The New Priesthood: An Interview with Yanis Varoufakis Part I

Yanis Varoufakis is a Greek economist who currently heads the Department of Economic Policy at the University of Athens. From 2004 to 2007 he served as an economic advisor to former Greek Prime Minister George Papandreou. Yanis writes a popular blog which can be found here. His treatise on economic theory ‘Modern Political Economics: Making Sense of the Post-2008 World’, co written with Nicholas Theocrakis and Joseph Haveli is available from Amazon.

Interview conducted by Philip Pilkington.

Philip Pilkington: Without getting into too much technical detail what is it that you refer to in your book Modern Political Economics: Making Sense of the Post-2008 World the ‘inherent error’ in all economic theories and models?

Yanis Varoufakis: The essence of the economists’ inherent error is that they erred into thinking it is possible to tell a credible story about how values and prices are formed in complex (multi-sector) economies that grow through time. For decades economists struggled to produce such a narrative. But all their best laid plans for piecing it together crashed on the shoals of indeterminacy. Put simply, their mathematical models could not be solved. At that point economists did one of two things: Either they accepted that it could not be done, or they introduced hidden (and sometimes not to hidden) assumptions that ‘closed’ their model at the expense of credulity (e.g. an assumption that the economy comprises a lone Robinson Crusoe-like figure, or a single commodity, or that all exchanges occurred in a timeless universe and at a flash of a fleeting moment). The former scholars were forgotten by history, as their papers never saw the light of day. The latter built up careers, sometimes radiant ones. Alas, their economics were riddled with only thinly disguised ‘tricks’ the purpose of which was to disguise economics’ ‘inherent error’.

PP: One consequence of this is that you believe a meaningful theory of value cannot be established, right? In this estimation both the old Marxist/Ricardian labour theory of value is as meaningless as the supposedly sophisticated marginal theory of value. Can you give a gloss on why this is the case and what consequences it has for political economy?

YV: Allow me to be tactful about what our book refers to as the economists’ inherent error (including Ricardo’s and Marx’s): If a theory of value cannot be ‘closed’ properly (or embedded in a mathematically appropriate manner) within a theory of growth, then we have to cut corners to do it.

Neoclassical economists cut corners either by telling stories about how an economy creates relative prices in the absence of time, or by narrating the real-time growth of some single-sector or single-individual economy. Ricardo and Marx, in contrast, allow for different sectors to grow concurrently but introduce a single sector economy through the backdoor by implicitly assuming that the degree of capital utilisation in the same across all sectors (so as to ensure that profit rates are also equal across sectors). In the end, the same inherent error rears its ugly head and pushes economists into interminable debates of little or no value. The consequence of this, for political economics, is that we get absorbed in a self-referential, introverted mindset that allows us to lose sight of a really-existing capitalist reality which refuses stubbornly to fit into well-behaved models.

PP: You mention that economists seem to always want to ‘close’ their models. This appears to me to be a somewhat desperate desire to create a deterministic system. Yet, even in physics determinism is generally recognised to be incomplete and ‘open’. Why are the economists still stuck back in the 19th century in this regard?

YV: All model builders have a natural tendency to ‘close’ their models. When we see a system of equations we immediately wonder whether it can be solved. When (and if) we discover a solution –‘closure’ in other words – we feel a sense of pride and, even, joy. So, yes, if you are in the business of building models, it is natural to aspire to mathematical ‘closure’. This aspiration comes natural to all: mathematicians of course but also economists and physicists (the latter have been, after all, gunning for the Theory of Everything for a long, long while). The difference between economists and physicists lies not in their ambition to ‘close’ their models. It lies in the following:

Physics is blessed with an object of study – let’s call it Nature – that does, normally, not give a damn about the physicists’ theories of it (the Heisenberg Principle excluded). This means that Nature provides an impassionate assessor of the physicists’ models. If their models have been ‘closed’ in a manner that defies logic (i.e. by means of illegitimate hidden axioms), then Nature will expose them. It will defy their predictions in the laboratory (or thought the telescope) in a manner that forces the physicists back to the drawing board. So, if a particular model cannot be ‘closed’ (because it is not solvable), Nature will ensure that the physicists come clean and admit that this is so.

Economics on the other hand, by virtue of being a social science, is caught up in the famous infinite regress problem. What this means is that there exists no neat separation between (a) the economists’ object of study and (b) our theories about it. Indeed, our theories are part and parcel of the world of phenomena that we are trying to theorise about (unlike a theory of thermodynamics which is quite independent of the thermodynamic phenomena under study). Thus, on the one hand, our models can never be properly ‘closed’ (since they are, by construction, ‘open’ theories/beliefs about theories/beliefs etc.) while, on the other hand, when they are illegitimately ‘closed-shut’ by the economists (by means of hidden axioms whose purpose is to ‘close’ the damned models at all cost) there is no objective test that can either confirm or deny the validity of these models. Put differently, the Social Economy can never come to an objective verdict on our economic models (e.g. on some theory of bond markets) simply because these models are an intimate part of our Social Economy (i.e. of the larger game within which agents form beliefs about particular bonds and about the bond market in general).

This great difference between physics and economics means that, whereas physicists gain their discursive power in society from managing to explain and to predict the world we live in, the economists gain their discursive power exclusively from:

(i) convincing the rest (who are not sophisticated enough to be able to discern that they managed to ‘close’ their models utilising logically incoherent and well hidden axioms) that they managed successfully to ‘close’ their models, and

(ii) the great utility that these models offer to financiers who use similar models in order to pretend to value risky assets (e.g. CDOs)

(iii) the political utility offered by these ‘closed’ models to anyone who wants to argue that capitalism is a socio-economic system as natural as Nature itself, and thus amenable to the 19th century mechanistic approach which helped humanity conquer electromagnetic and other such natural phenomena.

PP: But some might say that the economists DO have a reality to contend with and that reality came screaming back in 2008. This certainly isn’t the first time that a crisis has occurred and yet economists remain evasive or they arrogantly assert that their models can in fact deal with it, when it is clear to any objective observer that they cannot. Does this not indicate that there is something fundamentally different happening in the economics profession?

YV: Economists may very well have a ‘reality’ content, to the extent that they are creatures of this really-existing world. The problem is that their own circumstances, within this reality, are improved significantly the less their own models of this reality has to do with actual… reality. In other words, the economics profession concentrates its rewards (tenured positions, large research grants etc.) onto the economists whose models subscribe to certain norms. The most important of these norms is that the truth of the offered economics be self contained within ‘closed’ models whose ‘solution sets’ are rather narrow. To meet this demand economists must ensure that their models leave no room for inconveniently open-ended phenomena like… crises.

This leads us to the question (that you pose): So, how do economists respond when some real crisis hits? How do their account for the fact that when their model had left no room for it? The fascinating answer is that they assume the crisis to have been the result of a random ‘disturbance’. Something like a meteor falling on an otherwise harmonious Earth; an event that is to be untheorised per se. Then, they employ all their mathematical prowess in order to ‘study’ how the ‘system’ (i.e. capitalism) absorbs this shock. As you may imagine, the result of this ‘recovery’ path is founded on assumptions which can only yield one plausible answer: The process of adjustment to the shock of the crisis is best left to the markets which, prior to the crisis, were assumed incapable of causing a crisis!

PP: That’s really twisted. How do you think students are responding to this chicanery after the crisis? And maybe you could say something about how students are imbued with this mindset in the first place.

YV : There have been some interesting studies that reveal how common decency and ‘other’-regarding norms are weeded out of students of economics very early in their undergraduate career. Take the example of the generalised prisoner’s dilemma below:

Young men and women are given some money (e.g. $10) and asked to contribute (each one separately from the rest, and in perfect anonymity) all or part of it to a common purse. Then, the contents of the purse are multiplied by the factor of, say, three and the contents redistributed among all of them independently of their contribution. Clearly, the best outcome for the group is that each contributes all of his or her windfall to the common purse and, that way, each gets a return three times as large. The problem here is that there is a temptation to let others contribute while you do not (since that way you get your share of three times of their contributions and, to boot, you have also kept your own money).

