The global financial crisis and the science of economics

Science basically is synonymous with methodological naturalism. This should not be equated with some hard and fast conception of "the scientific method". No such method exists. Nonetheless, science is not an irrational or arational pursuit given that there is a crucial difference between the context of discovery and the context of justification. The philosophy of science itself should be a science, further discussion of which is left aside here.

Science concerns itself with uncovering internally consistent and empirically well grounded theories that seek to explain the natural world.

Commitment to reason and rationality in economics has not been a prominent feature of the discipline. To illustrate this let me dust off an old macroeconomics text book of mine, which provides an IS-LM model of the Australian economy. There is an interesting section on economic thought, with an especially fascinating part thereof devoted to an analysis of post-Keynesian economics.

Post-Keynesians are very much in the minority in the field of macroeconomic theory. This is intriguing, for when the standard neo-classical economists spun elaborate webs about the efficient nature of markets, the application of the financial instability hypothesis of post-Keynesian theory predicted something basically synonymous with the current global financial crisis. The most noted post-Keynesian in this regard was Hyman Minsky.

That should tell us something about the supposed scientific credentials of standard theory. We are told that we are "all Keynesians now", however in reality few of us are post-Keynesians, Brand Rudd included.

Neo-classical economics is basically an ideological discipline. As I have stated previously, the fundamental axiom of economic theory, which underpins all the celebrated theorems, is: if we make the rich happy wonderful things will happen. Think for instance of what we call in Australia "tax reform".

Tax reform basically means skewing income tax cuts towards the top tax rate while broadening the tax base towards consumption, which of course is regressive. By the same token we must cut corporate taxes so that we can remain "internationally competitive". Brand Rudd, alongside his newly found best mate Ken Henry, has placed cutting corporate tax at the centrepiece of the Henry tax review.

We are told that this is best for economic efficiency. It is easy to see the prime axiom in operation here. Notice, furthermore, that this is couched within a fiscal policy that is directed towards maintaining budget surpluses. We make the rich happy while broadening the tax base towards the poor and, wholla, great things will happen.

Standard economic theory tells us we must do this. This conclusion is made because of the prime axiom that underpins the overall theoretical structure.

Any economic theory that seeks to undercover laws that are supposed to hold in any economy is a form of positivism. In the social sciences positivism is associated with the search for laws that supposedly apply in the social world. The problem here is that the social world largely is the world of the contingent rather than of the necessary. Because of this, large scale macro social laws, economic laws included (post-Keynesian as well), do not exist.

The critiques of the scientific pretensions of economic theory are correct when they point this out. However, economics can be a science. Essentially a scientific theory of economics would be a theory of the mind, or better still, of the cognitive.

Human economic behaviour must follow on from some essential property of human nature. Whatever that property may be, surely it must be mentalist. Indeed humans are not the only species that exhibit economic behaviour or actual economic systems. Insects such as ants have economic systems, which even exhibit class structure. The economic systems created seem very rigid and must thereby be based on an innate genetic endowment. We assume that this genetic endowment is based on mental structure, rather than in the legs or digestive system of ants.