December 31, 2014

Yes, orthodox economics is poor science, but can Heterodoxy raise hope?

Comment on 'Modern macroeconomics and the perils of using ‘Mickey Mouse’ models'


In 1898 the great heterodox economist Thorstein Veblen asked: “Why is Economics Not an Evolutionary Science?”

What Veblen pointed out was that the petty mechanical models of his neoclassical fellow economists were mistaken, useless, and misleading.

He famously ridiculed homo oeconomicus: “The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact.”

Well said, indeed, and true until this day. Yet, then one has to ask back: Why did Veblen spend much time on questioning and ridiculing Orthodoxy instead of developing an evolutionary economics? If he knew what was wrong, why did he not demonstrate how to do it properly? Why is the very personification of Mickey Mouse economics -- homo oeconomicus -- still busy with maximizing utility in our days?

Yes, Orthodoxy is a failure. Yes, the heterodox critique is fully justified. Yes, the emperor has no clothes. Yes, the textbooks are wrong. Yes, linear models are unsatisfactory. Yes, equilibrium is a nonentity and rational expectations are a physical impossibility.

We know all this since Veblen or even longer. Time enough, one would think, to develop something better.

Let all dreams come true and imagine for a moment that each orthodox economics professor is replaced by a heterodox professor. What could he teach? That there is something good and right with the Classics, with Marx, with Walras, with Keynes, with the Austrians, with Sraffa, Kalecki and Minsky, but that we do not know exactly what it is and how it fits together. Is the pluralism of partial or even falsified theories something that can be justified and taught as science?

The fact of the matter is: there is no heterodox alternative. To replace a paradigm means to replace obsolete axioms with new axioms. This effects a change of the whole theoretical superstructure and that is what a paradigm shift is all about. At the moment there exists no heterodox common ground in the form of a set of axioms and therefore nothing to consistently build upon.

Orthodoxy is unacceptable but its proponents have taken the pain to formulate its premises and conclusions in such a way that errors/mistakes can be identified with accepted scientific procedures. This is the minimum condition and this made it possible that General Equilibrium Theory could be refuted by its own proponents.

“The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)

Yes, nobody needs the Mickey Mouse models of Orthodoxy. But this is no sufficient reason to jump to heterodox Donald Duck models.

The common error lies in the assumption that there must be something like behavioral laws or at least regularities. There is no such thing. No way leads from behavioral assumptions to an understanding of how the actual economy works. The problem is not with the econometricans, the problem is with economic theory. From the assumption of utility maximization follows no testable relationship. It is the same with other green cheese assumptions like rational expectations, perfect competition, supply and demand functions, twice differentiable production functions and all the rest (2013). Nonentities are not testable and that is not a weakness of statistical methods with a well-defined field of application. Standard economics simply falls outside this field.

As long as Heterodoxy, or anybody else for that matter, cannot replace the obsolete set of foundational assumptions with a consistent alternative economics is caught in a cul-de-sac.

“Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

Or, as Mirowski put it: “The task of producing knowledge against the grain requires imagination.” (2013, p. 4)

Seems to be a scarce resource in economics.

Egmont Kakarot-Handtke

Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, pages 123–138.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Mirowski, P. (2013). Never Let a Serious Crisis Go to Waste. London, New York, NY: Verso.