Seven Theses for a Theory of Realist Economics*
Theses One to Four
II: Theses Five to Seven will appear in the next issue)
Jacques Sapir1 (L'École des Hautes Études en Sciences Sociales,
© Copyright 2003 Jacques Sapir
The issue of realism has been central to the PAE
movement from its beginning. As I have
previously stated in this journal and elsewhere, for me realism is not the
opposition between a "factual" world and a "theoretical"
one, between reality and abstraction.
Instead for me realism is both a methodological stance and the
definition of a theoretical research program.
Realism however can give rise to different interpretations. Uskali Mäki has made an important distinction between world
realism and truth realism.2
This distinction nevertheless raises the issue of what we understand
as being the "real world", and there is here a kind of fast-lane to
I agree with Tony Lawson’s distinction between events and processes.3 A process, a notion central to the works of
Marx and Keynes,4 is understood here not as a sequence of events
but as "...the genesis,
reproduction and decline of some structural mechanism or thing, the
formation, reformation and decay of some entity in time".5 This realism is completely different from
empirical realism, which takes for granted the notion that any human agent
can have a direct, non-mediated access to reality.
‘Realism’ as I use the word is both procedural and subjectivist. Subjectivism does not mean that human
subjectivity is the only possible reality, a fallacy commonly found in some
post-modern authors, but that subjective views of reality, as far as they
shape human decisions, are part of reality.
Realism will then define methodological constraints for
economists. That does not mean that
economics must have a specific methodology, which is the position of
mainstream economists defending Friedman's instrumentalism, but rather that
the methodological requirements for social science can have distinct
applications for economics, with specific methodological rules for conducting
enquiries or for story-telling.6
Elsewhere I have described what such applications in the methodology
of economics could be.7
Realist economics does not bear kindly theoretical tinkering or ad-hoc arguments. There are, as I have explained before in
this journal, limits to pluralism.8
A coherent research program needs to be developed for a realist
economics. To this end I offer the
following seven theoretical theses.
Thesis 1: The central issue in
economics is the co-ordination of decisions and interactions generated by
decentralised, heterogeneous and interdependent agents whose decision-making
abilities are constrained by limited cognitive capacities.
In the real world, in the theoretical sense of this word, decision-making
is done in a decentralised way. Not to
acknowledge this fact is to reduce human agents to the status of mere parts
of a giant machine, the issue then being who is the power behind such a
machine, God Almighty, the market auctioneer (pace Walras),
the Party general secretary or the mainstream economist himself.
But human agents are not only decentralised, they also are
heterogeneous. Not to acknowledge
heterogeneity, as when one assumes identical decision-making patterns and
initial positions or a single commonly shared rationality principle,
transforms the community of human agents’ into a world of clones. If this were really the case there would be
no sense in talking about decentralisation even in a politically free
The decentralisation principle is then largely grounded on the refutation of
the possibility of a single rationality principle which could be shared by
all agents, everywhere, always and under every possible condition. Daniel Kahneman
and his colleagues, the late Amos Tversky
especially but also Richard Thaler, Paul Slovic and Sarah Lichtenstein to name just a few, have
made this refutation.9 The
reluctance of mainstream economists to acknowledge these scientific results -
a paradoxical position for a group professing fondness for the Popperian legacy - betrays their unwillingness to accept
true decentralisation, whatever they may say about possible different initial
human and material resources allocations to individuals. Heterogeneity is a necessary concept for
Ultimately heterogeneity means not just that situations can be
different and thus also the social positions from where decisions are
made. This is heterogeneity in its
descriptive sense. In a more
analytical sense heterogeneity derives from the fact that patterns of
decision-making, models of rationality - here to be understood as the simple
fact of having a reason for doing something - are different. Heterogeneity is
not exogenous to the decision-making process, something that a dedicated
policy could eradicate, but instead something at the very heart of this
The interdependency of decentralised and heterogeneous agents must be
understood. The standard economics
theoretical tradition emphasises the Robinson Crusoe metaphor, negating the
interdependency issue, and envisions the social process from the point of
view of a completely isolated individual.
Against this tradition, realist economists conscientiously put the
issue of possible unintentional effects of individual decisions on other agents
at the very centre of economic activity and as part of social life. Here they reclaim both Hayek's legacy, at
least the one coming from The
Constitution of Liberty,10
and the Durkheimian one with its concept of social density.11 This last, that the web of intentional and
unintentional relations and the perceptions related to them is the real place
where decisions are made, was developed by Emile Durkheim
in his seminal work on the social impact of the division of labour.12
To jointly acknowledge decentralisation and interdependency implies a switch
from the allocation paradigm to the co-ordination one. Co-ordination can be achieved through
intentional processes (networks and hierarchies) as well as through
unintentional ones (markets). But
whatever the process one thinks fits best at a given time and for a given
problem, decentralisation is the central issue.
