Realism in Economics

A relevant feature of the current crisis in economic knowledge is the recurrence of the  Ricardian Vice. Joseph A. Schumpeter coined this term in his book History of Economic Analysis when he criticized the habit assigned to Ricardo to represent the economy by a set of simplified assumptions and to use tautologies to develop practical economic solutions. Indeed, Schumpeter rejected the kind of economic thought that mainly favours deductive methods of inquiry – based on mathematical reasoning- because the  habit  known as the Ricardian Vice generates analytical unrealistic results that are irrelevant to solve the real-world economic problems.

Also Keynes warned that the understanding of the economic phenomena demands not only purely deductive reasoning, but also other methods of inquiry along with the  study of other fields of knowledge- such as History and Philosophy. In his own words:

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” (Keynes, Collected Writings, vol. X: Essays in Biography)

Today, Schumpeter’s and Keynes’s criticism could be certainly addressed to those economists whose beliefs ultimately privilege the deductive method of inquiry in Economics. Due to these beliefs,  mainstream economists favour the adoption of a nominalist bias. And as a consequence, the trouble is that the dialogue between economic theories and the economic reality turns out to be abandoned not only in academic research but also in the policy making process.

This dialogue is complex and should be considered in any attempt to build realistic economic theories, as Keynes warned. Indeed, the changing environment of real-world markets through time -that is irreversible-  refers to a certain degree of ontological indeterminacy that should be considered in realistic economic theories and in the study of Economics.

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16 comments
  1. Dear Maria,

    I have read Ricardo a lot, and have yet to find a single proof for the so-called Ricardian Vice. What I have found is that many unrealistic assumptions like constant costs, zero transportation costs, perfect internal factor mobility, etc. have been falsely attributed to him, in order to gain some sort of legitimisation.

    Perhaps you might be interested in reading a paper recently published in the WEA Journal “Economic Thought” were I highlight the differences between Ricardo’s famous numerical example and the so-called Ricardian trade model of economic textbooks. None of the unrealistic assumptions of the textbook trade model can be found in Ricardo’s original numerical example in the Principles.
    https://www.worldeconomicsassociation.org/files/journals/economicthought/WEA-ET-6-1-MoralesMeoqui.pdf

    Best,
    Jorge

    • Ernesto Vaihinger said:

      Interesante reflexión. Otro ejemplo similar podrá encontrar con el caso de la Curva de Phillips según la explica su autor y según la simplifican los libros de macroeconomía, perdiendo su contenido esencial. Lo mismo podrá observar con la riqueza conceptual que Pigou presenta su explicación del valor del dinero y la contundencia dogmática de los libros de textos.
      Mis saludos
      Ernesto Vaihinger

      • Maria Alejandra Madi said:

        Hola Ernesto, Gracias por tu comentario. Tienes razón, simplificación y dogmatismo hacen parte de la enseñanza de Economia. Como resultado, contribuciones clásicas no llegan a los estudiantes. Por el contrario, el espíritu científico es rechazado y se dá lugar a repetición (dogmática) de una Verdad (!). Necesitamos aprofundar la discusión sobre realismo e falibilismo.

        Saludos,

        Maria Alejnadra

    • Maria Alejandra Madi said:

      Dear Jorge,

      Thanks for your comment. I would like to quote Schumpter’s words in the History of Economic Analysis:
      (pp 472-73): “His (Ricardo’s) interest was in the clear-cut result of direct, practical significance…, He then piled one simplifying assumption upon another until, …he set up simple one-way relations so that, in the end, the desire results emerged almost as tautologies. For example (if)… profits ‘depend upon’ the price of wheat. And under his implicit assumptions.., this is not only true, but undeniably, in fact trivially, so. Profits could not possibly depend upon anything else, since everything else is ‘given’, that is frozen. It is an excellent theory that can never be refuted and lacks nothing save sense. The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice.”

      Our concern in about simplification and dogmatism in current Economics courses.

      Maria

  2. chdwr said:

    Fix The Monetary Paradigmatic Dominance of Private Finance…..
    and all of the confused and confusing figure-figure-figure of macro-economics will finally fall back into its otherwise obvious perspective. This is perceiving the actual problem….and Wisdom.

    • Maria Alejandra Madi said:

      Thanks for your comment. We certainly need to develop other perspective- a realistic one. The current dominant paradigm in economics is dogmatic and nominalist. As a result, students do not know how to reflect on “actual problems” that, as Marshall highlighted, are always changing.

      • David Chester said:

        How else are we to understand how our social system truly works if all we have to use as means for finding out are conjectures, the assumptions (which are rarely stated) not being consistent with the situation, because they themselves are biased toward political leanings and preformed concepts? The only way to properly find out the truth is through some sensible and logical analysis, which is based on clearly stated principles which we can all accept. Due to the need for the use of logic, order and science, it is inevitable that numerical analysis must enter after some prior algebraic handling of the variables. I suggest you begin with my paper: SSRN 2865571 “Einstein’s Criterion Applied to Logical Macroeconomics Modelling”.

