[OPE] Mistaking Mathematical Beauty for Economic Truth

Actually what Paul Krugman somewhat mystically wrote about this, was:

"During the golden years, financial economists came to believe that markets
were inherently stable (...) Meanwhile, macroeconomists were divided in
their views. But the main division was between those who insisted that
free-market economies never go astray and those who believed that economies
may stray now and then but that any major deviations from the path of
prosperity could and would be corrected by the all-powerful Fed. Neither
side was prepared to cope with an economy that went off the rails despite
the Fed's best efforts. (...) As I see it, the economics profession went
astray because economists, as a group, mistook beauty, clad in
impressive-looking mathematics, for truth. Until the Great Depression, most
economists clung to a vision of capitalism as a perfect or nearly perfect
system. (...) The renewed romance with the idealized market was, to be sure,
partly a response to shifting political winds, partly a response to
financial incentives. But while sabbaticals at the Hoover Institution and
job opportunities on Wall Street are nothing to sneeze at, the central cause
of the profession's failure was the desire for an all-encompassing,
intellectually elegant approach that also gave economists a chance to show
off their mathematical prowess."
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&scp=2&sq=paul%20krugman%202009&st=cse

I agree with Ian Wright about the importance of mathematical analysis and
the lack of adequate conceptualizations, but I think that real Marxists
should go at least one step further and ask, "why of all things is
mathematics suddenly being blamed?".

In the first instance, because mathematical models proved unable to provide
insurance for the value of capital. Obviously if the mathematical approach
to economics is the problem, then the implication is that we don't actually
have to take mathematical arguments seriously anymore or understand them -
which is a regression to irrationalism if not an elitist contempt for the
public.

One implication seems to be, that ordinary people do not understand the
mathematical arguments, but they don't have to understand or trust them
anyway, because they led to terrible results. It deflects any inquiry into
what exactly went wrong with the math, but more importantly it deflects any
inquiry into the underlying assumptions for which the math was supposed to
specify the quantitative implications, and provide a rigorous logical
justification. So by focusing on "wrong math", the underlying ideology is
saved.

John Kay commented in the Financial Times ("In magic or in markets, it is
never rational to be wrong", FT September 1 2009) as follows:

"Modern economics - and the rational choice theory that has now spread
throughout the social sciences - defines rationality not as wealth
maximisation but as consistency. If the tribesmen plant half their fields
where there is bad juju, and all their fields when there is good juju, their
behaviour is rational - so long as they adhere strictly to that principle.
Perhaps the greatest achievement of modern theoretical economics has been to
show the power of that consistency assumption. If agents act on a consistent
set of preferences and beliefs, a market economy will establish prices based
on them. Under certain further assumptions, resource allocation in line with
these prices is the best means of fulfilling these preferences and beliefs.
That has been espoused by business people and rightwing politicians who
would not know a fixed point theorem from a quadratic equation."
http://www.ft.com/cms/s/0/8567164c-9725-11de-83c5-00144feabdc0.html

What this quote suggests, is that the theoretical issue doesn't in fact
concern mathematics, but the meaning of (economic) rationality. Wedded to
methodological individualism, economic thought is unable to understand how
the individual market actors are socially related, and how they social
existence influences their rationality. Wedded to empiricist reductionism,
it is unable to understand the relationship between the micro world and the
macro world.

In contrast to this, Marxists such as Elmar Altvater (Gesellschaftliche
Produktion und ökonomische Rationalität, 1969), Ernest Mandel (Late
Capitalism, 1972) and Frank Furedi (Mythical Past, Elusive Future, 1992)
referred to the fact that the social logic of capital combines rationality
of (competing) parts with overall irrationality, and thus, to the
dialectical concept that rationality and irrationality are combined as
determinations in the development of society. This insight seems to be
forgotten by the later crop of Marxists.

But there is yet another point overlooked in this discussion: the fact, that
economic theory actually pays very little attention to the empiria of
economic history, except that time series of prices are pumped into
mathematical models. There is nothing in the track record of economic
history that can sustain the core assumptions of economics, e.g. general
equilibrium theory - we can only sustain the models, by denying what
actually happened in history.

Jurriaan

There's beauty in the silver singing river
There's beauty in the sunrise in the sky
But none of these and nothing else could match the beauty
That I remember in my true love's eyes

If today was not an endless highway
If tonight was not an endless trail
If tomorrow wasn't such a long time
Then lonesome would mean nothing to me at all

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Received on Sat Sep 12 07:33:48 2009