Anti-realism as a methodological strategy supported by mainstream economists
does not stop with rejection of heterogeneity and/or interdependency. Perfect information, as in the initial Walrasian model or as in the rational expectations
theory, is part of such a strategy.
Refutation of the perfect information assumption can be
epistemic. Simon and de Groot have shown that even if a perfect information
structure could exist, our cognitive capacities preclude us from computing in
a time short enough for this structure to be of actual use for our
But refuting the perfect information assumption can also be
ontological. Perfect information could
be an unreachable goal because the real world is too complex to be understood
- the classical Hayekian understanding of uncertainty - or because our own
attempts to gather more information are generating endogenous modifications
of the information structure (Stiglitz, Akerlof).
Uncertainty is then not an exogenous addition but is endogenously
generated. This understanding of
uncertainty puts the asymmetrical information school on the right side of the
methodological realism border when compared to the information search school
One has to add that if we agree with the fact that there can not be a single
and common rationality principle then the rational expectations theory is
devoid of any logical basis. Whatever
the reason for endogenous uncertainty, this assumption is another defining
characteristic of mainstream or non-realist economics. It is so as to deny uncertainty that
neo-classical economics pretends to give to profit and price a natural law
A common attribute of varieties of non-realist economics, whether because
they refuse to acknowledge heterogeneity or interdependency or endogenous
uncertainty, is their denial of the relevance of time and money. Realist economics, on the other hand,
stresses time and money relevance.
Time is relevant as a causal factor,15 something which was
understood quite early by Gunnar Myrdal who pointed to the relevance of the ex-ante /
ex-post divide in the perceptions of economic agents,16 and by the
classical institutionalist school with its first
mover / second mover paradigm.17
Time is also relevant, as a delay between decision and effects or
between a demand and a supply response, as clearly understood by Mordecai Ezeckiel a long time ago.18
Money is a necessary institution for co-ordination. It generates the illusion of homogeneity
that agents need to make complex decisions on the basis of their limited
cognitive capabilities and because, by allowing for the separation between
income formation and income utilisation, money makes possible a better use of
Thesis 2: If money is a necessity in
an uncertain world, money also introduces a specific form of uncertainty,
casting doubts on the market’s ability to efficiently process information.
In a world devoid of uncertainty money would not matter. But money gives to every agent in an
uncertain world the ability to shelter himself in liquidity. Liquidity in turn allows every agent to
defect from the long and continuous chain of interdependencies generated by
the division of labour. This very
possibility of defection introduces a new strategic uncertainty which is at
the heart of economic decision-making in money-based economic systems. Actually there is a deep interaction
between uncertainty and the flight to liquidity, which in turn generates this
strategic uncertainty. This was
perfectly described years ago by G.L.S. Shackle:
"When knowledge seems
especially elusive, we desire money rather than specialised, vulnerable
assets. We sell the assets, their
prices fall and it becomes no longer worthwhile to produce them, no longer
worthwhile to invest, to give employment.
Had Keynes attended to Cantillon, he could
have freed himself from the proposition that an employer will always offer a
wage equal to marginal product of value of his body of employed people. For since he must employ people first and
sell their product later, he cannot know for sure what their marginal product
is going to be".19
Minsky has shown how financial innovation, as
burgeoned during the second half of the XXth
century, could be deeply destabilising.20 From Marx to Keynes,
realist economists have analysed how the flight to liquidity should put
crisis - not equilibrium - at the centre of economic thinking. Crisis is the permanent horizon of a
capitalist economy because either liquidity is too much in demand or is not
wanted at all. The specific
uncertainty generated by liquidity pushes economic systems toward
under-investment and under-employment.
This uncertainty can not be managed by economic computation and can be
called radical uncertainty.
Here we are facing the first paradox of money. As an institution money pretends to solve
the heterogeneity problem by setting monetary prices as a common norm for
decision-making, something which makes the deepening of the division of
labour possible. However by doing so
money generates the radical uncertainty which constrains the expansion of the
division of labour.
A second paradox of money is that as an institution it would seem to unify
time through interest rates and its function as a reserve of value. But money, through its liquidity function,
contributes greatly to making the future even more uncertain.
The twin paradoxes of money stress the fact that if monetary prices are a
necessary fiction, from the realist economics point of view, they nonetheless
are a fiction. That was precisely what Max Weber tried to show when
explaining that monetary prices are necessary in a decentralised economy but
are not the result of demand and supply equilibrium - as pretends capitalist
spontaneous collective thinking.