What we find in experimental studies involving real students, who play the above game with real money, is something quite startling: students of economics were significantly less willing to contribute to the common purse. Moreover they were more pessimistic about the prospects that others would contribute! So the question arose: Is it that economics attracts the less cooperative, more ruthless young persons? Or is it that exposure to economics makes them relatively more ruthless, pessimistic and aggressive?

To find out, the experiments were repeated separately for first semester first year undergraduates (before they were ‘contaminated’ with economics or other subjects) and for students who had just graduated. Guess what: Amongst the fresh(wo)men who played the game, the ones that had chosen to major in economics did not behave differently to the rest. They were equally willing to contribute. Therefore no evidence was found supporting the hypothesis that economics attracts misanthropes. On the other hand, amongst graduates those with an economics training stood out from the rest: they were much less likely to contribute, and more pessimistic about the others. The conclusion is inescapable: a training in economics significantly increases the probability that a person becomes less sociable, more aggressive, less cooperative; in short, miserable.

Why and how is this indoctrination taking place? The answer is simple: Economists are all about creating determinate models; ‘closed’ models that predict behaviour. To do this, they need to assume a particularly narrow minded form of rationality (which I call ‘instrumental rationality’): you are rational to the extent that you deploy your means efficiently in the pursuit of given objectives. When a young person is told repeatedly that to be rational means to be ruthlessly instrumental (i.e. to treat others as a means to one’s own ends), and that contributing in this game is for sissies (or, more ‘scientifically’, irrational), is it any wonder that a training in economics makes young persons more brutish and nastier?

The end result is that youngsters with a heightened sense of civic responsibility either drop out of economics, in a bid to retain it, or manage gradually to shed it; to adopt ‘instrumental rationality’ in their own daily life and mindset. Suddenly, the models begin to shape the modellers, rather than the other way round. It is a subtle process of change that turns economists into simulacra of themselves in a hopeless pursuit of ‘closed’ models that validate their own sad ‘conversion’. Seen from a different perspective, what we have here is a remarkable Darwinian process that guarantees the survival and dominance, within economics departments, of the anti-social, aka instrumentally rational, fools.

As for the Crisis and its effects on economics students and departments, I am afraid it has done nothing to ameliorate this Darwinian mechanism within existing economic departments. The norms of instrumental reasoning are so powerful that not even the earthquake of the Crisis has had the power to unsettle them. I have a hunch, however, that what the Crisis will do is speed up further the rate of decline in the number of youngsters interested in studying economics. This is the good news. The bad news is that they will not turn to other social studies but to pseudo-disciplines like marketing, business, advertising etc.

PP: That’s fascinating, let’s continue to run with this for a moment. If what you say is true – and I believe the evidence is unquestionable in this regard – then economics is not a science whatsoever. It more so resembles a school of morality or even a philosophical cult. The old Greek Stoics spring to mind. They were a school of philosophy that not only taught certain ideas but demanded that their followers live these ideas in their day-to-day lives. But in economics the students aren’t even told that they’re signing up for a moral vision, a sort of religion or belief system, they’re told that they’re being initiated into an objective science. Perhaps you could reflect a little in that direction and its implications?

YV: Quite so. It is a priesthood that truly believes it is not a priesthood but, rather, a community of scientists. How do they manage to maintain this delusion? The simple answer is because their incantations involve rather advanced mathematics and their rituals are steeped in statistical tests and projections.

Indeed, in aesthetic terms, the economists’ papers, models, presentations seem indistinguishable from those of physicists, bio-statisticians etc. The only difference is that, unlike the latter, economists generate nothing more than analytical propositions about economic variables which are, as Popper would have pointed out, profoundly non-falsifiable. And here is the rub. Once their non-falsifiable (and thus non-verifiable) propositions are expressed, the statistical tests that follow (usually referred to as econometrics) give economists a great excuse to imagine that their models have been tested. But tested they never are!

Let me explain this in more detail, as it goes to the heart of your question: The economist first builds a model – say: M – that seeks to explain one or more variables (e.g. wages and employment). Once that complex mathematical model is ‘solved’ (just like a system of two equations in two unknowns, y and x, can be solved by means of a function that links y to x; e.g. y = 3x+5), a so called ‘reduced form’ equation (or system of equations) is derived from that solution. Let’s call this R. What economists are good at doing is demonstrating that R corresponds to M (i.e. when the mathematical relationship R holds, this is consistent with the solution of model M). The virtue of R is that is can be checked statistically: data is collected and used to show that, indeed, there is no evidence that R does not hold in real life. At that point, the economist celebrates with yelps of joy: “My model M has been proven to be consistent with reality.” Alas, what the economist forgets to add is the crux of the matter. And what is that? Two crucial facts:

(a) There is a plethora of models, in addition to M, that are also consistent with R. Which means, naturally, that there has been no demonstration whatsoever that model M has been verified (since an infinity of alternatives could explain R just as competently). Now, of course this is also true in non-experimental sciences like astronomy. Yet, economics is unique. This is why:

(b) Model M, like all possible economic models, can only squeeze their ‘reduced form’ R out of their edifice if dodgy assumptions are made regarding time and/or complexity; i.e. only if they axiomatically dismiss what I call the economists’ ‘inherent error’. The practical importance of this is that the imposition of these assumptions may have succeeded in deriving R out of M but that success is bought at the price of having lost any capacity to predict what a complex economic phenomenon will generate (as outcomes) in the future (recall that if you account properly for both complexity and time in model M, no R is possible). It is in this sense that, as I claimed above, no test of M’s predictive capacity (regarding events unfolding in real time) is possible.

This is a most peculiar failure: The hapless economist uses the same tools as acclaimed physicists and astronomers. She has trained for years to speak precisely the same language as them, to understand the same advanced mathematics, to deploy most complex statistical methods which are an essential part of the scientific toolbox. It is, understandably, incredibly difficult to accept that her work is a form of higher order superstition; a religion couched in the language of mathematics and statistics. Tragically, this is precisely what it is. Come to think of it, what is it that separates science from mythology? The fact that scientific propositions are not self-referential. That, in science (unlike in mythology), when the facts clash with the theory it is too bad for the theory.

E.E. Evans-Pritchard (the famous anthropologist) once offered a brilliant insight into the social success of the priesthood within the Azande society. The question he asked is similar to yours (regarding economists): If they get it so wrong so often, how should we explain their continuing dominance? When the Azande priests and oracles failed to predict or avert disasters, why did people continue to believe them? His explanation of the Azande’s unshakeable belief in witchcraft, oracles and magic goes like this:

Azande see as well as we that the failure of their oracle to prophesy truly calls for explanation, but so entangled are they in mystical notions that they must make use of them to account for failure. The contradiction between experience and one mystical notion is explained by reference to other mystical notions. Evans-Pritchard in his Witchcraft, Oracles and Magic among the Azande, 1937

Economics, I submit to you, is not much different. Whenever it fails to predict properly some economic phenomenon (which is more often than not), that failure is accounted for by appealing to the same mystical economic notions which failed in the first place. Occasionally new notions are created in order to account for the failure of the earlier ones. For instance, the notion of natural unemployment was created in order to explain the failure of the market to engender full employment and of economics to explain that failure. More generally, unemployment and excess demand (or supply) is ‘proof’ of insufficient competition which is to be fought by the magic of deregulation. If deregulation does not work, more privatisation will do the trick. If this fails, it must have been the fault of the labour market which is not sufficiently liberated from the spell of unions and government social security benefits. And so on. The fact that these ex post rationalisations of theoretical failure are narrated in mathematically complex language, and accompanied by myriad statistical ‘tests’, adds to their social power to silence critics without and doubts within.

