June 27, 2003

being sceptical about economics

Here is the reason why philosophy.com has a critical stance to neo-classical ecomomics as a social science. It is one Aristotlean used against Plato who favoured abstract mathmatical knowledge as the form of knowing. Modern neo-classical economics is Platonic and so the objection is a classic philosophical one directed at the assumptions.

The description of this Platonism is given by Jeffrey Friedman, the editor of Critical Review. I quote:

"In Feldstein’s quite standard “neoclassical” model of the economy, everyone is motivated by self-interest. Consumers self-interestedly pay the lowest price possible for whatever they buy, after comparing the various goods for sale against their own hierarchically ranked desires. Similarly, in the pursuit of profit, producers compete with each other to provide consumers with exactly what they want, and will thus pay for. Selfish competition among producers channels their self-interest toward serving selfish consumers’ desires. As Adam Smith put it in The Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Economists such as Feldstein take Smith’s generalization and run with it — too far."

What we get is a few axioms from which a theoretical edifice is constructed that is stated in terms of equations. So you can either criticise the initial assumptions upon which the edifice is built (the foundations) or the deductive inferences. Friedman continues:

"Although they are usually careful to note that their model is an abstraction from reality, in practice they treat the abstraction and reality as interchangeable. Only by assuming that in reality people are always selfishly motivated — and only by adding the further assumptions that self-interested entrepreneurs have perfect knowledge of what self-interested consumers want; and that self-interested consumers have perfect knowledge of what selfinterested entrepreneurs have to offer — can economists diagram, in the form of supply and demand curves, the Smithian transformation of self-serving behavior into behavior that serves others. These diagrams are required if calculus is to be applied to economics. And calculus is required if economics is to acquire the appearance of precision: at the intersection of its supply and demand curves is the perfect price for a product."

So what is being produced is an economics of the blackboard that is covered in equations; or if you prefer the first steps on the way to constructing a computer model of the economy. Friedman continues:

"The assumptions of universal self-interestedness and perfect knowledge, then, are needed in order to turn economics into mathematics. So, even after noting the ahistorical, unrealistic aspect of the assumptions necessary to generate supply and demand curves, economists continue to deploy those assumptions. And this practice justifies protests such as those launched at Harvard. For if the economists’ assumptions are unrealistic, the appearance of precision they produce is an illusion."

If you want to be blunt about it, what has been produced is a house of cards that is called Pareto Optimality with the whole production given the name of science. Under economic rationalism reality is shaped to fit with the model of the purely competitive economy.

Thats a bit unfair I know. Below the belt. But see here for the more scholarly account of the flight from reality. And you have to get rough and ready here---ie., suspend your belief in science--- to make some space in order to be able to introduce practical knowledge. The response by Aristotleans to this account of theoretical reason is to emphasis a concrete and particular ethical knowledge of a practical reason. And politics has its own form of practical knowledge such as state craft: shaping the conduct of a population to specific political ends.

Posted by Gary Sauer-Thompson at June 27, 2003 12:01 AM | TrackBack

For a minute I thought that Milton Fiedman had seen the light! You ought to look at the "Introduction" to Milton F.'s "Positive Economics" where he says that the fictional or false nature of his axioms was irrelevant if the equations were predictive. (Econ has admitted that it is not predictive since then; don't know how Milt responded).

Friedman's justification was some of the false assumptions Newton made while producing his theory. (E.G., the earth's mass is concentrated on a single point in the center). But Newton did not defend his false assumptions or forbid that they be challenged, and Newton's false assumptions did not have a political impact.

From my point of view, beyond positivism and math formalism per se, academic disciplinary organization enables this kind of thing. Anyone who wants to can say "As an economist, of course, I don't discuss that sort of thing", and when saying so can feel very superior to his discussant, even though that's effectively a know-nothing position.

I'm not writing about philosophy at the moment, but a sketch of my point of view is at my URL. I think we're an about the same page -- did you meet Toulmin when he was in Australia?

Posted by: zizka on June 27, 2003 04:24 AM

nope I did not met Toumlin.Pity.

I know the Milton Friedman book. I have to admit that I was a bit stunned by it all when I first read it.

I still am stunned by the mathematical formalism of economics and the expert elitism of the policy economists.

Posted by: Gary Sauer-Thompson on July 2, 2003 12:38 AM
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