The Pseudoscience of Economics

According to wikipedia, "Pseudoscience is a claim, belief, or practice which is presented as scientific, but does not adhere to a valid scientific method, lacks supporting evidence or plausibility, cannot be reliably tested, or otherwise lacks scientific status. Pseudoscience is often characterized by the use of vague, exaggerated or unprovable claims, an over-reliance on confirmation rather than rigorous attempts at refutation, a lack of openness to evaluation by other experts, and a general absence of systematic processes to rationally develop theories." I think economics satisfies most of these criteria. For example, economists love presenting their work as scientific (see Lazear) however, many of their theories cannot be reliable tested, because people's "utility" functions simply cannot be measured in any sense, so any conclusions derived from those functions are totally bogus. Moreover, pseudoscience is characterised by "exaggerated or unprovable" claims, which is true of economics as well. The impact of minimum wages on unemployment for example is hugely exaggerated, even though reality shows the effects to be negligible if that. The same with the so called "disincentive" effects of high rates of marginal taxation. There's clearly an overreliance on confirmation rather than refutation, as Card and Kreuger found evidence of publication bias with respect to minimum wage studies, with papers showing a statistical significant effect of the minimum wage on unemployment more likely to be published than those showing no effect. There is clearly "a lack of openness to evaluation by other experts,", since whenever scholars from other disciplines try to debunk economic theories, they're called left wing idiots. When other heterodox economists like Steve Keen criticise economics, they're called cranks, without any attempt to rationally debate their arguments.

Modern economics is obsessed with modelling. An overwhelming majority of academic papers on the subject work like so: they take data, and use data to construct formal mathematical models of economic processes. Models mostly describe a situation, and describe how that situation would be changed by a given set of events; a very simple example is that as the supply of a good diminishes, its price will increase. Another is that deficit spending increases the national income. A mathematical model is a predictive tool created to demonstrate the outcome of events in a massively simplified alternate universe. As someone who rather enjoys voyages of the imagination, the use of mathematical models in economics is intriguing. The pretension that through using formal mathematical techniques and process we can not only accurately understand, but accurately predict the result of changes in the economy is highly seductive. After all, we can accurately predict the future, right? Wrong. The wonderful and terrible and confounding thing about our world is that it is a deeply

unpredictable place, at least in the economic sphere where each number (for instance “aggregate demand” or “aggregate supply”) in an equation may loosely refer to millions of huge, complex and dynamic events. When you’re using huge simplifications to describe reality, those simplifications may miss the important details, and your projections may go askew. Not all modelling is equal. Newton’s model of gravitation (since superseded by Einstein’s relativity) makes relatively accurate predictions about how gravitation works, and what would happen to an object dropped 500 metres above the Earth. NASA used Newton’s equations to fly to the Moon. Of course, even in physics there are occasionally divergences and oddities (which is why there are quite often unrepeatable or anomalous experimental results, for instance the recent experiment that seemed to show neutrinos travelling faster than the speed of light). So economics — with its fixation on creating models of situations, and using these models to attempt to predict the future, mimics physics, chemistry and biology, where data is collected, and used to produce theories of physical processes which allow a modestly accurate representation of the future. The key qualitative difference, though, is that mathematical economic theories don’t accurately predict the future. Ben Bernanke — the chairman of the Federal Reserve, and one of the mostcited academic economists in the world told the world that subprime housing was contained. That is the economic equivalent of Stephen Hawking telling the world that a meteorite is going to miss the Earth, when it is really going to hit. Physicists can very accurately model the trajectories of rocks in space. But economists cannot accurately model the trajectories of prices, employment and interest rates down on the rocky ground. The thing that I believe modern economists are most useful for is pointing out the glaring flaws in everyone else’s theories. Steve Keen has made a public name for himself by publishing a book entitled debunking economics, in which he explains the glaring and various flaws in modern economic modelling (DSGE, New Classical, etc). Economics is a complex and multi-faceted subjects. Economists must be in some measure, philosophers, historians, linguists, mathematicians, statisticians, political scientists, sociologists and psychologists, and many other things. The trouble is that at some stage in the last century the multi-faceted multi-dimensional economics (like that Xenophon) was hijacked by mathematicians who tried to turn this huge and delicate subject into an equation. Yet economics — and economic decisions, from the macro to the micro level — is a human subject. It is subtle and psychological and sporadic. A human subject requires human language, human emotion, human intuition. The grand theoretical-mathematical approach to economics is fundamentally flawed. Trying to smudge the human reality of economics and politics into cold mathematical shackles is degenerative. So what to do if you want to understand the economy? Follow the data,consider the history (similarities and differences between the past and the present) and explain your conclusions simply, as you would to a child. Consider philosophical definitions: what is money? What is demand? What is supply? What is value? How does demand affect supply? What are the global patterns of trade? Why have they emerged this way and not an alternative way? Consider possibilities. Admit the limitations of your knowledge and explore the boundaries. Stop forcing the construction of absolutes, grand frameworks, grand theories. No theory will ever be robust to everything nature will throw at it, but simple microeconomic heuristics (opportunity cost, cost-benefit analysis) combined with data-focussed historical analysis may be more robust than cold, dead mathematics. As Heraclitus noted: No man ever steps in the same river twice

