Ceterus Paribus and the Pseudo Science of Economics

By Sean Monaghan Stevens

“Ceterus Paribus clauses are untestable, uninformative, unfalsifiable and lack empirical meaning. Because of this Economics is more like a religion than a science.”

The topic has two components. The first is a statement, the second is a consequence of that statement. To properly examine this position one must address the statement to ascertain its validity. If the statement is valid, then we accept the consequence of Economics being more like a religion than a science. It has to be under any scientific inquest that we know of. The only question that remains is what this means, and whether this is good or bad. If the first assertion is invalid, then Economics remains whatever it presently is, and that becomes the question – What is it?

Ceterus Paribus (CP) is a Latin term that has been loosely translated to mean all else remaining the same. CP is not an assumption. An assumption as defined by Friedman, has nothing to do with all else remaining the same. Friedman’s three roles for assumptions are that they are useful summaries of the theory presented, they actually test the theory presented, and they specify the conditions under which the theory will work (Friedman, 1953, p23). The first two roles of an assumption, according to Friedman, have no connection with the role of CP. One  might consider CP to fall under the third category, but this is not the case.

Even in the most dubious of Economic models, CP is never intended to be an assumption that is crucial to the function of the model. Even the topic describes CP as a clause, not an assumption. Assumptions are concerned with the variables within the model. That is what Friedman means by the factors which specify the conditions under which the theory will operate. How could CP be a condition under which a theory will operate? The whole point of an economic theory is to help understand the economic world we live in. To have an assumption which states that things must remain the same is a tautology. What is the point of constructing a model about the economy where nothing changes?

An example of this is the Investment Savings Liquidity Monetary (ISLM) model. That model predicts that a fall in the interest rate will result, Ceterus Paribus, in a rise in output. The reason is the relationship between investment and savings through the mechanism of the interest rate. Without going into the dynamics of the model, savings and investment both rise but remain equal. This is the assumption of the model which drives its ultimate prediction. The IS curve shifts to the right, but not because all else in the economy remains the same, it is because of the assumption that S=I. The assumption that savings equals investment is where criticism of the model is valid. Savings may not always equal investment for a variety of reasons. CP is just a tyoe of disclaimer against an unexpected change in the economy which affects the mechanics of the model. If World War three broke out and people suddenly decided to keep their money under their beds to ensure its safety, the model would break down. It would break down because the relationship between savings and investment has changed. Things, on this occasion external to the model, are not as they were. Their would be a major leakage of funds from the system and the circular flow of income would cease to be circular.

This is where the topic comes in. The proposer of such a statement would contend that this clause makes the whole model irrelevant. The assertion being that the real world is too complex for the model to work when there are so many other things that may interrupt the mechanism. The model becomes irrelevant to the outside world. It becomes an exercise in theoretical logic and not an attempt to explain reality. Because of this irrelevance it becomes unfalsifiable and untestable, uninformative and it will lack empirical meaning. I intend to use other natural sciences such as physics, to examine what CP means to Economic methodology.

Einstein’s theory of Relativity has been described as one of the three great contributions to human knowledge (Thompson, 1992 : Lecture Series). The basic tenet of this theory is that all forces come together to create a relative universe. If one force is changed in any way, there must be a compensating change in some other area of the universe. Mass becomes energy, or force (Robinson, 1990, Ch 7:1).

There are many theories that result from this brilliant insight, but the one that I would like to highlight is gravity. The implication from the theory of relativity is that the force of gravity id dependant on mass (Robinson, 1990, Ch 7:1). A thought that would never have occurred to Newton. Science tells us that an apple will fall to the ground because of a force that exists between two bodies of mass. The sun and the earth being the mass’s in question. But all of the planets in our solar system have an influence on the balance of energies. The reason that the apple falls toward the Earth and not the sun, is because we live inside the earths gravitational pull. We are closer to the center of the earth than we are to the center of the sun.

But this implies the same CP clause as the economic model. The reason is the unknown forces that exist in the Universe. The force that makes the apple fall toward the center of the earth is still unexplained. Einstein was working on this problem when he died (Robinson, 1990, Ch 13:2). The possibility that it is linked to other known forces in the universe, like electricity, is more than a possibility. Unified field theory is an attempt to extend this line of explanation. If this unknown force were to cease suddenly, for whatever reason, we might all float off into space.

Is it plausible for a physicist to suggest that Einstein’s theory of relativity will always be the dominant scientific paradigm? Things do not remain the same. Whether that be the state of our knowledge, our minds, or the natural that surrounds. Religion has dominated our knowledge of the natural world that surrounds us. Since well before recorded history religion has been the accepted paradigm to explain the reason for existence and the world that surrounds us. The development of science was blasphemous even for the Greeks. Copernicus’s delay in making known his heliocentric theory of the solar system, is a good example of science not believing in itself. Even when science did develop the confidence to attack religious paradigms, it did not mean that scientists knew it all. Classic Newtonian physics dominated scientific thought for two centuries before Einstein came along and revolutionized it (Robinson, 1990, Ch 13:2). As sure is this is true, someone will once again revolutionize scientific thought, relegating Einstein back to the history books.

