rate. A theory based on unrealistic assumptions may work for a while, but eventually it will make erroneous predictions.

    Second, the wording of Friedman's assertion suggests that the "perennial criticism" he refers to is just a nuisance that he would like to ignore for as long as he can. This a strange attitude, and also a rather cavalier attitude to take when the social cost of erroneous predictions can be very high - consider the 2007-08 crash, for example.

    Indeed, many economic theorists act as if any thing empirical that argues with their theories (whether erroneous predictions or evidence that assumptions are false) is just a nuisance, which they prefer to ignore. I recall one contemporary of mine from graduate school, now one of the most prominent economic theorists, who used to say to me: "Peter, can't you stop thinking about the real world for a moment?!"

    I find the ideas in Rick Szostak's book ever more compelling: Econ-Art: Divorcing Art from Science in Modern Economics (London: Pluto Press, 1999). Perhaps economic theorizing, as practiced by modern economic theorists, should be seen as art not science.

    • admin says:

      Peter, Szostak (1999) is unhelpful in saying (p.2), "I have long thought that the most useful – if tautological – definition of art is that which someone perceives as being art." In this case, one does not need to write a book to assert that economics is art. For what's worth, I have attempted a definition of the arts. In a university arts faculty, economics would be a close cousin of philosophy.

      Great economists generally write sloppily. It fact they write like great philosophers. Philosophers do their writing as an activity of thinking, which is meant to demonstrate how to obtain knowledge by introspection. Philosophers toss around many "facts" and do "gedanken" experiments in their writing to come up new "insights" or perspectives on all sorts of subjects such as "existence", "being", "morality", "happiness", etc.

      They do not start with definitions, but rather end supposedly with clearer "definitions" or views of their topics. Their writings, considered as works of art, are their own justification for existence. This explains why there are many different philosophical views and there is no consensual wisdom in philosophy which one can learn. Philosophy is not a body of accepted knowledge but rather, it is an activity like doing a painting.

      Philosophy is the intellectual groping, often without direction, towards the clarification of something apparently profound. I agree with the view of Wittgenstein (1921, p.37):

      "Most of the propositions and questions to be found in philosophical works are not false but nonsensical. Consequently we cannot give any answer to questions of this kind, but can only establish that they are nonsensical. Most of the propositions and questions of philosophers arise from our failure to understand the logic of our language."

      The Wealth of Nations (Smith, 1776) and the General Theory (Keynes, 1936), despite the use of some mathematics in the latter, are philosophical treatises. Definitions and assumptions are not clearly set down and certainly no attempts have been made to provide the shortest or clearest arguments to reach well-thought-out key conclusions. The works are the theorizing of philosophers. On the General Theory , Samuelson (1946) wrote:

      "Herein lies the secret of the General Theory. It is a badly written book, poorly organized; any layman who, beguiled by the author's previous reputation, bought the book was cheated of his 5 shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly-generous in its acknowledgments. It abounds in mares' nests and confusions: involuntary unemployment, wage units, the equality of savings and investment, the timing of the multiplier, interactions of marginal efficiency upon the rate of interest, forced savings, own rates of interest, and many others."

      The philosophical tradition of economics continues even with contemporary use of more mathematics and empirical data. The neoclassical paradigm is a failed attempt to move economics from the realm of philosophy to the realm of science. The pluralist movement in the teaching of economics is a tacit assumption that economics cannot be a science and that it should revert to philosophy.

  6. Jeff Z says:

    Economics in general is in disarray. You are right that people must decide for themselves what theories to accept and reject. In a scientific endeavor, one hopes these decisions are not based on mere whim, but this can be disguised in a 'scientific cloak.' Thus the importance of peer review, but Amartya Sen wrote a paper a few years ago that detailed the impact of shared group biases, which peer review may not avoid. Given your comments elsewhere about journals and self-confirmation bias, this problem may be quite large. I will have to send the specific Sen reference later.

    Having just completed Keen's work 'Debunking Economics,' I am left in a quandary about what to teach my students. I may have to start with the chapter in which he discusses alternative approaches - pluralism if you will. It seems to me that a new economics will have to arise from the ashes, and move toward dynamic explanations.