Monetary prices actually reflect the balance of power between social
or individual forces and interests.21 Keynes, in one of his first works, wrote
something very similar. He explained
that inflation and deflation translated into the monetary world social
conflicts opposing large, structured social groups.22
However if monetary prices are a necessary fiction they also are an
uncompleted one.23 They are unable to carry the whole range of
information needed for decision-making.
Because we need information which can not be conveyed through monetary
prices and which belong then to different information spaces, our decisions
are situated and embedded in multidimensional worlds. One consequence is that the transitivity
of individual preferences is broken in
a systematic way.24 Then
the Allais' Paradox holds true,25 and we
can forget the subjective expected utility theory and every device invented
by mainstream economics to transform the static Walrasian
world into a dynamic one and to cope with uncertainty (even in a Bayesian
form). A second consequence, as
demonstrated by Grossman and Stiglitz, is that in
such a situation, where prices do not convey all needed information,
competitive markets are not informational efficient.26
Thesis 3: Time and money are at the
very heart of the interchange between the individual and collective levels.
Time matters, inter-allia, because of the time
constraint: the more we wait before making a decision the more we lose even if
our decision is the perfect one.
However the time constraint has not the same meaning for individuals
and groups. Our decision tempo is
largely shaped by our more or less deep insertion into collective groups,
from the family to the enterprise, including social and political
organisations. In turn, the way
collective groups are institutionalised shapes also their impact on our
individual use of time and our sensibility to the time constraint.
The power that money gives, particularly as liquidity, is not used in a
vacuum of representations. Kahneman and his colleagues have demonstrated that our
individual preferences are shaped, or more precisely "framed" by
collective contexts.27 But
the way I use my liquidity power could affect decisively some collective
groups to which I belong, even if I have no idea of this fact. A bank-run, even if induced by misguided
collective representations, is a movement of thousands of individuals who try
to protect their savings but, by doing so, usually destroy most of the
economic context supporting collective groups (enterprises) from where their
income is generated.
Any attempt to seriously make time and money relevant, from a theoretical
point of view, amounts to repudiating methodological individualism. But because time and money relevance comes
from interdependency and from social density, we also have to repudiate the
idea of a single dominating collective context. If realist economics embraces
methodological holism it is a non-deterministic holism.
Thesis 4: Any attempt to negate the
theoretical status of time and money leads to non-scientific assumptions and
transforms the economist himself into a producer of ideology.
Being serious about time and money places economics in the very middle of the
social sciences. If statistical
regularities and stabilities are to be found, they are not the products of intemporal laws but of social systems of
institutions. The stability of these
systems is itself a local and temporary phenomenon. On the other hand if one wants to ground
economics on laws similar to ones found in natural sciences, in physics or
mechanics, one has to negate time and money relevance. Such a strategy is logically coherent if
and only if one negates either decentralisation or interdependency. Both are radical retreats from realism.
Here we have one of the most fanciful paradoxes of mainstream economics. To reject realism for axiomatics,
mainstream thinkers have to invoke ergodicity.28 But to pretend that economic processes
could be in any sense a kind of ergodic process,
one has to demonstrate that they are subject to a determination which is
non-human (thereby violating the initial assumption of decentralised
decision-making) and non-social.
Obviously the standard theory of individual preferences and its
conclusion, the closed and universal model of rationality, fit nicely here.
assumptions about individual preferences (transitivity, continuity,
reflexivity, independence and time monotony) are then just not ad-hoc
assumptions but the logical core for any instrumentalist methodology grounded
on preference utilitarianism.29
They provide the stable, non-social, reference point needed to pretend
that observable local economic stabilities are like the exposed tips of yet
unknown "natural" laws of economics.
It happens to be the case, however, that all these axioms can be tested and
when they are they are invalidated.30 Facing such results most mainstream
thinkers pretend they are irrelevant.
They dismiss the very idea of confronting an economic theory with real
life experiments.31 By
doing so they fail to understand that they can claim legitimacy for the axiomatic approach if and only if they can
find empirical grounds for their ergodic
assumption. What psychology has done
is no less than to destroy the only substantial argument for ergodicity, that is the universality and stability of the
neoclassical model of rationality.
