February 28, 2015

Replacing sand by granite

Comment on Lars Syll on ‘Macroeconomic foundations made of sand’

Blog-Reference

Newton told the storytellers of his day: “Those who take the foundations of their speculations from hypotheses, even if they then proceed most rigorously according to mechanical laws, are merely putting together a romance, elegant perhaps and charming, but nevertheless a romance.” (Roger Cotes, Preface to the 2nd edition of Principia, 1999, p. 386) With ‘hypotheses’ green cheese assumptions were meant.

Keynes told his fellow economists: “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.” (1973, p. xxi)

Hutchison aptly remarked some time ago: “... it is precisely the task of science to supersede crude common-sense notions by critical analysis, and further that it is the unsatisfactory state of the foundations beneath the common-sense surface which is the most serious and crippling deficiency of contemporary economic science, ...” (1960, p. 18)

Keen told us: “Even some of the most committed economists have conceded that, if economics is to become less of a religion and more of a science, then the foundations of economics should be torn down and replaced. However, if left to its own devices, there is little doubt that the profession of academic economics would continue to build an apparently grand edifice upon rotten foundations.” (2011, p. 35)

Actually, Frances Coppola tells us that the macroeconomic foundations are made of sand (see intro).

Well, now everybody got it! Let us see, then, what exactly are the foundations? Weintraub gave the following account.

“As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.
By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. "Taken to be true" means that the hard-core functions like axioms for a geometry maintained for the duration of study of that geometry.” (1985, p. 147), see also (Arnsperger and Varoufakis, 2006) and (2013)

It cannot be said, as Keynes did, that there is a lack of clearness in the premises: “Like mathematics and physics, economics is proud of having an axiomatic foundation, and rightly so.” (Helbing, 2013, p. 4)

Formally, all is in perfect order. The orthodox paradigm is well articulated. Nevertheless, it has to be abandoned. The subjective behavioral foundations of Orthodoxy are unacceptable. No way leads from the neo-Walrasian hard core to the understanding of how the actual economy works: “Economics today is a discipline that must either die or undergo a paradigm shift ...” (Kaletsky, 2009, p. 156)

This is a critical juncture and one has to be very careful. From the fact that the behavioral axioms of Orthodoxy are forever beyond acceptability does not follow that axiomatization is inapplicable. It follows that subjective behavioral axioms have to be replaced by objective structural axioms (2014). That is what the ongoing paradigm shift is all about: sand is replaced by granite.

Egmont Kakarot-Handtke


References
Arnsperger, C., and Varoufakis, Y. (2006). What Is Neoclassical Economics? The Three Axioms Responsible for its Theoretical Oeuvre, Practical Irrelevance and, thus, Discursive Power. Paneconomicus, 1: 5–18.
Helbing, D. (2013). Economics 2.0: The Natural Step towards A Self-Regulating, Participatory Market Society. EconoPhysics Forum, pages 1–29. URL
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
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
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kaletsky, A. (2009). Goodbye, Homo Economicus. real-world economics review, 50: 151–156. URL
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
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).
Newton, I. (1999). The Principia; Mathematical Principles of Natural Philosophy. Berkley, CA, Los Angeles, CA, London: University of California Press. (1687).
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL