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05/01/98 
Challenge
Magazine: Challenge,
MAY-JUNE 1998
Section: THE STATE OF
MODERN ECONOMICS
THE PROBLEMS WITH FORMALISM
Interview with Mark Blaug
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Q. I think it is fair
to say that you are the leading proponent of the idea that a weakness of
economics is that much of its theory is not falsifiable. If you cannot
falsify something, then how can you demonstrate that it might be true? What
is your definition of falsifiability?
A. In confronting a
theory, it should be possible to think of evidence that, if found, would
falsify the theory or would lead you to abandon the theory. You would
realize that it was wrong. It could be falsified by some evidence. If, for
example, someone says, "I believe such and such, and there is no
evidence that would ever make me abandon this theory," then whatever
this belief is, it is not science because scientific beliefs, theories,
hypotheses, or whatever you want to call them, should be falsifiable at
least in principle. Now all the problems begin.
Q. Did Karl Popper,
the philosopher, originate this criticism of economics?
A. No, he said this
about other areas. He said very little about economics, and what he did say
was adulatory rather than critical. No, he never criticized economics.
Popper was a philosopher of science. Most of the applications of his ideas
were in physics, and he was particularly interested in relativity theory,
quantum mechanics, and all that. Insofar as he was interested in social
science, it was the sort of grand social science. He wrote The Open
Society, which had three great enemies-Plato, Hegel, and Marx. But he was
not particularly interested in economics and said very little about it, and
some of the things that he said about it generate more questions than
answers.
Q. Then who is the
first person to raise falsifiability as an issue in economics?
A. Terrence Hutchison,
who at an amazingly early age wrote The Fundamental Postulates of Economic
Theory. In this book, he criticized the assumption of perfect knowledge in
most of economic theory and introduced Popper. Hutchison, who is still
alive and in his early nineties, has remained ever since a great disciple
of Popper and the application of Popper in economics. I have followed in
his footsteps. He was sort of a mentor of mine.
Q. Did you study with
him?
A. He was one of my
Ph.D. supervisors at Columbia University. He visited Columbia. I had two
supervisors: George Stigler and Terrence Hutchison. They made a wonderful
contrast. But actually there was quite a lot of Popper in Stigler. So, in
some ways, I owe a lot to both of them.
Q. In the current
mainstream practice of economics, is falsifiability ignored entirely?
A. No. It would in a
sense be easier if it were ignored altogether. Mainstream economics pays
lip service to it; that is, it always says, "Oh, yes, of course,
economic theory should be confronted by evidence. And, of course, if the
evidence is contrary, if it seems to refute the theory, oh, yes, we
certainly pay attention to that, and we must adjust the theory or even
consider possibly a new theory." So, they do not in any way disagree
with the implications of falsifiability. They preach it but they do not
practice it. In other words, when confronted with contrary evidence of some
beloved theory, they adjust the theory, or they minimize the evidence.
Sometimes they even ignore the evidence. They do not look very hard at contrary
evidence, preferring to confirm rather than to look for refuting evidence.
Q. Isn't that the
point--that economic theory is often so malleable that it can be applied to
any series of outcomes?
A. Yes. But it is
false to believe that this is something unique to economics. It is
pervasive in all of social science and, indeed, it is actually a much more
telling point in sociology and political science. Because they do not
produce such hard conclusions, their theories are even more difficult to
refute than economic theories. But even in the natural sciences it is rare
to find a crucial experiment that conclusively confirms or conclusively
refutes. If people in a discipline take empirical evidence seriously, it
piles up and eventually causes the theory to be overturned. But it is not
the kind of thing where you wake up one morning and suddenly say, "By
God, there is refuting evidence and now I am going to throw away the
theory."
So, there is a very
slow buildup, even in natural sciences. And sometimes the empirical
evidence is more in the nature of big events. To give you a trivial
example, the inflation and the stagflation of the 1970s did more to
persuade economists that there was something wrong with Keynesian
economics--that you needed supply-side policies and all that--than all the
empirical evidence on the econometric studies against Keynesian economics.
Sometimes you have to be hit over the head with a hammer before you give up
a beloved theory.
Q. What examples can
you name in which evidence has been overwhelming and yet economics has not
abandoned a theory?
A. Rational
expectations and the new classical macroeconomics. The implication that no
government policy can possibly influence the real output, income, and
employment of an economy has been refuted again and again. And the contrary
evidence is indeed acknowledged to a considerable extent by those who are
the leading spokespersons for this classical macroeconomics. Yet new
classical macroeconomics is still taught in all the textbooks, and there
are still many macroeconomists who go on fervently believing that new
classical macroeconomics is based on a firm foundation and that people
indeed hold expectations rationally. There is even the evidence in the
stock markets. Stock markets are one of the best places to test the idea
because, of all markets, they are the one that most motivates people to be
well informed. Yet the stock market is littered with anomalies, with market
bubbles, which are impossible to explain if all traders in the stock market
hold expectations rationally.
