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Self reference in economic theory

Perhaps the most serious critique of Marxist and Hegelian dialectical materialism is put forth in Karl Popper’s little gem The Poverty of Historicism. If I may be so bold as to offer my own summary of the main argument I give the following:

Any objective approach to economic or social theory is fundamentally unscientific and bound to fail because the theory will impact the phenomena under observation rendering the theory instantly defunct.

I broadly accept this and would never give sociologists the compliment of calling them social scientists. However it recently occurred to me that it might be possible to categorise political and economic thought in a logically consistent manner which encapsulates Popper’s concerns. I claim this may be possible by considering self reference in economic theory. I propose to offer a number of possibilities:

1) Weakly self consistent theory: a theory which describes social phenomena in a society where belief in that theory is held by the majority and where it is not.
2) Strongly self consistent theory: a theory which describes social phenomena in a society if and only if belief in that theory is held by the majority.
3) Self inconsistent theory: a theory which can describe social phenomena in a society if and only if belief in that theory is not held by the majority.
4) Wrong theory: A theory which describes no phenomena regardless of whether it is accepted by the population. This one covers most of the ideas I have ever had including probably the entirety of this post.

The ideal would be to find an example of 1. The theory would work before being accepted and would therefore be easiest to popularise. However, example 2 creates a fascinating possibility. It is with example 2 that an interesting possibility for policy arises. Perhaps consumer confidence is an example. Not a good example because the individual can believe that increased investment depends on consumer confidence but also believe that there is no consumer confidence and therefore one would be unwise to invest. Nevertheless policy makers only have to invent some imaginary cause of optimism and the cause is rendered legitimate.

The analogy of the placebo or self fulfilling prophesy might be helpful. The aim of economists might then be to construct a theory which if adopted by the mainstream will produce effects which are described by the theory. The leap of logic here is that such a theory may not describe any effects that exist before its creation. The real question which then remains is will such a theory lead necessarily to a prisoner’s dilemma scenario. That is, while the individual knows it will work if everyone accepts it, she also knows that it will not work if some subsection does not.

To make a more tendentious assertion, Popper was perhaps arguing that Marxist thought is an example of 3. It may describe phenomena as they currently exist but if it becomes adopted as an active political movement it ceases to describe real phenomena… leading to a runaway nightmare. A Marxist capitalist is a hypocrite and a Marxist communist is a contradiction.

An example
The challenge I would like to set my self is to create an example. The major difficulty is that it is possible to find examples that reference some other theory and therefore become a prisoner’s dilemma or otherwise resort to classic cooperation problems. Anyway, here is my best attempt:

1) Any society that believes in both the following statements and the current one will produce phenomena that are consistent with the statements.
2) The economy is fundamentally unstable and strict adherence to these rules is the only way to mitigate risks associated with the fundamental instability.
3) This theory is always true regardless of whether it is known to the population. (a false statement)
4) Some final statement regarding public policy such as loose fiscal policy will mitigate risks associated with the business cycle (this could be non-Keynesian or essentially anything the population might believe).

This represents a further abstraction on top of Keynes’ discussion of optimism/pessimism being self-fulfilling. The key point is that statements 1 to 3 could create statement 4 so long as the population can be made to believe false ideas (surely not?!).

Believe it or not, I meant this post to be a joke. A Very Unfunny Joke (VUJ).

Let me finish with a joke. Marx famously defined Communism as the authentic movement replacing capitalism. Could the necessary extinction of humanity fulfill that definition?

Best,

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