Question
Asked 5th Jan, 2015

What has become of the Axiomatic method of economics?

For instance, F. Edgeworth wrote of “the two first axioms of the Utilitarian Calculus, the law of increasing labour, and the law of decreasing utility” (Mathematical Psychics, London:, C. Kegan Paul & Co., 1881, p. 34)
According Ludwig von Mises, economic is about praxeology. He wrote that “The starting point of praxeology is not a choice of axioms and a decision about methods of procedure, but reflection about the essence of action.” (Mises, “Human Action, 4th Revised Edition, Fox and Wilkes, SF, 1963 p. 39) Murray Rothbart on the other hand thinks of an Action axiom: “It is this fundamental truth—this axiom of human action—that forms the key to our study. The entire realm of praxeology and its best developed subdivision, economics, is based on an analysis of the necessary logical implications of this concept.” (M. Rothbard, “Man Economy, and State with Power and Market,” Auburn ALA: Ludwig von Mises Institute, Scholar’s Edition, 2009 by, p. 2)
I think that the Axiomatic Method has reached its zenith with the Arrow-Debreu general equilibrium and went downhill afterwards. In some books and articles, some efforts to carry forward this model has been made, but nothing as a ‘micro revolution’ has taken place.
Might it be a degenerating research program for the 21st century? Or has there been a paradigmatic shift? To take an analogy, E. Bohm Bawerk spoke of the faith of two axioms of capital theory, one as a social fund for the maintenance of labor, which has disappeared, and the other as an axiom of capital as a produced means of production which has survived. He wrote “Economic theory must make decisive choice between the two competing conceptions, and, however the choice turns out, … Either we shall decide for that conception which makes capital an aggregate of Intermediate Products—and this choice, for reasons of appropriate terminology already stated, I consider the happier one—and in this case the labourers' maintenance falls outside the conception; or we shall give the name capital to the Subsistence Fund.” (E.  Bohm Bawerk, “The Positive Theory of Capital,” New York: G. E. Stechert and Co., 1930) So, this leads me to ask: What choices are being made between the Axiomatic and non-axiomatic method--to bury it or to make it more progressive?

Most recent answer

26th Feb, 2016
Yuri Yegorov
University of Vienna
Victor Aguilar has mentioned an interesting list of Hilbert problems in economics. I was not aware about them before, but after reading the list I found high correlation with my way of thinking. In fact, in some of my papers I tried to follow this agenda.
1 Recommendation

Popular Answers (1)

9th Jan, 2015
Harold Houba
Vrije Universiteit Amsterdam
The generation of economist that developed the Arrow-Debreu model has retired or is about to retire. According to Susan Coyle in her book "The soulful Science, what economist really do and why it matters": 1.  the public image of economics is one of the neo-classical model prescribing liberalizing markets; 2. Economics has moved beyond this framework. For instance, her view in Chapter 5 is that psychology and behavioral economics lack an overarching framework and that we are left with many pieces of a puzzle and no idea how to put them together into a coherent framework. Whether this is temporary or structural is heavily debated. There are economist working successfully from within the axiomatic tradition, e.g., Douglas Bernheim, Faruk Gul, Wolfgang Pesendorfer and Antonio Rangel, to enrich and extend theories such that these capture anomalies. This has not yet reached textbooks. But the importance of solid theory explaining observations has grown over the past decades. Although there are also areas where neoclassical economics does work, much interesting work needs to be done still.
3 Recommendations

All Answers (22)

