The Problems with Formalism

Author(s): Mark Blaug

Reviewed work(s):
Source: Challenge, Vol. 41, No. 3 (MAY-JUNE 1998), pp. 35-45
Published by: M.E. Sharpe, Inc.
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 TheStateofModernEconomics

TheProblems
with
Formalism
Interview
with
Mark
Blaug

V^^ I thinkitis fairtosaythatyouaretheleadingproponent

oftheideathata weaknessofeconomicsis thatmuchofitstheory
is notfalsifiable.Ifyou cannotfalsifysomething, thenhow can
you demonstrate thatitmightbe true?Whatis yourdefinition
offalsifiability?
A. In confronting it shouldbe possibleto thinkof
a theory,
evidencethat,iffound,would falsify thetheoryor would lead
youtoabandonthetheoryYouwould realizethatitwas wrong.
Itcouldbe falsified bysomeevidence.If,forexample,someone
says,"I believe such and such,and thereis no evidencethat
would evermakeme abandonthistheory/' thenwhateverthis
beliefis,itis notsciencebecause scientific
beliefs,theories,hy-
potheses,or whateveryou wantto call them,shouldbe falsifi-
able at leastin principle.Now all theproblemsbegin.
Q. Did KarlPopper,thephilosopher, originatethiscriticism
ofeconomics?
A. No, he said thisaboutotherareas.He said verylittleabout
economics, and whathe did saywas adulatoryratherthancriti-
cal. No, he nevercriticizedeconomics.Popperwas a philoso-

MARK BLAUG is professor ofLondon,and visitingprofessor

emeritus,University ofeconomics,
University
of Exeter.

Challenge,vol.41, no.3, May/June1998, pp. 35-45.

© 1998 M.E. Sharpe,Inc.Allrights
reserved.
ISSN
0577-51 +0.00.
32/1998$9.50 1998
Challenge/May-June 35
 withMarkBlaug
Interview

pherof science.Most of the applicationsof his ideas werein

physics,and he was particularly interestedin relativity
theory,
quantum mechanics, and all that.
Insofaras he was interestedin
socialscience,itwas thesortofgrandsocial science.He wrote
TheOpenSociety, whichhad threegreatenemies- Plato,Hegel,
and Marx.Buthe was notparticularly interested in economics
and said verylittleaboutit,and someofthethingsthathe said
aboutitgeneratemorequestionsthananswers.
Q. Thenwho is thefirstpersonto raisefalsifiability as an is-
sue in economics?
A. TerrenceHutchison,who at an amazinglyearlyage wrote
TheFundamentalPostulatesofEconomicTheory.In thisbook, he

Mainstream do notlook veryhardat

economists
evidence.
contrary
criticizedtheassumptionofperfect knowledgein mostofeco-
nomictheoryand introducedPopper.Hutchison,who is still
alive and in his earlynineties,has remainedeversincea great
discipleofPopperand theapplicationofPopperineconomics.I
havefollowedinhisfootsteps. He was sortofa mentorofmine.
Q. Did you studywithhim?
A. He was one ofmyPh.D. supervisorsat ColumbiaUniver-
sity.He visitedColumbia.I had twosupervisors: GeorgeStigler
and Terrence Hutchison.Theymade a wonderfulcontrast. But
actuallytherewas quitea lot ofPopperin Stigler.So, in some
ways,I owe a lottobothofthem.
Q. In thecurrent mainstream practiceofeconomics,is falsifi-
abilityignoredentirely?
A. No. It would in a sensebe easierifit were ignoredalto-
gether.Mainstreameconomicspays lip serviceto it; thatis, it
always says,"Oh, yes,of course,economictheoryshouldbe

