Economic Indeterminacy

Yanis Varoufakis

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135141356
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This volume is a collection of some of the best and most influential work of Yanis Varoufakis. The chapters all address the issue of economic indeterminacy, and the place of a socialized Homo Economicus within the economy. The book addresses Varoufakis' key interpretation regarding the way in which neoclassical economics deals with the twin problems of complexity and indeterminacy. He argues that all neoclassical modelling revolves around three meta-axioms: Methodological individualism, Methodological instrumentalism and the Methodological Imposition of Equilibrium.

Each chapter is preceded by an introduction, which explains its place within the overarching theme of the book. The volume also includes a lengthy introduction, plus a concluding chapter focusing on the future of economics. It will be a key work for all students and researchers in the field of political economy and economic methodology.

1 Introduction: Economic indeterminacy and the dance of the meta-axioms

The dynamic mechanism by which neoclassical economics turns defeat at the hands of indeterminacy into unassailable dominance

1.1 Prologue

Since the 1970s, give and take a few years, a decision to immerse oneself in economics has been translating into an exclusive training in what can be termed neoclassical economics. Neoclassical economics is a particularly narrow method of conceptualising market economies which, astonishingly, has managed to monopolise academic and professional economics since the mid-1970s. In philosophy, this would be the equivalent to, say, a total supremacy of Existentialism over all other philosophical traditions – to the extent that Plato, Aristotle, Hegel and Russell do not even get a mention in any of the offered courses. Such a development would be scandalous and impossible to imagine. And yet, in economics this is our reality.

How did the bewildering dominance of neoclassical economics come to pass? By what mechanism is it reproduced? In this chapter I venture an answer to these two questions. Section 1.2 defines what I mean by neoclassical economics; the sort of economic analysis that succeeded in expelling all other analytical methods from professional economics. My definition is that all neoclassical modelling revolves around three meta-axioms: methodological individualism, methodological instrumentalism and methodological equilibration. Then, Section 1.3 presents the dynamic mechanism, which I call the dance of the meta-axioms, by which neoclassical economics reinforces its power. Central to this process is, I argue, the way in which neoclassical economics deals with the twin problems of complexity and indeterminacy.

To deliver models of reasonable complexity, neoclassicism relaxes the first two meta-axioms. However, the price of that relaxation is massive, radical indeterminacy. To arrest it, neoclassicists resort to an austere tightening of the third meta-axiom. The dance of the meta-axioms is, therefore, a series of unending moves by the economics profession: When interested in demonstrating the sophisticated complexity of their models, they take forward steps through the relaxation of meta-axioms 1 and 2. But when indeterminacy threatens to dissolve the offered analysis, they move sideways and then backwards through the tightening of meta-axiom 3. Soon after, however, in a bid to return to a sophisticated narrative, they relax, once more, meta-axioms 1 and 2. And so on. Section 1.3 concludes with a number of examples of such moves in the literature; moves that have shaped the profession’s views on all the significant theoretical issues that economists are naturally interested in – from the theory of value and growth to game theory and the theory of risky choices.

Section 1.4 discusses how the dance of the meta-axioms helps reproduce neoclassicism’s dominance, by extracting copious discursive power from its spectacular theoretical failures. It tells a story of how young, gifted economists are lured into the worst type of theoretical cynicism, lashed with generous doses of solipsism. Almost in a bid to emulate the bankers’ capacity to extract huge rents from society after the financial crash of 2008, i.e. to benefit in proportion to their failures, so too neoclassical economics succeeds is reinforcing its dominion in proportion to the magnitude of its theoretical failure. A most peculiar ‘failure,’ indeed…

So, the dance of the meta-axioms is central to this book. Every chapter that follows represents a personal encounter with this dance. It constitutes a case study of how a reasonable attempt to relax the more unrealistic assumptions of certain models that I once studied ended up in retreat and ignominy due to the profession’s determination to ‘close’ the models down; to dance the dance of the meta-axioms. Taken together, these chapters comprise a warning for graduate economics students and young academic economists that alerts them to the unintended ruthlessness with which they will be met, by the profession, if they put realism and intellectual honesty above the urge to ‘close’ their models, even if this is what common sense demands of them.

