Frank Hollenbeck’s Parallel Universe

I have a hard time believing that “The Sad State of the Economics Profession” was written by a professional economist. It is entirely wrong, including in its assessment of the profession, and it’s narrow, idealized history of thought. Frank Hollenbeck, the author, makes a number of claims, which are extremely unorganized, making it difficult to write a general comment. I want to address certain specific arguments,

  1. Hollenbeck’s attempt to contrast between economists who specialize in disproving “popular misconceptions” and those who “have sold themselves to the enemy” (government — maybe Hollenbeck should quit the University of Geneva, since it’s a public research school).
  2. The claim that mathematical models are not useful in economics, because “the parameters are not constant, most of the variables are interrelated with constantly changing interrelationships and omitted variables, like expectations, some of which being immeasurable, are conveniently assumed away as unimportant.”
  3. That empiricism is useless, because “it is difficult to distinguish between association and causation or correctly determining the direction of causation.” (Economists must be idiots for missing such a simple fact!)

If there is any element of truth in those three statements, Hollenbeck has done them a great disservice, because his defense of those claims is very weak.


The irony in Hollenbeck’s piece is that he accuses his peers of corruption, and supports his theory by building a mythology. All theory — except, I assume, that put forth by economists friendly to Mises — since 1930 is retrogressive, because it was all developed to legitimize false truths. Yes, Hollenbeck makes this argument explicitly,

The profession is always moving forward, right? In economics, we wrongly take the same attitude. Macroeconomics as a profession has not advanced but has regressed. We had a better understanding of macroeconomics 80 years ago. Politicians put Keynes on a pedestal because he gave them the theoretical foundation to justify policies that had been justifiably ridiculed in the past by the classical economists.

Nevermind that the academic popularity of Keynes’ ideas was a result of how well they persuaded his peers, not because of their congruency with public policy of the time. Although, I suppose all of Keynes’ peers were also corrupt, except (conveniently) whichever one of them might have advanced a theory that Hollenbeck actually agrees with (but may just be unaware of, because his history of thought is so poor). But, my intention is not to defend Keynes, just to point out that Hollenbeck mistakes reasonable disagreement for corruption and malice.

Economics is tough, because society is complex. Because of reality’s complexity, economists must build theories, or ideal types, that help us explain what we observe. But, this implies a certain disconnect between theory and the real world, because ultimately the former is only an interpretation. This interpretation was made by someone who only knows only some fraction (0 < x < 1) of the facts. Because we are cognitively limited, which is the reason why complex systems are difficult to understand, the ideal types we build will be similarly limited. And, because we all have asymmetric sets of priors, our posteriors are unlikely to be exactly the same. In English: economics is exactly the kind of subject over which there will be a lot of disagreement.

Hollenbeck’s approach to this disagreement is to dismiss it as corruption. I suppose this option is attractive to someone who does not know much about, or sees no merit, in post-interwar economics. The lack of merit position is hard to square, however, with the undeniably insightful theoretical advancements since 1930: the transaction cost theory of the firm (I forgot, Coase is a socialist), New Trade Theory, asymmetric information, et cetera. Those are three examples of hundreds more. Our understanding of the economy is incomparable to that of the 19th century — it is superior. J.B. Say did not benefit from the same degree of understanding of institutions, for example, or international trade, or price theory. Although, J.B. Say was smart enough to know better than Hollenbeck on monetary theory — so, I guess that some economists’ understanding has indeed retrogressed.

What about disagreement before 1930, was it also caused by intellectual corruption within the profession? Was Adam Smith a pawn of the state for preferring a dynamic, private supply of money? I am assuming that David Hume was the economists’ equivalent of a Jedi, because he advocated for a fixed money supply. Dark forces must have been behind the disagreements between Carl Menger and W.S. Jevons. J.S. Mill’s utilitarianism must have been developed to justify public policy of the mid- and late 19th century. It’s easy to play Hollenbeck’s game, but it’s obvious that the game is bunk.

What makes Hollenbeck’s approach so unfortunate, and so disheartening (as an Austrian sympathizer), is it runs contrary to the other common claim that the mainstream simply ignores what heterodox economists have to offer (and, by heterodox, I mean “Austrian” specifically). The truth is that the ignoring works the other way: heterodox economists like to ignore the mainstream, or dismiss it is as all wrong — which is essentially the same thing. But, how could a serious economist ever take a critique like Hollenbeck’s seriously? I am sure he has good ideas, but he does them an injustice by instead accusing his peers of intellectual corruption. This being an accusation that only someone terribly ignorant of the state of economics could make.


