Comment on Lars Syll on 'Microfounded DSGE models ― a total waste of time!'
Blog-Reference
One defect is a bad thing, but countless defects are a good thing. This keeps the critics busy, the discussion lively, and the outcome forever inconclusive. Accordingly, Hahn was very happy with the critics of the neoclassical research program. “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets.” (Hahn, 1980, p. 127)
He even warned his colleagues of exuberance: “For as I said at the outset, the citadel is not at all secure and the fact that it is safe from a bombardment of soap bubbles does not mean that it is safe.” (Hahn, 1984, p. 78)
When homo oeconomicus was young and a simpleminded utility maximizer people laughed at him because of his unrealism. Poincaré, to be sure, choose his words: “Walras approached Poincaré for his approval. ... But Poincaré was devoutly committed to applied mathematics and did not fail to notice that utility is a nonmeasurable magnitude. ... He also wondered about the premises of Walras’s mathematics: It might be reasonable, as a first approximation, to regard men as completely self-interested, but the assumption of perfect foreknowledge 'perhaps requires a certain reserve'.” (Porter, 1994, p. 154)
What happened in the second approximation? Has nonsense been reduced since Walras? It has been multiplied by making it rigorous. This is what we actually have: 'an infinitely lived intertemporally optimizing representative household/consumer/producer, agents with homothetic and identical preferences, etc.' In the early days homo oeconomicus had only perfect foresight, now he has also eternal youth. Scientific progress is something different: “The last thirty years seem to this observer to have been downhill almost all the way. So much of the literature ... I see as silly beyond all expectation and unscholarly beyond all endurance.” (Leijonhufvud, 1998, p. 234)
Why have critics been so ineffective? Because they focus always on the most obvious weak link of the chain but do not understand the logic of the chain. J. S. Mill did, and he clearly stated the key question: “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.” (Mill, 2006, p. 746)
The fault of an approach lies always in the first element of the chain: in the axiomatic foundations. Keynes knew this: “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)
An effective critique does not waste time with the plain unrealism of some heroic assumption in the middle of the chain. An effective critique finds a new hook to hang an impeccable logical chain on, that is, an effective critique changes the axiomatic foundations (2014; 2014).
After more than a century, it is pointless to repeat Poincaré's critique of homo oeconomicus. Homo emotionalis or homo sociologicus are not the solutions. Simply take ALL behavioral assumptions out of the formal foundations of economic theory. Second-guessing the agents is a waste of time: “... there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman, 1992, p. 320), (Rosenberg, 1980, pp. 2-3)
Egmont Kakarot-Handtke
References
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge: MIT Press.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. 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.
Leijonhufvud, A. (1998). Discussion: Involuntary Unemployment One More Time. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),
Economics and Methodology. Crossing Boundaries. 225–235. Houndmills, Basingstoke, London: Palgrave.
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. URL (1866).
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic
Thought, pp. 128–170. Cambridge: Cambridge University Press.
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.