No two situations are identical. And in this universe even tiny differences can have huge effects on the outcome of a situation. This is the butterfly effect, a term coined by Edward Lorenz, and derived from the theoretical example of a hurricane’s formation being contingent on whether or not a distant butterfly had flapped its wings several weeks before. The pseudo-scientific school of mathematical economics hungers and craves for a perfect world, where each river is the same, where there is no butterfly effect, where human preferences are expressed in equation form, where there is no subtlety or ambiguity or uncertainty. It is a dreamworld constructed by and for people with Asperger’s Syndrome. The subject area covered by economics can be divided into three broad categories: "Economic" behavior, human material interactions, and the theory of value. In all three areas, economic theory fails to accurately describe, model, or predict the real world, and is in conflict with the best understanding provided by noneconomic disciplines. First, as a behavioral science, economics assumes that people are fairly rational, well-informed agents working in their own self-interest, with little or no concern for the effects of their actions on others or on society as a whole. Many economists would put this even more strongly, claiming that people are highly rational, and fully (and equally) informed. Not only is this view very culturally narrow, being applicable primarily to western societies of the last 200 or so years, it isn't even accurate within its cultural limits. Numerous studies (not to mention empirical observation) demonstrate that people are not very rational, are often not well-informed, and are certainly not equally informed. Consider a counter-example to the economic viewpoint: advertising. If the economic view of human behavior were correct, advertisements would do nothing more than provide accurate, useful information in order to convince consumers that it makes sense to buy the product being advertised. There would be no place for such irrational factors as emotional appeals, brand loyalty, sex, and so on. Clearly, this does not describe most mass media advertising. What's going on? Either emotional, non-rational advertising works -which can only be true if consumer behavior is not rational -- or else such advertising doesn't work -- in which case producers are behaving irrationally by continuing to employ ineffective sales methods. Even in very simplified situations, such as experimental studies of economic behavior, people seldom behave in a fully rational manner.

Economics as the study of human material interactions hardly exists at all. All economic transactions involve the transportation or transformation of matter and energy (even if only to alter the information content). The laws of physics and biology, most especially the limit laws (such as the laws of thermodynamics), must apply to any such interactions. Yet most economists are oblivious to such matters. The few who are aware either argue that the limit laws do not apply to economics (the most notorious proponent of this viewpoint is Julian Simon), or just get it wrong. (e.g., by asserting that any economic activity will increase the entropy of the earth. Since the earth is not a thermodynamically closed system, activity will not necessarily increase the earth's entropy, although it must increase the entropy of the universe as a whole.)

Economics as Pseudoscience Daniel Johnson Modern economics is based almost entirely on myths first pronounced by the 18th century moral philosopher, Adam Smith.

(CALGARY, Alberta) - I’ve been collecting quotes about, and insights into, economics since the 1970s. In fact, one of the first articles I ever published was "Superstition in Economics", in Humanist in Canada in 1974. Here is an outline of what I’ve accumulated so far. If any field of study is a pseudoscience, it's economics. As Leonard Silk, late economics columnist for the New York Times (an economist himself) once wrote: "Economists try to do what all scientists do—observe certain aspects of the natural or social world, gather data to measure those aspects, construct theories to explain the data, and test the theories against reality to validate or invalidate them. On the whole, however, economists do a weak job at all this. They commonly spend vast amounts of time observing each other's articles rather than reality. Their data are poor, and they devote little time to improving them. Their theories are rigid and mechanistic. And they rarely discard them unless some academic or government position is at stake." (Economics in Plain English) Or the late Harvard economist John Kenneth Galbraith: “Economists, on the whole, think well of what they do themselves and much less well of what their professional colleagues do. If a scholar probes deeply into a small section of the subject, he is fairly certain to mistrust, as superficial, the man who ranges more widely. The latter, in turn, will think the specialist lacking in vision or what is called reach. By knowing ever more about ever less, he will seem to risk becoming quite ignorant. Those who are mathematically inclined see others in retreat from rigor. The others think those who manipulate symbols impractical. The statisticians believe those who prove points deductively to be dangerously intuitive. But, by their colleagues, those who are controlled by numbers are often thought unduly cautious or even dull. It is exceedingly fortunate for the psychic health of the profession that inadequacy lies so uniformly with others. The situation in the other social sciences is said to be equally satisfactory.” (The New Industrial State) What Invisible Hand?

Modern economics is based almost entirely on myths first pronounced by the 18th century moral philosopher, Adam Smith. His most famous myth is that the market is ruled by an Invisible Hand. In The Wealth of Nations (1776) he wrote that an individual “generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention….By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.” Philosopher Thomas Hobbes But, says philosopher Joseph Heath, seventeenth century philosopher Thomas Hobbes “noticed—as many of us have—that when left to their own devices, people have a tendency to make a mess of things. His genius lay in the discovery that we do not necessarily make these messes because we set out to harm one another. Often the mess occurs simply because our attempts to secure our own self-interest are collectively self-defeating. So if our ‘natural’ inclination is to mind our own business and look after our own interests, then life in a ‘state of nature’ would be unbearable.” Smith was writing during a mercantilist period, even before the Industrial Revolution had begun. His ideas on economics are completely taken out of context and do not, can not, apply in the 21st century. This does not negate his importance as a moral philosopher, as shown in his otherwise neglected Theory of Moral Sentiments. Unpredictability in economics Economics historian Stephen Mihm gives us an initial perspective: “Recessions are signal events in any modern economy. And yet remarkably, the profession of economics is quite bad at predicting them. A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions

when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.” John Kenneth Galbraith In the same vein, Galbraith calls the Federal Reserve System the "most prestigious form of fraud, our most elegant escape from reality…it has had a record against inflation and notably against recession of deep and unrelieved inconsequence….The belief that anything as complex, as diverse and by its nature personally so important as money can be guided by well-discussed but painless decisions emanating from a pleasant, unobtrusive building in the nation's capital belongs not to the real world but to that of hope and imagination. Here our most implausible and most cherished escape from reality. No one should deny those participating their innocently acquired prestige, their sense of personal competence, their largely innocent enjoyment of what in economic effect is a well-established fraud. Perhaps we should let their ineffective role be accepted and forgiven." (Economics of Innocent Fraud) Going on to say that “Those employed or self-employed who tell of the future financial performance of an industry or firm, given the unpredictable but controlling influence of the larger economy, do not know and normally do not know that they do not know. Predictions from a financial firm, Wall Street economist or financial advisor as the economic prospect for a corporation—recession, scheduled recovery or a continuing economic boom—are thought to reflect economic and financial expertise. And there is no easy denial of an expert’s foresight. Past accidental success and an ample display of charts, equations and self-confidence affirm depth of perception. Thus the fraud. Correction awaits.” Recall that the current recession was predicted by no economists at all. If any did, their voices were not heard. What is economics? In The Unnatural Nature of Science, Lewis Wolpert wrote: “The Nobel laureate [in economics] James Meade would like his tombstone to bear this epitaph: ‘He tried to understand economics all his life, but common sense kept getting in the way’.” Joseph Heath: “Markets really are efficient, vastly more efficient than any other form of economic organization. The pursuit of profit, under proper conditions, does generate collective benefits—win-win outcomes. Markets are quite amazing. But because this sounds so unlikely, the fans of global capitalism have had a marked tendency to overstate their case. After all, it is hard to imagine that haggling, price-gouging, profit-seeking, personal enrichment, usury, or any of the other roughand-tumble practices of the marketplace have beneficial social consequences. Self-interest is usually bad. Why should this be any exception? As a result, proponents of the marketplace have been very reticent to admit that the market pattern of organization has any flaws or limitations. When combined with the utopian streak of many right-wing economists, this has given the debate over markets unnecessarily ideological and often quasi-religious overtones.”

