Why mainstream economics is a dead end

Dr Frank Shostak
BrookesNews.Com
Monday 24 January 2010

Mainstream economists regard various theories that they are employing as tentative. This means that theories might be valid for a certain period of time. However, as time goes by, it is held, the changing world requires new theories. For instance an economist forms a view that people's consumption of goods and services is determined by their incomes. Once this view is validated by means of statistical methods it is employed as a tool to assess the future direction of people's consumption. The tentative nature, so it is argued, becomes apparent once the theory fails in its predictive capability. Once this occurs the economist will modify the theory by adding few more factors into the equation to explain movements in consumption. Or he might alter his theory altogether by removing income as an explanatory factor.

According to this way of thinking, an economist can never be certain about his theories, they are always in the realm of being speculative. Economists cannot be even certain about the law of supply and demand. Although, everybody accepts that an increase in the supply of a good for a given demand will lower the price of a good. This is however not always must be so. One could also envisage a situation, so it is argued that the price of a good will increase. It follows therefore, that we are condemned to be in total uncertainty with regard to the world of economics. The only way to navigate in this environment is by identifying correlations among various economic data, so it is argued. By applying various statistical and mathematical methods, the mainstream or modern economics follows the footsteps of natural sciences.

The main reason for the employment of mathematical and statistical methods in the natural sciences is to formulate the essential nature of objects. In other words by means of a mathematical formula the response of objects to a particular stimuli in a given conditions is captured. The same approach however, is not valid in economics. For economics is supposed to deal with human beings and not objects. The main characteristic or nature of human beings is that they are rational animals. They are using their minds to sustain their lives and well beings. The usage of the mind however, is not set to follow some kind automatic procedure, but rather every individual employs his mind in accordance with his own circumstances. Consequently the human nature is not suitable to mathematical quantification.

In other words, people have the freedom of choice to change their minds and pursue actions that are contrary to what was observed in the past. Thus the importance people attach to various goods can change, and consequently various mathematical formulations become useless. As a result of the unique nature of human beings, analyses in economics can only be qualitative. So if people can change their minds does it then mean that we are condemned to be in total darkness as far as the world of economics is concerned? Since mathematical and statistical methods are not valid in economics, how then economists can make assessments about the state of the economy? What type of analyses must they pursue?

Once the mathematical cover is removed from the mainstream economics its shallowness becomes crystal clear. For it can only offer various arbitrary statements. In other words by pleading ignorance, the mainstream economics cannot offer anything of substance as far as understanding the facts of reality is concerned. As opposed to the mainstream economics, Ludwig von Mises presented a framework that enable economists to understand the facts of reality, rather than pleading total ignorance there are some things that we can be absolutely certain about. Once these things are ascertained one can in turn infer from them the entire body of economics.

So what are these things? To begin with we know that human beings exist. By acknowledging existence we also acknowledge that human beings are conscious. For without being conscious one cannot be aware of existence. We also know that the ultimate goal of every human being is to sustain his life and well being. This in turn means that humans are setting various ends to serve as means towards this ultimate goal.

To reach these various ends humans require resources. Since at any point in time available resources fall short in relation to wants, humans are forced to establish priorities. Setting priorities implies that humans must choose between various ends. From the knowledge that human beings exercise their preferences with regard to various ends we can ascertain the law of supply and demand.

In other words we can establish with absolute certainty that an increase in the supply of a good for a given demand will not raise the price of a good. The reason why we can be certain about this law is because it is based on non refutable facts that human beings exist and that they are conscious and purposeful. To try to refute that human beings are not conscious and purposeful would require to be conscious and purposeful, thereby contradicting the attempt to prove that this is not so. (Reality cannot be contradictory).

The purpose of any theoretical economics framework is to assist in understanding the facts of reality the way they are. This, however, requires that a theory must be linked to a non-refutable proposition. Consequently various ideas that are inferred from such a theory are part and parcel of the reality and are always valid. (Regardless of time, human beings have been always conscious and purposeful). This is however, not so with regard to the mainstream economics. For the mainstream theories are not inferred from non-contradictory propositions.

Consequently any conclusion drawn from these theories are of arbitrary nature. For instance mainstream economists still remain unsure as to whether raising the minimum wage will lower employment. Some mainstream economists, after conducting statistical analyses, have concluded that raising the minimum wage by a certain amount will not cause less employment but on the contrary the employment might even increase.

This type of a conclusion however is meaningless, for it contradicts the law of supply and demand which is derived from a non contradictory proposition. Mainstream economists hardly deal with human beings, and instead are fond to discuss the economy. The economy is depicted as a living creature which must be guided by the government and the central bank by means of fiscal and monetary policies.

However, the whole concept of economy apart from individuals is not valid. In other words there is no such thing as the economy which can be moved by the government and the central bank. It follows then that mainstream economists are engaging in a fiction which they are dressing up by means of various statistical artifacts like Gross Domestic Product. By attempting however, to fix the direction of a non existent entity the economy, the government and its central bank policies are undermining the well-being of human beings.

Frank Shostak is a former professor of economics who now works as an economist for M. F. Global.