36 1998
Challenge/May-June
 The ProblemswithFormalism

confronted by evidence.And,ofcourse,iftheevidenceis con-

trary, ifit seemsto refutethetheory, oh, yes,we certainlypay
attention to that,and we mustadjustthetheoryor even con-
siderpossiblya new theory/7 So, theydo not in any way dis-
agreewiththeimplications Theypreachitbut
offalsifiability.
theydo notpracticeit.In otherwords,when confronted with
contrary evidenceofsomebelovedtheory, theyadjustthetheory,
ortheyminimizetheevidence.Sometimestheyevenignorethe
evidence.Theydo notlookveryhardat contrary evidence,pre-
ferring to confirm ratherthanto lookforrefuting evidence.
Q. Isn'tthatthepoint- thateconomictheoryis oftenso mal-
leablethatitcan be appliedto anyseriesofoutcomes?
A. Yes.Butitis falsetobelievethatthisis somethingunique
toeconomics.Itis pervasivein all ofsocialscienceand,indeed,
itis actuallya muchmoretellingpointin sociologyand politi-
cal science.Becausetheydo notproducesuchhardconclusions,
theirtheoriesare even moredifficult to refutethaneconomic
theories.Butevenin thenaturalsciencesitis rareto finda cru-
cial experiment thatconclusivelyconfirms or conclusivelyre-
futes.Ifpeopleina disciplinetakeempiricalevidenceseriously,
it piles up and eventuallycauses thetheoryto be overturned.
Butitis notthekindofthingwhereyou wake up one morning
and suddenlysay,"ByGod,thereis refuting evidenceand now
I am goingto throwaway thetheory/'
So,thereis a veryslowbuildup,eveninnaturalsciences.And
sometimestheempiricalevidenceis morein thenatureofbig
events.To give you a trivialexample,the inflationand the
stagflation ofthe 1970sdid moreto persuadeeconomiststhat
therewas somethingwrongwithKeynesianeconomics - that
-
youneededsupply-sidepoliciesand all that thanall theem-
piricalevidenceon theeconometric studiesagainstKeynesian
economics.Sometimesyou have tobe hitoverthehead witha
hammerbeforeyou giveup a belovedtheory.

1998
Challenge/May-June 37
 withMarkBlaug
Interview

V^^ Whatexamplescanyounameinwhichevidencehasbeen
overwhelming and yeteconomicshas notabandoneda theory?
A. Rationalexpectations and thenewclassicalmacroeconom-
ics.Theimplication thatno government policycan possiblyin-
fluencetherealoutput,income,and employment ofan economy
has beenrefutedagainand again.And thecontrary evidenceis
indeedacknowledgedtoa considerable extentbythosewho are
theleadingspokespersons forthisclassicalmacroeconomics. Yet
newclassicalmacroeconomics is stilltaughtinall thetextbooks,
and thereare stillmanymacroeconomists who go on fervently
believingthatnew classicalmacroeconomics is based on a firm
foundation and thatpeopleindeedholdexpectations rationally
Thereis eventheevidencein thestockmarkets.Stockmarkets
areone ofthebestplacestotesttheidea because,ofall markets,
theyaretheonethatmostmotivates peopletobe wellinformed.
Yetthe stockmarketis litteredwithanomalies,withmarket
bubbles,whichareimpossibletoexplainifall tradersinthestock
marketholdexpectations rationally
Q. In yourarticlein thisissue ofChallenge you makemuchof
formalmodelingand theevolutionfromtheworkofKenneth
Arrowand GerardDebreu.Whydo you believethatsuchfor-
mal mathematical modelinghas takensuch a firmhold? Why
has theprofession gonein thatdirection?
A. I willgiveyou thestandardanswer,althoughI thinkitis a
verydifficult issue.Thisis a deep questionaboutthehistoryof
ideas. How did we get like this?If I could answerthatques-
tion- ifI thoughtI could confidently answerit- I would cer-
tainlyrushto printwiththe answer.I am not surethatI can
confidently answerit.Buta standardapproachamongpeople
who have thoughtaboutthisis that,sometimeafterWorldWar
II,economicsbegantomodelitselfafterhardscience.Itwanted
tobe theonesocialsciencethatlookedexactlylikephysics.This

38 1998
Challenge/May-June
 The ProblemswithFormalism

led tomathematization,mathematical modeling,formal mod-

eling,and theresultingworshipoftechniqueand formalel-
egance.
Buttheodd thingis thisexplanation does notreallywash
becauseifyouknowanything aboutphysics - andI amanama-
- physicsis notatall likethat.Physicstakesevi-
teurphysicist
denceveryseriouslybut manyphysicaltheoriesare rather