Q. In your article in
this issue of Challenge you make much of formal modeling and the evolution
from the work of Kenneth Arrow and Gerard Debreu. Why do you believe that
such formal mathematical modeling has taken such a firm hold? Why has the
profession gone in that direction?
A. I will give you the
standard answer, although I think it is a very difficult issue. This is a
deep question about the history of ideas. How did we get like this? If I
could answer that question--if I thought I could confidently answer it--I
would certainly rush to print with the answer. I am not sure that I can
confidently answer it. But a standard approach among people who have
thought about this is that, sometime after World War II, economics began to
model itself after hard science. It wanted to be the one social science
that looked exactly like physics. This led to mathematization, mathematical
modeling, formal modeling, and the resulting worship of technique and
formal elegance.
But the odd thing is
this explanation does not really wash because if you know anything about
physics--and I am an amateur physicist--physics is not at all like that.
Physics takes evidence very seriously but many physical theories are rather
muddled and confused and inconclusive. They are by no means very elegant.
The subject we economists really have been aping is mathematics. We have
turned economics into a kind of social mathematics that employs words such
as "price," "market," "commodity." It looks
like economics, but when you read an article that uses such words, all the
relationships are mathematical relationships; all the inferences are
mathematically drawn; and no thought is given to whether these mathematical
variables, concepts, functional relationships bear any resemblance to
real-world observation. Deirdre McCloskey [see Challenge, January-February
1997], whose writings I do not otherwise like, has said quite rightly that
economists look to the math department, not the physics department. That is
absolutely true.
Q. Let us try to take
it one step further, though. Why would these mathematical models, which
after all are not very complex by a mathematician's standard, catch on?
Does the modeling serve as some kind of fraternal initiation that bonds
economists?
A. The math is not all
that difficult, although it does create an entry barrier. Most people can
learn the mathematics, but you do have to study it. It is just as if we
wrote economics in French. It would be an effective entry barrier because
some people find it rather difficult to learn foreign languages. You do not
have to be terribly intelligent, but you do have to be patient, and spend a
lot of time at it. So, it is an effective entry barrier.
The people who have
been initiated now have a vested interest in taking the barrier seriously
and paying attention to it and giving it high prestige. Otherwise, it would
not serve as an entry barrier. So, after a while, they justify the entry
barrier because they possess this elegant particular virtue or technique.
After it is created, it justifies itself. I shall add one other thing to
this: the enormous output of Ph.D.s in economics in the United
States--almost a thousand every year! Many of them do not go into academic
life, but all the estimates suggest that about 45 to 50 percent do seek
employment in academic life. They have been taught by their teachers a
particular kind of economics, and, of course, they disseminate the same
economics in their teaching and also by publishing in journals.
Journal discussions
that are expressed mathematically are much easier to evaluate inasmuch as
you can see whether a person has really written down a consistent
mathematical model. That is much easier to judge unambiguously than a piece
of economic wisdom expressed in prose, which is very difficult. Two people
can easily disagree on whether the prose work is valuable or not. And these
journal articles, which number in the thousands--there are three hundred or
more journals in the English language in economics, publishing two, three,
or four issues a year--have to be refereed. Most of them are refereed by
volunteers who have to pass judgment quickly (once you get on the list you
read dozens of articles, sometimes in one week). It is all much easier once
you share a community of standards, mathematical standards essentially. It
still does not explain how it all got started. And I really do not
understand it.
Q. Has the computer
reinforced this tendency even more? After all, regressions are so easy to
do now.
A. Insofar as it has
created, curiously enough, a kind of econometrics that is no longer very
interested in empirical evidence either but in econometrics theory.
Econometrics has become almost as much a spectacle as economic theory, and
it is a theory of a statistical kind. Yes, economists run regressions and
all that. But that is not what the econometric journals are full of. They
are full of fancy new statistical analyses, a much more sophisticated way
of analyzing time series that are almost ends in themselves.
Q. You make some
rather categorical statements that economists pay no attention to the
real-world implications or applicability of their models. Are there any
clear exceptions?
A. Of course. If you
wish to express criticism that will have an impact on ten or twenty
thousand practitioners throughout the world, you have to exaggerate
slightly to make any point at all. If you modify too much, nothing is left
of it.
Q. What was it about
the Arrow-Debreu thesis that you single out in your article in this issue
of Challenge that so influenced the profession?
A. It was
extraordinarily sophisticated mathematically, and even though it was
published forty-four years ago, it is an elegant article using game theory,
which was then very new. It used game theory in a way that nobody had
expected to prove the existence of general equilibrium. It was elegant, it
was rigorous, and it appeared to solve a problem. Does general equilibrium
actually exist? To be a little more technical, can multimarket equilibrium
actually exist in an economy? And it seemed to establish this. After all,
Walras had argued this eighty years earlier but had never been able to
prove it in any satisfactory way. So it appeared a wonderful example of
elegant quasi-mathematical proof, and it seemed to elevate economics almost
immediately to a subject rather like mathematics, certainly applied
mathematics.
