Economics as Social Organisation: Why We Should All Be Relativists

Article of the Week from Fixing the Economists

by Philip Pilkington

What if all the world’s inside of your head
Just creations of your own?
Your devils and your gods
All the living and the dead
And you’re really all alone?
You can live in this illusion
You can choose to believe
You keep looking but you can’t find the woods
While you’re hiding in the trees

— Nine Inch Nails, Right Where It Belongs

As I make my way through Lars Syll’s series on probability and economics I have also done a bit of digging into his academic work. Let me first say that while I fundamentally disagree with his overarching philosophy — which he refers to as “critical realism” — I nevertheless agree with him on almost every other issue. I also recognise that he is a highly competent economist and philosopher whose work I find extremely stimulating. That said, focusing on agreement is so much less interesting than focusing on disagreement, so let’s turn to the latter.

Let me first of all state clearly what sort of philosophical position I conceive myself as representing. I would broadly call it post-structuralist, others might call it postmodernist, but I think this position actually encompasses a history that includes the likes of David Hume and George Berkeley. That is a fairly controversial statement, of course, and I do not hope to back it up here, but I only make it because I believe that economic philosophers — including Post-Keynesian economic philosophers — don’t actually understand what they call postmodernism. Rather than engage with the work of, say, Jacques Lacan, Claude Levi-Strauss or Michel Foucault they rely on what can only be called a caricature of this lineage of thought — one which they portray as some sort of simple nihilism (a charge, oddly, never really applied to David Hume whose philosophical skepticism was easily more profound than, say, Lacan’s — who would have thought such a level of skepticism indicative of neurosis).

In a paper entitled Capturing Causality in Economics and the Limits of Statistical Inference Syll summarises his philosophical position which he contrasts with that held by some neoclassicals. He first quotes Chicago School economist and econometrician James Heckman as writing:

A model is a set of possible counterfactual worlds constructed under some rules. The rules may be laws of physics, the consequences of utility maximization, or the rules governing social interactions … A model is in the mind. As a consequence, causality is in the mind. (Emphasis Syll’s)

Syll then makes his case against this position as follows:

Even though this is a standard view among econometricians, it is – at least from a realist point of view – rather untenable. The reason we as scientists are interested in causality is that it’s a part of the way the world works. We represent the workings of causality in the real world by means of models, but that doesn’t mean that causality isn’t a fact pertaining to relations and structures that exist in the real world. If it was only “in the mind,” most of us couldn’t care less. The reason behind Heckman’s and most other econometricians’ nominalist-positivist view of science and models, is the belief that science can only deal with observable regularity patterns of a more or less lawlike kind.

Frankly, I don’t think that Syll’s criticisms stand up here. For one, there is no reason why “if it were only ‘in the mind,’ most of us couldn’t care less”. I see no justified reason that this might be the case. Emotions, for example, are clearly “only in the mind” and I know of very few people who would not care less about their emotions. Also, I see no reason why if I believe that reality is mediated through human perception to such an extent as to make the idea of an external world, at best, misleading, at worst, logically nonsensical that I should as a consequence “not care less”. In fact, I do think this; and I certainly do care a great deal about what is going on in the world — as people who have read my posts on the Financial Times website can attest to.

The second point that Syll makes that I don’t think stands up is that the view of science and models that Heckman puts forward is due to a belief that science can only deal with “observable regularity patterns of a more or less lawlike kind”. Again, I fully agree with what Heckman is saying — although I probably disagree with him on just about every other economic and philosophical issue — and at the same time I do not think that economics need trade in observably regular patterns or lawlike relations. I see literally no reason to think this.

What is to stop me from thinking — as I quite genuinely do — that when a tree falls in the woods and no one is around to hear it that it categorically does not make a sound (unless we posit an omnipresent God) and at the very same time posit that there are no genuinely lawlike relations in the study of economics and that economic processes are nonergodic? I would say nothing. I hold both of these positions with equal conviction and have never found any logical reason that indicates they are mutually exclusive.

Where Syll and I differ is in our vision of what economics does. In his paper he writes that for the neoclassicals:

Only data matters, and trying to (ontologically) go beyond observed data in search of the underlying real factors and relations that generate the data is not admissable.

I largely agree with this viewpoint. For me data trumps theory in a heartbeat. Recently, for example, someone told me that a good deal of the US recovery was due to increased student debt. Theoretically I, and many other Post-Keynesians I know, thought this highly unlikely. But the data showed otherwise, so theory takes a back seat. But Syll seems to imply that this is a weakness of the neoclassical philosophy. I think it is no such thing. I just think that, because they misunderstand what economic data actually is and because they use extremely dubious methods of manipulating it, the neoclassicals abuse data and force it into constrictive a prioris — a point which Syll and I agree on.

At a fundamental level, I think that Syll and I have a very different idea of what data is — and this is also where I would say that I substantially differ from the neoclassicals on the data question. Syll seems to think that it is something externally given in the “external” world. I think it is nothing of the sort. Data is a human construction, put together using conventions (usually accounting conventions in economics) that are invented by people. Data is a constructed tool and the methods used in its construction — from the National Income and Product Accounts to the Flow of Funds — are also tools.

This leads to a broader disagreement about what economics actually is. For Syll I gather that it is a means to understand the world — “the world” here understood as something external to the observer. For me it is nothing of the sort. For me economics is a manner of organising the world. Again, it is a tool.

If I am trying to understand where the stock market is going to likely be a year from now, I am doing so in order to organise my investment portfolio or to advise others how to organise theirs’. If I am advising a government on a stimulus program I am trying to organise the level of employment and effective demand — both of which are just concepts that we invent to organise the world and not things, by the way. Economic theory and data are then deployed to help us achieve more effective ways of organising our lives — whether at the level of the individual portfolio or at the level of the macroeconomy.

This is, I would argue, the nature of all human knowledge and cognition. When I line my shoes up in my wardrobe I am effectively imposing some order on what I perceive to be reality. In doing so, others can encounter my particular mode of organisation — although they will likely view it in a totally different way. When we are engaged in economic reasoning we are doing exactly the same thing.

Does this mean that all economic reasoning is equally valid? Does the supposed scourge of such a so-called postmodern stance mean that the theory of every monetary crank is as good as Post-Keynesian theory? I see no reason why this should follow from what I have just written. If a person decides not to line up their shoes in their wardrobe but instead leaves them on the doorstep and then, when their shoes are constantly stolen, they complain about this but nevertheless continue to leave them on the doorstep, it is clear that their approach to shoe organisation is less effective than mine. Just because perceptions are relative from the philosophical angle that I am describing, it does not follow that all are equally valid.

Again, this is a deep misunderstanding of the perspectivist and relativist position that is often associated with postmodernism — and which was indeed espoused by certain political radicals who took over post-structuralist ideas. Such a position does not entail that every statement and every idea is equally valid because none are necessarily true. Such is not the case at all. If we as a society decide that we want, for example, full employment and price stability then there are objectively better and worse tools for achieving these goals.

The relativist position no more says that we cannot evaluate economics theories for their practical worth than it says that we should all go around wearing bear skins because they are no less “valid” than modern clothing. If some people choose to adopt this position based on these ideas — if they choose to wear bear skins and have their shoes stolen from the doorstep every night — then that is their prerogative and their decision and while they may use relativist ideas to justify their actions, their actions are not dictated by the relativist ideas.