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  1. Peter Dorman

    In most respects, Varoufakis’ argument is the same as my own, that economists do not really adhere to the admonition, central to real sciences, that Type I error (the risk of false positives) should always be minimized. “Is consistent with” is hardly equivalent to “the risk of false belief is minimal”. See:

    I disagree slightly, however, about the interpretation of econometrics. I often skip the theory part of an empirical economics article and go straight to the data analysis. Economists often do uncover interesting and important patterns in the data; their tools are mostly useful in separating wheat from chaff. What is seldom of value, for the reasons Varoufakis gives, are the theoretical interpretations economists tend to give to the patterns they find.

    Perhaps the reason I see more usable stuff in academic economics is that I work mainly in applied micro, where the explosion of giant datasets has been revolutionary in itself. On the macro side, where data are sparser and econometrics leans more heavily on “theory”, the landscape is pretty bleak.

    1. Knut

      I would have thought that the real culprit here is the use of simulations to ‘test’ the validity of theories. I can’t count the number of seminars I’ve attended over the past 15 years in which the speaker sets out his ‘idea’ in a simple model, pulls parameter values from hither and yon, and then ‘simulates’ the model, comparing it with the so-called ‘real’ data (which by the way are the ultimate source of the parameter values). Then, if the fit is visually ‘close’ (and I never knew precisely what ‘closeness’ means here), the model is considered to be verified (or at least not contradicted).

      There is something fundamentally fishy about this procedure. I think a trained philosopher could make mince-meat of it.

      1. MonkeeRench

        “There is something fundamentally fishy about this procedure. I think a trained philosopher could make mince-meat of it.”

        A trained philosopher did, many years ago — he called it ‘non-falsifiability’ (Karl Popper).

  2. Mark P.

    Varoufakis: ‘Take the example of the generalised prisoner’s dilemma below: Young men and women are given some money (e.g. $10) and asked to contribute (each one separately from the rest, and in perfect anonymity) … to a common purse…. Clearly, the best outcome for the group is that each contributes all of his or her windfall to the common purse and, that way, each gets a return three times as large. The problem here is that there is a temptation to let others contribute while you do not (since that way you get your share of three times of their contributions and, to boot, you have also kept your own money).

    ‘What we find in experimental studies involving real students of economics … were significantly less willing to contribute to the common purse.’

    This is interesting.

    But, gee, Philip. Why didn’t you confront Varoufakis and explain to him that all game theory-based analysis like this is a “disease,” as you termed it in your post ‘Sexual Politics and Child’s Play – The Absurdity of Game Theory’ a couple of days back?

    1. Philip Pilkington

      I did in private. Although not quite in those words. I said that it was a complete nonsense way of viewing the world. He largely agreed. We had an interesting discussion about Nash and his motivations for developing the theory too.

      It is by teaching ‘games’ like PD that produces the toxic mindset that Yanis describes above.

      Yanis discusses game theory more in the Part II of the interview. Stay tuned. You might not like what he says though.

  3. K Ackermann

    Excellent interview!

    And by putting forth a model of nothing, they can do more damage than had the model never been invented.

    A company reports two good pieces of news: 1) Profits are higher than last year, and 2) They are higher despite the average salary in the company having risen sharply higher.

    Well that’s great news… that’s how it should be done, says the politician.

    How did you do it, asks the competitor.

    Simple, they answered. We laid off all lowest paid employees and gave the work to even cheaper labor overseas.

    Profits rise, average pay rises, but the country now pays unemployment to a bunch of people.

    Economics will break us all.

    1. F. Beard

      It’s banking that’s killing us. Without the counterfeiting cartel to borrow from it is likely that corporations would have to pay their workers with common stock. And if that were the case then how likely is it that owner-workers would support management that planned to outsource their jobs UNLESS it would benefit those owner-workers?

      Long ago, it was decided that stealing the population’s purchasing power was expedient for the good of the country. You know what the say about the road to Hell being paved with good intentions?

  4. Paul Tioxon

    From the last paragraph entry on “Deferent and epicycle”:

    Slang for bad science

    In part, due to misunderstandings about how deferent/epicycle models worked, “adding epicycles” has come to be used as a derogatory comment in modern scientific discussion. The term might be used, for example, to describe continuing to try to adjust a theory to make its predictions match the facts. According to this notion, epicycles are regarded by some as the paradigmatic example of Bad Science.[20] Part of the problem may be due to the misconception of the epicycle as an explanation of a body’s motion rather than merely a description. Toomer explains as follows,

    “Whereas we use ‘hypothesis’ to denote a tentative theory which is still to be verified, Ptolemy usually means by ύπόθεσις something more like ‘model’, ‘system of explanation’, often indeed referring to ‘the hypotheses which we have demonstrated’.”

    There is a reason why there is also sociology and political science, in addition to economics, together they form an adequate minimum understanding of the human condition in total. Economics, in addition to its ideologically driven set of transgressions which place you outside of the mainstream, has problems with establishing its scientific bona fides. Its power to explain and describe the business goings on and predict what will happen when changes occur to the standards of operation on the scale of society should speak for itself. However, the fact that it can not predict and avoid depression after depression and banking collapse after banking collapse speaks for its lack of scientific rigor and useless practical value. The social order must be maintained and to do so requires that we understand it as clearly as we understand how a clock keeps time. Economics as practiced in the USA and most of its allies only mystifies people as to how money should be invested, safely saved for retirement or even raised for simple public purposes such as education and transportation. People know less and less about their money, their jobs and the economy than they do about how to correctly cook a turkey on Thanksgiving. That information seems to be competently disseminated to 310 people consistently even when they only prepare this dish once a year. Economics becomes less and less understood due to the conflicting pronouncements and obvious gap between everyday experience and the messages delivered by the media.

  5. DiSc

    This article pretty much sums up my experience as an Economics undergrad. I thought much of that when I was sitting in class, although I probably could not have worded it that well. And in the end I did drop out, although I cannot say I was completely immune to econospeak – it was me against the rest of the world, and I had to adapt.

    Then came 2008 and I thought – ah, now they will be forced to admit that there is something deeply wrong with everything the Mankiw & Gang were saying (I hated the Principles of Economics, although as I understand it, Mankiw the economist is much saner than Mankiw the book author). But no, we got more of the same.

    In the end I think the Crisis – and the ones that will follow until the academia fixes the theory and politicians implement better policies – will bring about a radical change in Economics, which will go back to being a branch of History of Philosophy. But many prominent economists will have to pass away before that happens.

    1. Travis Fast

      As currently constructed economics is not sufficiently reflexive or social to qualify as a social science. Economics, as currently constructed, however, is a very interesting and legitimate object of social scientific inquiry.

      1. They didn't leave me a choice

        Excuse me, but how can a religion like economics be a “legitimate object of social scientific inquiry” as anything but a case study for anthropologists?

  6. Mack

    Nice interview. I’m surprised that no one has yet noted that the basic point here is one of the main themes of ‘Econned’ — that a central problem with modern economics is that it’s social science masquerading as hard science. Which is mainly an issue because of the outsized influence of economists on government policy.

  7. fresno dan

    “As for the Crisis and its effects on economics students and departments, I am afraid it has done nothing to ameliorate this Darwinian mechanism within existing economic departments”

    As I said, economics is a religion

  8. Schofield

    Since it’s easier and theoretically more efficient to learn from each other by taking on board deductive arguments than engaging in our own inductive line of reasoning many disciplines are vulnerable to using the former rather than the latter economics being no exception. Even science is vulnerable with the materialistic or physicalist argument for the orgins of life which consistently fails to show how the “software” part (algorithms in genetic coding) comes into being to interact with the “hardware” part. Curiously the economists who were early to predict this current Great Global Recession and the breakdown of the Euro, people like Wynne Godley, 1998 and 1992 respectively were very mindful of accountants book-keeping, the process of balancing accounts, which is by its nature an activity that involves not just deductive reasoning but a high degree of inductive reasoning. A dealing with facts rather than just suppositions hence Godley’s name for his modelling insights the famous Three Balances Model.