Wehaveturnedeconomicsintoa kindofsocial
mathematics.

muddledandconfused andinconclusive. Theyarebynomeans

veryelegant. Thesubjectwe economists reallyhavebeenaping
is mathematics. Wehaveturnedeconomics intoa kindofsocial
mathematics thatemployswords suchas "price/7 "market/7
"commodity." Itlookslikeeconomics, butwhenyou readan
articlethatuses suchwords,all therelationships are math-
ematicalrelationships; all theinferences aremathematically
drawn;andnothought is giventowhether thesemathematical
variables,concepts, functionalrelationshipsbear anyresem-
blancetoreal-world observation.DeirdreMcCloskey [seeChal-
lenge,January-February 1997],whose writingsI do not
otherwise like,has said quiterightlythateconomists lookto
themathdepartment, not thephysicsdepartment. Thatis
absolutely true.
Q. Letus trytotakeitonestepfurther, though.Whywould
thesemathematical models,whichafterall arenotverycom-
plexbya mathematician's standard,catchon?Does themodel-
ing serveas some kind of fraternal initiationthatbonds
economists?
A. Themathisnotallthatdifficult, although itdoescreatean
entry Mostpeoplecanlearnthemathematics,
barrier. butyou

1998
Challenge/May-June 39
 withMarkBlaug
Interview

do havetostudyit.Itis justas ifwe wroteeconomicsin French.

Itwouldbe an effective entrybarrierbecausesomepeople find
itratherdifficulttolearnforeign languages.You do nothave to
be terribly butyou do have tobe patient,and spend
intelligent,
a lotoftimeat it.So, itis an effective entrybarrier.
Thepeoplewho havebeeninitiatednow have a vestedinter-
estintakingthebarrierseriouslyand payingattention toitand
givingithighprestige.Otherwise, itwould notserveas an en-
trybarrier.So, aftera while,theyjustifytheentrybarrierbe-
cause theypossess thiselegantparticularvirtueor technique.
Afteritis created,itjustifies
itself.I shalladd one otherthingto
this:theenormousoutputofPh.D.sin economicsin theUnited
States- almosta thousandeveryyear!Manyofthemdo notgo
intoacademiclife,butall theestimatessuggestthatabout45 to
50percent do seekemployment inacademiclife.Theyhavebeen
taughtby theirteachersa particular kindofeconomics,and,of
course,theydisseminatethesame economicsin theirteaching
and also bypublishinginjournals.
Journaldiscussionsthatare expressedmathematically are
mucheasiertoevaluateinasmuchas youcan see whethera per-
son has reallywrittendown a consistent mathematical model.
Thatis mucheasiertojudgeunambiguously thana pieceofeco-
nomicwisdomexpressedin prose,whichis verydifficult. Two
people can easilydisagreeon whethertheproseworkis valu-
ableornot.Andthesejournalarticles, whichnumberinthethou-
sands- therearethreehundredormorejournalsin theEnglish
languagein economics,publishingtwo,three,or fourissues a
year- have tobe refereed. Mostofthemarerefereed byvolun-
teerswho have to pass judgmentquickly(once you geton the
listyoureaddozensofarticles, sometimesin one week).Itis all
mucheasieronce you sharea community ofstandards,math-
ematicalstandardsessentially. Itstilldoes notexplainhow itall
gotstarted.And I reallydo notunderstandit.

40 1998
Challenge/May-June
 The ProblemswithFormalism

Q. Has thecomputer reinforced

thistendency evenmore?After
all,regressions are so easyto do now.
A. Insofaras ithas created,curiouslyenough,a kindofecono-
metricsthatis no longerveryinterested in empiricalevidence
eitherbutin econometrics Econometrics
theory. has becomeal-
mostas mucha spectacleas economictheory, and itis a theory
kind.Yes,economistsrunregressions
ofa statistical and all that.
Butthatis notwhattheeconometric journalsare fullof.They
arefulloffancynew statistical analyses,a muchmoresophisti-
catedwayofanalyzingtimeseriesthatarealmostendsinthem-
selves.
Q. You makesome rathercategoricalstatements thatecono-
mistspayno attention tothereal-world implicationsorapplica-
bilityoftheirmodels.Arethereanyclearexceptions?
A. Ofcourse.Ifyouwishtoexpresscriticism thatwillhave an
impacton tenortwentythousandpractitioners throughout the
world,youhave to exaggerateslightly tomakeanypointat all.
Ifyou modifytoomuch,nothingis leftofit.

