Economics and Armchair Psychology
Global Research, May 16, 2013
Url of this article:
http://www.globalresearch.ca/economics-and-armchair-psychology/5335230
http://www.globalresearch.ca/economics-and-armchair-psychology/5335230
Image: John Maynard Keynes
“Economics is haunted by more fallacies than any other study known to man.”― Henry Hazlitt
Over
millennia, numerous enterprises have sought the status of science. Few
have succeeded because they have failed to discover anything that stood
up to scrutiny as knowledge. No body of beliefs, no matter how widely
accepted or how extensive in scope, can ever be scientific.
In
the Ptolemaic system of astronomy, the epicycle is a geometric model of
the solar system and planetary motion. It was first proposed by
Apollonius of Perga at the end of the 3rd century BCE and its development continued until Kepler came up with a better model in the 17th
century, and the geocentric model of the solar system was replaced by
Copernican heliocentrism. In spite of some very good approximations to
the problems of planetary motion, the system of epicycles could never
get anything right.
Phrenology was originated by Franz Joseph Gall
[right] in the late 1700s. After examining the heads of a number of
young pickpockets, Gall found that many of them had bumps on their
skulls just above their ears and suggested that the bumps, indentations,
and shape of the skull could be linked to different aspects of a
person’s personality, character, and abilities. Gall measured the skulls
of people in prisons, hospitals, and asylums and developed a system of
27 different “faculties” that he believed could be directly
diagnosed by assessing specific parts of the head, and he chose to
ignore any contradictory evidence. After Gall’s death in 1828, several
of his followers continued to develop phrenology. Despite some brief
popularity, it was eventually viewed as a pseudoscience much like
astrology, numerology, and palmistry. All of these, too, could never get
anything right.
Sigmund Freud
was an Austrian neurologist who is known as the father of
psychoanalysis which is a clinical method for treating psychopathology
by having a patient talk to a psychoanalyst. Results on the mental
health of patients were scanty at best. Some contend that Freud set back
the study of psychology and psychiatry “by something like fifty years
or more”, and that “Freud’s method is not capable of yielding objective
data about mental processes”. Others consider psychoanalysis to be
perhaps the most complex and successful pseudoscience in history. Karl
Popper, who argued that all proper scientific theories must be
potentially falsifiable, claimed that no experiment could ever disprove
Freud’s psychoanalytic theories and thus were totally unscientific. Now
Freud’s work has little relevance in psychiatry. It could never cure
anyone. But it was not Freud who created a pseudoscience, it was the people who uncritically adopted his views.
Today
the great fraudulent science is economics, but I don’t intend to beat
that carcass. It has been shown not to be a science by numerous astute
people. Even some renowned economists have been convinced of it. Paul
Samuelson has said, “Economics has never been a science—and it is even
less now than a few years ago.” Even Nassau William Senior
knew it: “The confounding Political Economy with the Sciences and Arts
to which it is subservient, has been one of the principal obstacles to
its improvement.”
Yet
many working economists continue to claim that it is or at least that
it is more of a science than its siblings in the social enterprises of
study. Perhaps these people feel that their work lacks dignity if it is
not scientific, being unable to say exactly what it is if it is not
science. So let’s look at some things that economists regularly do to
see if what they are doing can be defined.
Jared Bernstein [right],
with a Ph.D. in Social Welfare from Columbia University, is not
technically an economist but he has held many positions that an
economist would usually hold. He was chief economist and economic
adviser to Vice President Joe Biden and a member of President Obama’s
economic team. Prior to joining the Obama administration, he was a
senior economist and the director of the Living Standards Program at the
Economic Policy Institute. Between 1995 and 1996, he held the post of
deputy chief economist at the U.S. Department of Labor. His pieces are
frequently posted on Economist’s View where I found a piece containing the following section:
the deeper, and more interesting, reason one worries about too-low inflation right now comes out of the work of Ackerlof et al
back in the mid-1990s. It has to do with sticky wages, something Keynes
recognized as contributing to intractably high UK unemployment back in
the early 1920s. Back in the mid-90s, we also faced a period when price
growth was slowing, and inflation hawks called for the Fed to set zero
as their inflation target. Alan Greenspan apparently took it seriously, and internally debated the idea.
That
inspired Ackerlof et al to think about what might happen in a zero
inflation economy, and what they found was that it would engender
significant costs in terms of unemployment and growth.
The
reason that zero inflation creates such large costs to the economy is
that firms are reluctant to cut wages. In both good times and bad, some
firms and industries do better than others. Wages need to adjust to
accommodate these differences in economic fortunes. In times of moderate
inflation and productivity growth, relative wages can easily adjust.
The unlucky firms can raise the [nominal] wages they pay by less than
the average, while the lucky firms can give above-average increases.
However, if productivity growth is low (as it has been since the early
1970s in the United States) and there is no inflation, firms that need
to cut their relative wages can do so only by cutting the money [i.e.,
nominal] wages of their employees. Because they do not want to do this,
they keep relative wages too high and employment too low.
As
long as there’s a little inflation in the system, “less fortunate”
firms can give nominal wage increases below the rate of inflation,
allowing them to adjust to harder times. With very low inflation, they
don’t have the room to pull that off.
