Tuesday, January 20, 2015

Presuppositions and idealizations...

Lars Syll quotes an interesting passage from Hans Albert on the weird use of theoretical abstraction in economics; "weird" as in very unusual and rather questionable from the perspective of the rest of science. As Albert writes,

Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the fatal consequences of such methodological strategies for the usefulness of the theoretical conception in question, but with the view that this is a characteristic of especially highly developed economic procedures: the thinking in models, which, however, among those theoreticians who cultivate neoclassical thought, in essence amounts to a new form of Platonism.

In other words, economists (many of them) start with some assumptions or presuppositions, derive some conclusions, and then feel as if they've made a real and lasting contribution to understanding the world. They've produced an "if... then" statement; established a logical connection. It's often a secondary consideration whether this "if...then" has anything at all to teach us about OUR world. Economics, in this sense, is just a branch of mathematics. Pure mathematics, not applied mathematics.

This is interesting as it resonates quite strongly with the conclusions of the recent work of Itzhak Gilboa and colleagues, who try to understand how economists see economics in relation to the rest of science. Their conclusion is much the same -- that many if not most economists (theorists, at least) see their task as producing "theoretical cases," which cannot possibly be refuted, as they are merely logical connections between antecedent suppositions and logical implications.

I wrote about the article in a recent Bloomberg column, the beginning of which goes below:

When economists say they can "explain" something, beware: Their understanding of the word might be very different from yours.

Several years ago, in the immediate wake of the financial crisis, economist Ricardo Caballero wrote about what he called the “pretense-of-knowledge syndrome” in academia. Economists, he argued, had become “so mesmerized” with the internal logic of their theories that much of the discipline -- even that part concerned directly with policy making -- had spiraled off into fantasy. Even when they studied issues close to the crisis, such as bubbles, panics and fire sales, they relegated them to the periphery of macroeconomics, which at its core valued mathematical elegance over usefulness.

Not much has changed since then. That, at least, is the conclusion of Itzhak Gilboa and a group of economists who recently tried to understand why their profession operates so differently from most sciences. Academic economists, they say, use the term "explanation" in a way that other scientists never would. Instead of developing realistic and testable theories like those in biology or physics, they often aim only to develop "theoretical cases" -- imaginary mathematical worlds with their own rules of cause and effect.

Suppose, for example, that an economist wants to explain a persistent recession following a financial crisis....  

Read more here.