    There’s another line of argument though we should take into account. We use deductive arguments to establish tribal or group bonds. Our limited capacity to get to know more than about 150 individuals well enough to figure out who we can trust and who we can’t (Robin Dunbar argument) means the use of shorthand deductive argument bonding helps cement the trust process. It also results in phenomena such as 15% of the world’s 7000 languages being found in Papua new Guinea, a land mass the size of Texas. I mean if you aren’t sharing a whole bunch of deductive arguments of great significance (religious, technological, etc.) to you why bother separating your tribe off from others through a separate language? Maybe protecting your deductive beliefs by differentiating your language aids establishing your ecological niche in the world. Inductive belief, however, would quickly show you everybody was at it not just your tribe!

  9. craazyman

    Yeah but its so much fun to be on TV and get paid a lot of money.

    I survived economics and retained my instinctive altruism probably because I was a terrible student and did not learn a damn thing. Or it may have been the invisible hand of a benevolent diety steering me away from the rocks and shoals of cult-like indoctrination — and directly into the keg party.

    It would be better if these dudes wore long cloaks with hoods and pendant necklaces with shrunken heads and jeweled eyes.

    I’ve seen the same hideous soul crushing energies in the financial business. You put some people in proximity to money and they start thinking it’s theirs and that they made it through their incredible brilliance. And that possession elevates their status closer to god than man. Heaven needs a guard because the lord is fragile.

    It’s like an exoskeleton of rigid invisible shimmering hysteria. Ready to snap and break when they encounter slothfullness in service of their wants. The horror of inefficiency, the sin of lassitude, the urge to punish in devine retribution.

    I guess now the money is theirs and economists helped. Aztec pyramid dreams. Dreams of blood money life force domination and extraction through equations. The eyes together are never the We.

  10. achilleas

    What is the point of this article? To blame the profession?

    Yves did some critique and she even included the super basic Robinson Crusoe model in her book to support her point. But it’s REALLY sad to see academic economists do the econ vs. physics comparison.

    (most) economists understand the limitations of their models and most importantly understand why models are built, which is mainly to give structure to abstract thoughts. Whether economics is a science or not it’s just an issue of semantics. What do we mean by science???? Let’s say economics does not satisfy the definition of science, so what? It’s importance is still massivve.

    The fact is that this priesthood has helped to a huge extent our understanding of economics and therefore improve our standard of living which is what matters

    1. Philip Pilkington

      “The fact is that this priesthood has helped to a huge extent our understanding of economics and therefore improve our standard of living which is what matters.”

      Really? Do you REALLY believe that? Wow. Takes balls to say that these days.

    2. IdahoSpud

      Can you please enlighten me on how the field of economics has improved my standard of living?

      1. Attitude_Check

        If you understood economics you would know. If you dont understand economics, then it cant be explained to you. ;P

    3. DiSc

      Ah nice to read you write that. It reminds of my youth, when my mom would say stuff like that about the Soviets, my father about Mussolini, my grandma about the Catholic church, and my hippie neighbor about Falun-Gong.

      I wish I could indulge in such psychotic allucinations as well, life would be so much more tolerable.

    4. jake chase

      Achilleas: The models of economists do not suffer from “limitations”. The models are contrived to produce bogus conclusions sympathetic to a class of corporatist parasites which provides the economists with cushy sinecures provided they toe the corporate line. Utter divorce from reality is hardly a “limitation”. Debt slavery in a world of worthless junk should not be confused with a rising standard of living. What planet do you inhabit?

    5. diptherio

      “What do we mean by science????”

      Well, for starters it must produce falsifiable statements. Economics fails utterly on this count. A system that produces non-falsifiable statements is not a science but a system of circular-reasoning.

      E.g. individuals are utility-maximizers. This statement is non-falsifiable in economics since non-maximizing behavior is explained by recourse to broader definitions of utility. Therefore, any possible action is defined as utility-maximizing, which provides zero information about how people actually behave, since in economic doctrine it is true by definition. Nevertheless, economic models are built up around this non-falsifiable bit of intellectual hokum, and policies are prescribed on the basis of these models.

    6. Susan the other

      But the argument we are having today is about the idiotic crisis from 2007 to 2012 when the Credit Bubble burst. It was allowed to happen due to economic “theory. To say that “economics” is what lead us out of the dark ages is nonsense. It was social cooperation. Period.

    7. scraping_by

      “The fact is that this priesthood has helped to a huge extent our understanding of economics and therefore improve our standard of living which is what matters”

      Who’s “us”?

      It would be interesting to compare the amount of econspeak in the public press and the continuing impoverishment of the majority in favor of the minority. Certainly there is talk of “theories” behind the dismantling of the New Deal. All models seem to have but one result, so it’s hard to believe it was an accident.

      In ages past, say thirty years ago, it was understood and plainly stated there was a difference between “economics” and “business”. This is usually portrayed as undereducated managers and small business owners losing out on theoretical gains possible by following abstract models. Turns out it was the inability of academic economics to say anything useful to practical economics, the real world provision of material goods.

      Isn’t it odd as economic debate grew more abstract, say the Laffler curve onward, the middle class started falling and the elite began battening.

  11. dbak

    Too much heavy thinking here. Economists are really trying to predict the future. No one has ever been able to do that. But if you make a few lucky guesses and dress it up with an plausable theory that’s not science, but it looks good.

    1. F. Beard

      Economists are really trying to predict the future. dbak

      I’d like to predict the future
      but it’s certain if I do
      that the One who own’s the future
      might pull a switch-er-roo.

    2. Susan the other

      Then they should concede that predicting the future is not what they should be doing under the primitive paradigm currently in use. Cart before horse.

    3. No Know

      Where’s Jack Nicholson when you need him…”You want the truth, you can’t handle the truth”

    4. Jim

      dbak, on point.

      As Emanuel Dermans argues in “Models Behaving Badly”….


      Physics Envy
      Creating financial models involving human behavior is like forcing ‘the ugly stepsister’s foot into Cinderella’s pretty glass slipper

      The basic problem, according to Mr. Derman, is that “in physics you’re playing against God, and He doesn’t change His laws very often. In finance, you’re playing against God’s creatures.” And God’s creatures use “their ephemeral opinions” to value assets. Moreover, most financial models “fail to reflect the complex reality of the world around them.”

    5. steelhead23

      If it was merely predicting the future that they would do, I’d be just fine with mainstream economists – the world is filled with soothsayers. But some of them hold decision-making positions and thus they are not merely soothsayers, but creators. Think Bernanke. Is there anything more dangerous to civilization than ideologues with power? Heaven help us.

  12. achilleas

    It is really easy to blame models if you dont understand the reasons that make them necessary. Yes the models reflect all the cultural, political, whatever biases of the authors but thats why we have so many different models.

    Jake yes you are right. Actually the word limitation is wrong. Models are much less ambitious in trying to explain the world than perceived.

    I missed the constructive part of dr. Varoufakis post, I assume it will appear in post #2?

    1. Philip Pilkington

      I understand models perfectly well. But they are not necessary. They are only necessary to close down thinking and miss what’s really going on the economy. Like… you know… 99% of the profession did in the past 30 or so years.

      1. doug

        So why don’t you enlighten us on how we are supposed to try to understand the “economy”; it inputs, outputs, and the processes that connect the two. And don’t use models!

