December 30, 2014

Scrap the lot and start again

Comment on 'Mainstream macroeconomics distorts our understanding of economic reality'

• Orthodoxy is a failure.
• Heterodoxy is a failure.

Neither orthodox nor heterodox economists have a clear idea of the fundamental concepts income and profit. The profit theory is false since Adam Smith. Because economists fail to capture the essence of the market system they have no valid theory about how the economy works. This is of some consequence for economic policy.

Under an even broader perspective, both political defense and political attack of the actual market system have no scientific basis.

Theories do not consist of a series of statements which describe a certain part of reality, they have an architectonic structure. In purely formal terms they consist of premises and logical conclusions. The well-structured whole has to meet the criteria of material and formal consistency.

Methodologically, therefore, J. S. Mill's Starting Problem has always to be dealt with first. The crucial question is:

“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

At present, economics is not built upon a set of acceptable premises or axioms. Orthodoxy is based on behavioral axioms. Heterodoxy lacks a consistent foundation, that is, it does not meet the formal minimum standards of theoretical economics.

From the philosophical viewpoint, a set of axioms is the shortest possible formal summary of an underlying ontology. With all details left aside for the present, axioms say on a high level of abstraction unambiguously what the economy ‘is’. There is virtually no room for interpretation. In marked contrast to theoretical economics, political economics does not rise above the level of chart-supported loose verbal reasoning.

A set of axioms is the formal minimum. All that seems at first missing in the axioms is consistently integrated in the course of further analysis. Thereby, a successively closer approximation to reality is achieved. Axiomatization has nothing to do with reductionism; it is the only way to come to grips with the complexity of the real thing.

Heterodoxy has identified the numerous flaws of Orthodoxy. It is no question that Orthodoxy is beyond repair. However, Heterodoxy has not come forward with a paradigm of its own. What we have as a result is the pluralism of false theories. This situation is unacceptable.

So: “Scrap the lot and start again!” (Joan Robinson). A paradigm shift is inevitable. At present, there is no superior alternative to the structural axiomatic approach in the public domain. Its formal foundation is given by this axiom set.

The challenge is, in technical terms, to move from the old axiomatic basis to the new one. That is not an easy task because the whole theoretical superstructure has to be reconstructed. The pioneer's situation could be initially as follows.

You do not have full support of the academic apparatus, nor financial support from the government or from private sponsors, nor the emotional support of a politically like-minded group. You have, though, the three essentials of the scientist: the irrefutable need for a new paradigm, a consistent set of objective axioms to work with, and your own inventive genius. Thus, you win in any case.

That is what J. S. Mill called the opus magnum.

Egmont Kakarot-Handtke