Forget, for a second, about mathematics and formal economics. Take any theory, such as Ricardo’s theory of comparative advantage. This theory says that exchange will be organized in such a way to minimize opportunity cost, because people will specialize where they have a comparative advantage. You have a comparative advantage in specializations where your opportunity cost is lower relative to others’. This can be generalized, and we can say that countries will specialize where they have a comparative advantage. Ricardo missed, however, — or at least it was not explicit in his model — that factor endowments help determine comparative advantages, and so initial endowments can go some way in explaining international trade. As it turned out, Ricardo’s model of trade was missing out an entire independent cause! Economies of scale can also explain trade, and it might even do a better job at it! These were factors which Ricardo had omitted from his model.

It’s strange that Hollenbeck does not level the same criticism against all economic theory. If we have to build ideal types, abstractions, to understand the real world, and these ideal types will suffer from incompleteness (because of the incompleteness of our knowledge), then they all are burdened by the same probability of omitted factors. The truth is that all economists, including Hollenbeck, are aware of this and they embrace it. That is why there is an academic process of scientific advancement. We know that our theories are not good enough, so we continue to develop them. Hollenbeck’s critique of mathematical models on account of “omitted factors” is simply nonsense.

The claim that mathematical models are useless, because their parameters are non-constant, is weak, and is equally applicable to theory in general. Theory is about positing, and rationalizing, certain relationships between variables. It’s no different whether you present a theory in words, or whether you present it in math. If you read a good theoretical economics paper, what you find is a model that is largely qualitative, in the way that I think most people understand that word. The model does not say that an increase in price by five percent will lead to a decrease in demand by one. It abstracts from those kind of specifics, focusing instead on the relationships. This is true whether the model is presented in words or in math.

Why use math at all? The problem with the written word is that it’s easy to be vague. An economist might advance a theory, their critiques would respond, and that economist might claim that his critiques completely misunderstood him. Math helps make the model more explicit. This also helps the economist to present a stronger, more complete theory, since he has to figure out the explicit model before he can present it. In other words, math helps the economist think about what he is omitting. In other words, Hollenbeck’s critique is actually stronger against the form of communication he prefers, than it is against math.

While Hollenbeck does not bring this up, one other objection to math might be that the type of assumptions that have to be made are typically much more strict, and less plausible. I think there is merit to this criticism, but it’s also something that most economists are aware of when they are drawing conclusions from their model. Mathematical models have to worry about being tractable, so that they can be worked with. Good models are always very careful about their assumptions, however, and if the simplification is too strong the model is not very useful. Economists often put work into defending their assumptions. And, when it comes to drawing conclusions, economists consider their assumptions when generalizing the results of the model.

If you think there is an “obvious case” against the use of math in economics, you are wrong.


This needs to be made clear: all economists know that correlation is not causation.

This is something students are told in the first or second week of an introductory econometrics class. Your model must be informed by theory. There has to be a reason that you assume a relationship between two variables. I mean, duh. It doesn’t make sense to use econometric techniques to test a theory if you aren’t actually basing your model on any theory. But, if your theory says that any increase in the money supply will cause a general rise in prices, then we have good reason to expect correlation between those two variables. We use econometrics to get an idea of what the direction of joint variation is, if there is direction at all. The theorist imputes causation, and the empiricists tests whether there is association at all.

Why would we want to test theory? People can make mistakes in their reason. In fact, they can make mistakes they are unaware of. We all do it all the time. We all have had that experience where we’ve thought something to be true for the longest time, we suddenly see it from another angle, and what was once true is now false. The false belief, at the time, seemed very reasonable. We even looked down on those who disagreed with us, because we thought they were missing something obvious (obvious to us, at any rate). But, it was only we who were missing something! Empiricism cannot definitely disprove or prove theory, but it can help to update our priors. It helps us to see which correlations in the data there actually are, to weed out theories that are irrelevant. And, if we posit a causal relationship between A and B, but we observe that B doesn’t occur, despite A, it might lead us to revise our assumptions. It might cause us to see the world a different way, and to discover something that we previously hadn’t considered.