Q. You argue that such
models require highly simplified assumptions in order to work. And you
point out that, if these assumptions are relaxed, the conclusions do not
hold up. But do economists try to relax these assumptions and test their
conclusions?
A. Yes. There are many
economists who look at relaxing these assumptions. "Let us see if we
relax the assumptions-will the answer still hold?" But this can become
rather alarming because, again, all we really do is work a little harder at
the mathematical modeling to get it right. I think this way of thinking
about establishing economic relationships is misleading. I am not against
modeling, nor am I even against mathematics. It can be a very useful
handmaiden, but not as an end in itself. Not as the way we judge whether,
for example, an article is worth reading or not, an argument is worth
listening to or not. What I am trying to do is to alter the intellectual
priority that economists assign to different kinds of economics. That is,
they assign enormous prestige to any kind of economic theory that is
mathematically expressed, but almost none to historical argument or a case
study. This is a clever way of marshaling empirical evidence to prove a
particular economic theory. That is what is wrong.
Q. What examples come
to mind of real-world issues where this kind of thinking in economics has
led to errors in public policy or errors in judgment?
A. We have not been
very good at thinking about the transition problem in Eastern Europe
because we have not been thinking about how market economies actually work
and what is required to make markets function. So our advice to East
European governments has been very wooden because you have to understand
how markets have to be created and how property rights have to be
established. We spend little time studying the institutional structures in
which markets are imbedded and without which they cannot work. And so, we
have given either no advice or bad or misleading advice to East European
governments. The transition problem of Eastern Europe has made me and other
economists extremely aware of how lopsided our approach is to markets and
the market mechanism and to capitalism. Creating markets is not just Gerard
Debreu's general equilibrium theory. That is not very helpful. Indeed, it
is probably even misleading in thinking about these problems.
Q. Can similar
statements be made about the Asian financial crisis at the moment or, let
us say, the inequality of income in America?
A. The problem with
the Asian tigers is partly the same: We no longer give much attention to
developing economies. It was a big subject in economics in the 1950s and
1960s but has gone into an almost total decline. One of the causes for this
decline is that it is not a good area to work in if you want to produce
fancy, technically puzzling pieces of mathematical modeling. So many young
economists find that it is just not an exciting area in which to work. You
cannot get promoted publishing articles on development economics. They will
admit that these are important real-world problems, but that is not the way
to get ahead. It is not the way to build your career in an area that prizes
technical elegance.
Q. Is your solution,
then, more empiricism?
A. More empiricism,
more history, more getting your nose dirty in data, surveying people,
asking opinion, monitoring behavior--yes, all of that.
Q. In the United
States there seems to be some movement toward more empirical
experimentation anyway. Have you noticed this?
A. I think a move
toward experimental economics is very hopeful. The amazing thing is the
enormous resistance that it has encountered.
Q. What example can
you name of that?
A. Talk to any of the
leading experimental economists. They will tell you about the enormous
resistance that their work has run into. It is very hard to push
experimental economics because you are running against this grain of formal
modeling. It has made forward progress in recent years, but I am amazed how
difficult it has been to interest economists in it and how little of it is
part of mainstream economics as taught in graduate school.
Q. Have we learned
anything fundamental in, say, the past quarter-century of economics?
A. Sure. Particularly
in macroeconomics, how to deal with inflation, how to deal with
unemployment. I think we've learned an enormous amount, particularly about
steering the economy in a macro sense. We certainly learned a lot from the deregulation
and privatization movement. Although there is a lot more to learn, when I
contrast what we now know about these things with the days when I was a
graduate student in the 1950s, I think we have made forward strides. But to
some extent we have also gone backward.
Q. In what specific
sense have we gone backward?
A. In the sense that
economics as a completely formalistic discipline has turned students off
from pursuing it. I do not know about America, but in Europe economics
unfortunately is attracting fewer students, whereas business studies and
business management is attracting more students. It is not just that
economics has become technical; it is that economics prizes technicalities
above everything else and that is why I call it formalism. Formalism is the
tendency to worship the form rather than the content of the argument. That
is the kind of subject it has become. We care only about the form in which
an economic theory or hypothesis is presented, and we care almost nothing
about the actual content of the hypothesis.
Q. What are the major
issues on which we have not made progress?
A. Markets and how
they actually function; that is, how they adjust to match demand and
supply. We in economics know a hell of a lot about equilibrium, but we
really don't know how markets actually get to equilibrium.
Q. In your view, what
can save economics?
A. I am very
pessimistic about whether we can actually pull out of this. I think we have
created a locomotive. This is the sociology of the economics profession. We
have created a monster that is very difficult to stop.
Q. Could real-world
empirical facts or a severe economic cataclysm change it?
A. That would
certainly change it, but I do not see that around the corner. Perhaps I am
too pessimistic, and it is very depressing to stay there. There does not
seem to me to be any way out.
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~~~~~~~~
Interview with Mark
Blaug
MARK BLAUG is
professor emeritus, University of London, and visiting professor of
economics, University of Exeter.
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