When
I read this, I recognized that the fuzzy writing, which is always a
symptom of bad thinking, lead to entirely the wrong conclusions. First
we see that “firms are reluctant to cut wages.” Then we see that firms
cut wages by giving “nominal wage increases below the rate of inflation”
which, apparently, firms are not at all “reluctant” to do. The
conclusion that aches to be drawn is that inflation allows firms to
covertly reduce the wages of their employees, and it does that
regardless of the firms’ financial conditions, since nothing prohibits
any firm from giving raises below the rate of inflation. Bernstein wants
the rate of inflation to be higher so employers can engage in this
sneaky way of reducing the wages of their employees. Inflation is good
for employers but bad for employees.
Bernstein
is involved in equation adjusting, a prevalent practice among
economists. An equation exists; economists call it a model. The
equation, they believe, describes reality albeit in a simplistic way.
When economic data is plugged into the equation, if both sides are
unequal, one side, or sometimes both sides, must be adjusted to make
both sides equal. I don’t know what specific equation Bernstein has in
mind, but I know that one side describes, in mathematical terms, the
economic conditions firms face, and the other side describes the costs
of production. So when the side that describes the economic conditions
the firms face declines, something on the other side must be reduced.
For
Bernstein, it’s wages. But what has the equation to do with reality?
Economists believe that their equations describe reality accurately, but
no model ever comes accompanied by a proof that it does. As Keynes
pointed out, “Too large a proportion of recent ‘mathematical’ economics
are mere concoctions, as imprecise as the initial assumptions they rest
on, which allow the author to lose sight of the complexities and
interdependencies of the real world in a maze of pretentious and
unhelpful symbols.” As others have pointed out, the map is not the
territory.
When
the model that Bernstein has in mind is combined with what economists
call the Paradox of Thrift (the claim that saving benefits consumers but
damages the economy and spending, which benefits the economy, damages
consumers), it follows that Capitalism can never be made to function in a
way that benefits all people.
Economic
models are based on mere beliefs, many of which can never be known to
be true. Consider the following claims for instance:
“Nobody
ever saw a dog make a fair and deliberate exchange of one bone for
another with another dog. Nobody ever saw one animal by its gestures and
natural cries signify to another, this is mine, that yours; I am
willing to give this for that.” Adam Smith
“Every
individual is continually exerting himself to find out the most
advantageous employment for whatever capital he can command.” Adam Smith
“That every person is
desirous to obtain, with as little sacrifice as possible, as much as
possible of the articles of wealth.” Nassau William Senior
“Everyone wants to live at the expense of the state.” Frederic Bastiat
“People spend more when they feel wealthier, even if they’re not.: Economists call this the “wealth effect,”
“the consumption of the rich is no more than a scaled-up version of the consumption of the poor”
And
then there’s this from Dani Rodrik: “Mainstream economists are often
seen as ideologues of the market economy. I would concede that most of
my economist colleagues tend to view markets as inherently desirable and
government intervention as inherently unwelcome. But in reality what we
teach our students in the classroom – the advanced students if not the
undergraduates –and what we talk about in the seminar room are typically
much more about the myriad ways in which markets fail.”
How could anyone know
any of these things? Did Adam Smith spend a lot of time observing the
behavior of dogs? And even if he did, what would that have taught him
about trade? In what sense do public school teachers or nurses
continually exert themselves to find out the most advantageous
employment for whatever capital s/he can command? How many readers of
this piece want to live at the expense of the state? And how many
economics teachers have had their teaching observed by Prof. Rodrik? No
evidence exists for the truth of any of these examples.
So
why do economists make claims like these? Is it because these claims
describe how they themselves would behave if given the opportunity? Was
Bastiat spectacularly lazy? Was Smith really a greedy man? If those who
make such claims wouldn’t have acted in the ways they described,
wouldn’t they then know that the claims were false?
These
all are unprovable claims about human (or canine) nature. Economics as
we know it is nothing but claims about how human beings will act in
given circumstances. As such, it is nothing but armchair psychology, and
the psychology is based on the psychological attributes of the
economists making the claims. Greedy people believe that all people are.
Dishonest people believe that all people are. Corrupt people believe
that all people are. Evil people believe that all people are. But, you
know, they’re wrong! Paul Bloom, a professor of psychology at Yale,
says.
When it comes to accepting or changing the status quo . . . [people] tended to “defer to experts or the community.” Economists assume that “everything is subject to market pricing unless proven otherwise. … The problem is not that economists are unreasonable people, it’s that they’re evil people. … They work in a different moral universe.”
Martin Feldstein tells us how its all supposed to work:
“When
the Fed buys long-term government bonds and mortgage-backed securities,
private investors are no longer able to buy those long-term assets.
Investors who want long-term securities therefore have to buy equities
[stocks]. That drives up the price of equities, leading to more consumer
spending [wealth effect].”
But it doesn’t work, does it?
Economists
have been carrying coal to Newcastle since Adam Smith provided English
merchants with a rationalization of what they had always wanted to
do—treat their fellow human beings as beasts of burden. Economists
continue to perform the same function.
“Capitalism
is the astounding belief that the most wickedest of men will do the
most wickedest of things for the greatest good of everyone.”—John Maynard Keynes
Economics
is not about economy; it is a way or organizing society. Our economists
have resuscitated an old social order. We live in a neofeudal world
where the elite rentier group lives in manor mansions and everyone else
is a serf.
John Kozy
is a retired professor of philosophy and logic who writes on social,
political, and economic issues. After serving in the U.S. Army during
the Korean War, he spent 20 years as a university professor and another
20 years working as a writer. He has published a textbook in formal
logic commercially, in academic journals and a small number of
commercial magazines, and has written a number of guest editorials for
newspapers. His on-line pieces can be found on http://www.jkozy.com/ and he can be emailed from that site’s homepage.