For contemporary science to have any validity, there is an implicit CP clause in all theories. There has to be because of all the great unexplained natural phenomena that we observe in the world around us, and the quantum leaps that we make in our own technology and knowledge.

The topic states that CP clauses make economic methodology untestable, unfalsifiable, uninformative and lacking in empirical meaning. This cannot be so because so much of what we think we know is based on things we know very little about. Quantum mechanics is a good example of this. I, like you, the reader, will never see an atom or a quark. Yet most of the science that surrounds our everyday lives is based on this foundation. As Enders A. Robinson puts it, ” Quantum Mechanics says that light is made up of particles (photons) but light propagates as a wave. This wave-particle duality can be handled by mathematics, but our brains cannot conceive of it in the same sense that we know that eating takes away our hunger” (Robinson, 1990, p44). Wave or particle? We do not know, yet we use our knowledge we have to explain the world around us.

This leap over a potential problem is not a bad thing if it is taken into perspective. If an economist discovered the reason for recessions and boom times tomorrow, and they could prove it, they would revolutionize economics. We may discover that recessions and booms are caused by something that has nothing to do with what we have been studying for the last two hundred years. But economics cannot stand still waiting for this new information, it has to seek it. As economics presently stands, we jnbow we have not found the solution to many very complex problems, but that does not stop some economists from claiming they have the way that all should follow, and in many cases being useful for the community in doing this. Milton Friedman would argue that the assumptions of a theory can be whatever they like, as long as the predictive powers of the theory hold empirically (Friedman, 1953, p15).

Given this line of argument, the claims made against the CP clause become invalid. Firstly, “untestable” and “unfalsifiable” can be dealt with together because they are both akin to each other. The only way one can falsify something is to test it. CP clauses are only unfalsifiable and thus untestable to the point that one can never be sure of exactly what can cause the theory to malfunction. If the economy changed only marginally and the proponents of the model then claimed that their inferior results were due to this minor aberration, then critics could justifiably lay claim to the model being untestable and this unfalsifiable. Every time the model fails to predict the real world, the critics would be unable to test the theory because the proponent of the model says that the CP clause has been violated. This means that the critics can only test the model when the situation is perfect for the theory. The grounds for such criticism being that the CP clause is too broad and that is is used by the proponents of the model to justify any minor change in the economy.

But this is an ex poste criticism. CP clauses are for broad changes in infrastructure, whether they be endogenous to the model or exogenous. This argument is of degree, and is a very arbitrary point. No one can write an essay to what degree CP can be used as an excuse for an economic model that is clearly not working. There is every scope for the abuse of the CP clause and it happens a lot. But this is no reason to discard it. If certain schools of economic thought are hiding behind the cloak of CP, then this is a problem for economic epistemology, not the concept of CP. If one is to follow Karl Popper’s theory of falsifiablility (Popper, 1972, Ch 1), then one must test the theory, not CP.

The notion that CP renders theory uninformative is an abstraction. All theories about the world around us are an attempt to explain the world that we live in. This is as informative as any science is ever going to be. Until we discover the meaning of life and the Universe, CP clauses will be necessary for us to understand that we can only be so informative. I reiterate my earlier point – Einstein freely admits that his theory of relativity is a story about the universe (Einstein, 1954). He recognised that new technology and information could render his theory obsolete at any moment. It is just the best theory we have. So, if CP clauses render economic theory uninformative, then what science is informative?

Finally, the claim is made that CP clauses render economic theory empirically unsound. This is a more subtle contention because it enters into the realm of the nature of science. I have to assume that empirically unsound means that the results of the model do not parallel economic statistics. If this is the case, we can assume the statistics are reliable, who is correct? David Ricardo was a deductivist, he would say that the real world is wrong and something needs to be done about it (Landreth & Colander, 1989, Ch 4). This attitude became known as the Ricardian vice. Paul Samuelson and Robert Solow may agree with it, but Joan Robinson and Pierro Sraffa probably would not. This last criticism is the most interesting because it leads us into the Cambridge controversies.

For the purposes of this essay, the Cambridge controversies can be splintered into one side saying that the role of science is explanatory, and the other side saying it is predictory (This may be a very small part of the whole picture, but Herb Thompson argued that this may be at the bottom of the methodological debate between the two schools of thought). The English Cambridgians argue that Economics is the science of explaining the economic system that we live in. The American Cambridgians would argue that Economic science has to predict what will happen in the economy that we live in. This is a complex problem for economics.

