Economics and Metaphysics

Modern theories of Economics make ontological clams. This post is about such claims that associate housing bubbles to expectation. The claims are metaphysical because they assume some form of causality. Any claim of causality, about anything, is metaphysical.

When one rotates a stone attached to a string (do not try this, just a thought experiment) is the rotation of the stone causing the centripetal force according to well-known Newton’s Law F = mv^2/r or the centripetal force is causing the rotation? Answering this question in Mechanics requires taking a metaphysical stand, i.e. relative vs. absolute space.

A metaphysical stand in modern economics is that housing bubbles are caused by expectation of rising house prices, or that stock market bubbles are caused by expectation of higher stock prices. I argue that based on evidence bubbles finally burst and at the top expectation is not enough to maintain them. Thus I argue that expectation is an epiphenomenon that runs in parallel with the primary phenomenon of a purposeful bubble creation by governments because that is the easy thing to do instead of assuming the political cost to modernize societies to create real wealth. Therefore, instead of a metaphysical causality I see a hidden variable in action (government intervention). This is close to a anti-realism (relativity) vs. realist (Newtonian) debate. Neoclassical economics and their unfounded metaphysical/ontological claims of reductionism (microfoundations) fall under realism. Keynesian economics is instrumentalist/anti-realist.

If one cannot grasp the metaphysical aspects of this, it is difficult to get around the issues. All the debates in human history have their roots in the oldest debate of all, rationalism versus empiricism, Cartesian vs. Bacon thinking.

Modern economics takes a rationalist approach ignoring all evidence. Others take an empirical approach based on evidence. When empirical evidence falsifies a rational model, auxiliary hypotheses may be introduced for salvaging it. This can go on for hundreds of years. Choice is ultimately a dogmatic stand in a world plagued by the paradox of material implication.

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