The Dangerous Mathematic Slant of Economic Theory: On 'Rational' Free-Market Behavior

Paul Kruger's recent article in the NY Times made an impression upon me; the gist of his argument is essentially this:

"...the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."

This got me thinking about how absolutely dangerous mathematics - and "empiricism" in general - can potentially be. The reason these are dangerous is because they appear neutral. Value free. Objective. Based on observable phenomena.

In the realm of human behavior, the golden rule - Garbage In, Garbage Out - is an aphorism for virtually any "empirical" study.

Economics, it seems to me, relies far too heavily on math. The result is a slew of sycophants, gleefully justifying the free market with clever little equations, giving everyone the impression of a system grounded in fundamental behavioral truths.

Economists love to talk about "rational" behavior. The emergent property of consumers - all making independent, rational choices in a free market - results in a near-perfect system.

Their attraction to the rational, unfortunately, is not merely derived from its ostensible resonance with observable behavior, but rather from its capacity for quantification. Rational behavior is predictable, measurable, and plugs right into an equation. This, from a strictly scientific view, is a bias that should set off alarm bells. Any behavior that lends itself to a desired methodological approach should be rigorously scrutinized.

It is not as if there aren't other perspectives. Max Weber's "The Protestant Ethic and the Spirit of Capitalism" cites irrationality as the defining quality of capitalism:

"...The earning of money... thought of so purely as an end in itself, that from the point of view of the happiness of, or utility to, the single individual, appears entirely transcendental and absolutely irrational. Man is dominated by the making of money, by acquisition as the ultimate purpose of his life. Economic acquisition is no longer subordinated to man as the means for the satisfaction of his material needs. This reversal of what we should call the natural relationship, so irrational from a naive point of view, is evidently as definitely a leading principle of capitalism as it is foreign to all peoples not under capitalistic influence."
- Max Weber

So, there appears to be some conflict, or at least irony, in the the idea - on the one hand - that the we should trust in the free market, guided by the collective rational decision-making of its actors, and - on the other - that the very spirit of capitalism itself (the Calvinist-inherited notion of vocation, making money as an end in itself rather than a means to satisfy material needs) is irrational.

When we observe our economic system at work, we see all kinds of 'irrational' behavior. It must drive the economists mad. Because there are more factors involved in life-decision making than purely market-driven sensibilities. But Weber's point is a much larger one: irrationality in capitalism extends to even those making the ostensibly correct decisions.

To infer the existing system as we know it is grounded in some empirical reality, governed by objective mathematical laws, is both foolish and extremely dangerous. Fortunately it is also false; reality has sent a discipline mired in hubris scrambling for the calculator! I suggest they crush the bloody thing with a hammer and start doing some actual thinking.

I do not mean to criticize mathematics - obviously a robust explanatory tool when accounting for a full range of predictable behavioral phenomenon within a contained, rule-governed environment. But the scientific method becomes absolutely overwhelmed when dealing with the Real World, simply because it is impossible to isolate variables or even to identify them all!

And yet they do try, don't they? And what happens? In study after study, not just in economics but virtually any discipline, causal relationships are made from mere correlations (and that even in cases where most of the variables have been accounted for). This results in all kinds of reductionisms: biological, economic, etc. - all of which merely reinforce our general cultural hegemony. Instead of opening up our world, we use science to close it. An institutionalized myopia.

That little island in The Phantom Tollbooth comes to mind: Conclusions. You have to jump to get there.