    That means that there needs to be some careful, patient observational work, and a lot of this is accomplished by government statistical agencies, with varying degrees of reliability. They have had to confront those questions of what actually exits, and then find ways to measure those things.

    Utility as a basis for economics always seemed suspect to me - it is at heart an ethical theory, thus it is in the realm of philosophy. The same goes for a rigid interpretation of the labor theory of value.

    If I was to start anew, I would look at a market economy of today, and try to define the economy, businesses, consumers, and government. An individual business, a sandwich shop, has to decide how to price their products. They confront a group of buyers, who could go to other sandwich shops. Price too high, and they go to competitors or don't buy at all. Price to low - may not cover costs. Still, even at this basic level you run into the idea of how my actions impact others and strategic thinking. Implicit in this is some idea of money. Economics of this sort appears to be a cross between many different disciplines - philosophy and math, anthropology, biology and psychology, history.

    Neoclassical economics has the advantage of a consensus method of investigation, where the pluralist movement does not. Each individual "school" in the pluralist movement has its own agreed method and starting point, but these are often incommensurate with one another. Unfortunately, the consensus of neoclassical economics has been shown to be false, but as noted earlier, there is no consensus replacement candidate.

    "May you live in interesting times" is regarded as a curse. Well, as an economist, I certainly live in 'interesting times!"

  7. admin says:

    Jeff, You are wrestling with issues I had to deal with 25 years ago. I left teaching finance and economics partly because I didn't believe in what I was teaching and partly because I wanted to find out what the real world outside, in fact, does believe in.

    I discovered a strange world where most people don't believe in the academic claptrap they learned at university and yet they do not repudiate that knowledge. They manage and deal with it in their interactions with other people, much like acknowledging the naked emperor's new cloths.

    In many ways the situation is like a beauty contest (Keynes, 1936, p.156) in which the actual winner doesn't matter, because the game is to guess what others think as the eventual winner. Seen in this light, it may appear that it doesn't really matter what you teach so long as there is an intellectual reference for the "game" that most people play.

    But economics does matter and is actually more than a game when academic economists populate positions of power in central banks and governments and they make bold decisions based on their erroneous ideas of "economic science". Unlike ordinary people who pay personally for their mistakes, these bureaucrats have not been made accountable for their human disasters (e.g. GFC). As a result, there is no incentive for greater care in their exercise of enormous power.

    Until there is surer knowledge, all we can do is to question policy decisions and actions. Even this skepticism may not have impact unless there is acceptance of objective evidence proving ineffectiveness of policy measures.

    Economics is in such a poor state that we cannot even all agree objectively on what has happened or what is happening. That is, we cannot even examine the recent data and come to a consensus view on the current state of the economy. There is no agreement on the facts of observation, which is basic and essential to science.

    The bureaucrats claim that their policies are working while many in the real world disagree, academics like Krugman, Summers and MMTers cheer on and the rest are silent. Based on their academically approved claims to success, the bureaucrats remain in control and are applying more and more Keynesian stimulus.

    How can pluralism help to reach a consensus view on the facts of observation? Because of the failure of orthodoxy, academics see pluralism as both an excuse to play with all sorts of defunct ideas and an opportunity to publish more papers. What we need to do is to ask: what are the urgent and important economic issues of our time?

    If I were to teach economics now, I would develop for students clear economic concepts and ideas which can be used to observe and analyze economic data. I would avoid any theoretical dogma. (If you teach one dogma you have to teach others.) If economic students can extract and comprehend what are the facts of observation, with minimum theoretical bias, they are already streets ahead of most blinkered economists who confound their own values with the facts.

    From the facts of observation, I would identify economic issues of importance. Then I would investigate how those issues were addressed in economic history and attempt to empirically falsify their theories. A new and contemporary understanding of the interaction between old theories and new data and their conflict resolution should suggest more relevant theories for our time.

    This approach to teaching is consistent with my project to build a scientific economic paradigm. The skills students acquired from this approach would be useful to practically any employer, unlike current students whose theoretical biases may not suit their potential future employers.

    Economics of all persuasions, as currently conceived, is a gigantic fallacy, "from go to woe". I have been taking a long time trying to write down this view clearly and compellingly - may be in a post soon.

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