Capitalistic Musings | Page 3

laws of its internal
logic and the rules of logic "out there", in the real world.
e. Insightfulness - It must cast the familiar in a new light, mine patterns
and rules from big bodies of data ("data mining"). Its insights must be
the inevitable conclusion of the logic, the language, and the evolution
of the theory.
f. Aesthetic - Economic theory must be both plausible and "right",
beautiful (aesthetic), not cumbersome, not awkward, not discontinuous,
smooth, and so on.
g. Parsimony - The theory must employ a minimum number of
assumptions and entities to explain the maximum number of observed
economic behaviours.
h. Explanatory Powers - It must explain the behaviour of economic
actors, their decisions, and why economic events develop the way they
do.
i. Predictive (prognostic) Powers - Economic theory must be able to
predict future economic events and trends as well as the future
behaviour of economic actors.
j. Prescriptive Powers - The theory must yield policy prescriptions,
much like physics yields technology. Economists must develop
"economic technology" - a set of tools, blueprints, rules of thumb, and
mechanisms with the power to change the " economic world".
k. Imposing - It must be regarded by society as the preferable and
guiding organizing principle in the economic sphere of human
behaviour.
l. Elasticity - Economic theory must possess the intrinsic abilities to
self organize, reorganize, give room to emerging order, accommodate
new data comfortably, and avoid rigid reactions to attacks from within
and from without.
Many current economic theories do not meet these cumulative criteria
and are, thus, merely glorified narratives.
But meeting the above conditions is not enough. Scientific theories
must also pass the crucial hurdles of testability, verifiability,

refutability, falsifiability, and repeatability. Yet, many economists go as
far as to argue that no experiments can be designed to test the
statements of economic theories.
It is difficult - perhaps impossible - to test hypotheses in economics for
four reasons.
a. Ethical - Experiments would have to involve human subjects,
ignorant of the reasons for the experiments and their aims. Sometimes
even the very existence of an experiment will have to remain a secret
(as with double blind experiments). Some experiments may involve
unpleasant experiences. This is ethically unacceptable.
b. Design Problems - The design of experiments in economics is
awkward and difficult. Mistakes are often inevitable, however careful
and meticulous the designer of the experiment is.
c. The Psychological Uncertainty Principle - The current mental state of
a human subject can be (theoretically) fully known. But the passage of
time and, sometimes, the experiment itself, influence the subject and
alter his or her mental state - a problem known in economic literature as
"time inconsistencies". The very processes of measurement and
observation influence the subject and change it.
d. Uniqueness - Experiments in economics, therefore, tend to be unique.
They cannot be repeated even when the SAME subjects are involved,
simply because no human subject remains the same for long. Repeating
the experiments with other subjects casts in doubt the scientific value
of the results.
d. The undergeneration of testable hypotheses - Economic theories do
not generate a sufficient number of hypotheses, which can be subjected
to scientific testing. This has to do with the fabulous (i.e., storytelling)
nature of the discipline.
In a way, economics has an affinity with some private languages. It is a
form of art and, as such, it is self-sufficient and self-contained. If
certain structural, internal constraints and requirements are met - a
statement in economics is deemed to be true even if it does not satisfy
external (scientific) requirements. Thus, the standard theory of utility is
considered valid in economics despite overwhelming empirical
evidence to the contrary - simply because it is aesthetic and
mathematically convenient.
So, what are economic "theories" good for?

Economic "theories" and narratives offer an organizing principle, a
sense of order, predictability, and justice. They postulate an inexorable
drive toward greater welfare and utility (i.e., the idea of progress). They
render our chaotic world meaningful and make us feel part of a larger
whole. Economics strives to answer the "why's" and "how's" of our
daily life. It is dialogic and prescriptive (i.e., provides behavioral
prescriptions). In certain ways, it is akin to religion.
In its catechism, the believer (let's say, a politician) asks: "Why... (and
here follows an economic problem or behaviour)".
The economist answers:
"The situation is like this not because the world is whimsically cruel,
irrational, and arbitrary - but because ... (and here follows a causal
explanation based on an economic model). If you were to do this or that
the situation is bound to improve".
The believer feels reassured by this explanation and by the explicit
affirmation that there is hope providing he follows the prescriptions.
His belief in the existence of