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August 7, 2009
Ever since modern economics started in the 18th century it has generally presented itself as a predictive scientific discipline, akin to a natural science. Neoclassical economics is widely accepted to be “the most scientific of the social sciences”, and unlike sociology, political science, etc, economics is regularly referred to as a “science” rather than a “social science”. This scientific status as a natural science is a major source of legitimacy for “economic” approaches in social science, and these neoclassical economic approaches to social phenomena, such as Rational Choice Theory have become very influential, if not dominant.
The failure of the economics profession – with a few exceptions – to foresee the global financial crisis does discredit its scientific pretensions. Economics is revealed to have no more clothes than the other social sciences, such as sociology. The neoclassical attempt to construct a ‘pure’ economics has failed. The economics profession has problems, given their identity in economics' status as a hard, predictive natural science. The positivist model of science as the appropriate model for social science and it this model of science (as distinct from a scientific realist one) that provides neoclassical economics with its seemingly unassailable scientific status. However, this problem in predictive failure does mean that the profession needs to address its self understanding as a positivist natural science.
These kind of anomalies can be found throughout the theoretical edifice. Thus neoclassical economics's claim that it is a positivist science (as distinct from normative economics) is undercut by its central core that appeals to metaphsycs. First, in a free market, competition establishes a price equilibrium that is perfectly efficient: demand equals supply and no resources are squandered. Second, in equilibrium no one can be made better off without making someone else worse off. This metaphysical core has deep roots in that neoclassical economics has its roots in the eighteenth century in a climate of Newtonian mechanistic science, with its belief in forces in balance. In Lakatosian terms this core is based on a hard ontological commitment of homo economicus; or, to use an older term, the metaphysical core of neo-classical economics. Economists view social reality through metaphysical windows.
The mathematical turn in the late 20th century reflects, and is based on, a persistent bias towards an idealised account of both human behaviour and markets, which stand in such contrast to the complexity of the mathematical theoretical edifice built up from its axioms. That edifice is used to understand the allocation of scarce resources among alternative ends and understanding such allocation is often considered the core of economics in the context of public policy.
Neoclassical economics works in terms of an excessive abstraction that conceptualizes the world as a mechanical world of interacting robots driven by the instinctual springs of a fixed human nature. The economy is simply the sum of microeconomic decisions of rational agents pursuing their own self-interest. Agent behaviour is fixed: market agents pursue a single goal regardless of what others do, and the only way one agent can influence another’s choices is via the indirect effect of trading on prices; even though it is abundantly clear that herding –---irrational, copycat buying and selling – provokes market fluctuations. In general, people gather limited information, reason poorly and act intuitively rather than rationally.
Hence, there are problems with its concept of rationality, which is deduced from its initial axioms. Most economists assume that the economic system works as if it consisted of rational, self-interested persons maximising utility or profits: it is a means-end or instrumental rationality centred around the agent's optimization of their preferences. The agent maximizes utility because they are rational.They are rational given the axiomatic definition of human nature as homo economicus.This is an axiom (the model posits the existence of rational agents as a theoretical assumption), as it is not considered to be falsifiable by empirical observation. So it does not really matter that individuals do not always maximize utility as the assumptions and deduced postulates hold. What matters are the axioms of the deductive theoretical edifice not the empirical evidence,and so there is a process of shedding many of the encumbrances reality places on theorizing.
Neoclasssical economics, therefore, is not the positivist science it claims to be. This can also be seen in the appeal to the value of instrumental rationality (it is a better concept of rationality than others and better than irrationality), which undercuts the neo-classical claim to be a hard edged positivist science. Logical Positivism, which arose in philosophy early in the twentieth century, proclaimed the sharp distinction between facts and values. Positivism was imported into economics in the 1930s and ethical considerations were eventually driven out of its core, even though the fact/value distinction is now discredited in philosophy. What we find are hidden or tacit appeals to the value of rationality buried in the theoretical edifice.
Reality has to be shaped to fit with the utopian model of a decentralised market system. Analysts talk about the market making ‘corrections’, as though there is some ideal or optimal state that it is trying to attain. But in reality, the market is intrinsically prone to leaps and lurches.Drawing on the mathematical apparatus named after Vilfredo Pareto neoclassical economic science eschewed reference to utility, basing itself exclusively on acts of exchange and choice.
In logical positivist terms, “utility” can only be defined in terms of each agent’s preference ranking as objectively manifested in the choices they make. The crucial concept here is the “Pareto optimum” — that state of the market where there exists no possible exchange, deemed by both parties to be beneficial, which remains to be executed. By this move, a new utilitarianism is established, in continuity with the old, in which the good is a Pareto optimum, in that it assumes that no mutually beneficial exchange is left unmade. Hence the idea of this is “the best of all possible worlds” even though Pareto optimality is entirely compatible with leaving some people in extreme misery while others roll in decadence and luxury.
Though neoclassical economics has reworked the homo economicus ontology to resemble us human beings more, this has not dislodged the neoclassical theory from its ontological and methodological anchorage. Thus neoclassical theory retains its roots firmly within the individualist ontology of liberal social science. The ontology of homo economicus (as in rational choice accounts) take individual preferences as given, and consider how preferences are aggregated within pre-specified institutional arrangements. Individuals are assumed to always maximise their utility functions specified in the model. In contrast, theories based upon the homo sociologicus model of man see agents acting out roles (a ‘typified response to a typified expectation’) in response to norms. Roles encode norms and conformity to norms is seen as being the motivationbehind agents’ behaviour.
Though it is acknowledged that the agent is a creature of her social context, and that social structure and individual agency are messily intertwined, the theory places the burden of explanation on the individual.The standard assumption still is that agents’ current preferences are separate from the structure of the interaction and power relations in which they are involved.
The method is still of the analytic-synthetic type: the socio-economic phenomenon under scrutiny is to be analysed by focusing on the individuals whose actions brought it about; understanding fully their ‘workings’ at the individual level; and, finally, synthesising the knowledge derived at the individual level in order to understand the complex social phenomenon at hand. Those working within a methodological individualist framework, using some variant of homo economicus are at pains to ‘explain’ observed behaviour by formulating, along Popperian lines of parsimonious falsifiable hypotheses, which in positivist political science should ideally have predictive power. If economists view social reality through metaphysical windows, then this places constraints on the empirical testing of falsifiable hypotheses.
If neoclassical economics is systematically grounded in the positivist philosophy of science then the consequences of using Positivism as the philosophical foundation for theory- building in neoclassical economics include: the reliance on anti-realist core assumptions; the centrality of deductive-nomological modeling; reductionist methodological individualism and the related mathematical problems of aggregation; equilibrium as a central concept of theory- building; and the neglect of temporality through the construction of static models. The unrealistic nature of all of these central axooms and postulates in neoclassical economic theories are explicitly defended through the deployment of Positivist explanations of what science looks like.
This is why the self-questioning of neoclassical economics needs to include a discussion of its underlying positivist philosophy of science.
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Try learning English before criticizing economics: "it's" versus "its".