"...there appear to be so many violations of the condition under which competitive equilibrium exists that it is hard to see why the concept survives, except for the vested interests of the economics profession and the link between prevailing ideology and the conclusions which the theory of general equilibrium provides." Ormerod, Pg. 66
In this book Ormerod, an economist, presents us with a scorching critique of orthodox, or neo-classical, economic theory. He criticizes the idea of `equilibrium', widely believed by academic economists but found nowhere even approximately in real economic data. He argues that, in reality price levels are never determined by the matching of supply to demand. Real markets are always far from equilibrium, so that there are no clearing prices for assets or commodities. Said otherwise, the `graphs' in Samuelson's famous textbook do not represent real data but are merely cartoons invented for inexperienced or uncritical students. Traders know that equilibrium does not prevail. Traders generally do not use orthodox economic theory in decision making.
Ormerod's summary of the neo-classical theory (which theory led to the emphasis in the west over the past 15 years to implement free market solutions regardless of circumstances) is concise and clear:
1. A free market competitive equilibrium is efficient, demand equals supply, no resources (including people) stand idle or unused. That is, Adam smith's invisible hand leads to the best of all possible worlds.
2. In equilibrium no person or unit can be made better off by altering resources without making someone else worse off (Pareto optimum). That is, redistribution of wealth will make things worse. Indeed, this is the religion of the far right in America, and elsewhere: In this phlosophy governments simply should not intervene at all (Greenspan and the Fed are unnecessary).
As is well-known, general equilbrium theory is based on the assumption of perfectly rational agents who foresee the future perfectly and all conform to the same picture of the future (pg. 89). Ormerod's message is that nothing could be further from economic reality than this picture.
Ormerod does a nice job, via presentation of empirical data, of demolishing the notion (beloved of governments) of the Phillips Curve, the idea that there is a simple relationship between unemployment and inflation (ch. 6). He shows that there is no such relationship in the data. [Ed: Yes, I knew that it's been debunked for 30 years.] He also argues that Adam Smith was interested in empirics and did not advocate a completely unregulated free market devoid of all moral principles, but that economic theorizing was `highjacked' late in the last century by theorists who ignored empiricism altogether and instead tried merely to take over the physicists' notion of equilibrium, but without any idea of dynamics and nonequilibrium. Mirowski makes a similar argument about the lifting of the idea of static equilibrium from physics. Ormerod lambasts the tendency of academics to prove empirically meaningless theoems, to treat economics as a branch of mathematics rather than an empirical science. Also criticized is the hokey assertion by orthodox economists that the failure of real markets to be in equilibrium is due to governmental and other constraints, that a truly unregulated free market would approach equilibrium (i.e., the problem of unemployment is supposed to be solved by complete deregulation). The disaster of Russia is given by Ormerod as a good counterexample. The next examples of such disasters may be the entry of former E. block countries into the (price levels of) the European Union.
The text propagates some common misconceptions about deterministic dynamics, in particular about detreministic chaos. Here are a few examples: the author asserts that the behavior of a chaotic machine cannot be predicted accurately in the long run (true in nature, completely false mathematically). Analogs of phase plots (Poincare sections) are misinterpreted as showing evidence for stable cycles (elliptic points). Certainly, in contrast with what the author expects, there are no elliptic points indicated in the data that he shows (ch. 7). The search for unstable cycles would require data of high decimal precision and cannot be decided on the basis of merely staring at a scatter plot. `Linear' is confused with `mechanistic', as if chaotic and/or complex could not be mechanistic. Scientifically, we do not really know how to distinguish `mechanistic' from `organic'. Perhaps there is no real boundary in nature. These are, in context, relatively minor criticisms of a book that does a good job of emphasizing the flaws in neo-classical economic theory when compared with economic reality.
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Edward Fullbrook, "Post-Autistic Economics:The Case for Pluralism in Economics"
Keynes had trained at Cambridge University as a mathematician. In his mid-twenties he wrote Treatise on Probability, a book that was lauded by Whitehead and Russell (‘it is impossible to praise too highly’), and launched what has become known as the ‘logical-relationist’ theory of probability. When he turned his attention to economics, he was shocked by the way mathematical economists abused mathematics, especially when they applied them in meaningless ways to unsuitable phenomena, and he made no secret of his professional contempt for their empty pretentiousness. But these economists were soon to have their revenge. Led by Paul Samuelson in the US and John Hicks in the UK, they set about mathematicising Keynes’s theory. Or, more accurately, a part of his theory. They left out all those bits that were inconsistent with the neoclassical axioms. Their end product was a formalised version of Keynes that is like a Henry Miller novel without sex and profanity. This bowdlerised version of Keynes, called ‘Keynesianism’, soon became standard fare in undergraduate courses. Even graduate students were discouraged from reading the primary text. With the real Keynes out of the way and Veblen and all the other free spirits forgotten, the road was now clear to establish a neoclassical tyranny...
Many common consumer behaviours are prohibited under the neoclassical notions of rational choice and rationality, including: looking to the choices of other consumers as guides to what one might buy; buying a stock because you believe other people will be buying it and so increase its value; spending your money in a spirit of spontaneity rather than stopping to calculate the consequences and alternatives up to the limits of your cognitive powers; indulging a taste for change, that is, buying something that you did not previously prefer. All these actions are considered outside the scope of analysis of neoclassical economics.
