Blog-Reference
“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)
Rational expectations and the rest of neoclassical assumptions were never taken seriously by real scientists. The question is: Why has the representative economist not realized this in more than 100 years?
Lars Syll comes close to the right answer: “The fact that Lucas introduced rational expectations as a consistency axiom is not really an argument to why we should accept it as an acceptable assumption in a theory or model purporting to explain real macroeconomic processes.” (see intro)
Of course, rational expectation is an unacceptable behavioral assumption. However, the error/mistake of Orthodoxy does not lie in this particular green cheese assumption but in a complete failure to understand what the scientific method is all about.
Rational expectation, and constrained optimization, or utility maximization for that matter, are perfectly in line with the accepted methodology: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1); see also (Arnsperger and Varoufakis, 2006)
The fundamental methodological blunder resides in the idea that economics is about human behavior. Let us call this the social science delusion. The irony is that Heterodoxy is even more convinced that economics is essentially a social science. It differs from Orthodoxy only insofar as it claims that their behavioral assumptions are more ‘realistic’.
The fact of the matter is that economics is about the behavior of the economic system and not about the behavior of individuals. This, indeed, is the realm of psychology, sociology, anthropology etcetera. To speculate about rational or irrational human behavior is not economic analysis at all (Hudík, 2011).
This means that the subject matter of economics has to be redefined. The fault of Orthodoxy is not so much that it introduces rational expectation as a behavioral axiom, the methodological blunder is that there is no such thing as a specific behavioral axiom.
No way leads from the understanding of human behavior to the understanding of how the actual economy works. This fully explains why economics is a failed science.
Because there is no such thing as a behavioral axiom, Lars Syll is right: “And that ought to be rather embarrassing for those ilks of macroeconomists to whom axiomatics and deductivity is the hallmark of science tout court.”
Lars Syll is completely wrong, though, in concluding that axiomatics and deductivity have to be abandoned as ‘horseshit’. See here.
From the fact that the behavioral axioms of Orthodoxy are forever beyond acceptability does not follow that axiomatization is wrong. It follows that subjective behavioral axioms have to be replaced by objective structural axioms.
To find the correct axioms is the prime task of economics since J. S. Mill: “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)
Neither Orthodoxy nor Heterodoxy has achieved the opus magnum.
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.
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
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
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, 128–170. Cambridge: Cambridge University Press.
Related 'Austrian blather' and 'Joan Robinson and the early death of Behavioral Economics' and 'Still in the woods' and 'Economics is NOT a science of behavior (IV) and 'Heterodoxy ― an axiomatic failure just like Orthodoxy'. For details of the big picture see cross-references Not a Science of Behavior and cross-references Methodology.
