Meta-economics
Taking a break from commenting on consciousness studies today to write about a topic far more important in contemporary life. If you are possibly able to do so, please read (even just browse) a few books like Steve Keen's Debunking Economics, or John Quiggen's Zombie Economics and definitely read through the MMT Primer, and I suggest you cannot skip Mosler's Seven Deadly Innocent Frauds of Economic Policy. These sources provide the hard background to what follows.
What I will write about today is the importance of understanding your field of study before even thinking of saying you are an expert. Mainstream economics is one profession where it is possible to claim expertise and high academic rank without knowing anything significant about the real world. As the above sources will show you, mainstream (neoclassical and some post-Keynesian) economics taught in our educational institutions is a mathematical set of fictions that have some loose relevance to microfinance, but they have almost no relevance to real world macroeconomics.
Macroeconomics is important! It is where all broad economic policy and law get settled. It alters peoples lives far more than microeconomics. In microfinance and economic theory of firms one can get by with a simple business acumen and need not ever read treatises on microeconomics. That's not to say microeconomics is unimportant, but it is not used in practice anywhere near as much as economic department academicians would like to think. This matters because professionals who get into central bank policy positions are mislead by a lot of standard microeconomics, because it is inferred as applicable to the macroeconomy. This is bad news for us because, as any halfway decent complex system theorist will tell you, the micro is often not applicable to the macro. From the micro you can gain foundational dynamical laws, but in the macro what matters much more are boundary conditions and constraints, and the micro level analysis can never give you these, in economics they have to be measured, they are never a matter of pure theory. (Weather meteorologists have known this for years in their field of study.) The teaching of microeconomics is pretty bad in this regard, but it is not the real problem in our society.
(Although, if you would like a glimpse into how even mainstream microeconomics gets things badly wrong, I recommend the article by Nathan Tankus on Low Interest Rates Don't Drive Market Concentration.)
All the dominant policy that governs the laws that shape markets comes from power, and currently most of that power is government, and unfortunately most of government is undemocratic rule by elites and oligarchs. The oligarchs and plutocrats might not want to claim they distort democracy, and they might not even realize it, but the effect is undeniable, almost all government policy is influenced by the rich and powerful, not by the average citizens whom government purports to serve. Studies of policy preference have demonstrated this beyond doubt.
Meta-economics for the Beginner
Let me now consider the topic of the set of thoughts, ideas, ideology and operational reality that comprise macroeconomics. This is the level at which unbridled power has the most baneful influence.
My note today is aimed at younger economics students. (I've lost all hope for the oldies, they seem beyond redemption.) My plea to them is to try had to understand meta-economics before accepting any classroom and textbook theory. You might just then be able to see that most of what they teach you in class from books is fraudulent, or at least mathematically sound but not applicable to the real world.
A good enough place to start in meta-economics is to understand your subject's history. Of prime importance to this for the young economist is to understand physics envy and the fetishization of mathematical models. (I will not say this is the only good place to start meta-economics, maybe the history of thought is a better beginning point. But to make this essay sharp and to-the-point I am jumping straight to the physics envy problem.)
Physics Envy and the Use of Models
Neoclassical economics has been driven over the last century or more by an insane fetish for mathematical rigour. This is bad on a couple of accounts. Firstly, mathematical models are well-known (by dynamical systems experts) to be unreliable in predicting the behaviour of nonlinear dynamical systems, of which the economics system is an example. What is far more useful is empirical data. Yet mainstream economics theory almost completely ignores real world data. If they (the econ professors) bothered to examine real data they would teach more like how the top currency and market traders practice. The top traders who get paid to be right will routinely make bets against what mainstream economics teaches. This would be akin to an engineer dunking on a theoretical physicist (who got their theory wrong), "I spit on your general theory!"
One example is interest rate theory and monetarism. The mainstream teach that lowering interest rates suppress savings desires and increase investment, and the converse when interest rates are hiked. But in the real world traders who get paid to be right discount the influence of interest rates and instead look at fiscal policy. In the real world currency injections fuel an economy, austerity causes recession, and interest rates have very little effect.
Mosler likes to put it this way: monetary policy (interest rate control) is like a kid in the back seat of a car with a toy steering wheel imagining he is driving. He is right. And as time goes on and we get more data from countries running strong fiscal deficits and zero interest rate policy confirming what Mosler has been saying for years.
To get back to the meta-economics: what we see in academic economic history is a vast over-confidence in mathematics, and a gross dismissal of empirical data. We call this "physics envy". It is quite tragic, not the least because any respectable physicist knows that empirical data rules. Somehow this is lost on the average economist.
