Models and Realities 2
Foundations for modern social sciences were laid in the early twentieth century, and were strongly influenced by logical positivism. The central idea of positivism is that science is true and valid because it deals (principally) with observables, while religion is false and invalid because it deals (principally) with unobservables. For a detailed discussion, see “Logical Positivism and Islamic Economics“. Later, logical positivism had a spectacular collapse. It became clear to philosophers of science that the idea that we can base science purely on observables was seriously mistaken. Even those who were very strong proponents of positivism admitted that the philosophy was wrong. Strangely, this did not lead to rebuilding of the foundations for the social sciences. Especially in economics, the wrong philosophies about nature of human knowledge, which translate into bad theoretical models, continue to be used. A recent survey by Hands (2009) show that the economists continue to believe in positivist philosophy, without any conscious awareness of this. The disastrously bad methodology in use by economists has led to models which failed to predict the Global Financial Crisis. What is worse, these positivist models continue to be used, even after the crisis. For reasons to be explained in detail, current methodology makes it impossible to learn from experience. THIS is the real source of the problem. Having a wrong theory is never a problem; it can happen to the best of scientists. The real problem is refusal to modify theories in light of experience, which makes it impossible to learn and improve. But this analysis is not sufficiently deep — precisely what is it about the methodology that makes it impossible for economists to learn from experience and to modify and improve theories in light of experience? Explaining this is the main goal of this sequence of posts. But, before proceeding to do this, it is worth documenting the stubborn resistance of economists to mere facts.
Keynes: Economists are unmoved by lack of correspondence between their theories and facts.
Sitglitz: Economists frequently make claims in conflict with easily observable facts, because economics is a religion, not a science.
Paul Romer: Macroeconomic theorists ignore mere facts by feigning an obtuse ignorance.
Olivier Blanchard: DSGE (are based on) assumptions profoundly at odds with what we know about consumers and firms.”
The full quotations from these and many other economists can be found in my blog post “Quotes Critical of Economics.” While most quotes are general condemnations of the discipline, the particular four quotes picked up above point to a specific problem — the failure of economists to respond to empirical rejections of theory by modifying the theory. Economists do not follow Feynman’s methodological princple: “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong“. Theories flatly contradicted by empirical evidence continue to be used. For example, Stiglitz states that “ Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.” Further strong evidence of this methodological failure is found in Romer’s Trouble With Macro . Romer discusses the anti-scientific attitude of leading theorists, refusal to learn from empirical evidence, and the retrograde progress in macro, leading to loss of precious earned knowledge –Again, we need to know exactly how a methodology PERMITS this loss of knowledge — how can good theories be replaced by worse theories while everyone is watching?
To understand this failure, we need to explore the concepts of “models”, “explanation”, and “reality”. As we will see, there are many different types of models, many different concepts of what it means to explain, and also many different approaches to the nature of hidden (unobservable) reality.
In remaining posts, we hope to explain how economists gradually slipped from a valid concept of models and how they help us to understand reality, to Friedman’s Folly which insulates, protects, and advances the cause of crazy models. NEXT POST:Thinking about Thinking 3.
This post was originally posted by Dr. Asad Zaman