“In a properly structured market, firms should be indifferent to environmental regulation. The problem is that markets are often not properly structured. As long as oil companies were making leaded fuel, they were not paying the true cost that the manufacture of their product imposed upon society. This is because of the negative externality—the airborne lead emissions. As a result, society was consuming ‘too much’ gas. Eliminating the externality should therefore reduce total demand for gasoline and increase the demand for other fuel sources. This is why the oil companies and refiners were opposed. They were profiting from the public bad. Thus opposition from business to regulation is often a sign that the regulation is a good idea and is likely to improve the overall efficiency of the economy.” Milton Friedman: “The major lesson of the Great Depression that has affected our lives is the wrong lesson, a misinterpretation of the Great Depression. There is no doubt that the major lesson [was] you… could not count on the private enterprise system to maintain prosperity and that you had to rely heavily on government to play a major role. If you take the period before 1929, so far as public opinion in general is concerned, government was regarded as a necessary evil. I think here was widespread support for the kind of views that Jefferson had expressed a century and a half earlier on the virtues of small government and of limiting the role of government. The Great Depression changed that because the lesson that the public at large learned from the Great Depression was that it was the result of a failure of business, a failure of capitalism,…and that in order to be safe in the future they would have to rely much more heavily on government. That was the lesson that was in fact learned from the Depression….[I]n my opinion, the lesson that should have been learned, the right lesson, was that government let them down. That it was mismanagement of the money system that produced it and not a failure of the market system.” Some things never change In 1960, Vance Packard wrote in The Waste Makers: “A survey by insurance companies revealed that the average American family was about three months from bankruptcy. That was its cushion against disaster after two decades of unparalleled prosperity. For millions of families—especially for many living in suburban subdivisions—the brink of disaster was much closer. They were so pressed in meeting their host of monthly instalment charges that they were stopping smoking temporarily or putting their wives to work or seeking debt-consolidation loans, or all three.” Overall, the situation is worse today for almost everyone. Vision in economics In the 1950s Senator Joseph S. Clark of Pennsylvania said:

“The goal of our economy is not the production of more consumer goods at all. The goal of our economy is to provide an environment in which every American family can have a good house for living and shelter, a good school to which to sent the children, good transportation facilities and good opportunities for cultural and spiritual advancement.” But just the opposite situation has evolved. Galbraith: “The economy is geared to the least urgent set of human values. It would be far more secure if it were based on the whole range of need.” “The income men derive from producing things of slight consequence is of great consequence to them. The production reflects the high total utility of a livelihood to a person. For this reason, although there is conventional wisdom to deny it, income and employment rather than goods have become our basic economic concern.” This, he says, is because “The individual serves the industrial system not by supplying it with savings and the resulting capital; he serves it by consuming its products. On no other activity, religious, political or moral, is he so elaborately and skilfully and expensively instructed.” Charles (Charlie) Brower As BBDO president Charles H. Brower said in the 1950s: “The house of advertising is a mighty fortress in our economy….Pull down advertising, and a frightening number of things will fall with it.” In our society it has become difficult, well nigh impossible, to step away from the system and live even a partial non-capitalist life. As Galbraith went on to say: “As does the voter, the buyer has the right to exercise independent choice, to opt out. This some do; they resort to a lifestyle outside the system that is thought eccentric, even slightly insane. The existence and exercise of such choice does not lessen the force of market persuasion. Economics as taught and believed lags well behind the reality in all but the business schools.” ”Charity leads to the exploitation of the moral by the immoral” Here are three observations by philosopher Joseph Heath from his 2001 book The Efficient Society:

“The fact that we are forced to pay taxes rubs some people the wrong way. But this is inevitable whenever it is necessary to do something as a group. In the case of the condominium association, people have no choice but to pay for the security guard at the front desk. In the case of the state, people have no choice but to pay for the [police]. In both cases, the freedom that is being restricted is nothing other than the freedom to free-ride. And that’s a freedom we’re all better off not having.” Stranger than fiction Order Now “The material prosperity of Americans is due to the relatively unrestricted operations of the market economy in their society. It can cost a lot of money to make buildings beautiful. Once they are built, their beauty can be enjoyed for free by anyone who happens to pass by. Thus the enjoyment we all get from beautiful surroundings is largely a positive externality. As we have seen, market economies systematically underproduce goods with positive externalities. And so beauty suffers.” “When I was living in Chicago, I once passed a homeless man on my way to school. It was the middle of winter, and he had no shoes. It made me feel ill. In some people, this feeling is strong enough that they are willing to donate some of their own money to charity in order to help relieve such suffering. Unfortunately, the fact that this preference is felt so strongly in some quarters gives others an opportunity to free-ride. People who don’t care much about other people can get away with not donating anything to charity. They still get all the benefits that poor relief generates—in terms of improved environment and security—yet pay none of the costs. Thus charity leads to the exploitation of the moral by the immoral.” Economics as ideology Joseph Heath’s first impression of economics was that it was a “crude right-wing ideology”. He says that as he learned more about economics, “a number of studies have since shown that studying economics can actually make you a bad person.” He added in a footnote that “in fairness, I should point out that these studies do not show that studying economics makes you a bad person. It may just be that bad people are more likely to be attracted to the study of economics. Anyhow, the truth probably lies somewhere in between.” Milton Friedman: “The state might come back. The only reason free markets have a ghost of a chance is that they are so much more efficient than any other form of organization. When you argue for free markets, you are arguing against the trend. When something goes wrong, the natural tendency is to say, ‘by God, we need to pass a law and do something’.” The idea that free markets “are so much more efficient” is an unsubstantiated, never proven assumption. As British writer Frances Wheen points out in Idiot Proof):

