(Neo-Classical) Economics under Scrutiny ... (again!)

Not too long ago here at Alpha.Sources I introduced you my dear reader to what I called a theoretical moment. The point was too allow me to dig into some more theoretical subjects apart from my coverage of the 'real world' of Japan and Eurozone watching, global imbalances etc. I kicked off with a thorough description and account of the 'fertility trap hypothesis' and this time I am going to continue with a stint of core economic theory/tradition. I am not going into an elaborate description of neo-classical economics (hey, who do you think I am) but rather present a short article which I found very relevant to the general discussion of economics theory, research and practices. This is not to say that I agreed with everything in it but I found it thought provoking. The article was originally posted over at the ever brilliant Gabriel Mihalache's Economic Investigations; now there is a theoretical economist for you! The article is called 'What is Neo-Classical Economics' and is written by Christian Arnsperger (University of Louvain, Belgium) and Yanis Varoufakis (University of Athens,Greece). So, what does it have to say then?

Let me begin by saying that the article is fairly critical towards economics as a science and more specifically what they coin as neo-classical economics. In that way their critique resembles the critique levied towards economics as a science by many other sources; among those for example one Phillip Ball whose recent contribution stirred up quite a commotion in the blogsphere. However, I kind of like their initial entry point of argument which basically notes Neo-Classical economics as an adept moving target which makes it difficult to critizise and as such we need to define and agree on some salient and ligering points about economics today if we want to critizise it.

There is nothing more frustrating for critics of neoclassical economics than the argument that neoclassical economics is a figment of their imagination; that, simply, there is scientific economics and there is speculative hand-waiving (by those who have never really grasped the finer points of mainstream economic theory). In this sense, neoclassicism resembles racism: while ever present and dominant, no one claims to be guided by it. Critics must find a clear definition of neoclassicism if only in order to liberate neoclassical economists from the temptation to barricade themselves behind infantile arguments viz. the non-existence of their school of thought. Then, the good debate may begin.

In this chapter, we offer a definition of neoclassical economics which turns on three crucial axioms and which, in conjunction with one another, as we shall claim, underpinall (and only) neoclassical theory.

The crucial question of course becomes whether the authors in fact are right, not so much in their attempt to get Neo-Classical economics firmly set within the bullseye in terms of an overall definition but more so in their definition of what Neo-Classical economics essentially is in their formulation of the three axioms. What are then these 'axioms' which linger in all aspects of economics today according to the authors?

(this is of course thoroughly described in the article but I will briefly summarize it below)  

• Methodological individualism - This is the idea that economics today is based on the fundamental perception (onthology with a flashy word) that economic phenomena and thus the economic system consists of the individual agents' actions which then also become the key object of economic analysis. In this way, knowledge on the entire system is derived (synthezises) from the level of individual agents.
  

• Methodological Instrumentalism - This one is much more tricky I think. Basically this denotes the view that all economic behaviour is preference driven or more specifically driven by the (agent's) attempt to maximize utility and satisfaction. What lies beneath here is then the idea of a homo economicus who acts based on a strict mono causal behavioral impetus to maximze satisfaction/utility. Furthermore, the authors claim that although considerable efforts have been made by economists to shed (and perhaps differentiate) this instrumentalism it still lingers within the economic science.
  

• Methodological Equilibration - This last lingering feature of (Neo-Classical) economics today is the idea that economic theory works to seek determinacy based on the assumption that agents' behaviour (i.e. the methodological individualism) is sorted in a way to always foster a situation of equilibrium which then makes prediction more feasible. This is also where the authors are most explicit in their critique as they accuse economics for not asking why an equilibrium will emerge but simply state that ... 'it could not be otherwise'.

Like I stated above there are several entry points to discuss this article. First of all we could ask whether these axioms are actually true and whether they apply as dogmatic to all corners economics as the authors argue? I somewhat doubt that but I do feel that it is arrogant if economics do not accept and make explicit a fundamental methodological perception of economic science which then quite naturally should be subject to critique and revision. This also brings us to what I see as the main argument of this article. As such the authors point to the necessity for economics to argue why these axioms are so crucial for the investigation of the social economy or more specifically; do the fundamental principles of economics work in the real world? I this way, this article takes up the baton from Phillip Ball linked above and argues that the core of economics seems to suffer from fundamental flaws in it scientific construction. For example they note this on the idea of the existence of the equilibrium ...

(...) the defender of neoclassisism has to provide hard evidence concerning the actual, material processes of (a) how preference orderings determine actions uniquely, and (b) how their reasoning skills, or social/natural selection, slice through indeterminacy to bring about an equilibrium. Needless to say, such extreme naturalism has no chance of being empirically supported. Even sophisticated empiricists like Karl Popper rejected the idea that the joint hypothesis of individualism and equilibrium can be tested empirically; they are, he rightly claimed, preconditions for knowledge rather than objects of knowledge. Hence there is no such thing as a ‘natural method’. The very thrust of the Enlightenment project rules it out of court.

So, what do I think then?

In essence, I agree with the fundamental approach and as such the attempt to pin down the core aspects of economics as a science today. I think it is important to make this explicit in order to continuously be able to revisit fundamental convictions. Also, as I stated above it is arrogant by economists to wave off critique of their science on the basis of the fact that their critics simply do not get what economics is all about. This then brings us to the idea of these three axioms and whether they really encapsulate all aspects of economics and we need to consider this pretty strongly in this connection since this conceptualization represents the backbone of the authors' arguments. And on that, as I noted in a comment over at Gabriel Michalache's blog I am a bit undecided as I still cannot decide on whether they are right or whether they are oversimplifying an, in reality, very versatile profession?