Neoklassieke economen bedienen zich vaak van aannames die geen enkele relatie met de werkelijkheid hebben. In deze column laat ik zien dat deze aannames een ideologisch doel dienen en een historische achtergrond hebben.
Economics as usually taught is not a positive science at all. To be fair, no science is for a 100 percent. The reason is that causal mechanisms are fundamentally unobservable. This is true even in physics. We can observe that a dropped object falls to the ground. But to explain this by invoking the law of gravity, requires an additional flash of insight that cannot be based on factual experience alone. After all, neither gravity nor its law-like character are directly observable. Once formulated, however, a law or theory informs more precise testable hypotheses. These hypotheses, in turn, tell us what observations matter and how they are to be isolated and observed. In short, the received view of science is that experience informs a flash of insight, which in turn tells us what observations are relevant. What flashes of insight are worthy of further research is at bottom a normative judgment. This normative judgment, in turn, limits the observations and data we deem relevant and thus blinds us to other possibilities.
Economists’ theories, however, are not even informed by experience. The workhorse model of modern macro-economics for instance assumes ’a large number of [profit maximizing] identical firms, […that] hire workers and rent capital in competitive factor markets, […] sell their output in a competitive output market[, and] are owned by the [rational] households, so any profits they earn accrue to the [large number of identical] households’ (Romer 2012: 49-50). It is difficult to see how experience could give rise to any of these assumptions. Firms are not identical, but try to stand out from the competition instead. Neither are households. In the light of much behavioral economics and psychology alike, the assumption of rationality does not appear to be very tenable either. Furthermore, competitive markets are few and far between. If we all shared in companies’ profits, the developments Pikkety describes, could never occur. Romer might as well write: ‘Ignoring reality completely, we may assume…’
Now, if these were just simplifying assumptions to be relaxed later (comparable to assuming friction away when discussing gravity), this lack of realism would just be a temporary matter and more advanced models would regain their positive footing. But as I stated before, we have known ever since Sonnenschein (1972), Mantel (1974) and Debreu (1974), that some of these assumptions cannot be relaxed at all without sacrificing the solvability and/or stability of the model. So we are indefinitely stuck with absurd assumptions that have no basis in reality and can never be relaxed.
Positive or normative science?
Reasoning from those absurd assumptions however, we can ‘prove’ that markets tend to optimal allocative efficiency. A unique equilibrium that optimizes societal welfare. If you accept this outcome, it follows that society is best off if the assumed conditions can be realized in reality. Once you accept this conclusion, you are engaging in wishful thinking: a normative agenda that outlines not what reality really is like, but what it should be like to reach optimal outcomes. Since it has been established that reality cannot even in principle conform to all of the assumptions in the models, their continued usage borders on the ideologically insane.
None of the above is exactly rocket science, I think. Why then do so many economists cling to the belief that economics is a positive science that studies ‘man as he really is’? This conviction probably stems from historical inertia. When Adam Smith wrote The Wealth of Nations, he was up against the clergy and the widely held belief that avarice (which we now call profit maximization) was a mortal sin that should be fought tooth and nail if we were to prevent chaos. Pushing back against the clergy, Smith envisioned a society in which self-interested behavior would actually benefit everyone if it were constrained by a proper market. This was a very liberating argument. No longer did people need to constrain their impulses, live in poverty and hope for salvation in the after-life. Instead, they could do what was best for them without fearing God’s wrath. From this perspective it can be understood why economics at the time could be hailed as the study of ‘man as he really is’. After all, economics had replaced lofty moral ideals with the idea that attending to one’s self-interest is actually beneficial to all. Doing so surely comes more naturally to most people than being a saint.
The early successes of the new world order Smith envisioned seemed to prove him right: wherever capitalism took hold, economic growth jumped (Heilbroner 2012; cf. Fouquet and Broadberry 2015). This strengthened the belief in Smith’s vision and later on prompted attempts to ‘prove’ the superiority of markets mathematically. This endeavor required a mathematical representation of self-interested behavior. This led Jevons (1871) to hypothesize rational economic man as an entity that makes the most of scarce resources in satisfying given and stable preferences. This hypothesis was not borne out by Jevons’ experience with actual economic behavior. Rather, it was meant to describe the self-interested behavior that Smith had hypothesized would ensure superior outcomes.
Smith himself however, never claimed that self-interest was the only motive determining human behavior. Nor did he claim that this motive would ensure superior outcomes in all situations. In fact, he was best known in his day for his theory of moral sentiments (1761), which provides a detailed analysis of the sorts of behavior that are morally acceptable in different circumstances. Jevons ignored all those nuances and simplified economically relevant human behavior to the rational pursuit of self interest. In so doing, he hoped to be able to rigorously prove the superiority of markets. Unfortunately, his attention to rigor also meant giving up on realistic depictions of economic agency.
From the outset, then, neoclassical economic models were not intended to describe markets as they really are, but as they could be if people behaved in a solely self-interested fashion. The outcome just had to be that communities of self-interested individuals interacting in markets achieve superior outcomes. Modeling took the form of establishing the assumptions that would generate this conclusion. Now that it has become apparent that only very restrictive assumptions ensure this, it is astounding that economists and policy makers still put faith in these models.