In summary, the remainder of this chapter argues that:

(a) neoclassical economics is well defined in terms of three meta-axioms (methodological individualism, methodological instrumentalism, and methodological equilibration);

(b) their adoption is the common practice which delineates mainstream economics;

(c) while the first two meta-axioms allow for rich depictions of socioeconomic phenomena they lead to an unquenchable indeterminacy, and

(d) the spectre of this indeterminacy generates evolutionary and social forces within the economics profession which cause practitioners to introduce stringent variants of the third meta-axiom.

Thus the neoclassical models’ sophisticated complexity is sacrificed in favour of a determinate framework within which not even a glimpse of contemporary capitalism is possible. Neoclassicism, I contend, owes its hegemonic position in the social sciences to this most peculiar, axiomatically inbuilt, theoretical failure that is masked and turned into stunning success by a series of moves I term the dance of the meta-axioms.

1.2 The three meta-axioms underpinning neoclassical economics

Few, if any, economists would describe their work as neoclassical. As the term was coined much later, the nineteenth century pioneers of marginalism would not have even recognised it. As for contemporary economists, they seem ill disposed to the neoclassical label even when their work is demonstrably neoclassical.¹ But this disinclination, in itself, is immaterial: for if a particular body of economics can be profitably distinguished by means of some single epithet (e.g. ‘neoclassical’), the deployment of such an epithet may be in order. After all, the inhabitants of the Eastern Roman Empire would not have appreciated the label ‘Byzantine’; nor would late nineteenth century Britons have conceived of their society as ‘Victorian.’ Such epithets have analytical value analogous to their capacity to illuminate certain eras and mind frames.

In my quest for a useful definition, I take a second leaf out of the historians’ book: Their terms ‘Byzantine’ or ‘Victorian’ may well be over-arching but, at the same time, are deployed carefully so that their use does not invalidate their subject-matter’s dynamic complexity.² In the same vein, we too ought to be keen to define neoclassical economics in a manner that respects the undisputed fact that its axioms and theoretical practices have been evolving, changing, and adapting from the very beginning. For that reason, I shall eschew any definition based on a fixed set of neoclassical axioms.³

Let’s begin by asking: Granted that neoclassicists’ axioms and methods are in constant flux (inter-temporally but also across different models and fields), is there some analytical foundation which: (a) remains time and model invariant, and (b) typifies a distinct approach to economics? This is equivalent to searching for invariant meta-axioms: higher-order axioms about axioms which underpin all of neoclassical economics, irrespective of the actual axiom’s fluidity or the malleability of its focus. I propose three such meta-axioms as the foundation of all neoclassicism.

1.2.1 Meta-axiom 1: methodological individualism

Consider the analytic-synthetic method of a watchmaker faced with a strange mechanical watch. First, she takes it carefully apart with a view to examining the properties and function of each of its tiny cogs and wheels. Then, she screws it back together. If a reassuring ticking sound ensues, this must surely mean that the fragments of knowledge imparted by the separate study of each of its parts were successfully synthesised into a macro-theory of the watch.

This parable of an ideal reductionist, analytic-synthetic economic approach has been implicit to neoclassical theorising since the first stirrings of marginalism. While the term methodological individualism came later with Schumpeter (1908), it featured well before its christening as the bedrock on which economics (in juxtaposition to classical political economy) was to be re-founded. To the economists who sought a break from the political economy of Smith, Ricardo and Marx, a new focus on the individual agent became the litmus test of ‘scientific’ economics (see Mirowski, 1989).