The willingness to integrate into economic theory the findings of applied
psychology versus the refusal to do so is the true borderline between
economics as a scientific activity and economics as production of
ideology. The defence of axiomatism clearly no longer belongs to any kind of
scientific approach to economic phenomenon but instead is a form of religious
In contrast to the we-do-not-want-to-know approach, George Akerlof has succeeded in integrating recent psychology
results to a theory of inflation, which is clearly Keynesian.32 Akerlof’s writings are living proof that Kahneman and Tversky works can
be solid ground for Keynesian assumptions, particularly when it comes to
money and time.33
* This paper is a
translation and adaptation of one that appeared in the French journal Alternatives Économiques
(n° 57, 2003, hors série, pp. 54-56, see also
www.alternatives-economiques.fr) and is published here with authorisation of
the journal’s editorial board. The initial aim was to review assumptions
developed in an earlier book, Les trous noirs de la science économique
(Albin Michel, Paris, 2000) and to specify some
details that could be of use for the PAE
This book was published in the very middle of the battle following the French
students appeal for more realism in the teaching of economics (spring 2000) and
sold quickly, being re-printed twice before its forthcoming pocket
edition, September 2003. This
coincidental publishing was a pure stroke of luck. The book was written between 1995 and 1998 when I was
teaching at the Vyshaya Shkola Ekonomiki (Higher School in Economics - Moscow). From
lectures delivered in Moscow I wrote first a basic book for Russian students
teorii neodnorodnykh sistem - opyt issledovaniya decentralizovannoy
ekonomiki - Economic theory of heterogeneous
systems; an essay on decentralised economies) which was published by Vyshaya Shkola Ekonomiki Press, Moscow, in 2001. At the same time I
re-focused and expanded part of its content to write Les trous noirs, this time not as a basic book but as a critical essay on mainstream
economics. This second book is not then the translation of the Russian one,
although they are closely related.
I have adapted and developed here the arguments of the Alternatives Économiques paper for the
sake of an English language readership not necessarily aware of debates
currently raging in Paris.
1. Professor of economics, EHESS-Paris, director CEMI-EHESS.
2. U. Mäki, "How to combine rhetoric and
realism in the methodology of economics" in Economics and Philosophy, vol.4, avril
1988, pp. 353-373.
3. T. Lawson, "Realism and instrumentalism in the development of
econometrics", in Oxford Economic
Papers, vol. 41, janvier 1989, pp. 236-258.
4. For the latter, A.M. Carabelli, On Keynes's Method, Macmillan, Londres, 1988.
5. T. Lawson, Economics & Reality,
Routledge, London & New York, 1997, p. 34.
6. C. Lloyd, Explanations in Social
History, Basil Blackwell, Oxford, 1986.
7. J. Sapir, "Calculer,
comparer, discuter: apologie
pour une méthodologie ouverte en économie", in Économies et Sociétés,
série F, n°36, 1/1998, pp. 77-89.
8. J. Sapir, "Realism vs. Axiomatics"
in Edward Fullbrook (ed.), The Crisis in economics, Routledge,
London & New York, 2003, pp. 58-61.
9. For a now quite old review of this literature see J. Sapir,
"Théorie de la régulation,
conventions, institutions et approches hétérodoxes de l'interdépendance
des niveaux de décision",
in A. Vinokur (ed.), Décisions économiques, Économica, Paris,
1998, pp. 169-215. Also: A. Tversky, "Rational
Theory and Constructive Choice", in K.J.
Arrow, E. Colombatto, M. Perlman
et C. Schmidt (eds), The Rational Foundations of Economic Behaviour, Macmillan and St.
Martin's Press, Basingstoke - New York, 1996, pp. 185-197.
10. F. Hayek, The Constitution of
Liberty, University of Chicago Press, Chicago, 1960.
11. E. Durkheim,
Les règles de
la méthode sociologique,
PUF, coll. Quadriges,
Paris, 1999 (1937).
12. E. Durkheim, De la division du travail social, PUF, coll "Quadrige", Paris, 1991 (1893).
13. A. de Groot,
Thought and Choice in Chess, Mouton,
La Haye, 1965.
De Groot's work has been much used by
Herbert Simon. See H.A. Simon, "Theories of
bounded rationality", in C.B. Radner & R. Radner (eds.), Decision and Organization, North
Holland, Amsterdam, 1972, pp. 161-176.
Shackle, "The Origination of Choice", in I.M.
Kirzner, (ed), Subjectivism,
Intelligibility and Economic Understanding , Macmillan, Londres, 1986, pp. 281-287.
15. M. Capek,
The Philosophical Impact of
Contemporary Physics, Van Nostrand, Princeton,
1961. G.P. O'Driscoll Jr. and M.J. Rizzo, Economics of Time and Ignorance, Basil
Blackwell, Oxford, 1985, pp. 60-61.
16. G. Myrdal, Monetary
Equilibrium, W. Hodge, London, 1939, pp. 43-44.