Consider two facets of our lives. Observable phenomena, and theory. We observe the natural world around us and we derive theories based on our thought processes to explain these observed actions.

Now consider two observable phenomena, and two theories. For reasons of continuity let us observe the falling apple; and a rise in output due to a fall in interest rates. CP is a legitimate clause because both may cease to happen as we try to discover the explanation. The theory. It is also important that observable phenomena continues as we continue the search. It is fair to say that there is more certainty that the apple will fall than the rise in output, but  they continue nonetheless. As Stephen Gould puts it. “Einstein’s theory of gravitation replaced Newton’s, but apples did not suspend themselves in the air pending the outcome (Gould, 1983, p254). As we have discussed, apples may indeed start floating if there is a change in an unknown force. Output may consistently fall with falls in interest rates. It sometimes happens as we have observed in Australia during the late 1980’s, but that is due to a whole range of inappropriate assumptions that do not handle variables in the real economy. If output consistently defied the theory of lower interest rates causing higher investment causing higher output, then the theory needs to be looked at.

The point that I am making is this. We try to explain the world around us. We do the best we can. When we explain the universe we also make, intrinsically, predictions about it. But the universe, like the existence of the human race, is balanced on Dylan Thomas’s ragged edge of disaster. The Cambridgians on both sides of the Atlantic should not spend so much time debating the role of science. Joan Robinson refers to Professor Ferguson’s “faith” in neo-classical methodology (Robinson,J, 1970, p309). If he is a religious man, they will never convince him of any other approach to his reality. Even if they bombard him with undeniable facts. He even refers to his faith while he acknowledges the criticisms of the English Cambridgians.

CP, as I have interpreted it, merely refers to the Economic world around us remaining relatively the same. This is plausible. It is intrinsic in all theories that relate to the world that surrounds us. If that world that surrounds us does change, then our science must change also. The statement is invalid. CP clauses necessary for the scientific process. As long as CP remains a clause and not an assumption of a model, and is not used as an excuse for every minor aberration in the economy, then it is legitimate. This is not a defense of economic modelling, it is a defense of CP. An economic model, like the aforementioned ISLM framework, may be irrelevant and worthless, that is another topic. The assertion that CP makes them so is invalid.

If the statement were valid, then all science would be considered religion. So economics remains what it currently is. Now this could mean that the consequence is rejected and we move onto another topic. But there is a further problem that this topic poses. The topic begs the differentiation between science and religion because so much of the epistemological discussion that I have used, relates to the bigger question; what is the difference between religion and science?

Stephen Hawkins and D.H Wilkinson, both English academics, have written papers on the Universe, and the facts that we develop from it, being whatever we want them to be. Hawkins’s law of Singularity (Thompson, Lecture Series, 1992), and Wilkinson’s Universe as Artefact (Wilkinson, 1988), both take the same general position. One could argue that this is an oversimplification of Hawkins in particular, but the thrust of their argument is about humility concerning our knowledge. We cannot look from outside ourselves. The things that we take for granted as facts are not necessarily real. The earlier point I made about the force of gravity illustrates this.

There is no doubt that the force of gravity does exist in its present form. We observe an apple falling to the ground. It is the fact. We can also use mathematics and experiments in laboratories to show that the reason that the apple falls to the ground is because of the force that exists between two masses. This is the theory. But what if the force of gravity is dependent on another force that we know nothing about, and this force suddenly ceased to be. The apple would no longer fall to the ground and we would have to change our facts and our theories. It would also mean that Einstein’s theory, upon which he spent the major part of his life working on, would need to be changed. The whole system of education would need to be changed for his theory of relativity is now taught to high school students.

An extension to this line of thinking is Stephen Gould’s belief that scientists cannot rid themselves of the social pressures and paradigms that exist at the time (Gould, 1983, Ch 8). He cites the biological experiments of the past that were made by white Europeans to prove that white men had larger brains, and were thus superior to black men. Gould made two observations. The experiments neglected a basic principle of scientific procedure, and women happen to have brains as well. But he did not ridicule them or think them to be racists or sexists – he simply points out that they really did believe what they thought they had proven in their laboratories. But in reality, they were going to prove that white men were superior before they did any tests at all. The problem was that they could not see beyond the social paradigms that surrounded them. Just as Gould himself quipped, “What does a fish know about the water in which he swims all his life?” (Wilkinson, 1988, p1).

Hawkins and Wilkinson assert the facts that we believe about the world that surrounds us are products of our imagination. Gould suggests that we cannot escape the social paradigms that surround us. To merge the two theories is to suggest that we should be very humble about the state of our knowledge. We all believe in different things, but no one has the right to say that because something is science, it is objective.