“there is no evidence for the contention that simple laissez-faireis the prerequisite for trade and prosperity. The IMF may say so, but its own figures tell a different story. Its report on ‘The World Economy in the Twentieth Century’, published in May 2000, includes a graph—printed very small, perhaps in the hope that no one would notice—which shows that the period between 1950 and 1973 was by far the most successful of the twentieth century. This was an era characterized by capital controls, fixed exchange rates, strong trade unions, a large public sector, and a general acceptance of government’s role in demand management. The average annual growth in ‘per capita real GDP’ through the world was 2.9 percent—precisely twice as high as the average rate since then.” In fact, writes Heath, “There is a tendency in our society to overestimate how easy it is to put together a market. We are sometimes told that markets will spring up naturally whenever people are left free to trade. Nothing could be further from the truth. Markets are extremely sophisticated legal constructions. Furthermore, getting them to work properly requires people to think about their society in a very counter-intuitive way. As a result, markets represent a very unobvious and improbable institutional development (If they weren’t so unobvious people would have thought of them long ago.) The central virtue of markets is that they allow individuals to organize productive activities using far less information than any other type of economic institution. They allow us, in a sense, to solve the basic problems of our economy without actually working out a solution. Precisely how they do this is the question that has fascinated economists for the last two hundred years.” In his book Capitalism and Freedom, conservative Nobel economist Milton Friedman argued that “a central element in the development of collectivist sentiment…has been a belief in equality as a social goal and a willingness to use the arm of the state to promote it.” What is the justification for state intervention? he asked. “The ethical principle that would directly justify the distribution of income in a free market is, ‘To each according to what he and the instruments he owns produces.’ The operation of even this principle implicitly depends on state action. Property rights are matters of law and social convention. As we have seen, their definition and enforcement is one of the primary functions of the state. The final distribution of income and wealth under the full operation of this principle may well depend markedly on the rules of property adopted.” Simon-Henri Linguet, a lawyer in pre-Revolutionary France, was disbarred from practice because he was critical of both the law and property. He said: Jacques Necker “Laws are destined above all to safeguard property. Now as one can take away much more from the man who has than from the man who has not, they are obviously a guarantee accorded the rich against the poor. It is difficult to believe, and yet it is clearly demonstrable, that the laws are in some respects a conspiracy against the majority of the human race.”

Jacques Necker, controller of finances, was fired on the eve of the French Revolution: “Almost all civil institutions have been made by property owners. One might say that a small number of men, having divided the earth among themselves, made laws as a union and guarantee against the multitude.” In Emile, the French philosopher Jean-Jacques Rousseau wrote: “The universal spirit of laws in all countries is to favour the stronger against the weaker, and those who have against those who have nothing; this disadvantage is inevitable and without exception.” This is echoed today by no less a personage than Col. Muammar el-Qaddafi (Libyan dictator as of this writing) who said in his Green Book: “This is genuine democracy, but in reality the strong always rule.” In The Social Contract Rousseau said that the 17th century thinkers, Hugo Grotius (jurist) and Thomas Hobbes (philosopher) “show us the human race divided into herds of cattle, each with a master who preserves it only in order to devour its members.” Economics of a “Christian” nation Joseph Heath wrote: “St. Matthew had a number of good lines. My favourite is his somewhat infamous principle of justice: ‘To everyone who has will be given, and he will have abundance, but from him who has not, even that he has will be taken away. Throw out the unprofitable servant into the outer darkness, where there will be weeping and gnashing of teeth’. This passage occurs in the so-called ‘parable of the talents’, in which Jesus appears to endorse a number of very dubious moral principles.” Conclusion: The original affluent society In the 1960s, anthropologist Marshall Sahlins argued that our society had “erected a shrine to the Unattainable: Infinite Needs,” submitting to capitalist discipline and competition to earn money so we can chase those infinite needs by buying things we don’t really want. We could learn something, Sahlins suggested, from the pre-agricultural, hunter-gatherers of ten thousand years ago. “The world’s most primitive people,” he wrote, “have few possessions but they are not poor.” This only sounds like a paradox, for Sahlins went on to point out that foragers typically worked twenty-one to thirty-five hours per week. Hunter-gatherers did not have cars or TVs, but they did not know they were supposed to want them. Their means were few but their needs were fewer, making them, in Sahlins view “the original affluent society.”

This is a somewhat simplistic observation but it contains the kernel of a profound truth. Their lives, by our standards, were short and in many ways uncomfortable (understatement?). If they had had medicines and medical techniques that would have rid them of curable diseases and let them live longer and more comfortably, there still would have been no need for them to pursue useless material goods. Excess consumption is an artificial situation promoted by the capitalist system, i.e., by property owners whose only goal is to increase their property and maintain their dominance over their workers. As Galbraith wrote: “To be guided by the belief that everyone should work a standard week and year—is to make the needs of the industrial system, not the opportunity of the individual to fashion his own existence, the ruling social concern. Men who speak of liberty should allow and even encourage it.” Daniel Johnson was born near the midpoint of the twentieth century in Calgary, Alberta. In his teens he knew he was going to be a writer, which is why he was one of only a handful of boys in his high school typing class — a skill he knew was going to be necessary. He defines himself as a social reformer, not a left winger, the latter being an ideological label which, he says, is why he is not an ideologue. From 1975 to 1981 he was reporter, photographer, then editor of the weekly Airdrie Echo. For more than ten years after that he worked with Peter C. Newman, Canada’s top business writer (notably on a series of books, The Canadian Establishment). Through this period Daniel also did some national radio and TV broadcasting. He gave up journalism in the early 1980s because he had no interest in being a hack writer for the mainstream media and became a software developer and programmer. He retired from computers last year and is now back to doing what he loves — writing and trying to make the world a better place