In this new, or neoclassical, mindframe, individuals are the equivalent of the watchmaker’s cogs and wheels: parts of a whole to be understood fully (complete with determinate behavioural models) and independently of the whole their actions help bring about. Thus, any socio-economic phenomenon under scrutiny is to be explained via a synthesis of partial knowledge derived at that individual level.

But there is a snag: Unlike the world of mechanical watches, society consists of ‘parts’ which are not readily separable. A pulley or a cog can be fully described in isolation to the other mechanical parts with which it was designed to work harmoniously. Indeed, the ‘relations’ between the watch’s parts are straightforwardly revealed, to the trained eye, through close inspection of the parts’ shape, size and other physical properties. In the social world, however, not only are the relations between its ‘parts’ not deducible from primitive data concerning these parts alone (e.g. from data on persons’ means and ends) but also it is simply impossible to understand the parts’ properties in isolation to one another. When Aristotle spoke of humans as political animals, or when Hegel narrated his master-slave paradox, they were dwelling on this radical difference between the constituents of society as opposed to the parts of mechanical systems (regardless of their complexity).

Hodgson (2007), drawing on Udéhn (2001, 2002), relates the ambiguities in the methodological individualism espoused by leading neoclassicists and suggests that neoclassicism seems to oscillate between strong methodological individualism, which insists that all explanation must be reducible to knowledge derived from isolated selves (an archipelago of Robinson Crusoes), and a weaker version which acknowledges that the individual is indefinable outside its social and relational context. My explanation of this oscillation will be that, while thoughtful neoclassicists are mindful of the logical conundrum awaiting them if the analysis of persons excludes their relations to other persons (and, thus, to the surrounding institutions), they are forced inevitably to fall back on a strong version of methodological individualism.

Forced by what? By the ambition to ‘close’ their models, I suggest (see Lawson, 2003, for the predilection of mainstream economics for closed explanatory systems). Human relations are notorious for their resistance to determinate modelling. Put simply, the mathematics of defining a person in terms of her relations to others, in addition to her means and ends, is of an order higher than most economists would want to engage with and, worse, offer no determinate solution (i.e. behavioural prediction).⁴ Importantly, this is no mere technical difficulty awaiting a technical fix. Rather, it reflects the impossibility of a deductive methodological individualism which treats human relations as primitive data (see also Fine, 2008). It is for this reason that neoclassicism gravitates toward strong methodological individualism, while alluding to its weaker version when in a more philosophical mood.

To sum up, neoclassicism’s first meta-axiom encompasses two main variants of methodological individualism, one of which typifies neoclassical economics of all types:

Strong methodological individualism – D: All explanations are to be synthesised from separate, autonomous, and prior explanations at the level of the individual. A strict explanatory separation of structure from agency is imposed, with an analytical trajectory that moves unidirectionally from full explanations of agency to derivative theories of structure. In this variant, agency feeds into structure (which is merely the crystallisation of agents’ past acts) with no feedback effects from structure back into agency.

Weak methodological individualism – d: As above, with the difference that feedback between structure and agency is permitted, even though the explanatory force remains in the realm of agency.

All textbook economics is founded on D, as are the foundational texts on the mainstream’s main theorems: general equilibrium, game theory, new classical economics etc. However, in the last two decades or so, a new crop of highly interesting models has appeared which turn on d.⁵ In the following sections I shall be arguing that the interplay between D and d, rather than signifying a retreat from neoclassicism, is part of a complicated dynamic which reinforces its dominance and can be grasped only when all three meta-axioms are considered at once. Therefore, I now turn to the other two meta-axioms.

1.2.2 Meta-axiom 2: methodological instrumentalism

Methodological individualism is vacuous without a theory of what motivates individuals. Contrary to the impression given by microeconomics textbooks, greed was never a foundational assumption of neoclassicism. While it is true that its models may have been traditionally populated by hyper-rational bargain-hunters, never able to resist an act which brings them the tiniest increase in expected net utility, the latter ca...