The Institute Blog

Harald Uhlig: Economics and Reality

Earlier today, INET published a paper, written by John Kay, that deals with the relationship between economics and the world we live in. The Map Is Not the Territory: An Essay on the State of Economics spells out methodological critiques of economic theory in general, and of DSGE models and rational expectations in particular.

INET forwarded Kay's paper to a handful economists and invited them to respond. Here we offer a perspective by Harald Uhlig, Chairman of the Economics Department of the University of Chicago, who sent us his recent working paper:

Economics and Reality 

The paper poses the question of how reality in the form of empirical evidence does or does not influence economic thinking and theory, and suggests some answers.

More responses to come

Tomorrow, and in the following days, we are going to publish direct responses to John Kay’s paper by a handful of prominent economists. Follow the INET Blog and stay tuned to what is going to be a healthy discussion.

uhlig-harald-economics-reality-v10.pdf617.22 KB



Having read the beginning and end of the Uhlig paper it comes across as a superficial and intellectually shallow attempt at a defense of the current state of economics. There is no genuine attempt to interrogate the questions he raises, as is clear from his dismissal of Lawson (who arguably does a much better job, but clearly with an 'unacceptable' conclusion) in a footnote.

But what else would we expect from someone whose fortunes have risen, and continue to depend, on the belief that there is some substantive connection between economics as it is practiced and 'reality'?


Cit.: “By design, a good theory is false.”

Cit.: “It makes little sense to ‘test” a theory according to all its aspects. If a good theory is false by design, then a theory that cannot be rejected, is probably not good enough or the data is yet inconclusive.”

Statements like these explain to a large extent the horrible state of contemporary economics. The author fundamentally misses the whole point of scientific research, which is to create explanations for real-world phenomena.

Theories have to be tested against reality. That is the whole point of having a theoretical model!
It the theory can’t explain a certain phenomenon it at least is incomplete. If a phenomenon is ruled out by the theory then the theory is not only incomplete but falsified. Incomplete theories have to be replaced by better theories which are those that can explain more real world phenomena than the old one. Falsified theories have to replaced by theories not yet falsified.

Therefore a theory is just as good as it is not false. Someone who deliberately seeks theories that are false is not seeking for truth and therefore not working scientifically at all.

End of rant.


The socially constructed view of economists is closer to that of engineers than that of physicists. Engineers are expected to build bridges that don't fall down, and a bridge that collapses even though it complies with theory just demonstrates the falsity of the theory. In addition to being pragmatists, engineers are also eclectic, whereas economists have become functionally illiterate in all areas except economic theory, and, as Gary Becker's quote illustrates, economics has become a religion and a fundamentalist religion at that.
The real question is: what are going to do about it? How do we rescue economics from being an intellectual form of Sudoku, where all the interesting and important problems have either been assumed away or decided to be exogenous. Taking the simple definition of economics as the application of reason to choice, economics ought to be immensely useful to society. Intellectually, there is enormous interest to be gained from addressing all the fundamental questions that economics has, to date, assumed away or excluded such as: what is value? As Ken Boulding pointed out, economics uses the term in a completely different sense to that in which it is used by everyone else.


I don't understand this criticism at all. Why even focus on "his dismissal of Lawson (who arguably does a much better job, but clearly with an 'unacceptable' conclusion) in a footnote."? It is such a minor part of the paper, and to Uhlig's credit, he at least cites Lawson. Perhaps the previous commentator is Lawson himself and is frustrated, that his work gets such a weak reception? If the commentator had read beyond that footnote on the first page, he would have found a terrific and interesting paper! At least, that's my view.

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