These failings all connect with another. For neoclassical economics is by its own axioms incapable of offering a coherent conceptualisation of the individual or economic agent. It cannot explain where the preferences that supposedly dictate the individual’s choice come from. The preferences cannot be explained through interpersonal relations, because if individual demands were interdependent they would not be additive, and thus the market demand function - neoclassicalism’s key analytical tool - would be undefined. And they cannot come from society, because neoclassicalism’s Newtonian atomism translates as methodological individualism, meaning that society is to be explained in terms of individuals and never the other way around.
... The close to monopoly position of neoclassical economics is incompatible with normal ideas of democracy. Economics has some of the qualities of a science, but because of the very nature of its subject matter, it is forever and fundamentally ideological. It is best not to deceive oneself and others about that. The preoccupation of economics with values and worldly acts means that in a democratic society it has a moral responsibility to promote the exploration of economic knowledge from more than one point of view, so as to make possible the informed and intelligent debate and discussion that democracy requires. But the hegemony of neoclassical economics means that departments of economics have become political propaganda centres. In 2002, Joseph Stiglitz, a recent winner of the Nobel Prize for Economics, wrote in The Guardian that economics as taught ‘in America's graduate schools … bears testimony toa triumph of ideology over science’.
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Economics, Philosophy of
More than 150 years ago John Stuart Mill confronted the problem of how to reconcile his high regard for economics (despite its empirical adequacies) with his commitment to empiricism. His solution, which was accepted by most economists until the 1930s, held that the basic principles of economics are well established by introspection or everyday experience. One can thus justifiably have confidence in economics, despite the inexactness of its implications, which is only to be expected, since economics deals with the most important determinants of economic phenomena...
Mill was firmly committed to the economics of his day, yet he was a strict empiricist. See EMPIRICISM. Since economics faced such major empirical difficulties, it might appear that Mill would have to change his epistemology or disavow his economics. Call this conflict between empiricism and economics, which arises from the apparent disconfirmation
In his 1953 essay, "The Methodology of Positive Economics," Friedman argued that the only relevant test of an economic theory is its success in predicting the phenomena that economists are concerned with. He believes that standard microeconomic theories and the quantity theory of money pass such tests well. He responds to criticisms of theories that point out that they contain "unrealistic assumptions" (such as the assumption that firms are profit maximizers) by arguing that the criticisms presuppose mistakenly that theories can be tested by their assumptions...
From his thesis that the goal of economics is such "narrow" predictive success, Friedman jumps to the conclusion that narrow predictive success is the only relevant test. Although tempting, this inference is a mistake. It is like arguing that the only relevant way to check a computer program is to run it and see whether it does what it is supposed to. If it is possible to tell for sure by running a program whether it will always do what it is supposed to, then there is indeed no point to studying the code (though studying the code might be cheaper and easier than investigating what happens when one runs the program). But with economic theories, as with complicated computer programs, one can only look at a small sample of their performance, and success in the sample is no guarantee of success in general. One cannot look and see how well the theory performs with respect to the full range of phenomena it was designed to account for. Indeed, the point of a theory is precisely to provide guidance when one does not yet know how the theory's predictions come out. Just as one can assess computer programs by studying their code or examining how they work in uninteresting applications, so one can assess theories by examining their assumptions and attending to the success or failure of uninteresting predictions. Such scrutiny of the "realism of assumptions" is of particular importance when extending a theory to new circumstances or when modifying a theory in the face of predictive failure...
One radical reaction to the failure to solve Mill's problem is to deny that it can be solved. In Alexander Rosenberg's view (1992), economics can only make imprecise "generic" predictions, and it cannot make progress, because it is built around folk psychology, which is a mediocre theory of human behavior and which (owing to the irreducibility of intentional notions) cannot be improved. Complex economic theories ought to be valued as applied mathematics, not as empirical theory. Since economics despite its many well-trained practitioners, does not show the same consistent progress as the natural sciences, one cannot dismiss out of hand Rosenberg's suggestion that economics is an empirical dead end. But his view that it has made no progress and that it does not permit quantitative predictions is hard to accept. For example, it seems that contemporary economists can do a much better job of predicting the revenue consequences of a change in tax rates than could economists of even a century ago.
An equally radical but opposite reaction is Donald McCloskey's. He would solve Mill's problem by repudiating methodology. In McCloskey's view, the only relevant and significant criteria for assessing the practices and products of a discipline are those accepted by the practitioners. Apart from a few general standards such as honesty and a willingness to listen to criticisms, the only justifiable criteria for any conversation are those of the participants. The pretensions of philosophers to judge the discourse of scientists are arrogant and may be dismissed. Mill's problem dissolves when economists recognize that philosophical standards of empirical success may be safely ignored. Those who are interested in understanding the character of economics and in contributing to its improvement should eschew methodology and study instead the "rhetoric" of economics -- that is, the means of argument and persuasion that succeed among economists... as Alexander Rosenberg has argued, it seems that economists would doom themselves to irrelevance if they were to surrender standards of predictive success, for it is upon such standards that policy decisions are made...
A third approach is to return to Mill's own solution. Many of the basic principles of economics are plausible and are borne out in everyday experience. Although such plausibility does not place these principles beyond question, it does provide some warrant for them and some warrant for what may be deduced from them. Given the weakness of tests involving market data, in which there is an uncontrolled multiplicity of causal factors, it may be reasonable to hang on to orthodox theory in the face of disconfirmation. This thought can be rigorously supported in terms of Bayesian confirmation theory (Hausman 1992, ch. 12). See CONFIRMATION THEORY.