        1. Susan the other

          Why do we even need models when we have computers to analyze all the transactions in reasonably good time?

        2. Knut

          Until you can tell us precisely what you mean by ‘understanding the economy’, your point is nonsense.

          1. Knut

            I would add that this requires explaining two very problematic terms: ‘understanding’ and ‘economy.’

        3. Philip Pilkington

          Eh… you conceptualise it without models. Duh. So, all else being equal, if the economy is at full output/employment and wages rise, prices will rise. Does that require a model? No. It’s just a relation.

          Just the same, the Fisher identity explains quite a lot when used properly, but its just a relation.

          So, understand the rules governing relations. Easy.

          A model is like a story. It has a beginning, a middle and an end. If you don’t conceptualise the economy in terms of telling a story, you just get it relationally. People do this for all other forms of knowledge. Why not economics?

          1. Philip Pilkington

            Also, I don’t see any ‘model’ in Keynes’ General Theory. If he could make THE economic statement of the century without a model… well, just MAYBE we don’t need models.

          2. Me

            doug (March 1, 2012 at 1:17 pm):

            “So why don’t you (i.e. Philip Pilkington) enlighten us on how we are supposed to try to understand the ‘economy’; it inputs, outputs, and the processes that connect the two. And don’t use models!”

            Philip Pilkington replies (March 1, 2012 at 3:25 pm):

            “Eh… you conceptualise it without models. Duh. So, all else being equal, if the economy is at full output/employment and wages rise, prices will rise. Does that require a model? No. It’s just a relation.”


            Me: JUST A RELATION!!??

            Bravo! Best joke ever. LOL.

            That was a joke, wasn’t it?

          3. Kukulkan

            Philip Pilkington wrote:
            Eh… you conceptualise it without models. Duh. So, all else being equal, if the economy is at full output/employment and wages rise, prices will rise. Does that require a model? No. It’s just a relation.

            No, that’s a correlation. If you’re suggesting there’s a relationship between full employment, wages and prices, then you’re invoking a model.

            A model is like a story. It has a beginning, a middle and an end.

            No, a model is like a game. It has inputs and outputs, but what happens is determined by how the rules of the game deal with the inputs. The rules of the game are an attempt to describe the relationships between various factors that operate in reality.

            People do this for all other forms of knowledge. Why not economics?

            Because the other forms of knowledge where people do employ models – such as the sciences – have proven to be remarkably productive and have advanced by leaps and bounds, while those where they don’t, preferring instead to conceptualise things in terms of relationships – such as theology – haven’t advanced much at all.

            Perhaps, given the rather nasty consequences that economics can lead to, some people think it’s worth trying to understand how it works, rather than just preferring to tell stories about it.

          4. Philip Pilkington

            This is semantics. When the word ‘model’ is used in economics it refers to restricted assumptions models like the Philip’s Curve, DSGE or the ISLM. Anyone engaged in economics debate knows this. While we can cast a wide net and call everything a ‘model’, most economists know exactly what I mean when I say that I reject models.

          5. Philip Pilkington

            P.S. By your definition theology does have ‘models’. By your definition every semi-constant relationship that the human mind can conceive of is a ‘model’. Anyway, enough of this pseudo-philosophising.

        4. steelhead23

          Arghh! I tend to get a tad irritated when otherwise intelligent discussions turn into semantics diatribes. A model, any model, is merely a conceptualization of reality. As a professor I once had was fond of saying: “All models are wrong, some are useful.” The problem with economics models lies in their assumptions, the first and foremost being that we (individuals) are marginal utility maximizing robots. Then comes that damned equal sign when an “if you ignore all other throughputs” disclaimer is needed (e.g. the mine was highly profitable but created a superfund site). The problem with models is that few thoroughly investigate the validity of their underlying assumptions (e.g. humans as marginal utility maximizing robots). Math is cool. It facilitates analysis – but authors should not confuse the mathematical precision of their models with their reflection of reality. It ain’t necessarily so.

          1. Me

            “…think I missed the ‘funny’ there…”

            You mean… that wasn’t intentional?!

            Seriously, now.

            When you mention a “relation” you are mentioning a mathematical/logical object: a model. Even if stated verbally, like “energy is directly proportional to the square of the speed of light”.

            Or when saying that demand falls with price. A way of translating that into mathematics is saying that demand is a decreasing function of price: demand = f(price) where first derivative of f respect to price is negative.

            steelhead23 got close.

            Learn Philip, so you can avoid the embarrassment.

      2. No Know

        Sounds like the bottom line is, to paraphrase the droll comedian Steven Wright, “99 percent of economists give the rest a bad name”.

      3. Mark P.

        Philip P. wrote: “I understand models perfectly well. But they are not necessary. They are only necessary to close down thinking and miss what’s really going on the economy. Like… you know… 99% of the profession did in the past 30 or so years.”

        This is _your model_ of how models work, my friend.

        1. Philip Pilkington

          Cast that wide a net and obviously you’ll always be right. Why not say that my grammar is a ‘model’ for understanding language? Since I use it to describe the economy I must thus use models to understand the economy… Easy way to win an argument, no?

          Also a complete load of rubbish. When I say ‘models’, I mean restrictive assumption models like ISLM, the Philip’s Curve or DSGE.

          1. Mark P.

            Humpty Dumpty “When I use a word it means exactly what I want it to mean, nothing more and nothing less.”

            Philip P: “When I say ‘models’, I mean restrictive assumption models like ISLM, the Philip’s Curve or DSGE.”


            Science Dictionary
            model : –
            A systematic description of an object or phenomenon that shares important characteristics with the object or phenomenon. Scientific models can be material, visual, mathematical, or computational and are often used in the construction of scientific theories. See also hypothesis, theory.

    2. YankeeFrank


      Wait wait. We haven’t received a response yet to our questioning of your preposterous assumption that neoclassical economics has made us more prosperous. How have your precious models and neoclassical economics done anything good for the world? I can see how Keynesian economics has improved the lot for many, but neoclassical econ, and its ugly implementation via neoliberal economic programs has taken large parts of the world and turned subsistence communities into nightmare shanty towns of disease, starvation and death. It has also justified the massive stagnation and decline in living standards in the west over the past 40 years. The middle classes in the west are disappearing faster and faster, all due to neoliberal dogma. Privatization as theft, plundering and looting of the commons, corruption of government, morality stood on its head: these are what I see as the legacy of your neoclassical mess. Please, tell us how this has helped the world… We’re waiting.

    1. Philip Pilkington

      Don’t give me that rubbish. There’s a whole alternative research program that we document regularly on this site. And it generally shuns models.

      1. yann

        Just to clearify your remark and from genuine interest: Do you also dismiss the evolutionary economics program which is much more open and less deterministic than the mainstream but also include model building and simulation? Tony Lawson, from his critical realist perspective, does support evolutionary economics but dislikes econometrics. The evolutionary guys I met on the other hand use econometrics (though not necessarily in the mainstream way of an average representative agent but looking on distributions, emergent properties etc.) Any views on that?

        1. Philip Pilkington

          More of the same, for the most part. Slightly better approach than neoclassical economics, only because the restrictions from neoclassical economics are so suffocating. But I have never really come across an economic model that did anything more than shut down thinking and blind people to real world problems.

          1. Philip Pilkington

            Here’s a great quote from an unpublished paper by Professor Fred Lee that I’m reviewing for an upcoming piece that sums up most modeling well:

            “The reliance on techniques and models is the continuation of a secular trend in which mainstream theory has become increasingly separated from its subject matter and progressively engaged in articulating properties of internally generated models. Thus, the mainstream’s method of evaluating its fictional theories is to compare the projected fictional outcomes of a fictional model to actual data, if that has any meaning.”

            Couldn’t have said it better myself!