When history has It's say I think the Twentieth Century will be seen as a period in economic thought where millions of lives were lost due to bad economic policy (basically, in a word, due to neoliberal austerity thinking). Folks, you should know by now that austerity does not help an economy, not ever. It destroys lives and reduces real productivity. Even in a boom, when inflation is on the rise, austerity does not help. Austerity can be used to control inflation, but what we now know is that there are at least two completely different types of inflation: pure monetary inflation (increase in money supply) which is a good healthy type of inflation, provided it is not due to a sudden shock, for it reduces the burden of debt and reduces the value of hoarded wealth. Whereas hyper-inflation arising from supply shock is a bad type of inflation and may necessitate austerity measures like rationing. We know how to avoid hyper-inflations these days, and they are rare events, triggered always by a gross distortion or shock (oil price fixing, corruption, war, famine, pestilence).
The reasons why economics suffers from physics envy are well-known but I do not wish to go into them here. What I am more interested in noting is why economists should not have physics envy, and how the economists are miss-using modelling.
For the "why?" question it is easy to summarize in a paragraph. Economics is of such importance to both human material and spiritual needs that there is vast unexplored and vital territory far in advance of any mathematical modelling. By limiting oneself to mathematics the economics profession is crippling itself. We are not merely talking about the Behavioural Economics explosion here either. Economics (though few acknowledge it) fundamentally deals with spiritual abstractions like justice and power, and even the marxists have not begun to tap this infinite mine of riches (not least because the marxists deny the spiritual and have thus not fully understood the basis for their own views on material justice).
Physics Models are Not Used for Predicting the "Real World"
OK, that heading is a bit of an exaggeration. What I really mean is that the way physicists use models is to narrowly test theory. To do so they will typically (in fact, almost always) collaborate with experimentalists to set up highly artificial conditions to eliminate all sorts of unwanted effects in order to isolate the causes and effects of interest in the context of their theories.
Also, physicists never test whole theories, they set up conditions to test narrow subsets of a full theory.
Here's the big lesson: this methodology in physics is precisely why mathematical models are so useful in physics! It is because with the exercise of tight experimental control, setting up totally atypical conditions (e.g., Rutherford's gold foil experiment, or Thompson's oil drop experiment, or the LHC — any number of famous experiments) is useful in testing narrow aspects of a broader theory.
The broad theory is supposed to apply to the whole universe, but that's not how the theories are tested. Even when we explore the cosmic microwave background, we are never observing the whole universe, we can only detect the light in certain patches of the sky, and only in narrow frequency bands, over time a fuller spectrum can be compiled, but even then this is only one result of the hypothetical Big Bang that we are testing. There is so much more that we are unable to measure and test (gravitational waves from the Big Bang will be almost forever impossible to directly observe, yet they pass through us every day).
Economists do not understand this meta-economics part of their own profession. Probably because they are not taught meta-economics, and most never go near economic history. They might say they don't need it, but they would be wrong, and horrifically wrong, because their profession exercises a baleful effect on the lives of working people.
Most economists fail to understand their own subject and seek to apply their mathematical models to the real economy. This is where they go badly wrong from the get-go. It is an abject failure of meta-economics.
The point is, in the way they conduct academic economics, the mainstream econs think they are copying the successes of physics, but they are not. A physicist (who has any sense) would laugh at them. The econs need to learn that their models can at best only be applied to tightly controlled conditions. Yet they never achieve such conditions! They are always presuming the real world is their laboratory. They are wrong.
One type of give-away on this is that whenever you see economics papers that talk about limits where variables "go to infinity" you know the paper is worthless. It will not be applicable to the real world unless by sheer fluke.
Contrast this when physicists deal with mathematical infinities; the physicists knows they are dealing with a fiction, a toy model, and the art of doing theoretical physics is mostly in knowing what parts of your mathematics apply to reality, and which are mathematical artefacts.
In economics there is a sort of intellectual corruption or infestation that has spread throughout several generations now, it has become almost an epic tragic mass delusion, because they never bother to figure out their art, they take their mathematical models and suggest policy advice with no regard to the fact their models are not models of real economic systems.
The article I referred to above is a good illustration of one such case: N. Tankus, Low Interest Rates Don't Drive Market Concentration. Tankus describes a mathematical model published in a mainstream econ journal, and lucidly explains why it is a totally fictional model, inapplicable to our real economic system, and yet is being used to inform neoliberal wonk policy.
This sort of sh*t has to stop! The economics profession needs to be thoroughly euthanised, and something new needs to be nurtured in It's stead. The legal realism of MMT that Nathan Tankus advocates would be a good fresh new start.