Friday, February 14, 2020

462 Philosophy of economic science

A famous defence of the unrealistic mythmarket of perfect competition is that theory requires abstraction and cannot and should not try to reproduce reality. The question is only whether the theory yields accurate predictions when we look at reality ‘as if’ the model applies. This is the famous instrumentalist argument of Milton Friedman. In fact most evidence has contradicted the theory. 

Karl Popper proposed that a theory cannot be proven true but can only be falsified by evidence against it. A problem there is that in economics theory is hard to falsify because one can take shelter in the fact that there are so many other, uncontrollable conditions that can upset predictions, other than limitations of the theory.

Therefore, the argument for validity, or warranted assertibility, if not truth, on the basis of empirical validation may work for physical science, but for economics it does not fly, but flutters like a lame stork.

In fact, economists perform a sleight of hand here. While granting that assumptions are not realistic, and are made only ‘as if’, economists next give excuses why predictions cannot be rigorously tested, and then fall back on the theoretical assumptions anyway, no longer only ‘as if’ they apply, but also in deriving policy implications, claiming that markets should be left alone because they are efficient. But that remains to be demonstrated. The snake bites its tail. At first, markets are taken only ‘as if’ they are efficient, this is never convincingly corroborated, and then for policy implications they are taken to be efficient. It is admitted that the model is a Utopia but since it cannot be falsified it is taken to be real.

Traditionally, science aimed to ‘save the phenomena’: a theory should be able to explain accepted observations or facts. In economics the principle is ‘save the theory’. If things claimed by the theory cannot be observed, occult, unobservable entities are posited by which they exist anyway.

There are several examples but I will discuss only one. In economic theory rational choice rests on the assumption that people have preferences that satisfy certain axioms (such as transitivity: if A is preferred to B and B to C, then A must also be preferred to C). These preferences cannot be observed, indeed in psychology they are found not to exist as postulated. In fact, much choice arises from unconscious impulse. And now comes the economists’ sleight of hand again, the reversal of logic: since people do make choices, preferences must exist; they are revealed in the fact that choices are made. What is wrong with this is that it neglects the possibility that choices are made differently. Intransitive preferences have been shown to occur, when choices have to be made among options with several dimensions of utility that are not commensurable, i.e. cannot be added and subtracted (see item 79 on incommensurability).          

 But then, if people are unable to arrive at a consistent, rational evaluation, how are choices made? If people are unable to consistently add and subtract different dimensions of utility, the choice may be determined by whim and impulse. Producers exploit this in advertising. Not knowing how to trade off different dimensions of utility consumers decide on something often small but salient, with simple, emotional appeal, such as the design of the dashboard As they also do in politics.

Also, preferences often are not given beforehand but develop when things are tried out, arising after rather than prior to choice and action.

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