V^/ Whatwas it about the Arrow-Debreuthesisthatyou

thatso influ-
singleoutin yourarticlein thisissue ofChallenge
encedtheprofession?
A. It was extraordinarilysophisticatedmathematically, and
even thoughit was publishedforty-four yearsago, it is an el-
egantarticleusing game theory, whichwas thenverynew. It
used gametheoryin a way thatnobodyhad expectedto prove
theexistenceofgeneralequilibrium.It was elegant,itwas rig-
orous,and itappearedtosolvea problem.Does generalequilib-
riumactuallyexist?Tobe a littlemoretechnical,
canmultimarket
equilibrium actuallyexistin an economy?And itseemedto es-
tablishthis.Afterall, Walrashad arguedthiseightyyearsear-
lierbuthad neverbeen able to proveitin anysatisfactory way.

1998
Challenge/May-June 41
Interview
withMarkBlaug

So itappeareda wonderful
exampleofelegantquasi-mathematical
proof,anditseemedtoelevateeconomics almostimmediately toa
subjectrather
likemathematics, appliedmathematics.
certainly
Q. You arguethatsuchmodelsrequirehighlysimplifiedas-
sumptionsin orderto work.And you pointout that,ifthese
assumptionsare relaxed,theconclusionsdo nothold up. But
do economiststryto relax these assumptionsand testtheir
conclusions?
A. Yes.Therearemanyeconomists who lookat relaxingthese
assumptions."Letus see ifwe relaxtheassumptions - willthe
answerstillhold?"Butthiscanbecomeratheralarming because,

Wespendlittletimestudying
theinstitutional
in whichmarkets
structures areimbeddedand
withoutwhichtheycannotwork.

again,all we reallydo is worka littleharderat themathemati-

cal modelingto getit right.I thinkthisway ofthinking about
establishingeconomicrelationshipsis misleading.I am not
againstmodeling,noram I evenagainstmathematics. Itcanbe
a veryusefulhandmaiden, butnotas an end in itself.Notas the
waywe judgewhether, forexample,an articleis worthreading
ornot,an argument is worthlisteningto ornot.WhatI am try-
ingto do is to altertheintellectualprioritythateconomistsas-
sign to differentkinds of economics. That is, they assign
enormousprestigeto any kind of economic theorythatis
mathematically expressed, butalmostnonetohistorical argument
ora case study.Thisis a cleverway ofmarshaling empirical evi-
dencetoprovea particular economic
theory. Thatiswhatiswrong.
Q. Whatexamplescometo mindofreal-worldissueswhere
thiskindof thinking in economicshas led to errorsin public
policyor errorsinjudgment?

42 1998
Challenge/May-June
 The ProblemswithFormalism

A. Wehave notbeen verygood at thinking aboutthetransi-

tionprobleminEasternEuropebecausewe havenotbeenthink-
ing about how marketeconomiesactuallywork and what is
requiredtomakemarketsfunction. So ouradviceto EastEuro-
pean governments has beenverywoodenbecause you have to
understandhow marketshave tobe createdand how property
rightshave tobe established.We spendlittletimestudyingthe
structures
institutional inwhichmarkets areimbeddedandwith-
outwhichtheycannotwork.And so, we have giveneitherno
advice or bad or misleadingadvice to East Europeangovern-
ments.The transition problemofEasternEuropehas made me
and othereconomistsextremely awareofhow lopsidedourap-
proachis tomarketsand themarketmechanismand to capital-
ism. Creatingmarketsis not just Gerard Debreu's general
equilibriumtheory. Thatis notveryhelpful.Indeed,itis prob-
ablyevenmisleadingin thinking abouttheseproblems.
Q. Can similarstatements be made abouttheAsian financial
crisisat themomentor,letus say,theinequalityofincomein
America?
A. TheproblemwiththeAsian tigersis partlythesame: We
no longergivemuchattention to developingeconomies.Itwas
a big subjectin economicsin the1950sand 1960sbuthas gone
intoan almosttotaldecline.One ofthecausesforthisdeclineis
thatitis nota good areatoworkinifyouwanttoproducefancy,
technicallypuzzlingpiecesofmathematical modeling.So many
youngeconomists areainwhich
findthatitisjustnotan exciting
towork.You cannotgetpromotedpublishingarticleson devel-
opmenteconomics.Theywill admitthattheseare important
real-world problems,but thatis nottheway to getahead. It is
nottheway tobuildyourcareerin an areathatprizestechnical
elegance.
Q. Is yoursolution,then,moreempiricism?
A. Moreempiricism, morehistory, moregettingyournosedirty