Economic theory claims to describe how economies maximize, or fail to maximize, value. Yet philosophers have demonstrated (as most economists will readily admit) that economists don't really know what they are talking about when the talk about value. Economic theory has been reformulated in various ways to try to circumvent this problem. But most such fixes are nothing more than circumlocutions, substitutions of other words or phrases for "value". There are also other, more technical, issues (e.g., economic theory is oriented toward static equilibrium models while the real world involves dynamic, ongoing processes; "proofs" of economic theories often rely on fixed-point theorems which require the absurd assumption that all economic quantities are continuous; and so on.) All the above criticism would be, if not negated, at least blunted, if economic theory were actually useful, if it could predict or help us to understand events in the realworld economy. This is where it becomes most obvious that economics is a pseudoscience. In science, theories and models are tested against reality. If they are contradicted by confirmed events, theories are either modified or rejected. In the long run there is a winnowing out process which selects one or a few theories as being most probably correct. In a pseudoscience, no such winnowing out occurs: when confronted with strong evidence against a pseudoscientific theory, either the evidence is dismissed or reinterpreted to conform to theory, or the theory is reinterpreted to make it consistent with the data. Abandonment of the theory is never even an option. There has been no winnowing out of economic theories. When an "impossible" event occurs (e.g., "stagflation"), data or theory is simply reinterpreted to conform to the new situation. Economics has all the earmarks of a pseudoscience. I believe it is leading us astray and should be abandoned, and that we should try to develop a true science of economy.

Corporate crime: basic economics
Unlearning Economics says that capitalism gives us "institutionalized law-breaking": Corporations have long history of force, fraud and theft...In a system based on private accumulation, they will use their profits to corrupt the legal system, hijack public funds, get the best lawyers, and make their operations as opaque as possible to avoid prosecution, no matter the charge. None of this is a bug of capitalism; it is a feature.

If this sounds like a lefty rant, it shouldn't. It's just elementary economics. This tells us that firms supply things up to the point at which the marginal benefit equals the marginal cost. But this doesn't merely apply to the supply of goods and services. As Gary Becker showed (pdf) it also applies to crime. Companies (like individuals) will commit crime up to the point at which the benefit of doing so - higher profits - exceeds the cost. In the amoral world of econ 101, the cost is the penalty for being caught (criminal punishment plus loss of business from irate customers), multiplied by the probability of being caught*. We should, then, expect there to be a positive level of corporate crime and bad behaviour: fraud, money-laundering, breach of health and safety laws, the silencing of critics and so on. However, it's not just companies for whom the optimum level of crime is positive. The same is true for society as a whole, because the cost of detecting and prosecuting some crimes might exceed the social cost of their commission; there is a reason why the government doesn't employ the whole population as policemen. As David Friedman wrote: Theft is inefficient—but spending a hundred dollars to prevent a ten-dollar theft is still more inefficient. Reducing theft to zero would almost certainly cost more than it would be worth. What we want, from the standpoint of economic efficiency, is the optimal level of theft. We want to increase our expenditures on law enforcement only as long as one more dollar spent catching and punishing thieves reduces the net cost of theft by more than a dollar. Beyond that point, additional reductions in theft cost more than they are worth. But here's the thing. The relative cost of investigating corporate crime is very often high; 90 officers are employed by Operation Weeting, for example.If Stephen Green didn't know about HSBC's dealings with money launderers, what chance would the average plod have of finding out? Given these costs**, we'd expect scarce policing resources to be directed towards lower cost activities such as arresting cyclists. We would therefore expect companies to commit crime and the state to tolerate this, up to a point. You don't have to be a leftist to see this. You just need to know very basic economics. * In a world where morality matters, we can add to the cost term a "psychic cost" of the sense of shame and guilt of doing bad things. But there's no reason, a priori, to assume that this psychic cost is so high as to prevent all crime. ** One caveat here is that public outrage about corporate crime might increase the benefits to the state of devoting more resource to its detection. But efficiency requires that such resources be sufficient to placate public anger, not that they be sufficient to prevent all crime. PS I hate the way economists model issues like crime using their overly simplistic "cost-benefit" marginalist framework. As a sociologist we understand that crime doesn't just occur in a vacuum, but is influenced and moulded by deep seated socioeconomic and cultural factors that interact with the existing structure of society. Economists treat criminals as making a "choice" to commit crime, which fits well with the neoliberal ideology of taking personal responsibility for your actions (which they use to bash the "underclass"). Where in the economic model of crime is the influences of class, power relations, social conditioning and propaganda (benefit claimants are criminals, but corporate tax avoiders are not)? This is why the rest of the social scientists despise economics as a discipline. It strips away all relevant aspects of a

particular topic, and what remains is a ridiculous conception of human motivations, and based on the behavioural assumptions imposed on homo economicus, you model his actions based on simple heuristics that bare no relation to the real world. And UnlearningEcon's point about socialism not being as good as capitalism in terms of capitalist objectives is spot on, and is something the neoliberal economics profession choose not to get. This is why we get bogus criticisms about socialism that complain that it doesn't achieve allocative or productive efficiency, or that it doesn't offer consumer choice, that trade is restricted, that economic growth is disappointing etc. Well, that is not the purpose of socialism. Only economists believe in infinite exponential growth in a world of finite natural resources. Socialists don't care about economic growth, the point of socialism is to help man achieve his true potential, unhindered by class divisions or social disadvantages. This self realisation of man is not dependent on consumer choice or economic growth, or efficient market production. A socialist system is based on the mantra of "From each according to his ability, to each according to his need". The aim is not acccumulation and exploitation, two goals that capitalism is undoubtedly the market leader in. Could be incorporated into the model, but it's the same way economists incorporate altruism into models of utility maximisation. It makes the concept of utility maximisation pointless, because you can simply justify anything in terms of utility maximisation or (in terms of crime) include all sorts of factors into the marginalist cost-benefit computation. But this is not how real people behave, and it individualises concepts like class, culture, stigma when in reality they are interconnected.

