Quote of the Week #4

I came across this whilst reading Sharon McGrayne’s history of Bayesian theory, its a quote attributed to the statistician Jerome Cornfield:

“A point is reached … when a continuously modified hypothesis becomes difficult to entertain seriously.”

How apt.

For much of economics.

Looking back over the history of the development of economic theory, more precisely theories since we have such an abundance of them, we cannot but be struck by one constancy: that they are all updated regularly. This updating is not to replace them because they have proven to be incorrect, but to modify them sufficiently to prolong their life despite the evidence. It is, apparently, intellectually cheaper to tinker than to replace.

This is especially true of the array of ideas that loosely can be called neoclassical theory. It is a mishmash of ideas that are known to be false or highly questionable or utterly divorced from reality, yet are still used as a basis for thinking and modeling economies. It is an archeologists dream.

If you, as I have done a little, start to peel away at the layers of assumptions, axioms, and other paraphernalia necessary to support orthodox economics the interest is not that it represents much about the economy, but that it represents an enormous amount about what someone, or some people, want to think about the economy. It is a stylized and rigorous emblem of what a certain group want to think. It is not a scientific enquiry into what is actually out there in the economy you and I come into contact with.

For one thing, you and I are nowhere to be found. Instead we are represented by an unrecognizable and inhuman cipher. Oftentimes just one. Yes a single person is taken to act on our collective behalf. This single person then interacts with – you guessed it – a single representative business. These two objects, person and firm, then heroically act out all the economists want in order to theorize, model, and draw conclusions about the real economy, which here in the US encompasses hundreds of millions of people, millions of firms, and there myriad interactions.

This is an exercise in simplification writ large. Or gone bonkers. I get that scientists habitually simplify in order to tease into the open key relationships, but it seems a tad odd to eliminate exactly that which needs to be simplified: the imperfection, asymmetry, and outright lumpiness of human based interaction.

You only arrive at such an extreme limit of simplification if all prior attempts to make sense of something have failed. If you have to go to this extreme you ought to invoke Cornfield’s thought: your hypothesis is hard to take seriously.

Likewise with what is known as marginal theory. It began as a perfectly reasonable observation about the diminishing returns on ever decreasing quality parcels of land. Then it was applied to distances travelled to markets by farmers. From there it was appended to practically everything. This extension, or modification, has made it pervasive and stretched it from useful to, potentially, ludicrous. Now almost everything is evaluated as if the precise edge of activity was clearly known, and as if we all – sorry that automaton representing us – knows it is dealing with a defined marginal activity. It doesn’t. It can’t. But tell that to an economist. They love margins.

You can go on like this: consumer preferences are another example. The original idea was useful: there has to be some element of usefulness attaching to an intentional action undertaken by a free willed consumer. When you buy something, you expect to get something useful from whatever it is you buy. This became utility theory. Which then marched relentlessly into a whole panoply of related theories some of which are absurd, with the ultimate absurdity being what is called rational expectations theory wherein we are all omniscient, hyper aware of our needs and desires, and cooly calculating about how to satisfy them. I know I am not. Perhaps you are. I assume all economists, those who hew to this line of thought, never, ever, miscalculate.

And so it goes.

My point being that there comes a time when a much stretched, over extended, and ultra modified idea ends up being used somewhere where it doesn’t belong. It is time, then, to to set its aside and start anew. Or, at least, to take it less seriously.

We seem to have arrived at such a point with much of orthodox economics. The only people who ought take it seriously are economists. The rest of us ought to ponder the actual economy. Not their made-up one.