      2. Mark P.


        No, MMT doesn’t shun models. It arguably — only arguably, till it gets tested in reality — makes more sensible, discretionary use of them.

        But that’s not very difficult to do when the alternative is the whole phony facade of neoclassical economics as developed by our modern pharisees to serve their monied masters. Is it?

    2. YankeeFrank

      Right. There is no alternative to the neoclassical garbage barge. Let’s see, we have Post-Keynesian, MMT, and little notions called common sense and morality. Selfishness and greed are not foundations for civilization. They are however the foundations of neoclassical economics. I imagine you spent many years becoming a neoclassical economist and simply cannot stomach the idea that you were being indoctrinated into a cult. What a shame. Are you really asking the world to join you in self-destruction just so you don’t feel bad?

  13. Lduende

    Varoufakis’s book “Foundations of Economics” is a true gem. Anyone interested should check it out.
    Also his article in Monthly Review “The Global Minotaur” will interest many readers of this blog.

  14. allcoppedout

    I’m in agreement really, but have a few quibbles. The philosophy/history of science is strongly empiricist but probably ends up in structured realism and a modern version of reliableism – in short there is no neutral observation language. This doesn’t negative what V says but suggests more work. His argument was made by Francis Bacon in terms to Idols around 1600 as to why science was different from general opinion.
    My guess is social science generally cannot confront power in much the same way as society generally cannot. The issue is how to encourage good accumulated wealth as opposed to bad of the same. Science sort of manages this with knowledge and my guess this is through its values and not a detached method. These values have been hidden in a version of value-free science handy in preventing fates with instruments of torture. A long story not told, I suspect the ‘data’ of economics is massively incomplete because economists lack the morality to do the needed investigations – not unlike the Metropolitan Police on phone hacking.

    1. Susan the other

      …”no neutral-observation language…”

      Only in future memory. When we look back and say,”If not for that, we’d be dead by now.”

  15. dutch

    I’ve often thought that the root cause of much of the world’s suffering is the fact that there is a Nobel Prize in economics. The discipline is just taken way too seriously – far more than the predictive power of it’s theories warrant. It used to be that politicians consulted astrologers to tell them how their policy decisions would play out. Nowadays they consult economists – with about equal success.

    1. doug

      Yeah that’s right the world’s suffering is caused by the Nobel Prize in Economics and the use of models to try to understand how an economy operates. And economists have no better understanding than astrologers, that is getting some kind of a handle on demand and supply is the same as consulting the stars. You guys are really throwing out the baby with the bath water.

      1. Knut

        Speaking as a professional economist who has actually been citged by the Nobel Committee for my work, most modern economics is astrology. And don’t tell me economists know very much about the economy. What they know alot about is a model of the economy, which is not the same thing. It would take too long to go into the long list of empirical reversals that constitute the main stream of so-called empirical work. As to the theory: if you believe the economy maps a Walrasian general equilibrium, the Tooth Fairy must have been very good to you as a baby.

      2. YankeeFrank

        Actually, astrology is nowhere near as destructive to humanity as neoclassical economics is: astrology would never dare to assert that selfishness is a moral positive, and cooperation and caring are for suckers.

  16. Hugh

    As usual the kleptocratic dimension is left unaddressed. Economists have not just constructed a self-reinforcing and arbitrary belief system. They have constructed one that kleptocrats can both use to validate certain of their activities and direct attention away from others. Kleptocracy is systematic predation by our elites. It is hardly coincidental that one segment of those elites gives intellectual cover to the looting of the class in general. But it does explain why economists, even Varoufakis, can stare kleptocracy in the face and pretend not to see it.

    1. Susan the other

      I think I read Varoufakis to say that it is not possible to have a meaningful theory of value! Cool. And the economy itself, because it is (has been described as) circular no matter what, is one big complex random variable. So kiss your predictions and all your planning goodbye. I just can’t but be astounded that we evolved at all. Granted we have come to a new and very dangerous level. But just think, if cave culture had deregulated, we’d all be extinct…having never reached a successful evolutionary threshold…by killing rationally expected results.

    2. Mark P.

      Not true.

      I’ve read Varoufakis’s THE GLOBAL MINOTAUR. He makes very clear that he believes that the role of all priestly classes ever since there’ve been any wealth surpluses produced by human societies has been to justify arrogation of those surpluses by some aristocracy/elite. In other words, in Varoufakis’s view, any elite is by definition a kleptocracy to some greater or lesser degree.

      1. Hugh

        First, kleptocracy is a central feature of our current economy. This was a perfect opportunity to discuss academic economics from a kleptocratic perspective. Yet Varoufakis did not make even a glancing mention of it.

        Second, that’s a stretch. Priesthoods in other eras have had much more power. Economists, by contrast, are just a subsidiary arm of kleptocratic propagandizing. As part of the elite, they do benefit from giving intellectual cover to kleptocracy and confusing issues surrounding it, but they are hardly its chief beneficiaries.

  17. Rotter

    Seriously Wondering why “the preisthood” continues to be listened to even after so many failures, seems kind of naive. No one other than a handful of the preists themselves believe any of it. Its just part of the rationalization for thier continued pillaging. They are thieves, not gullible.

    1. scraping_by

      Think of them as spokespersons, celebrity endorsers, except in this case the product they’re holding up beside their faces is a pack of lies.

  18. Min

    Varoufakis: “Why and how is this indoctrination taking place? The answer is simple: Economists are all about creating determinate models; ‘closed’ models that predict behaviour. To do this, they need to assume a particularly narrow minded form of rationality (which I call ‘instrumental rationality’): you are rational to the extent that you deploy your means efficiently in the pursuit of given objectives. When a young person is told repeatedly that to be rational means to be ruthlessly instrumental (i.e. to treat others as a means to one’s own ends), and that contributing in this game is for sissies (or, more ‘scientifically’, irrational), is it any wonder that a training in economics makes young persons more brutish and nastier?”

    Presumably it does not make them shorter. ;)

    This kind of thing is why I have recommended that prospective economists learn to play n-person games. That way they are less likely to be indoctrinated by the economic idea of rationality. They know from experience that cooperation pays off. :)

    BTW, I disagree with Varoufakis about mathematicians. Mathematicians know that if you have a system without a solution, that’s what it is. Making additional assumptions just because is not guaranteed to work. ;)

    1. ebear

      Exactly! After they’ve read Popper, this book:ödel,_Escher,_Bach
      should be required reading for all economics students, with emphasis on open vs closed systems, and the map vs territory problem.

      Economics will go nowhere without a solid grounding in epistemology, but I ain’t holding my breath. The people paying the bills pay to hear what they want to hear. – i.e. whatever supports the status quo.

        1. ebear

          I don’t think that’s what Hofstadter had in mind. Certainly not what I’m on about but I don’t want to hijack the thread. People can read him and decide for themselves what he meant.

  19. allcoppedout

    I’m not sure the views on Naked Capitalism are an alternative paradigm as Philip suggests – though I agree with a lot here. Many of the metaphors of the elite overlap here though there’s clearly more humanity. The problem with models is they are engines through which to view the world and we have to steel ourselves to belief, interpreting aberrant data to the core. This core is broadly defined as the legal-commercial and described as decadent (a term of Lakatos) as early as 1974 and even in places like the Harvard Law Review. The work around this is vast, but little of it confronts how we might really produce a world without violent conflict and gross depravity – that is an economics of radical change rather than merely a regulation in favour of existing wealth.
    if we ask questions like ‘can we afford to build decent housing across the world?’ what is the answer of so-called “economics”? One has to guess the answer is no, as this would be a moral duty unless we don’t care or positively approve the current situation. I’d guess we have the materiel and work resource to do so. This and further such questions on food etc. lead me to the conclusion economics is likely just an Idol – not scientific at all but stuck in old prejudice.