"I hate the way economists model issues like crime using their overly simplistic "cost-benefit" marginalist framework." I hate the way people make gigantic generalisations against millions of people, despite not actually knowing what they're talking about. "As a sociologist we understand that crime doesn't just occur in a vacuum, but is influenced and moulded by deep seated socioeconomic and cultural factors that interact with the existing structure of society." I would say that I hate the way sociologists love to point out the obvious and obfuscate with obnoxious and fundamentally uninteresting rhetoric, but I'm not as unbearably smug as you as to make such a gigantic generalisation. "(which they use to bash the "underclass")." More insane, unsourced, unjustified hyperbole. "Where in the economic model of crime is the influences of class, power relations, social conditioning and propaganda (benefit claimants are criminals, but corporate tax avoiders are not)?" Which economic model? I don't see any reason why any of these can't be included in an economic model. You seem to be attacking Chris for explaining how corporations might commit a crime because it is in their interests to. The fact that he didn't mention class or propaganda seems like an unbelievably mundane and trivial critique, he did nothing to actively exclude these factors as being a potential

explanation, just offered a motivation for their crime. "This is why the rest of the social scientists despise economics as a discipline." I would say that almost everyone despises sociologists for their unbearable intellectual masturbation consisting of mostly non rigorous verbiage, but again.. generalisations and all. " you model his actions based on simple heuristics that bare no relation to the real world." Really? I don't think it's unrealistic to think of firms looking at the risks and rewards to crime, and choosing to commit crime based on these factors. I actually know people who have committed white collar crime (tax fraud); they obsessed about the risks in a meticulous fashion, Chris' approach seems to appropriately fit in here, whereas propaganda or class does not seem to offer an insightful explanations for his action in this case. Of course this is just an anecdote, it can't match your... oh wait, you used literally nothing; not a single shred of evidence to support any of your claims, just rhetoric. You must be the worst ambassador for your discipline I have ever seen. Keep it up. I wasn't attacking Chris at all, but the way economists model complex socioeconomic problems like crime in such a reductionist, atomistic manner which completely ignores the social context in which such phenomena is observed. If we followed the economists' way of modelling crime, it appears to occur in a vacuum, which is totally divorced from reality. You mention sociologists point out the obvious, and yet economists don't seem to take into account the theories that sociologists have produced on topics that both disciplines study. If our insights are obvious and yet economists ignore them, what does that say about economics? You claim that my line about bashing the underclass is unjustified hyperbole. I simply ask you to read any of the main newspapers and its frequent attacks against the "underclass" or "chav" population of the country. They may use coarser language, but the underlying philosophy is based on this idea that individuals make a concious choice to commit crime (promoted by economics), and therefore deserve all the opprobrium heaped on them by the right wing media. They, like economists like Becker, fail to point out that the so called "criminal underclass" are actually subject to many social and cultural pressures and have suffered immensely due to an unjust economic system, so in some ways are also victims. The fact that you criticise sociology for intellectual masturbation is hilarious, given that same criticism is much more relevant for economics. Your discipline comes out with paper after paper using obscure, arcane mathematics to "prove" to yourselves that your theorems are actually correct if you assume about 100 different things. At least sociologists study topics that are relevant to people in the real world. You mention "non rigorous verbiage". Well, perhaps our way of studying social phenomena is not rigorous, but neither are economists' mathematical models. The economist Yanis Varoufakis says this in his introduction to his blog, "Quite clearly economics was only interested in putting together simplistic mathematical models. Worse still, the mathematics utilised were third rate and, consequently, the economic thinking that emanated from it was atrocious." My final retort to your post is related to your belief that the concepts I mention (class, power relations etc) can be included into economic models. Let's ignore for the time being the fact that the way these concepts are included make the models unfalsifiable and therefore unscientific. A more fundamental

point would be why, in the economics of crime literature, are these concepts not included if they are so easy to incorporate? IMO, it's probably because economists are simply in the pay of neoliberal corporate interests and therefore decide to self censor themselves so as not to upset their paymasters.

Mainstream Economics is a Cult
Posted on June 30, 2012 by WashingtonsBlog

Neoclassical Economics Is Based on Myth
Neoclassical economics is a cult which ignores reality in favor of shared myths. Economics professor Michael Hudson writes: [One Nobel prize winning economist stated,] “In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly as to the relation between reality and these assumptions.” This attitude did not deter him from drawing policy conclusions affecting the material world in which real people live…. Typical of this now widespread attitude is the textbook Microeconomics by William Vickery, winner of the 1997 Nobel Economics Prize: “Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them… The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world. A theory as an internally consistent system is valid if the conclusions follow logically from its premises, and the fact that neither the premises nor the conclusions correspond to reality may show that the theory is not very useful, but does not invalidate it. In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made.” Such disdain for empirical verification is not found in the physical sciences. “Our models show there is no chance of water” Neoclassical economists created the mega-banks, thinking that bigger was better. They pretend that it’s better to help the big banks than the people, debt doesn’t exist, high levels of leverage are good, artificially low interest rates are fine, bubbles are great, fraud should be covered up, and insolvent institutions propped up. Indeed, even after a brief period of questioning their myths – after the 2008 economic crisis proved their core assumptions wrong – they have quickly regressed into their old ways.

