12.20.09

Economics a science? + response to Krugman

Posted in you've got mail at 1:39 pm by nemo

RG mail
Elegant Theories That Didn’t Work
by Michael Hudson
Counterpunch (December 14 2009)
Paul Samuelson, America’s best known economist, died on Sunday. He was
awarded the Nobel prize for economics, (founded one year earlier by a
Swedish bank in 1970 “in honor of Alfred Nobel”). That award elicited this
trenchant critique, published by Michael Hudson in Commonweal (December 18
1970). The essay was titled “Does economics deserve a Nobel prize? (And by
the way, does Samuelson deserve one?)”

http://www.counterpunch.com/hudson12142009.html

——————-
Response to Krugman, RG mail
by Michael Hudson

Personal correspondence (December 20 2009)
Thanks, Bill,
Krugman criticized my criticism of Samuelson {1}, referring readers to the
UMKC reprint of my Counterpunch article. So I wrote this in response.
Michael
I have recently republished my lecture notes on the history of theories of
Trade, Development and Foreign Debt {2}. In this book I provide the basis
for refuting Samuelson’s factor-price equalization theorem, IMF-World Bank
austerity programs, and the purchasing-parity theory of exchange rates.

These ideas were lapses back from earlier analysis, whose pedigree I
trace. In view of their regressive character, I think that the question
that needs to be asked is how the discipline was untracked and trivialized
from its classical flowering? How did it become marginalized, taking for
granted the social structures and dynamics that should be the substance
and focal point of its analysis? As John Williams quipped already in 1929
about the practical usefulness of international trade theory, I have often
felt like the man who stammered and finally learned to say “Peter Piper
picked a peck of pickled peppers”, but found it hard to work into
conversation {3}. But now that such prattling has become the essence of
conversation among economists, the important question is how universities,
students and the rest of the world have come to accept it and even award
prizes in it!

To answer this question, my book describes the “intellectual engineering”
that has turned the economics discipline into a public relations exercise
for the rentier classes criticized by the classical economists: landlords,
bankers and monopolists. It was largely to counter criticisms of their
unearned income and wealth, after all, that the post-classical reaction
aimed to limit the conceptual “toolbox” of economists to become so
unrealistic, narrow-minded and self-serving to the status quo. It has
ended up as an intellectual ploy to distract attention away from the
financial and property dynamics that are polarizing our world between
debtors and creditors, property owners and renters, while steering
politics from democracy to oligarchy.

Bad economic content starts with bad methodology. Ever since John Stuart
Mill in the 1840s, economics has been described as a deductive discipline
of axiomatic assumptions. Nobel Prizewinners from Paul Samuelson to Bill
Vickery have described the criterion for economic excellence to be the
consistency of its assumptions, not their realism {4}. Typical of this
approach is Nobel Prizewinner Paul Samuelson’s conclusion in his famous
1939 article on “The Gains from International Trade”:

In pointing out the consequences of a set of abstract assumptions, one
need not be committed unduly as to the relation between reality and these
assumptions. {5}

This attitude did not deter him from drawing policy conclusions affecting
the material world in which real people live. These conclusions are
diametrically opposed to the empirically successful protectionism by which
Britain, the United States and Germany rose to industrial supremacy.

Typical of this now widespread attitude is the textbook Microeconomics by
William Vickery, winner of the 1997 Nobel Economics Prize:

Economic theory proper, indeed, is nothing more than a system of
logical relations between certain sets of assumptions and the conclusions
derived from them …

The validity of a theory proper does not depend on the correspondence
or lack of it between the assumptions of the theory or its conclusions and
observations in the real world. A theory as an internally consistent
system is valid if the conclusions follow logically from its premises, and
the fact that neither the premises nor the conclusions correspond to
reality may show that the theory is not very useful, but does not
invalidate it. In any pure theory, all propositions are essentially
tautological, in the sense that the results are implicit in the
assumptions made. {6}

Such disdain for empirical verification is not found in the physical
sciences. Its popularity in the social sciences is sponsored by vested
interests. There is always self-interest behind methodological madness.
That is because success requires heavy subsidies from special interests
who benefit from an erroneous, misleading or deceptive economic logic. Why
promote unrealistic abstractions, after all, if not to distract attention
from reforms aimed at creating rules that oblige people actually to earn
their income rather than simply extracting it from the rest of the economy?

Michael Hudson

Links and Notes:

{1}

http://krugman.blogs.nytimes.com/2009/12/18/why-economics-is-the-way-it-is/

{2} http://www.amazon.com/exec/obidos/ASIN/3980846695/counterpunchmaga

{3} John H Williams, Postwar Monetary Plans and Other Essays, third
edition (New York: 1947), from page 134.

{4} I have surveyed the methodology in “The Use and Abuse of Mathematical
Economics”, Journal of Economic Studies 27 (2000):292-315. I earlier
criticized its application to international economic theorizing in Trade,
Development and Foreign Debt (1992; new edition, 2009), especially chapter
11.

{5} Paul Samuelson “The Gains from International Trade”, Canadian Journal
of Economics and Political Science, Volume 5 (1939), page 205.

{6} William Vickery, Microeconomics (New York: 1964), page 5.

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