The Structural Incompleteness of Economics Rebuilding Economics
As I understand it, in the economic discipline there are two major paradigms in the sense that Thomas Kuhn employed the word, to mean modes of thought:
- a) the neoclassical paradigm (the still current mainstream);
- b) the behavioural paradigm (the dissident current).
Keynesianism and its avatars (new and post-Keynesianism) could be considered as properly fitting with the neoclassical model although, as it is well-known, Keynes anticipated the so-called behavioural economics (see, for example, the concept of “animal spirits”, also approached by Akerlof and Schiller). In my opinion, both paradigms are incomplete regarding some crucial, structural issues. The examination of this heretical assertion is the goal of this article.
Kuhn v. Popper
I would put into evidence a basic difference between the two paradigms, which qualifies both not only as radical (such a qualification is not even a sin), but as incomplete from the perspective of their targets – the explanation of even prediction of human economic behaviour.
Thus, the neoclassical model is overwhelmingly deductive – this is the rationality model, based on axioms formulated “inside the office”, from which the theorems on the economic behaviour are inferred through particularization.
At the same time, the behavioural model is overwhelmingly inductive – it is the “irrational” model based on empirics (and, mostly, localized – spatially and temporarily), from which rules are inferred through generalization. I think, in this context, behavioural economics would be better served by the name idiosyncratic economics (I am not sure the denomination heuristic economics would be more appropriate), because, in fact, any economic discipline has as object the economic behaviour (including, of course, the neoclassical economics), so the denomination behavioural economics does not distinguish between genre and species.
In addition, the currently named behavioural economics is so particularized (by exploiting the suspect practice of economic experiments) that it seems that every individual has his own very idiosyncratic way of taking economic decision (see, for example, the Richard Thaler’s concept of mental accountability).
So, both economic models are placed at the margins of the real economic behaviour: the neoclassical model regards an ideal individual, who never occurs in reality (without a frivolous and “illegal” particularization), while the idiosyncratic model regards a contingent individual, who does not allow any conceptualization (without a frivolous and “illegal” generalization). One should notice that the natural attitudes of economists should be, of course, to place themselves between the two extremes and to begin edifying an economic theory from there. As a partial conclusion, I would say that, conceptually, both paradigms are incomplete.
While the neoclassical paradigm relies on the logical method, the idiosyncratic paradigm relies on the heuristic method. What problems can emerge from this?
The logical method to identify (and, if interested, to predict) the economic decision the individual takes is of a great coherence and consistency, but only if the economic subject involved is an optimizing machine verifying the set of axioms belonging to this paradigm. Such a situation has never taken place and never will. Here resides the main reason for which the predictions made by the neoclassical model usually fail. Since, in the neoclassical model, the prediction is the mirror pair of the explanation (the explanation is an ex post prediction, just as the prediction is an ex ante explanation), then it results that the neoclassical model cannot deliver correct (i.e., truthful) descriptions of the economic behaviour.
In its turn, the idiosyncratic model which uses the heuristic method cannot tell us anything about the rules at work in searching and making the economic decision. The results obtained within the idiosyncratic economics are so particular that they cannot constitute something approaching science. In fact, the neoclassical economics is much more amenable to factual falsifiability than the idiosyncratic economics.
One could say here that the idiosyncratic economics has the potential to deliver counter-examples to the neoclassical claims on a given economic behaviour. I agree that the counter-examples (which can be given, of course, no matter how particular) are significant as anomalies to the orthodox theory, but there is a long way to go until these anomalies are integrated into a new theory. I would say that the neoclassical economics is too close to the representative agent (i.e., the average individual), while the idiosyncratic economics is too far from him.
Therefore, both the neoclassical and idiosyncratic economics are incomplete: the first – by ignoring too much of reality, the second – by immersing itself too much into it.
A very significant absence can be identified regarding the tools used in research and/or in making predictions. The enthusiasm of the neoclassical economists using the differential equations in modelling the economic processes and the economic behaviour could be counter-balanced only by the enthusiasm of the idiosyncratic economists using the most particular results of their economic experiments. One might state that both types of economic models are enamoured of their own adopted tools.
Both economic theories discussed here are incomplete regarding explanation - prediction. While the neoclassical model insists with obstinacy to make predictions based on its rational model of rationality (in fact, the homo œconomicus model of rationality, adjusted with certain realistic ingredients), failing almost always (of course!), and so feeding the accumulation of anomalies, the idiosyncratic model makes predictions based on its heuristic model of rationality, thus escaping from the factual falsifiability.
Both economic paradigms make efforts towards rapprochement. Thus, the neoclassical economics integrated many “ingredients” aimed to flesh out the concrete individual (bounded rationality, adaptive anticipations etc.), while the idiosyncratic paradigm is seeking its own theory which conceptualizes the particular results of the economic experiments. Such propensities of one for the other constitutes a peremptory (and self-assumed) evidence of recognizing their incompleteness. I hope that economists from both camps will approach the conceptual, methodological, instrumental and even formal reconstruction of Economics.
Basically, economics is, structurally and functionally, incomplete in any of its theoretical hypostases: the neoclassical model (including, as already mentioned, the Keynesianism and its avatars), as well as the idiosyncratic model. On a possible way to eliminate such lacunae will be presented below.