  20. craazyman

    that prisoners dilemma study raises some interesting perspectives that go unstated but are quite profound.

    if the participants trust each other completely and fully, of course they’ll all put in the $10 and will all profit at the expense of the game runner. It will almost be an inside joke among them.

    If they are altruistic enough, they will refuse to participate in the game because they would feel it to be theft of $20 each from th game-runner. In other words, most normal people would not willingly fool an idiot out of their money, even if they knew it could be easily done.

    In real life, they don’t all put $10 in because of the fragility of mutual trust, which is totally normal and understandable among strangers or classmates who know each other only slightly.

    This experiment suggests an interesting (albeit obvious) perspective on money and wealth — the existence of an inverse relationship between wealth potential and trust. If there is zero trust in the group (or in society), then all will retain $10 (or whatever they have) and contribute zero. If there is infinite trust, all will contribute $10 and possess $30.

    Of course, “trust” can be faked through cooercion. Slavery, for example, is forced total cooperation. But a coerced society will ultimately implode.

    Money is the trust medium a society uses to allow strangers to cooperate with each other. But money retains its value only in relation to underlying cooperation structures that foster trust and action between & among participants, even before the exchange of money occurs — like in the game. The trust factor and cooperation structure underlies both the action of the individuals and the manifestation of that cooperation as money & wealth.

    1. Mark P.

      Yes. You’ve encapsulated all main concerns very cogently.

      So, for instance, there’s a theory that one big reason why welfare states have a stronger hold in Europe than in the US has been the relatively greater ethnocultural homogeneity of, say, Germany’s population as against America’s. Over there, in other words, most people start off as more or less one national tribe and are more inclined to extent familial-type trust; here, we are a nation of immigrants.

        1. Mark P.

          I’m not saying I entirely buy the theory.

          I’m English-born and quite familiar with the history of the UK’s welfare state after WWII. I agree that there’s a lot of path-dependent historical specificity in each nation-state’s case.

  21. Jim


    You appear to be creeping towards an antifoundationalist sensibility.

    Why not now apply that sensibility to your own favorite theoretical framwork/model (MMT or whatever). Once you highlight the gaps there you might discover that the search for foundational premises in any sphere of human discourse tends to make us more thoroughly aware of the partiality and incompleteness of our own starting points.

    If you go down that road you might also discover that whatever particular phenomenon your are exploring are susceptible to multiple or even contradictory conceptual encasements.

    We each seem to end up (artificially) privileging certain premises and consequenly tend to move in a logical circle of our own creation.

    It may also be the case that physics does not simply have an object of study (nature). If I understand John Von Neumann’s mathematichal formulation of quantum mechanics(the orthodox interpretation)–choices of probing actions by the experimenter introduce an element of discreteness that seems to pervade the purely physical aspect of nature evolving by itself.

    Such discreteness or choice of probing actions also seems to be involved in each of our conceptual slicing maneuvers in constructing our own theoretical frameworks in economics or history or whatever.

    Everywhere we seem to be making prescriptive leaps–Is it only a question of choosing your priesthood?

      1. Philip Pilkington

        Well, it uses the sectoral balances approach. But that’s not a model of how an economy works. It’s just aggregations of balance sheets.

    1. gepay

      I observe the same kinds of behavior in the modern physics and astronomy. Any mainstream astronomer believes in dark matter. Dark matter was invented to cover up discrepancies in observed data and what accepted theory predicted such as the rotational behavior of galaxies. Rather than the theory being changed, dark matter was invented to make the premises of accepted theory work for observed data. So much dark matter had to be invented that mainstream astrophysicists apparently believe that the majority of the universe is made up of stuff we can’t detect. Sounds like a cult to me.
      Economics is not the only place bad science is to be found. The same not granting of PHDs and non publishing of peer reviewed papers for advocates of alternative theories happens all too often. One can balance on the head of a pin all the successful discoveries made by using string theory. I can’t number how many articles covering what the space probes actually find begin with = scientists “were surprised” or “theory had predicted … but … was actually observed.”
      Doesn’t everybody know that mathematics is just a human language that often correlates real well with reality and is therefore useful. However, there is not 100% correspondence so mathematical solutions are not proof.

      1. JIm Sterling

        Astronomers consider alternative theories all the time. Then when they’re done considering them they stomp them into little bits, because those alternatives fail to account for astronomical observations as well as the standard theory does. That’s why the standard theory is the winnah and still champeen.

        This isn’t impossible for laymen to check for themselves.

        1. JIm Sterling

          PS the time to worry about a science is not when it has one dominant paradigm, but when it is divided into multiple schools each claiming the truth but unable to stomp the others. They fail Popper’s falsifiability criterion; none of them can be disproved by any means available at present. Astronomy went through a period when there were Big Bang and Steady State cosmologists endlessly arguing, until thankfully Big Bang finally wiped the floor with Steady State, starting with the observations that got Penzias and Wilson the Nobel prize.

          Philosophy is like that, it’s as valid to follow Plato today as it has been for thousands of years, or you can follow some other philosophy school instead, they’re all still in business. That’s no science. Science is like Highlander, there can be only one.

          You can see economics is more like philosophy than science–multiple contending schools, no winner in sight yet.

  22. scraping_by

    “The essence of the economists’ inherent error is that they erred into thinking it is possible to tell a credible story about how values and prices are formed in complex (multi-sector) economies that grow through time.”

    Well stated.

    The story economics tells isn’t just not credible, it’s not a good story. They have no real theme, no rational plot, and the characters, the economic man, the enterprise, etc., are too abstract to relate to.

    With no real story of their own, economics has just refined and repeated the meta-story of the current age, the fantasy pounded daily by propaganda. It’s the world view of the elite, the dark melodrama of social Darwinism. It’s the Great Lie and even those who propound it know it’s the Lie.

    And each bit of light brought into the public conversation will add to the cost of maintaining that lie. Good on ‘un.

  23. Schofield

    From Randall Wray’s Modern Money Primer No. 2:-

    “Following the pioneering work by Wynne Godley, we can state this principle in the form of a simple identity:

    Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0”

    So was this the “pioneering” idea in Godley’s work?

    1. Philip Pilkington

      Wray said ‘pioneering work’ not ‘pioneering idea’. If you want to see why Godley’s work is pioneering, then I suggest you read it. It was pioneering. But not because it contained a single idea.

  24. Schofield

    Agreed. Although I can’t find the source, Godley stated he had the “pioneering” idea (deduction) in the Sixties but then had to do the inductive work which resulted over the years in the refining of his Sectoral Balances Model which validated his original idea. Even with his Model he cautioned quite rightly that he was still evolved in contingent forecasting. Nevertheless we are better off with his model because it enabling him in 1992 to warn about the conceptual weakness of the Euro and secondly in 1998 the approaching Great Recession. Clearly nobody paid much attention at the time but now his line of reasoning is seen to be “hot” particularly in relationship to MMT.

  25. Chris

    thanks Philip, interesting. My profession is again maligned and blamed for not foretelling the GFC and all that has happened since. What were all the non-economists doing?

    Of course the economists’ thinking has been wrong. They have been taught by economics departments who receive great largesse from banks, big oil, defense and pharma…

    Only in America…

    1. Yves Smith Post author

      Please read my blog. I’m a non-economist and I could see Bad Shit was in the offing in early 2007. And I went into the crisis short the stockmarket and made money in 2007 and 2008. And that went against ALL my training.

  26. achilleas

    i suggest you read this paper: Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome by Ricardo J. Caballero (2010).
    The author knows about models and is from MIT. So considered “mainstream”.

  27. dutch

    The first failure of economics is the assumption that there is such a thing an an “economy” separate and distinct from all other human interactions, which operates according to a finite set of laws or principles peculiar to itself, such that it can be understood without reference to the rest of human experience. Politics, religion, ethics and history have as much impact on people’s economic behavior as supply and demand, and that behavior cannot be understood without understanding all those other aspects of experience.