7th Jan, 2015
Marcelo Negri Soares
Centro Universitário de Maringá
Economists have not paid much attention — and so modern economics has become increasingly irrelevant to the understanding of the real world. "Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science." LARS P. SYLL (https://larspsyll.wordpress.com/) Apud Tony Lawson, Economics and Reality (1997).
7th Jan, 2015
Mario Arturo Ruiz Estrada
University of Malaya
Dear Marcelo: We need to keep in a constant production of new research and development to promote our ideas that it is based on propose alternative economic theories and models that can help explain our real world. 
2 Recommendations
9th Jan, 2015
Harold Houba
Vrije Universiteit Amsterdam
The generation of economist that developed the Arrow-Debreu model has retired or is about to retire. According to Susan Coyle in her book "The soulful Science, what economist really do and why it matters": 1.  the public image of economics is one of the neo-classical model prescribing liberalizing markets; 2. Economics has moved beyond this framework. For instance, her view in Chapter 5 is that psychology and behavioral economics lack an overarching framework and that we are left with many pieces of a puzzle and no idea how to put them together into a coherent framework. Whether this is temporary or structural is heavily debated. There are economist working successfully from within the axiomatic tradition, e.g., Douglas Bernheim, Faruk Gul, Wolfgang Pesendorfer and Antonio Rangel, to enrich and extend theories such that these capture anomalies. This has not yet reached textbooks. But the importance of solid theory explaining observations has grown over the past decades. Although there are also areas where neoclassical economics does work, much interesting work needs to be done still.
3 Recommendations
21st Jan, 2015
Lall B. Ramrattan
University of California, Berkeley
I thank you all for your responses.
12th Feb, 2015
Victor J Aguilar
12th Feb, 2015
Lall B. Ramrattan
University of California, Berkeley
Dear Victor,
Thanks for the post. The dominant theme in it seems to be that the social sciences are different from the physical sciences. But I recall that Adam Smith wanted to do for the social sciences what Newton did for the physical sciences. Smith evolved the notion of the spectator in his TMS which became the invisible hand in the WN. People are not satisfied with his solution, but, as I see it,  the Axiomatic Method is trying to lay bare the conditions that must be met for Smith's model to hold.
2 Recommendations
13th Feb, 2015
Victor J Aguilar
Marcelo-
On 28 December 2014, Lars Syll wrote:
"Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!"
Ten days later, on 7 January 2015, you wrote:
"Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science."
Clearly, you are a plagiarist. But I am curious: Why did you edit out the word "autism" when copying and pasting your comment? You are not ashamed of the history of your profession, are you?
In this recent paper I summarize the history of your profession.
13th Feb, 2015
Victor J Aguilar
Lall-
Thank you for your interesting comment regarding Adam Smith. However, my book, Axiomatic Theory of Economics, is not trying to lay bare the conditions that must be met for Smith's model to hold. I see Carl Menger, not Adam Smith, as the precursor to axiomatic economics. In this paper I critique Austrian economics:
Today, every economist of Austrian birth is lumped together, but I feel that, after Menger, there was a Y with Mises and then myself going in one direction and Böhm-Bawerk and then Hayek going in another direction, towards what is today known as “Austrian” but which I reject.
1 Recommendation
13th Feb, 2015
Lall B. Ramrattan
University of California, Berkeley
Dear Victor,
Your comments are enlightening. I did not mean to give precedent to Adam Smith over Carl Menger for the founding of the axiomatic method. I am aware of the force of this method in the Austrian school. We find Stanley Jevons also using the term in the following sense.
“That every person will choose the greater apparent good; that human wants are more or less quickly satiated; that prolonged labour becomes more and more painful, are a few of the simple inductions on which we can proceed to reason deductively with great confidence. From these axioms we can deduce the laws of supply and demand, the laws of that difficult conception, value, and all the intricate results of commerce, so far as data are available.” (The Theory of Political Economy)
Joseph Schumpeter ascribed the term to N. Senior in his chapter titled the “AXIOMATICS. SENIOR’S FOUR POSTULATES.”(Ch. 6 of Schumpeter’s His. Of Eco. Thought).
I did not mean to implicate Smith directly to the axiomatic method, but only indirectly in that sense in which Gerard Debreu “Theory of Value: An Axiomatic Analysis of Economic Equilibrium,” tries to address perfect competition.  Arrow-Debreu were explicit in saying that they wanted to improve Leon Walras effort to find a GE solution. We find in Arrow-Debreu work that “…perfect competition prevails, in the sense that each producer and consumer regards the prices paid and received as independent of his own choices.” (Arrow and Debreu, Eonometrica, 22 (1954) p. 265. I attach an excerpt from one of Debreu article explaining the role of the the axiomatic in his work.
1 Recommendation
15th Feb, 2015
Victor J Aguilar
Lall-
With varying degrees of success, many people have attempted to use the axiomatic method in economics. Extant are Egmont Kakarot-Handtke and I – everybody else is long dead and their theories forgotten. I reply to Kakarot-Handtke here and also touch on Senior’s early use of the method:
I consider Mises a precursor to my own work because his Regression Theorem somewhat inspired my third axiom. Mises was wrong to call it a theorem because he never proved it and he was wrong to call his Action Axiom an axiom because it is a platitude from which nothing is proven. Also, he was thinking too small; what he called the Regression Theorem applies not just to money but to everything.
But, in spite of these shortcomings, I give credit where credit is due. Mises’ Regression Theorem is actually the only thing of value in his work; originary interest was wrong as Keynes so cuttingly pointed out in a footnote on page 192-193 of his General Theory. But, reformulated as an axiom that applies to everything, Mises’ idea became one of the three axioms from which I deduce all of my theorems.
But Debreu is a not a precursor to my work because I do not believe in supply and demand. My theory is about price and stock. I discuss more thoroughly my rejection of supply and demand here:
In the excerpt you attach, Debreu writes, “as axiomatized theory has a mathematical form that is completely separated from its economic content. If one removes the economic interpretation of the primitive concepts, of the axioms, and of the conclusions of the model, its bare mathematical structure must still stand. This severe test…”
So we see that he meant this disassociation from economic interpretation as a test, like putting a race car on a dyno to test the power and torque of the engine, though with full realization that, while it is hooked up to the dyno, it is not actually going anywhere.
