January 12, 2015

Of birds and worms

Comment on Lars Syll on '”New Keynesianism” — neat, plausible and wrong'

Blog-Reference

Lars Syll writes: “Maintaining that economics is a science in the “true knowledge” business, yours truly remains a skeptic of the “New Keynesian” pretences and aspirations of people like Paul Krugman, Simon Wren-Lewis and Greg Mankiw.”

Attention! Science is in the true knowledge business. New Keynesianism is not in the true knowledge business. Therefore, New Keynesianism is out of science. This is not a matter of skepticism but of fact. It is important to avoid the following logical shortcut: New Keynesianism is a failed scientific look-alike, and this proves that scientific methods are inapplicable in economics. This, indeed, is a wrong conclusion that is widespread among heterodox economists.

Lars Syll writes: “Keynes basically argued that it was inadmissible to project history on the future.”

True, but is this a great revelation? It is common knowledge among physicists.

“The future is unpredictable.” (Feynman, 1992, p. 147)

And the great heterodox economist Georgescu-Roegen put it quite nicely: “The upshot is that we cannot possibly have a bird's eye view of the future evolution of mankind. All we can have is a worm's eye view, that is, we can at most have some idea of what is likely to happen in the very near future.” (Georgescu-Roegen, 1979, p. 325)

What seems new to economists has been practiced by scientists in all ages.

“The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions.” (Brown, 2011, p. 211)

Because human action is original humans have to be treated in the first approximation as randomizers in the economic system. Obviously, economists got something badly wrong.

“Much of economic theory is based on three questionable assumptions: (1) the world is deterministic; (2) decision makers act as if they know the values of all relevant parameters; and (3) consumers and firms respectively, act as if they were maximizing utility and profit.” (Stigum, 1991, p. 29)

The fatal mistake of Orthodoxy is the attempt to build economic theory upon a behavioral assumption. The locus classicus is Jevons. He combined the subjective concept of constrained optimization ...

“Repeated reflection and inquiry have led me to the somewhat novel opinion, that value depends entirely on utility.” (1911, p. 1)

... with mechanical determinism and axiomatization.

“Its method [the mechanics of utility and self-interest] is as sure and demonstrative as that of kinematics or statics, nay, almost as self-evident as are the elements of Euclid, when the real meaning of the formulæ is fully seized.” (1911, p. 21)

Quite obviously, Jevons copied the Newtonian method without true understanding. All looked pretty much like real science but it was only a big misunderstanding.

“Did anyone ever attempt to found a system of social science or economics on the level of identity with Newtonian rational mechanics or the Newtonian system of the world? In my research I have never found such an example.” (Cohen, 1994, p. 61)

The simple reason is that there is no such thing as a mechanics of utility. Microeconomics has no sound foundation. Therefore, it cannot be the foundation of anything.

Lars Syll writes: “Where “New Keynesian” economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social systems – including the economic system. The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.”

True, and that means that the behavioral axioms of Orthodoxy have to be replaced by objective structural axioms that describe the fundamental systemic interrelations (which are deterministic and testable). This is what a paradigm shift is all about.

Lars Syll concludes citing Quiggin: “If there is one thing that distinguished Keynes’ economic analysis from that of his predecessors, it was his rejection of the idea of a unique full employment equilibrium to which a market economy will automatically return when it experiences a shock.”

True, but Keynes got the employment theory wrong (2014a; 2014b). The correct employment equation is here.

There is no point in criticizing New Keynesianism. As Joan Robinson once said on a similar occasion: Scrap the lot and start again!

Egmont Kakarot-Handtke


References
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. URL
Kakarot-Handtke, E. (2014a). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Kakarot-Handtke, E. (2014b). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.