17. W. M. Dugger, “Transaction cost Economics and
the State”, in C. Pitelis, (ed.), Transaction Costs, Markets and Hierarchies,
Basil Blackwell, Oxford, 1993, pp. 188-216.
"The Cobweb Theorem", in Quarterly
Journal of Economics , vol. LII, n°1,
19. G.L.S. Shackle, Business, Time and Thought. Selected Papers of GLS
Shackle, New York University Press, New York, 1988, p. 43.
20. H.P. Minsky, Stabilizing an unstable economy, Yale
University Press, New Haven, Conn., 1986.
21. M. Weber, Economy and Society: An Outline of Interpretative Sociology,
University of California Press, Berkeley, 1948, p.108. See also about the
nature of money in chapter II in the first part of Wirtschaft und Gesellschaft , translated as M.
Weber, The Theory of Social and
Economic Organization, the Free Press, New York, 1964.
22. J.M. Keynes, "A tract on Monetary
reform", reprinted in J.M.Keynes, Essays in Persuasion, Rupert
Hart-Davis, London, 1931
23. C. Deutschmann, "Money as a Social
Construction: On the Actuality of Marx and Simmel",
in Thesis Eleven, n°47, novembre 1996, pp. 1-19.
24. This is clearly a consequence of
the Endowment Effect. See, D. Kahneman, J. Knetsch et R. Thaler, "The Endowment Effect, Loss Aversion and
Status Quo Bias" in Journal of
Economic Perspectives , vol. 5/1991, n°1, pp. 193-206.
25. M. Allais, "Le comportement
de l'homme rationnel devant le risque. Critique des postulats de l'école américaine" in Econométrica, vol. 21, 1953,
pp. 503-546. Also: M. Allais & O. Hagen (eds.) Expected Utility Hypotheses and the Allais Paradox, Reidel, Dordrecht, 1979.
26. S. J. Grossman & J. Stiglitz, “Information
and competitive price systems”, American
Economic Review , Vol. 66, n° 3, May 1976, Papers and Proceedings of the
Annual Meeting of the American Economic Association.
27. The framing effect is well
described in D. Kahneman, "New Challenges to
the Rationality Assumption" in K.J. Arrow, E. Colombatto, M. Perlman et C.
Schmidt (eds.), The Rational
Foundations of Economic Behaviour, St. Martin's Press, New York, 1996,
28. For an enlightening analysis about how not to use the ergodicity
concept see P. Mirowski, More Heat than Light, Cambridge University Press, London - New
York, 1989. See also : B. Ingrao et G. Israel,
"General Equilibrium Theory : A History of Ineffectual Paradigm
Shifts" in Fundamenta Scientiae,
vol. 6, 1985, pp. 1-45 et 89-125; P. Mirowski,
"Energy and Energetics in Economy Theory"
in Journal of Economic Issues, vol.
22, 1984, pp. 811-830.
29. C. Harsanyi, "Morality and the theory of
rational behaviour", in A. Sen et B. Williams,
Utilitarianism and Beyond,
Cambridge University Press & Éditions de la Maison des Sciences de l'Homme,
Cambridge & Paris, 1982, pp. 39-62.
30. D. Kahneman, "New Challenges to the
Rationality Assumption" in K.J. Arrow, E. Colombatto, M. Perlman et C.
Schmidt (edits.), The Rational
Foundations of Economic Behaviour, St. Martin's Press, New York, 1996,
31. For a good example of such an argument, see M. Friedman, "The
Methodology of Positive Economics", in M. Friedman, Essays in Positive Economics, Chicago University Press, 1953, p.
32. G.A. Akerlof, W.T. Dickens, G.L. Perry,
(1996), "The Macroeconomics of Low Inflation" in Brookings Papers on Economic Activity,
pp. 1-76 ; Andersen T.M., (2001) "Can
Inflation Be Too Low?" in Kyklos, vol. 54, Fasc.4, pp. 591-602.
33. G.A. Akerlof, "Behavioral Macroeconomics and Macroeconomic Behavior", in American
Economic Review, vol. 92, n°3, juin 2002, pp.
411-433, p. 424 ; the source quoted here is D. Kahneman
et A. Tversky, "Prospect Theory: An Analysis of
Decision Under Risk" in Econometrica, vol. 47, n°2, mars 1979, pp. 263-292.
Part II: Theses Five to Seven will appear in the next issue.
Jacques Sapir, “Seven Theses for a Realist Economics; Part I: Theses One to
economics review, issue no. 21, 13 September 2003, article 1, http://www.paecon.net/PAEReview/issue21/Sapir21.htm