I make clear that there are three senses to the term “truth” in Section 3.1 of my book. (And in Section 12 I make clear that I am not addressing perfect competition, which does not actually exist.) Here is the table of contents:
But most economists create a conflict where there is no need for conflict by insisting on pitting these different senses of the term “truth” against each other as though only one can prevail. In fact, they work hand-in-hand to create sound and useful theory.
Incidentally, note that Debreu refers to his axioms as “primitive concepts,” which is the same term used by Lewis Fry Richardson when he used the axiomatic method to found numerical weather prediction. Richardson’s use of the axiomatic method is a good role model for economists. I discuss how numerical weather prediction relates to economics in more detail here:
21st Feb, 2015
Victor J Aguilar
This paper now has a different URL than what I linked to above:
The History of Economics from 1974 to 2014
8th Mar, 2015
Victor J Aguilar
Lall-
I forgot to mention Dirk Helbing.  Here he proposes a "research program of grand scientific challenges in economics - a Hilbert program for economics and the social sciences as I call it."
Frankly, I am not sure that soliciting "a list of the greatest deficiencies and challenges of currently applied economic theories" is accurately described as a Hilbert program.  But the fact that he invoked Hilbert's name warrants mention on this thread.
2 Recommendations
18th Jun, 2015
Shian-Loong Bernard Lew
Taylor's University
Thinking in terms of recursive economics, perhaps a rule or pattern could be found to overcome the curse of dimensionality that often defeats an attempt to axiomatize economics. From this vantage point perhaps the search for recursive algorithms in economics is the way forward - a rule that will allow for the universal computation of economic phenomena. Ultimately what constitutes an axiomatization in economics has to be resolved.
2 Recommendations
19th Jun, 2015
Lall B. Ramrattan
University of California, Berkeley
Dear Shian-Loong,
Thank you for your suggestion. I too think that the axiomatic basis of recursive method is worth exploring.
2 Recommendations
20th Jun, 2015
Shian-Loong Bernard Lew
Taylor's University
Dear Lall,
Most welcome, was a pleasure- the ideas put forward here is really an indication that economics is still very much a formal system of thinking and not purely a vehicle for politics or opinions in current affairs.
Best Regards
2 Recommendations
20th Jun, 2015
Victor J Aguilar
Dear Shian-Loong:
I am pleased to meet an economist who states his assumptions clearly and then deduces a theory from the stated axioms and from nothing else, with no hidden assumptions.
Here I quote Aditya Chakrabortty, who laments that, "instead of a real, all-encompassing economic theory, we get conferences that devote as much time to discussing the holistic massage industry ('using a Foucauldian lens') as to analyzing financiers. "
There are all too many economists today who eschew all theory in favor of finding and/or fabricating whatever data will push their political agenda or "prove" the opinion of whoever is funding them.
2 Recommendations
20th Jun, 2015
Lall B. Ramrattan
University of California, Berkeley
Dear Victor,
You make an excellent point. I have been thinking of Shian-Loong view on Axiom and recursive methods. I looked into Lars Ljungquist and Thomas Sargent "Recursive Macroeconomic Theory", MIT Press 2000. The did not make clear the axioms they follow. Have you any thought about this.
1 Recommendation
23rd Jun, 2015
Victor J Aguilar
Lall-
Shiang-Loong said, “perhaps a rule or pattern could be found,” so he does not have a set of axioms that works either.  But at least he is trying, which is more than can be said for the other 99% of economists who despise the axiomatic method and are content to do endless statistical studies – none of them consistent with each other – that “prove” the opinion of whoever is funding them that day.
Frankly, I believe that what constitutes an axiomatization in economics has already been resolved, in 1999 when I published Axiomatic Theory of Economics.  But I welcome Shiang-Loong’s efforts to devise a new axiomatic theory along recursive lines.
Incidentally, recursion – as the term is used in computer programming – was first introduced in economics by Ludwig von Mises.  Notice that his regression theorem is like a subroutine that calls itself until it reaches a stopping point where money had only use value.  This is similar to the minimax algorithm for playing tic-tac-toe, which regresses all the way to the end of the game, or for playing chess, which regresses as far as it can within the time limit and then assigns values to all those end positions based on material remaining and pawn position.
“I went beyond Mises by recognizing that his Regression Theorem is not a theorem but an axiom and that it applies to all phenomena, not just money.”
1 Recommendation
23rd Jun, 2015
Lall B. Ramrattan
University of California, Berkeley
Dear Victor; Shian-Loong,
The recursive macroeconomic theorists start with a vector of variables that characterizes the current position of the system. Then, they use two transition functions, one mapping today's state to tomorrow's state; and the other mapping the state variables to other endogenous variables in their model to do the recursive procedure.
Now, it seems that the state vector they started with resembles say the Axiom of Leonard Savage, who was working on Maurice Allias Axioms, who in turn was reacting to John von Neumann and Oskar Mergenstern axioms. So, can we regard such recursive state vector of variables as their fundamental axiom?
13th Aug, 2015
Shian-Loong Bernard Lew
Taylor's University
Dear Lall,
It has been quite some time. Thanks for the insight and illustration from the economic methodology of recursive macroeconomic theorists. It is always beneficial to know where we are/have been in order to attempt a quantum leap. 
Thinking in terms of a cellular automata and extrapolating this to the way the economy works- artificial economy: interesting to note that John von Neumann was instrumental in promoting the use of cellular automata. The kind of recursive rule I am referring to would most probably resemble the 1st of the set of two transition functions- the set that maps today's state to tomorrow's state. This first set of transition function though more abstract compared to the second set (the mapping of variables), is nonetheless more general, as a recursive rule and hence would fulfill the criteria of universality for axioms (my assumption of what axioms should be).
I believe this sort of recursive structure approaches the kind of mesoeconomics that Schumpeter was referring to when he focused on creative change (transition from current to future states) vis-a-vis adaptive change (transition between state vector of variables).
Neo-Schumpeterians and evolutionary economists have reworked this idea somewhat and a formal categorization of rules leading to a general theory of economic evolution can be found in:
Cheers
1 Recommendation
Can you help by adding an answer?