Mises v. Keynes
Up to this point, we have discussed the (structural and functional) incompleteness of both the neoclassical model and the idiosyncratic model of economics. But, what can be said about overcoming this incompleteness? We will identify three classes of means to reconstruct the fundamentals of Economics in order to address the incompleteness.
I think there is an unacceptable conceptual import from mechanical physics regarding the economic phenomenon (or economic process, as variation of the economic phenomenon), especially within the neoclassical model, namely that it is an objective one. Epistemologically, we have a crisp distinction between subject and object, which is “very legal” in the natural sciences but becomes “illegal” in the social sciences. Indeed, while the natural object or phenomenon autonomously exists related to the subject, the economic phenomenon, instead, does not exist without the human action (in the general sense suggested by von Mises). It appears, changes, and disappears if and only if the human action (either by doing, or by abstaining) is performed. By way of consequence, the claim of current economics to explain (and, based on explanation, to predict) the economic phenomena in themselves is as impossible as it is useless. The conclusion is not only that the subject must be re-introduced in the economic phenomenology and theoretical models, but, even more, the economic explanation (and prediction) should strive to take into consideration the economic subject. It is not about to give up the economic object.
Since economics is, fundamentally, praxeology, nature implies the economic object (like energy resources), but, even in this realistic case, the subjective causality must be dominant. In other words, the economic model must be dominated by the teleology in establishing the causal relationships. To be honest, many of current approaches in economics (without the ambition of building up a reconstruction of it) focus on the economic subject, but generally in an experimental way, not in a theoretical one. For example, the idiosyncratic economics (or the so-called behavioural economics) was and is trying to do that but, unfortunately, without a theory backing it. In fact, in understanding and managing the economic field, we should be interested only in the subject behaviour regarding the way of deciding and acting (including the abstention).
If we look at current economic prognoses performed even by the most renowned fora or organizations (including the IMF, World Bank, OECD, or European Commission) we will only see some trajectories of time series data linking the past to the future, but we will not see the humans anywhere. Instead, the subject behaviour is presumed to be implied (in an unclear way) in the economic object kinematics.
As a logical consequence of the first part, there is the issue of the economic truth. If the economic phenomenon is entirely the result of the subject decision and action, if, still, the economic phenomenology is leaded by the teleology (i.e., by subjective goals), then the correspondence-truth becomes completely irrelevant in the economic field. Indeed, the correspondence-truth addresses the economic object (that is, the current object of the “professional” economic prognoses), while, in fact, what is determinant and significant in the economic kinematics and dynamics is just the subject. The economic object which has appeared at the end of the predictions horizon is nothing else but the objectification of the subjective desirability. So, once the economic subject is reintroduced in the economic process (I would call this the subject-object package – the SO package), a new economic truth must be designed and introduced in the economic phenomenology. Such a truth must, probably, satisfy certain logical sufficiency conditionalities, in order to save the testability of the economic enunciations or propositions.
I think a new testability should be accepted and introduced in economic theory. Such a testability must be weaker than the factual testability imported, via Karl Popper, from physics. For example, it could be a confirmability test, as logical positivism has already proposed. So, the economic prediction will be not only a pure prediction, but a mix between prediction and prescription (where the prescription is generated by the inherent teleology of the economic process). As a result, the testing of such a mixed proposition will take the form of procedural testing, not a factual one. The procedural testing implies the replacement of the correspondence-truth with the correspondence-goal, and the factual testing with the confirmability testing. Of course, all of these are only some general suggestions.
I believe a new economic formalism is needed in order to implement the above mentioned two directions of reconstruction in Economics. These are some thoughts on the matter:
- by now, the (very questionable) differential equations describing the economic world are explicitly focused on the “objective” economic phenomena or processes, and barely focused on the economic subject; I strongly believe that this has to change so the theoretical interest and modelling may be explicitly focused on the economic subject and only implicitly on the “objective” economic phenomena or processes; in other words, the economic subject must become the main question of economic theory;
- consequently, the new economic formalism must be reconstructed (or, if this is impossible or too difficult, a new economic formalism should be invented) in order to capture the economic behaviour of the economic subject. We have to be careful not to allow behavioural economics to enter such a new economic formalism, so we have to resume the debate on the economic motivations, reasons and calculus around the economic subject. Probably the heuristics cannot be totally avoided, but a mix between heuristics and hermeneutics could be a good idea. In such a way, what is good both in the apodictic praxeology (see von Mises) and in the heuristic behaviour (see Thaler) could be put together;
if asked how such a new formalism could be built, I would answer as follows: the economic behaviour is fundamentally socially anchored (see Bourdieu’s concept of habitus, for example), so the most appropriate formalism should be that which would capture such a feature. I think this purpose could be achieved by an economic formalism of topological type, i.e., a formalism with the potential to identify relatively invariant classes of economic behaviour and, consequently, a “map” of interactions among such classes. To be observed, the proposal avoids both the concept of the representative agent and the concept of statistical agent. Probably, we should accept a concept of something like “class agent”, a term which invokes all of the individuals which verify a relatively invariant way of economic behaviour, what can be named class-geodezic. Fortunately, once clarified, from the psychological and, especially, sociological points of view, the concept of class-geodezic, then topological mathematics (which is already very developed by the mathematicians) could simply be imported and applied. But, this time, that import is perfectly legitimated by the characteristics of the class-geodezic behaviour.