Economics and Alchemy

The following was posted on the SHOE (Society of the History of Economics) list serve in response to a thread there and I wanted to share it on this blog:

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With apologies for the length, I too have something to further add to this thread …it concerns the pursuit of ‘truth’ or the lack thereof in economics…

Economics should be a practical science. Certainly there is a rich tradition for this to be so in many theoretical traditions within the discipline. But practicality means that ways of thinking especially as regards the most fundamental principles of the science should change if demonstrably shown to be problematic and even outright wrong by properly formulated and tested reasonably objective criteria. But within economics this unfortunately does not happen nor is it encouraged; in fact the opposite! It is not a real big secret that our discipline is rather loathe to accept results of evidence that seriously undermines certain of the most sanctimonious principles of the mainstream of thinking. Two examples of this come to mind.

First concerns the minimum wage. Study after recent study has shown that increasing the minimum wage has positive effects in terms of wage increases across the board (even for those adjacent communities not governed by the minimum wage) and a positive impact on aggregate income via simple effective demand multiplier mechanisms associated a high consumption propensity of wage earners at the lower tier; and the increased minimum wage has effectively zero negative employment effects! In fact the opposite as, via effective demand, increased income often translates into increased output demand and hence increased demand for employment. The point here is this is what loads of evidence since the 1990s shows! At some point this should not be a matter of debate but rather the point of departure of theorizing; but it is not.  Instead the above scenario implies the dangerous notion that a downward sloping demand curve for labor may be bogus, and this crosses ideological terrain that certain powerful elements in our discipline just cannot accept. It’s unfortunate really, because here economics risks ceasing to be a science and becomes riddled with guns-for-hire as regards corporate and monied interests and influence (especially in the academy and with research opportunities; this speaks to the topic of the thread…).

Second is the the intellectual poverty of the Cobb-Douglas and generally well-behaved aggregate production functions which accord to standard neoclassical postulates when they are used to ostensibly corroborate and/or justify aggregate marginal productivity of ‘capital’.  But nothing of the sort actually exists, not even by violent abstraction or approximation. And mindful mainstream economists such as Frank Hahn, Paul Samuelson, Robert Solow, Herbert Simon, Mark Blaug, and C.E. Ferguson among others of that generation were at times honest enough intellectually to recognize this.  But not the current generation; witness Professor Mankiw who takes heart in the high R squared from empirical tests of malleable capital aggregate production functions as ‘proof’ that marginal products of ‘capital’ exist and are ‘well-behaved’, without himself seeming to know or care to learn that the purported ‘good fit’ comes from the fact that what is being tracked is NOT the so-called ‘marginal product of aggregate capital’ but rather simply an Euler-type income identity!

What is so frustrating is that this is nothing new; as far back as 1938 and 1939 Horst Mendershausen identified these types of problems with the then spanking-new Cobb-Douglas.  Phelps-Brown revisits this in 1957, Franklin Fisher in the 1960s, Anwar Shaikh’s HUMBUG production function in the 1970s and 1980s, and in the 1990s into the 21st century the extensive work by Jesus Felipe, John McCombie, and others.

But all that is erased, and the new generation of economists remain ignorant of these issues, as if they never existed, or have been unequivocally answered when in fact they have not; rather these tough questions have been avoided and those that ask them dismissed and denied tenure, and quite ostrich-like heads are firmly planted into the ground and the mantra of “free markets”, the purported sovereignty of the consumer, and the so-called ‘marginal method’ of constrained optimization is recited ad nauseam.  As Joan Robinson lamented late in her life, we are again thrust with essentially the economic theory that existed before Keynes.  To my mind that is the truly reactionary element in all of this…the retrenchment and further entrenchment of bad theories that lead to bad policies all of which are known and have been shown to be failed. And in this economic ceases to be a practical science and risks becoming for all intents and purposes alchemy.

Scott Carter
The University of Tulsa