Models and Realities 2

Foundations for modern social sciences were laid in the early twentieth century, and were strongly influenced by logical positivism. The central idea of positivism is that science is true and valid because it deals (principally) with observables, while religion is false and invalid because it deals (principally) with unobservables. For a detailed discussion, see Logical Positivism and Islamic Economics.   Later, logical positivism had a spectacular collapse. It became clear to philosophers of science that the idea that we can base science purely on observables was seriously mistaken. Even those who were very strong proponents of positivism admitted that the philosophy was wrong. Strangely, this did not lead to rebuilding of the foundations for the social sciences. Especially in economics, the wrong philosophies about nature of human knowledge, which translate into bad theoretical models, continue to be used. A recent survey by Hands (2009) showa that the economists continue to believe in positivist philosophy, without any conscious awareness of this. The disastrously bad methodology in use by economists has led to models which failed to predict the Global Financial Crisis. What is worse, these positivist models continue to be used, even after the crisis. For reasons to be explained in detail, current methodology makes it impossible to learn from experience. THIS is the real source of the problem. Having a wrong theory is never a problem; it can happen to the best of scientists. The real problem is refusal to modify theories in light of experience, which makes it impossible to learn and improve. But this analysis is not sufficiently deep — precisely what is it about the methodology that makes it impossible for economists to learn from experience and to modify and improve theories in light of experience? Explaining this is the main goal of this sequence of posts. But, before proceeding to do this, it is worth documenting the stubborn resistance of economists to mere facts.

Keynes: Economists are unmoved by lack of correspondence between their theories and facts.

Sitglitz: Economists frequently make claims in conflict with easily observable facts, because economics is a religion, not a science.

Paul Romer: Macroeconomic theorists ignore mere facts by feigning an obtuse ignorance.

Olivier Blanchard: DSGE (are based on) assumptions profoundly at odds with what we know about consumers and firms.”

The full quotations from these and many other economists can be found in my blog post  Quotes Critical of Economics.  While most quotes are general condemnations of the discipline, the particular four quotes picked up above point to a specific problem — the failure of economists to respond to empirical rejections of theory by modifying the theory. Economists do not follow Feynman’s methodological princple: “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong. Theories flatly contradicted by empirical evidence continue to be used. For example, Stiglitz states that “ Ricardian equivalence  is taught in every graduate school in the country. It is also sheer nonsense.” Further strong evidence of this methodological failure is found in  Romer’s Trouble With Macro . Romer discusses the anti-scientific attitude of leading theorists, refusal to learn from empirical evidence, and the retrograde progress in macro, leading to loss of precious earned knowledge –Again, we need to know exactly how a methodology PERMITS this loss of knowledge — how can good theories be replaced by worse theories while everyone is watching?

To understand this failure, we need to explore the concepts of “models”, “explanation”, and “reality”. As we will see, there are many different types of models, many different concepts of what it means to explain, and also many different approaches to the nature of hidden (unobservable) reality.

In remaining posts, we hope to explain how economists gradually slipped from a valid concept of models and how they help us to understand reality, to  Friedman’s Folly  which insulates, protects, and advances the cause of crazy models. NEXT POST:Thinking about Thinking 3.

  1. The symptoms of mainstream illness are many, but the medication could be only: a theory on how a person thinks, i.e. the Algorithm Framework Theory (AFT). Human minds are formed up by Instructions (logics or theories) in conjunction with data (experiences). Both inputs lead to the mindful fluctuations along with the changes of marginal productivity of each “factor”, just like those the traditional production theory describes. This implies positivism and its limits. Any knowledge cannot be testified entirely, but partially, more or less, sooner or later. Moreover, as knowledge (or theories) at any time is limited, it will expand, develop, correct and innovate, and it will further perceive that it will do, hence the knowledge or theories will adapt to the PERCEPTION, the Algorithmic theories will not be those separated with experiences, uncertainties, pluralities and changes, but anticipating and coordinating with them. The theories are therefore HIGH-ORDERLY. The hardcore of socio-economic theories are not theories but “about theories”. Yes, I agree with your critical opinions, and AFT could exactly be the antidote. Thanks.

  2. I strongly agree that “current methodology makes it impossible to learn from experience”, and the bulk of the article that deals with this, including Romer, Blanchard, etc. (These quotes also show that this problem is widely recognised by economists that I would describe as mainstream though not neoclassical.) What I don’t understand is the link with positivism, logical or otherwise, which holds that, as you say, “we can base science purely on observables”. Neoclassical economics is weak because the observables are not allowed to be used to replace bad theory. I know a lot of people think that positivism is a useful swear word, but the connection with the problems of neoclassical theory and its dominance – despite all the evidence that many economists have accumulated – has other roots, no?

    Secondly, I don’t think it’s a good starting point to discuss models. That’s what a lot of philosophers of economics do, and it is not very illuminating. Economists of many persuasions, including heterodox, seem to believe that you can’t think about anything without modelling it. This is one of the core methodological errors of economics – and is much wider than the truth or not of neoclassical economics. In fact, I think this is an illustration of what you said at the beginning: it’s not about swapping one model for another, it’s a methodology that cannot envisage anything except modelling. The natural sciences, such as biology, have been successful because they are based on an iterative interplay between hypotheses/theory and evidence. This generates empirically-based causal theories. Modelling then takes places nested within that context. It works very well! See (“Causal theories, models and evidence in economics—some reflections from the natural sciences”).

    It’s also important to be developing new, better, theory – including methodology – rather than spending a lot of energy on criticising existing practice. In other words, selective replacement mode is better than reactive mode.

  3. Yoshinori Shiozawa said:

    I strongly support evidencebasedeconomics.

    Condemning actual economics as a whole only please those idle economists and amateurs who have no intention to re-build economics. They rejoice on such accusations only because something they cannot understand are criticized. After participating debates in this blog (RWER-blog), I came to acknowledge that a Grasham’s law holds for commentators to this kind of blog site. Bad money drives out good. In the same way, bad commentators drives out good. I sincerely wish the inverse of the law holds.

  4. The mainstream which is what this web of bad models is called is in for a “Copernican revolution”. MMT is the new paradigm. It doesn’t have the construction of the economy backwards as does the mainstream and it can set a sound policy direction away from neoliberal austerity and other nonsense so damaging to society.

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