Similar questions and discussions

Use of Fixed or Random effects?
Question
4 answers
  • Bart VisschersBart Visschers
Hi,
Currently I'm writing my master thesis about the effect of gender diversity on CSR performance, using the Triple Bottom Line as dependent variables (environmental, social and economic).
I have a dataset containing 370 European companies spanning 4 years (due to data limitations). My panel is strongly balanced with no missing values.
I've included CEO duality, Revenues (log), ROA, Boardsize, Firmage and leverage ratio as control variables while also including year dummies.
However, I've ran the regressions and used the Hausman test to indicate whether the use of a fixed or random effect is most appropriate. The test indicated Fixed effects was the best fit. Just out of curiosity I've ran the regression with a random effect as well and to my surprise the results showed significant improvements. My IV became significant (0.004) all of a sudden, while the R-squared increased from 0.02 to 0.32 (not really sure if it matters). I also used clustered standard errors since they are more conservative compared to standard or robust st. errors.
Coming to my question:
Are the results of running the regression using random effects reliable and should I include them in my thesis? And if I do, how do I substantiate these findings?
My stata command looks like this:
xtreg envscore_ div_ ceodua_ logrev_ roa_ boardsize_ firmage2 lev_ i.year, clus(idasset) re
xtreg envscore_ ceodua_ logrev_ roa_ boardsize_ firmage2 lev_ yeardum, clus(idasset) fe
Thank you in advance.
Bart

Related Publications

Article
My subject is economic prognostication and my reason for choosing it is a simple one. Call it credential or confession as you will, the fact is that, for the last fifteen years or so, I have been a practising economic prognosticator. I attended at the birth of the Economic Survey and official attempts at longer-term planning, while the London and C...
Article
Se ha vuelto lugar común el escuchar que la mejor opción, y casi la única, de que disponen los países en desarrollo para modernizar sus economías es la reducción del tamaño del Estado y la transferencia al mercado y a la racionalidad privada de muchas de las actividades que actualmente se prestan por intermedio de empresas públicas. En esta confere...
Article
Full-text available
Este artigo foi escrito na suposição de que prestar atenção aos fundamentos filosóficos das teorias econômicas é importante, tanto para compreendê-las, quanto para ter consciência de suas fraquezas e limites. Sob esta orientação, faz-se um esforço para comparar a teoria neoclássica pura e a teoria neo-austríaca, investigando se aceitam ou rejeitam...
Got a technical question?
Get high-quality answers from experts.