Economics as a Social Science: An Approach to Nonautistic Theory

1. Introduction

CHAPTER 1 Introduction The work of human thought should withstand the test of brutal, naked reality. If it cannot, it is worthless. —czeslaw milosz There is a growing perception that a new approach is needed in economics if it is to be a useful branch of learning and provide the explanatory power and guidance needed for policy. Frey and Eichenberger concluded from their survey of economics and economists that with economics’ continuing emphasis on formalized, abstract, and institution-nonspeci‹c research, its future seems rather gloomy (1993, 192). The emphasis in contemporary economics on technical virtuosity in manipulating mathematics tends to turn students into truf›e hounds— people ‹nely trained for a single narrow function and not much good for anything else (Viner 1991, 393). In the World Bank, we found that it would usually take several years of bank experience before such economics graduates would have learned enough to be trusted to analyze real problems. For the same reason, Stephen Roche, head of the global economics group at Morgan Stanley, will not hire economics Ph.D’s if they haven’t had substantial experience outside of the university: “We insist on at least a threeto -four year cleansing experience to neutralize the brain-washing that takes place in these graduate programs” (Cassidy 1996, 51–52). While economists working in the economy are coping with the rich complexities of the real world, leading theorists of the formalist economics school have limited themselves to re‹ning mathematically the implications of a few sharply de‹ned axioms (Solow 1997b, 43). Their subject matter consists of completely rational agents devoted to maximizing their selfinterest within elegant theoretical structures that aspire to ‹t into a general equilibrium model. Before World War II, mathematics in economics was usually employed as an alternative means of explanation or a means of testing the logic or rigor of an argument. It is still useful to do so. Since World War II, the temptation for economists to approach theory with the mind-set of a mathematician was strengthened by a large in›ux into the profession of people who had majored in mathematics or physics in college but had moved on to the greener pastures of economics in graduate school. As Gerard Debreu, who followed this career path, has recognized, when mathematics has imprinted its values on a theorist, those values “may play a decisive role. The very choice of the questions to which he tries to ‹nd answers is in›uenced by his mathematical background. Thus, the danger is ever present that the part of economics will become secondary, if not marginal, in that judgment” (1991, 5). Yet, while he was warning economists of the dangers of mathematics, Debreu was also commending the axiomization of economics. But a branch of learning that consists of a structure of mathematical reasoning erected on a set of axioms is a subspecies of mathematics pure and simple. And, as the great physicist Richard Feynman observed, “mathematics is not a science.” A science is concerned with reality (1995, 47). An economics that is only a branch of mathematics cannot grasp the richness of the reality of an economy constructed and run by human minds. with all of their complexity. There is danger in drawing conclusions from logic alone that are not validated by the real world: hydrogen is highly ›ammable and oxygen is necessary for combustion, yet pouring H2O on a ‹re extinguishes it! To be valid, a scienti‹c theory must meet the following tests: • The assumptions must be isomorphic to reality. • From these, there must be a clear chain of correct logical or logico-mathematical reasoning leading to conclusions. • These conclusions must be testable for isomorphism to reality. • If a single link in chain this is broken, the theory fails. (Kamarck 1983, 3–6) Milton Friedman, of course, was right in insisting that it matters that an economic hypothesis should result in successful prediction. But this criterion does not go far enough. A scienti‹c theory should also provide an understanding of what underlies the predicted results. Knowing, as the ancients did, that the phases of the moon predicted the tides provided only a correlation, not an adequate theory. This came only when Newton’s theory of gravitation explained why and when the tides and their heights occurred. Formalist theory is uncomfortably similar to medieval scholasticism.1 Scholastics trusted the logical coherence of the system as a guarantee of the unrestricted relevance of their primary notions and used endless debate, 2...