Monday, January 10, 2011

Challenging the Myth of 'Established Facts"

Dan Ariely writes (10 Jan) in his Blog “Irrationally YoursHERE:

A gentler and more logical economics”

“Neoclassical economics is built on very strong assumptions that, over time, have become “established facts.” Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called in- visible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny.

Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?”
On the other hand, scientists in fields ranging from chemistry to physics to psychology are trained to be suspicious of “established facts.” In these fields, assumptions and theories are tested empirically and repeatedly. In testing them, scientists have learned over and over that many ideas accepted as true can end up being wrong; this is the natural progression of science. Accordingly, nearly all scientists have a stronger belief in data than in their own theories. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful, logically appealing, or mathematically convenient.

Unfortunately, such healthy scientific skepticism and empiricism have not yet taken hold in rational economics, where initial assumptions about human nature have solidified into dogma. Blind faith in human rationality and the forces of the market would not be so bad if they were limited to a few university professors and the students taking their classes. The real problem, however, is that economists have been very successful in convincing the world, including politicians, businesspeople, and everyday Joes not only that economics has something important to say about how the world around us functions (which it does), but that economics is a sufficient explanation of everything around us (which it is not). In essence, the economic dogma is that once we take rational economics into account, nothing else is needed.

I believe that relying too heavily on our capacity for rationality when we design our policies and institutions, coupled with a belief in the completeness of economics, can lead us to expose ourselves to substantial risks.”

So far, so good. But the crisis in rational economics goes much deeper. The “established facts” are not “facts” – in some cases they are plain wrong. Worse, they are inventions of the imagination among leading economists since the appearance of what become ‘neoclassical economics’ from the 1870s (such as Jevons, Edgeworth, Menger, Marshall, and company).

This began at both the theoretical and teaching levels. For many years Cambridge had the best teachers (such as Marshall, Pigou, Robertson, etc.,) and the best theorists (such as Keynes, Robinson, etc.,). The works of US based economists (also from War torn Europe) spread out via such as Chicago, Harvard, MIT) to dominate the discipline. As competent mathematics graduates took to the journals and the popular textbooks (Paul Samuelson, et al) and popular economics courses (Friedman, Stigler, et al), the ‘established facts’ of rationality in economic behaviours swept all before it.

Along the way, Adam Smith became a two-headed figure, his books almost totally unread and his name alone simultaneously lauded, revered by his epigones (who closely checked each other’s mathematics, terms by term, but casually accepted each other's assertions about Adam Smith’s metaphors, without bothering to open his texts to check their context).

This Chicago Adam Smith, definitely not born in Kirkcaldy in 1723, is a completely imaginary construct, driven by the myth of rational selfishness, complete with ‘invisible hands’ and perfectly-competitive, laissez-faire behaviours, and, from the 1950s onwards, it became the dominant, deeply-held doctrine of the majority of academic economists in Western campuses.

If there is a single canon that is held with theological conviction it is that “the so-called in-visible hand works to create market efficiency’. Challenges made to this doctrine simply on the basis of a demolition of the claims that this is not what Adam Smith said, led the brightest among the dominant paradigm to deny what are plain, historical facts from Smith’s actual use of the ‘invisible-hand’ metaphor, and ignores and remains ignorant of Smith’s life-long teaching on the role of metaphors in English literature and grammar (see Smith’s Lectures on Rhetoric and Belles Lettres, [1763] 1983, p 29, Oxford University Press).

The rest of the epigones ignore what is in Smith’s books in favour of what they were taught in their distant graduate days, which they now teach themselves to “politicians, business people, and everyday Joes”.

Yet, the existence of ‘an invisible hand’ outside its role as a metaphor for its object, which Smith explicitly spelt out in the (only) three cases that he used it (none of them were about competitive markets), is in itself a most strange phenomenon. Its so-called critical role in market forces is not just invisible within the light spectrum, it is also without any evidence of its physical presence anywhere in the equations written to prove the wonder of the general equilibrium of markets and, interestingly, there is no term for it in any mathematical abstraction supposedly proving its existence as ‘it’ “works to create market efficiency”.

Worse, there is no interest in showing how the “invisible hand’ does this. Surely scientists would be keen to identify how “it” works? Surely, a Nobel Prize would be awarded to someone who did so. Yet, none, to my knowledge has done so yet, either among the still living today or the men and women who passed on after lifetimes preaching its supposed existence.

Markets are among the most beneficial of all evolved complex systems for raising mankind from the awesome destitution of pre-stone-age subsistence to longer, healthier and educated life styles in societies where they operate. Markets were designed by no known individuals and no governing interests; they emerged from the dispersed anonymity of many people, who, before markets existed, had already created language, culture, knowledge and the behavioural wonders of the propensity to exchange things, including ideas, obligations, promises and acceptable behaviours, none of which were innate, though absolutely necessary for what followed.

Lastly, Dan Ariely makes a final plea:

“We would make little progress if the behavioral economists took the position that we have to throw standard economics—invisible hands, trickle-downs, and the rest of it—out with the bathwater.”

I see his motive – don’t provoke others to defend their firmly-held beliefs (not to mention their lifetime learning investment in their false convictions), which may prove counter-productive . The mathematical rationalists command all the advantages of their dogmas, which are difficult to dislodge by frontal assaults ((Khun on paradigms, etc.).

However, with the appropriation of Adam Smith’s legacy under the falsification of readily-available sources, it is a viable flanking attack to vigorously pursue the perpetrators of the original myth of the invisible hand and its spread across the profession (I am thinking of Paul Samuelson here), therefore, it is appropriate to press firmly on with challenges to the clear, unambiguous founding error of confusing self-interest with selfishness, and how markets work with ‘miracles’ and such like.

This is what Lost Legacy is about and, while welcoming Dan Ariely for his critique of modern economics, this Blog shall continue its campaign for understanding Adam Smith’s Age of Commerce (the fourth Age of Man), as he intended (limitations and all) and shorn of the nonsense added to it by the epigones.

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