  3. Realism is a dead end. Always has been such. Ask a janitor, fast food worker, engineer, high school student, etc. the fair price for a hamburger. The answers are not the same. Now read the price of a hamburger from the menus at McDonalds, Burger King, and Dairy Queen. Again, the answers are not the same. So, both the reality of the hamburger and the reality of its price is in dispute. Not unusual. In fact, the reality of whether a hamburger even has a price is in question, since the local homeless shelter gives them away. Which of these realities should the economist compare with his/her “theory of the burger?”

    • Maria Alejandra Madi said:

      Dear Ken,

      Thanks for your comment. Are you saying that the conception of reality is relative?

      I am not thinking about reality as a TRUTH, but as a necessary philosophical and epistemological concept. Time and space, as Kant already pointed out, influence the possibilities of our knowledge.

      Maria

      • Humans search for what’s real. The important words here are humans, search, and real. So long as humans piece together reality as best they can, reality will be unfinished and uncertain. Since human life is unfinished and uncertain.

  4. David Chester said:

    This definition of what an economist should be makes it impossible for him to exist. Its like that political speech-makers urge for us to put our shoulders to the wheel and our noses to the grind-stone, with our best foot forward whilst leaving no stone un-turned!

    I believe that the answer is to begin studying the subject on technical (even mechanical grounds, as in my book: “Consequential Macroeconomics” and in SSRN 2600103″A Mechanical Model for Teaching Macroeconomics”) and then when we reach the stage of decision-making it becomes necessary to introduce the more “human” aspects, so as to cover some of the other necessary matters noted above. Unfortunately current teaching is so unscientific that this better approach does not work and a lack of realism is apparent from the start.

    The explanation for greater realism will not hold much water unless its teaching is improved and the way to do this is by degrees. To begin to approach this difficult subject we need to pare away a lot of the complications and to begin by taking aggregate quantities as in my SSRN 2695571 “Einstein’s Criterion Applied to Logical Macroeconomics Modeling” which sets this matter along the right lines for approaching a more realistic view, from a greater perspective.

    • Maria Alejandra Madi said:

      Dear David,

      Thanks for your comment. I agree with you that current teaching is unscientific and that the lack of relism is apparent from the start of almost all economic courses.

      Our attempt to change Economics education should involve innovations both in teaching methods and in theoretical approaches.

      Maria

  5. chdwr said:

    Economics needs a new philosophy much more than it needs “realism” or even science. Science in too many respects anymore has become a religion that too many scientists and scientific pundits are slavishly addicted to. Some would say that we just need to be better scientists, and I wouldn’t necessarily disagree with that….as science, again, has become top heavy with orthodoxy and hence religiosity. We do want to include science in our considerations of course, we just want to broaden it and deepen it by broadening and deepening the ideas we scientifically consider regarding economics. And that brings us back to philosophy. And, if we give ethics its proper and superior due, after all any conscious human activity is inextricably (but not obsessively) an ethical concern, then we require Wisdom to aid us in our journey. The major sages of yore were, for their era, probably the most scientific and personally honest individuals history has produced, and their thinking and nostrums-policies informed, enhanced and/or rejuvenated civilization. When we see the flames of obsessive contention, instability and chaos looming up around us perhaps if we considered a new idea in science and economics and some old ideas from Wisdom that are updated with the scientific knowledge gained over the last couple of centuries, we could turn disintegration into a deeper and broader re-integration.

    wisdomicsblog.com

    • Maria Alejandra Madi said:

      Thanks for your comment. I agree that we need to bring Economics back to Philosophy. However, we need a Philosophy founded on realism. If not, we can bring Economic back to a nominalist Philosophy where concepts are not anchored in the real-world economic phenomena.

      Maria

      • David Chester said:

        There is no absolute realism because our powers of understanding use a language if not a thinking configuration that is specific and insufficiently generally arranged. It is incapable of looking closely at the absolute situation. This is philosophical too!

        Realism in human terms is somewhat subjective and this causes it to become inaccurate and related to the nature of the would-be realist. However, it can become slightly more objective when we a) become less personally involved as if we are uninterested spectators and b) look at the subject from a greater perspective or distance, so as to include many of the related things close to it.

        This is the approach I have used in my book: “Consequential Macroeconomics–Rationalizing About How Our Social System Works”. I will gladly send an e-copy to anybody “into” this subject if he/she write to me at chesterdh@hotmail.com I wish to state that I do not seek royalties or any payment–to have helped spread this vital knowledge is my only reward.

  6. I defend “Ricardian Vice.” It is not in reality a vice but a virtue. I argued on this theme in the ResearchGate:
    https://www.researchgate.net/post/Is_Ricardian_Vice_really_a_vice

    The essence of “Ricardian Vice” is to clarify the logic of a theory. A simple accumulation of facts does not lead us to truth or wisdom. Economics needs two moments which are often contradicting. One is abstraction, a logical (re-)organization of various propositions, deduction, mathematics and even abduction. The other is concrete events, accumulation of knowledge, natural history, induction, and sense of reality. As Maria Alejandra’s citation from Keynes tells, a good economist should be mathematician, historian, and philosopher at the same time.

    Those who demand reality in economics have a tendency to accuse mathematics. But it is not the mathematics that brings an absurd model. It is the lack of economic knowledge, history of the economy, history of economic theories, and the sense of reality. Do blame the enemy at the right target. Logical construction is something you need when you really want to reconstruct a new, more realisitic economics.

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