For the purposes of this essay I make no contrast between mythology and religion. I do not have the time to fully explain this position, but I base it on this thought: The ancient stories of the Greeks predate Jesus Christ by approximately twelve hundred years. Homer wrote most of the classic Greek stories about five hundred years before Jesus Christ. Yet the stories of Homer are considered mythology and the story of Jesus Christ is considered religion. One is just imagination and the other is the explanation of our existence. The difference is one of definition, but I contend that there is no difference between mythology and religion.

Keith Roby was a prominent scientist at Murdoch until his premature death in 1981. He was also a Christian. He wrote many excellent essays on the relationship between science and religion. His main contention was that science was mechanistic and that religion was supernatural (Roby, 1984, Pt 1, Ch 3). He developed these ideas through philosophers like Paul Tilich and the fascinating Teilhard de Chardin.

Tilich believed that Christianity could accept the changing world and still be very Christian (Roby, 1984, Pt 1, Ch 3). This notion would have an immediate appeal to someone like Keith Roby. He believed that the contemporary theologians have the duty to make Christianity evolve with the changing science. Tielhard de Chardin believed that evolution was very much part of God’s plan. He felt that the human race was evolving to an Omega point and when we reach that point, God will appear and collect his prize creation (Roby, 1984, Pt 1, Ch 3).

I am not sure what Stephen Gould would make of these two assertions, but I am certain that he would recognize the fact that the boundaries that separate religion and science can be blurred. The paradigms that divide human knowledge into religion and science, are fading. Leading scientists and theologians are beginning to question the separation of religion and science.

This may seem like an unusual paradox, even contradiction. Science and religion are different. It is something that we grow up with in our society. It is a struggle for power. But there is one important point that needs to be understood in this debate, and Keith Roby, as usual, puts it well, “Christianity, with its emphasis in the middle ages on the rationality of God and the consequent order of nature, was an all pervading influence in the rise of science” (Roby, 1984, Pt 1, Ch 3, p39). Science was born out of the rationality of God. This is a very interesting proposition. The rationality of God.

This line of thinking would indicate that the topic has made a serious understatement. One can no longer simply categorize a school of study into either religion or science, and walk away thinking they have nothing more to fear. Albert Einstein was one of the greatest scientists that eveer lived, and he was moved to write in 1953 that;

               The most beautiful experience we can have is the mysterious. It is the fundamental notion that stands at the cradle of true art and true science. Whoever does know it and can no longer wonder, no longer marvel, is as good as dead, and his eyes are dimmed. It was the experience of mystery – even if mixed with fear – that engendered religion. A knowledge of the existence of something we cannot penetrate, our perceptions of the profoundest reason and the most radiant beauty, which only in their most primitive forms are accessible to our minds – it is this knowledge and this emotion that constitute true religiosity; in this sense I am a truly religious man. (Einstein, 1954, p11)

Given this moving and highly intellectual attitude toward humanities’ relationship with its natural surroundings, I wonder what Einstein would have thought from about this theory from the Wotjobaluk tribe of South Eastern Australia:

                 A long time ago there was no sky as there is now, for it lay flat upon the earth, and covered it like a blanket. It rested so hard upon it that the people were not able to move, and were in dire distress. At last Goruk, the Magpie, managed to prop up one corner of it and some of the people were freed and enabled to come to his assistance. Between them they lifted it to where it is now. (Massola, 1968, p13)

The Wotjobaluk tribe have lived in South Eastern Australia for at least fifteen thousand years. This is according to the very latest scientific carbon dating techniques. Who would be the first to reject this as frivolous mythology? Who would be the scientist brave enough to cast the first stone? Hawkins, Einstein, Wilkinson and Gould would not, and this is the difference that still does separate the two viewpoints. Einstein writes of continued wondering. This is the essence of Science and should be the essence of Religion but it is not. There are some Religious figures that will concede that they can learn from science, and I have looked very briefly at a couple. But the overriding majority of the religious community believe that God knows everything and controls everything. The sense of wonder and mystery is no longer a human one. It becomes a supernatural one, or it is forgotten completely. This is the distinguishing feature, but it is not a criticism.

To conclude on an economic note. I mentioned earlier that professor Ferguson refers to his faith. Joan Robinson latches onto this and criticises him accordingly. The very existence of the Cambridge Controversies indicates that economics is indeed a science. The very fact that two points of view can debate with eachother, and they both believe they have the answer inside their own heads, is an indication that economists so wonder about the economic world we live in. This is despite the fact that they have been at it for thirty years and never changed anyone’s mind! Let professor Feruson cling to his neo-classical faith. He has that right, just as Einstein has the right to his faith………

               I want to know how God created this world. I am not interested in this or that phenomenon. I want to know his thoughts, the rest are details.(EA Robinson, 1990, p15).


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