1998
Challenge/May-June 43
Interview
withMarkBlaug

in data,surveyingpeople,askingopinion,monitoring behav-
ior- yes,all ofthat.
Q. In theUnitedStatesthereseems to be some movement
towardmoreempiricalexperimentation anywayHave youno-
ticedthis?
A. I thinka movetowardexperimental economicsis veryhope-
ful.The amazingthingis the enormousresistancethatit has
encountered.
Q. Whatexamplecan you nameofthat?
A. Talkto anyoftheleadingexperimental economists.They
willtellyou abouttheenormousresistancethattheirworkhas
run into.It is veryhard to push experimental economicsbe-
cause you arerunningagainstthisgrainofformalmodeling.It
has made forwardprogressin recentyears,but I am amazed
how difficult it has been to interesteconomistsin it and how
littleofitis partofmainstream economicsas taughtin graduate
school.

V^^ Have we learnedanything fundamental in,say,thepast

quarter-century ofeconomics?
A. Sure. Particularly
in macroeconomics, how to deal with
howtodealwithunemployment.
inflation, I thinkwe've learned
an enormousamount,particularly aboutsteeringtheeconomy
in a macrosense.We certainlylearneda lotfromthederegula-
tionand privatizationmovement. Althoughthereis a lotmore
tolearn,whenI contrast whatwe now knowaboutthesethings
withthe days when I was a graduatestudentin the 1950s,I
thinkwe havemadeforward strides.Buttosomeextentwe have
also gonebackward.
Q. In whatspecificsensehave we gonebackward?
A. In thesensethateconomicsas a completely formalistic
dis-
ciplinehas turnedstudentsofffrompursuingit.I do notknow

44 1998
Challenge/May-June
 The ProblemswithFormalism

aboutAmerica,but in Europe economicsunfortunately is at-

tracting fewerstudents, whereasbusinessstudiesand business
management morestudents.It is notjustthateco-
is attracting
nomicshas becometechnical;itis thateconomicsprizestechni-
calitiesaboveeverything else and thatis whyI callitformalism.
Formalismis thetendencyto worshiptheformratherthanthe
contentoftheargument.Thatis thekindof subjectit has be-
come.Wecareonlyabouttheforminwhichan economictheory
or hypothesisis presented,and we care almostnothingabout
theactualcontentofthehypothesis.
Q. Whatare themajorissues on whichwe have not made
progress?
A. Marketsand how theyactuallyfunction; thatis,how they
adjustto matchdemandand supply.We in economicsknowa
hell ofa lot aboutequilibrium, but we reallydon'tknowhow
marketsactuallygetto equilibrium.
Q. In yourview,whatcan save economics?
A. I am verypessimisticaboutwhetherwe can actuallypull
out of this.I thinkwe have createda locomotive.This is the
sociologyoftheeconomicsprofession. Wehave createda mon-
sterthatis verydifficult to stop.
Q. Could real-world empiricalfactsora severeeconomiccata-
clysmchangeit?
A. Thatwouldcertainly changeit,butI do notsee thataround
thecorner.PerhapsI am toopessimistic, and itis verydepress-
ingto staythere.Theredoes notseemto me tobe anyway out.

call 1-800-352-2210;outsidetheUnitedStates,call 717-632-3535.

To orderreprints,

1998
Challenge/May-June 45