December 31, 2014

Funny folks in the big omnibus

Comment on 'Macroeconomic aspirations'

Blog-Reference

“... economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem in the economics omnibus is that the majority of passengers are agenda pushers of one sort or another. This has always been an impediment to scientific advance.

Currently, economists do not understand how the economy works.

“As Joan Robinson said, our essential object in economics is "to understand how the economic system works"; or, putting the emphasis differently, as did Keynes, "Is the economic system self-adjusting?" Sadly, we economists have so far done little to address, much less provide satisfying answers to the issues posed by Newcomb, Robinson, and Keynes. ... we know little more now about "how the economy works," or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower, 1999, p. 401), see also (2014; 2014)

Keynes, too, was an agenda pusher but he clearly understood that nothing less than a paradigm shift would do in economics. His valuable insights for theoretical economics are:
(i) Conventional (=classical=orthodox) economic theory is false and has been refuted once and for all by the Great Depression.
(ii) The mistakes are located in the premises: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes, 1973, p. xxi)
(iii) The indispensable paradigm shift requires the replacement of old premises by a new set of axioms: “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight -- as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

Outcome of the Keynesian Revolution:
(i) Keynes could not perform the paradigm shift in a formally acceptable way (2011).
(ii) Post-Neo-New Keynesians were so occupied with 'What Keynes really meant' that they could not rectify the General Theory until today (2011).
(iii) Keynes could not 'throw over' the old axioms for good and this made the reappearance of 'dead ideas' (Quiggin, 2010) possible.
(iv) Theoretical economics is still groping in the dark in the no man's land between the obsolete and a new paradigm.

So here we are:
“Nothing is more difficult than to turn an entire discipline around, asking in effect to jettison its own history over the last 200 years.” (Blaug, 1990, p. 205)

The first thing to do is to turn microeconomics around. There can be no microeconomic foundation of macroeconomics because the foundations of microeconomics itself are erroneous. For funny label-sticking Oxford macroeconomists there is still something to learn from Keynes.

Egmont Kakarot-Handtke


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT:
Edward Elgar.
Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post
Keynesian Economics, 21(3): 399–414. URL
Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper
Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN
Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us.
Princeton, NJ, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
University Press.