    1. F. Beard

      Good point EXCEPT the banks and government have a monopoly on money creation for private debts thereby making economics a necessary study for national survival.

      Of course the study of economics should have led to the abolition of that monopoly …

    2. Mark P.

      No, a discipline called political economy has long existed.

      Much of the neoclassical effort over the last half-century was directed to wishing away or at least subordinating that discipline to the neoclassicals’ free-market fantasies.

  28. Schofield

    Ultimately they were not fantasies. The ability to be as greedy as one wished was at stake. Deny the private sector the ability to control and create money and allow a democratic body to exercise these functions threatened this ability. The MMT idea that government must run a deficit to allow the private sector to save opens up the possibility of an equitable targeting for that deficit.

  29. noggin

    While much of the critique presented in this writing is true, I am left wondering, what could be done better?
    Economic models are faulty and distanced from reality, that much is true. So what should we do about it? Make more complex models that better incorporate things like incomplete information and bounded rationality (which by the way only adds to the mathematical complexity)? Give up on trying to model and attain quantitative results and make economics more qualitative? From my experience with a number of other social sciences, this would certainly not increase the usefulness, or clarity, of economics. Math at least has the benefit of being (relatively) unambiguous. Give up trying to understand the economy altogether?
    It seems that most people just crave to hear economists admit that their methods are deeply faulted. What I don’t hear are actual constructive suggestions that would improve economics as a study of the economy and human interaction. If economics is at such a poor state, feel free to do it better.

  30. rob hollander

    Empirical observation is a constant chastisement for *all* the sciences, not just economics, but physics or neuroscience or any empirical science.

    Self-referentiality is no bar to a science: above all logic but also math, neuroscience, linguistics, cognitive science, and many others, refer to their own subject matter. Reflexive hypotheses can be predictive, and their predictions can be tested.

    One mustn’t confuse reflective *science* with a reflective regression in *implementation*. Moreover, a regressive theory becomes a reductio of itself if practiced — you can’t implement an infinite regression, so it can play no role among the phenomena.

    Implementing theories does complicate the science — but it is not a flaw in economic science. It’s just that the science must attempt to model the consequences of acting on economic hypotheses. But this is also a traditional part of science called trial and error. It may be an embarrassment to the dignity of human intelligence that many of our scientific advances have been driven by accidents within trial an error, but it is surely not a *failure* of science. It’s an embarrassing success (and usually viewed not as embarrassing but perhaps unjustifiably as brilliance).

    In any case, analogizing economists treating a crisis as a surprise meteor undermines Yanis’ own argument. Is cosmology a non science because not every meteor’s location or arrival can be predicted??

    Physics doesn’t purport to tell the shape of the next snowflake or when it will begin to rain today. It does tell me why we generally stand on the earth and not float through the air. The problem with economics may be that we expect too much. Just because we ourselves are the agents of our own economy shouldn’t lead us to expect us to predict it any better than any other science. And yet that’s exactly what economists try to do. I think it’s because there is a moral call in the field that is tough to ignore for those who hear it.

    The challenge for economics has always been not its lack of predictive ability, of which it has about as much as any natural science, but the moral dimension: Adam Smith long ago pointed out that labor gets shafted in the balance of wealth. What’s dismal about economics is that the economy often works most efficiently and exuberantly at the price of a human sacrifice. The big question is whether the failures of those who wish to resolve that moral quandary are greater than the occasional crises of the economy. This is also a matter of trial and error.

    That undergrads are more cooperative than those who chose to become economists may say more about why students choose economics. The experiment didn’t track those undergrads who went into econ and those who didn’t and what happened to their cooperativeness afterward. So it may say little or nothing about what is taught in economics. In any case, to assume that the personal attitudes of the scientists affect the science is to assume what was to be concluded: that it is a non science. If it is a true science, then the personal biases of the scientists won’t matter (well, that’s an idealization: even physicists take sides on theoretical issues, defend them, promote them and make their reputations on them and get their funding to promote them). Determining whether a discipline is science should depend on its predictive success — its testability — and its simplicity within itself and in relation to other sciences. But bear in mind that the Popper model is also an idealization that doesn’t correspond accurately to the actual practice of even the hardest sciences, even in logic, for example.

  31. john c. halasz

    “Ricardo and Marx, in contrast, allow for different sectors to grow concurrently but introduce a single sector economy through the backdoor by implicitly assuming that the degree of capital utilisation in the same across all sectors (so as to ensure that profit rates are also equal across sectors).”

    With all due respect for the formidable Prof. Varoufakis, is that really true of Marx. In Vol. 1 the “organic composition of capital” is equal across sectors because the question hasn’t come up and because a different problem-set, explaining the preconditions for industrial commodity production and the sources of profits, is at issue. But the “transformation problem” in Vol. 3 is all about addressing the issue of differing sectoral capitals and offers a rather complex account of price formation. Of course, the analytic assumption that the rate-of-profit long-run tends to equalize across sectors and that equalization amounts to an optimalization of investment and output is the most basic classical theorem ofall economics. But Marx is using it to demonstrate the long-run dynamic disequilibria that result from that static assumption.

  32. allcoppedout

    I’ve always been struck that there is some work that simply needs organising and doing for our general well-being. It seems chronic to rely on models involving invisible hands (and the rest) when it’s clear we don’t get a lot of this done and much of the resource gets bound up in riches that don’t get invested in this work either. One aspect of science history is that data is always around pre-theory and in this sense economics should be admitting a greater amount of data in need of explanation. Many concepts like efficiency are clearly hopeless as we drive productivity in individual firms, but assume a private sector cavalry will turn up to organise those now left to welfare by the ‘efficiency gain’.

  33. Vitamin

    This is a truth that needed to be told from within the profession and I am grateful for Varoufakis’ lucidity, but why no love for the so-called *heterodox* economists who have been fighting this battle for years and been ostracized as a result? There does exist a significant but publicly obscure group of reformers within the same nominal profession who deserve not to have their credibility lumped in with other “economists”. I hope the second part of the interview will give these reformers their due — it might be the best next step for overturning priesthood.

  34. votersway

    This is the comment I left on Mr Varoufakis blog:

    Mr Varoufakis, I can’t accept your main conclusion that value (and by implication economics in general) is an unknowable subject. I will briefly summarize my position here, a more elaborate version can be found at:

    First, the economic system is created by law, this is something we create, it’s our choice how to do it. To claim that the economy is unpredictable is to declare ourselves dumb, corrupt or both… BEYOND REPAIR.

    Second, the “math models can’t describe economics” stance smacks on lack of understanding of the subject. Math models can’t make a chaotic system stable, but then there is nothing better. The problem is, of course, why the system is chaotic to begin with.

    Third, economics as a science assumes the declared effects of regulations instead of analyzing the real effects – taking into account the loopholes and conflicts of interest. Today, such effects prevail over the market, so little wonder the economy doesn’t behave as it “should”. If you included them in the equations, all would be well.

    Crises are not “open-ended phenomena”, they are consequences of other phenomena, like regulations… Many knew well in advance about the banking crisis of 2008, check Dorgan”s speech at the repeal of Glass Steagall, given in 1999.. Only the economists didn’t know… Regulation quality is the key.

    Lastly, economics in its present form isn’t a religion, it’s a political cult. There are important differences. Again, this state of affairs is due to purely subjective choices. If analysis of regulations was a proper and a serious part of economics, it would be nearly as accurate as physics. Removing the secrecy from banking could even make economics more precise than physics (assuming the regulatory loopholes were removed).

    There is something very disturbing in the idea that we accept as normal the chaos in our own creations. A minute of thinking would convince you that such a position can be used to excuse crimes of monumental proportions.

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