Economics professor Steve Keen notes: Neoclassical economics has become a religion. Because it has a mathematical veneer, and I emphasize the word veneer, they actually believe it’s true. Once you believe something is true, you’re locked into its way of thinking unless there’s something that can break in from the outside and destroy that confidence. Paul Heyne said: The arguments of economists legitimate social and economic arrangements by providing these arrangements with quasi-religious justification. Economists are thus doing theology while for the most part unaware of that fact. Economics professor Bill Black told me: The amount of fraud that drove the Wall Street bubble and its collapse and caused the Great Depression is contested [keep reading to see what Black means]. The Pecora investigation found widespread manipulation of earnings, conflicts of interest, and insider abuse by the nation’s most elite financial leaders. John Kenneth Galbraith’s work documented these abuses. Theoclassical economic accounts, however, ignore or excuse these abuses. Black explains: [Neoclassical economists believed that] fraud is impossible because securities markets are “efficient” and act as if they were guided by an “invisible hand.” Markets cannot be efficient if there is accounting control fraud, so we know (on the basis of circular reasoning) that securities fraud cannot exist. Indeed, when [mainstream economists] try to explain why the securities markets automatically exclude frauds their faith-based logic becomes even more humorous. Alex Andrews notes in the Guardian: Greenspan’s confession [that his assumption that fraud is not a big problem for the economy was totally wrong] was seen by many for precisely what it was: a crisis of faith, the faith that unrestricted free markets would always act benevolently. [Note: As we show below, neoclassical economists do not really believe in free markets. As such, they are blind cultists, rather than thinking people of faith.] It revealed what a few had been arguing for some time, that the character of neoliberal economics is essentially religious. This is counter-intuitive. Surely the policy of Greenspan and others is based on an understanding of the science of economics, particularly in the mainstream neoclassical form that is most often taught in universities around the world? It is certainly the case that neoclassical economics appears scientific. This is because it deploys huge quantities of complex mathematics, giving it the veneer of being what it has long hoped to be, a kind of social physics. *** Equations prove free markets work, but only in a sterile world of mathematical abstraction that relies on ridiculous assumptions such as perfectly competitive markets. It is little surprise then that Jean-Philippe Bouchaud, writing in the journal Nature, calls for a “scientific revolution” in economics.

Once economics loses its status as science, its religious aspects become more obvious. Robert H Nelson has spent his career trying to show that economics is religious in character. Through “the gospel of efficiency” after the second world war, Nelson argues that economists promised progress, a removal of sin, heaven on earth. Economists play the role of priests, defining good and bad behaviours that make this salvation possible. *** It is clear that this is a market theodicy, justifying the ways of the market to men. When neoliberal politicians warn against governments interfering in the market, lest the irrational and temporary will of the electorate interfere with the “spontaneous order” of markets, this now seems like a dire warning that we must not “play God” and attempt to control the mysteries of the market that in our finitude, our “bounded rationality”, we cannot properly fathom. Harpers noted in 2005 that neoclassical economics – underneath it’s veneer of math and science – is actually a twisted form of Protestant religion in disguise: Economics, as channeled by its popular avatars in media and politics, is the cosmology and the theodicy of our contemporary culture. More than religion itself, more than literature, more than cable television, it is economics that offers the dominant creation narrative of our society, depicting the relation of each of us to the universe we inhabit, the relation of human beings to God. And the story it tells is a marvelous one. In it an enormous multitude of strangers, all individuals, all striving alone, are nevertheless all bound together in a beautiful and natural pattern of existence: the market. This understanding of markets—not as artifacts of human civilization but as phenomena of nature—now serves as the unquestioned foundation of nearly all political and social debate. *** Economics departments around the world are overwhelmingly populated by economists of one particular stripe. Within the field they are called “neoclassical” economists, and their approach to the discipline was developed over the course of the nineteenth century. *** Neoclassical economics tends to downplay the importance of human institutions, seeing instead a system of flows and exchanges that are governed by an inherent equilibrium. Predicated on the belief that markets operate in a scientifically knowable fashion, it sees them as self-regulating mathematical miracles, as delicate ecosystems best left alone. If there is a whiff of creationism around this idea, it is no accident. By the time the term “economics” first emerged, in the 1870s, it was evangelical Christianity that had done the most to spur the field on toward its present scientific self-certainty. When evangelical Christianity first grew into a powerful movement, between 1800 and 1850, studies of wealth and trade were called “political economy.” The two books at the center of this new learning were Adam Smith’s Wealth of Nations (1776) and David Ricardo’s Principles of Political Economy and Taxation (1817).

*** Ricardo concluded that the interests of different groups within an economy—owners, investors, renters, laborers—would always be in conflict with one another. Ricardo’s credibility with the capitalists was unquestionable: he was not a philosopher like Adam Smith but a successful stockbroker who had retired young on his earnings. But his view of capitalism made it seem that a harmonious society was a thing of the past: class conflict was part of the modern world, and the gentle old England of squire and farmer was over. The group that bridled most against these pessimistic elements of Smith and Ricardo was the evangelicals. These were middle-class reformers who wanted to reshape Protestant doctrine. For them it was unthinkable that capitalism led to class conflict, for that would mean that God had created a world at war with itself. The evangelicals believed in a providential God, one who built a logical and orderly universe, and they saw the new industrial economy as a fulfillment of God’s plan. The free market, they believed, was a perfectly designed instrument to reward good Christian behavior and to punish and humiliate the unrepentant. At the center of this early evangelical doctrine was the idea of original sin: we were all born stained by corruption and fleshly desire, and the true purpose of earthly life was to redeem this. The trials of economic life—the sweat of hard labor, the fear of poverty, the self-denial involved in saving—were earthly tests of sinfulness and virtue. While evangelicals believed salvation was ultimately possible only through conversion and faith, they saw the pain of earthly life as means of atonement for original sin. *** The extreme among them urged mortification of the flesh and would scold anyone who took pleasure in food, drink, or good company. Moreover, they regarded poverty as part of a divine program. Evangelicals interpreted the mental anguish of poverty and debt, and the physical agony of hunger or cold, as natural spurs to prick the conscience of sinners. They believed that the suffering of the poor would provoke remorse, reflection, and ultimately the conversion that would change their fate. In other words, poor people were poor for a reason, and helping them out of poverty would endanger their mortal souls. It was the evangelicals who began to see the business mogul as an heroic figure, his wealth a triumph of righteous will. The stockbroker, who to Adam Smith had been a suspicious and somewhat twisted character, was for nineteenth-century evangelicals a spiritual victor. By the 1820s evangelicals were a dominant force in British economic policy. *** Victorian evangelicals took a similar approach to the crisis in Ireland between 1845 and 1850 …the potato famine. ***