All in all, Hollenbeck’s article is very confused. His readers deserve better, because they are being misled. That his arguments are very weak, however, doesn’t mean that my beliefs are right. That’s alright. Disagreement is a part of business, and we have to communicate to resolve them. But, accusing me of intellectual dishonesty is not a way to go about that. Neither is leveling a barrage of “obvious” problems at the profession, “obvious” problems that on second look are not problems with the profession at all.

13 thoughts on “Frank Hollenbeck’s Parallel Universe

  1. Lorenzo from Oz

    The theory that Austrian economics and Marxism are mirror images of each other just got a boost with this “false consciousness” piece.


    Great response Jon. I agree with you largely about the article.

    I have an honest question. Mises said economic laws are not falsifiable by evidence. Do you agree that this is a proper interpretation of Mises? Do you agree with the contention?

    1. JCatalan

      I think Mises makes a valid point there. If we can’t make out the evidence without theory, what can the evidence tell us about the theory? I don’t think it can disprove it. But, it can at least inform how much you “trust” the theory. So, suppose you’re 90% sure that this theory of some event is true, but then the event occurs and the evidence doesn’t seem to support your theory, you might want to revise that probability downwards, depending on how strong you feel the evidence is. It could lead you to reconsider competing theories, as well.


        I’m not trying to be snarky.

        Just to clarify, you admit the possibility that, just using one example, the law of demand may be false?

        1. JCatalan

          Well, even if that probability is .000000001, that’s still a probability larger than 0.

          I don’t know how to profession approaches this, but there’s also the question of relevance. If several similar outcomes can result from different assumptions, and these assumptions are relevant at only certain points in time, then different theories — all of which explain the same outcome — might be right, but they may only be relevant at certain points.

          Edit: Just to give an example, we do know that the demand curve is not always downward sloping: Giffen goods.

          1. John S

            I’ve looked into this issue a bit before, but I’m curious: what are some real-world examples of Giffen goods?

          2. JCatalan

            The usual example is a luxury good. There’s a certain benefit that may accrue from owning something few others do. So, the demand for something may be higher at $71,000 than at $70,000 if that $1,000 pushes a large number of willing buyers off the market, and ownership becomes so rare that the good becomes a status symbol.

            Maybe we could say that the good now is a different good, but I think that would be close to splitting hairs.

          3. JCatalan

            Good catch, thanks. But, just exchange “Veblen” for “Giffen” good in my response to Hank.

            I think what’s being purchased is a good that can satisfy many different ends. Otherwise, we might call two apples different goods, because the people who consume them have different reasons for doing so.

            I mean, there might be some justification for considering them different goods, but at some point we have to ask when it’s not really useful to debate semantics, because it causes the general idea to be lost.

          4. John S

            Well, let’s think about luxury cars. As the price increases, the quantity demanded generally seems to decrease. There are more many BMWs sold than Porsches.

            And even among Porsches, in recent years the fastest growing sales have come from the affordable Boxster and Cayenne models (both around $50,000 each). So it seems like there is a healthy number of buyers who want the prestige of owning a Porsche at a lower price.


            Anyway, my main point is that a lot of people seem to be a bit too quick on the trigger to say “Giffen/Veblen goods disprove the law of demand” w/o citing any real-world examples.

          5. JCatalan

            In a way, though, all of this “proves” my point, right? We have a hypothetical situation where the law of demand doesn’t hold. The evidence suggests its not relevant to the real world, and I think many people have revised their priors because of it: Veblen or Giffen good arguments are rarely applied.

            Re: Porsche v. BMW, I think you need to look at certain brands, instead of between brands. The demand curves for both cars are probably going to look different, and the reasons people want those cars may also be different. They are imperfect substitutes, and may not be comparable in certain cases.

          6. John S

            Veblen or Giffen good arguments are rarely applied.

            Well, from reading LK’s posts on the law of demand (and relevant sections of Debunking Economics), it seems like these are core Post-Keynesian arguments against the applicability and usefulness of the LoD, which they then generalize to the uselessness of neoclassical economics in its totality.

          7. JCatalan

            He’s probably getting it from Steve Keen, and I agree that the argument is very, very, very poor. It’s part of the reason why I hold Keen’s book in such low esteem. I’m not at home, so I can’t check the book, but he seems to confuse the idea of a timeless model (or a demand curve at a certain point in time) with what a demand curve would look like if you’re plotting quantity demanded over a period of time.

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