The phrase “political economy” itself began to connote a cruel disregard for human suffering. And so a generation later, when the next phase of capitalist boosterism emerged, the term “political economy” was simply junked. The new field was called “economics.” What had got the political economists into trouble a generation before was the perception, from a public dominated by Dickens readers, that “political economy” was mostly about politics—about imposing a zealous ideology of the market. Economics was devised, instead, as a science, a field of objective knowledge with iron mathematical laws. Remodeling economics along the lines of physics insulated the new discipline from any charges filed on moral or sentimental grounds. William Stanley Jevons made this case in 1871, comparing the “Theory of Economy” to “the science of Statical Mechanics” (i.e., physics) and arguing that “the Laws of Exchange” in the marketplace “resemble the Laws of Equilibrium.” *** Today we often think of science and religion as standing in opposition, but the “scientific” turn made by Jevons and his fellows only served to enshrine the faith of their evangelical predecessors. The evangelicals believed that the market was a divine system, guided by spiritual laws. The “scientific” economists saw the market as a natural system, a principle of equilibrium produced in the balance of individual souls. *** U.S. policy debate, both in Congress and in the press, proceeds today as if the neoclassical theory of the free market were incontrovertible, endorsed by science and ordained by God. But markets are not spontaneous features of nature; they are creations of human civilization, like, for example, skating rinks. *** The claim that markets are products of higher-order law, products of nature or of divine will, simply lends legitimacy to one particularly extreme view of politics and society. Similarly, Philip Pilkington writes: Taken at a very base level, the notion that there is an ‘invisible hand’ that irons out inconsistencies and increases the efficiency of the production and circulation of goods is basically the same claim that Hegel made about history being moved by a force called Reason. (Indeed, Adam Smith was one of Hegel’s references, perhaps even one of his key references). This claim, when made by either Smith or Hegel, can be traced back in turn to the Protestant tradition of predestination. The reasoning here is absolutely metaphysical and like the metaphysicians of yore it carries with it a moral lesson to be passed on to disciples. *** Economists make huge generalisations about the people they study. They assume, for example, a single consumer that consumes the same goods and then projects this onto all consumers.

This is pure metaphysical reasoning. The economists concoct an idea in their heads which they then use to construct a theoretical edifice which falls apart when the original idea is shown to be false. They then derive a sort of ‘moral code’ from this construct which tells people how they should behave. In this case, students are told that this is how people should behave if they are to produce efficiently and effectively. How is this different from the shaman who makes up a myth about the origins of the tribe and then derives moral lessons from this myth that he then teaches to the tribespeople? It’s not. *** Economic ideas – such as the myth of the ‘single consumer’ – serve the function of ‘limiting principles’ for the way people in our contemporary society are allowed to think about the world. To think outside these ‘symbolic boundaries’ is not to be taken seriously. And yet, these boundaries are simply metaphysical constructs built up by economists and then disseminated to the population at large as a type of moral system. Economics, then, is the totem – its simple moral lessons, the taboos. And this is how we in the modern world organise our thoughts and actions. *** Adam Smith’s ‘hidden hand’ – is the direct descendent of Protestant predestination. *** Economics has become, once again, a metaphysical doctrine boiled down to a few crass moralisms that are spoon-fed to the educated public. *** It is really a subtle way of telling people what to do and assuring them that such authority is founded on some sort of Natural or Divine Law. *** In policy circles today economists play the role of the court-priest. They deploy their esoteric and impenetrable ‘knowledge’ to tell policymakers what they should and should not do. To constrain economists to simply explain how the system works is to give them a role closer to that of the lawyer. The policymaker consults a lawyer to figure out what he or she can or cannot do and then makes a decision from there. Similarly, he or she might consult the economist, if the latter was seen as an operational role rather than as that of a seer. This would, of course, threaten the role of the economist in society today. One can imagine that it is rather nice to be thought of as a divine, laying down metaphysical principles about the ‘inner’ workings of the world and deriving from these timeless truths and moral

certainties that we mere mortals can then submit to. So, one can also imagine that these preachers and their flocks will respond to such a challenge with moral outrage. It is the outrage of a priest who has been told that his God is an invention, concocted in his mind to be used as leverage over his fellow men.

Neoclassical Economists Do NOT Believe in a Free Market
While many of the above quotes claim that neoclassical economists worship the free market, this is not actually true. As I’ve previously noted: When Mahatma Gandhi was asked what he thought about Western civilization, he answered: I think it would be a good idea. I feel the same way about free market capitalism. It would be a good idea, but it is not what we have now. Instead, we have either socialism, fascism or a type of looting. If people want to criticize capitalism and propose an alternative, that is fine . . . but only if they understand what free market capitalism is and acknowledge that America has not practiced free market capitalism for some time. *** People pointing to the Western economies and saying that capitalism doesn’t work is as incorrect as pointing to Stalin’s murder of millions of innocent people and blaming it on socialism. Without the government’s creation of the too big to fail banks, Fed’s intervention in interest rates and the markets, government-created moral hazard emboldening casinostyle speculation, corruption of government officials, creation of a system of governmentsponsored rating agencies which had at its core a model of bribery, and other governmentinduced distortions of the free market, things wouldn’t have gotten nearly as bad. *** Being against capitalism because of the mess we’ve gotten in would be like Gandhi saying that he is against Western civilization because of the way the British behaved towards India. And – in the same way that the village shaman was often enlisted to promote and justify the chief’s power as being divinely-ordained and unquestionable, many of today’s neoclassical economists justify the acts of the ruling political class as being “economically sound”, even when such acts are antithetical to free market economics. Postscript 1: Of course, for free market economics to become a real science, it will have to take into account realities such as imperfect information, externalities, the ability of powerful criminals to warp markets, people’s behavioral idiosyncrasies and other real world factors.

Postscript 2: Just as it is unfair to blame the behavior of a crazy cult leader on religion as a whole, it is improper to blame our broken economic system on free market capitalism. It is the neoclassical economists who have broken our system.

Sign up to vote on this title
UsefulNot useful