March 19, 2015

Vacuonomics

Comment on Simon Wren-Lewis on ‘Is the Walrasian Auctioneer microfounded?’

Blog-Reference*

With a modicum of scientific intuition and after a deeper look into the matter everyone arrives with logical necessity at the following conclusion: “At long last, it can be said that the history of general equilibrium theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin. ... General equilibrium theory is simply a research program that has run into the sands.” (Blaug, 2001, p. 160)

Clearly, general equilibrium and all its offshoots and variants are unacceptable. Why is the Walrasian approach applied nonetheless? Because economists are not only without scientific intuition they are also ignorant of scientific standards.

“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

The third reason is the obvious lack of imagination, that is, of some hunch of a promising alternative approach.

“There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao and Israel, 1990, p. 362)

For lack of a promising alternative research program the representative economist simply clings to the familiar utility-demand-supply-equilibrium core —  always open and prepared, of course, for more realism or some fancy facelift.

To be sure, in his time Keynes was one big step ahead. He realized that something was wrong with the orthodox approach. With admirable consequence, he took a different route and formulated the foundational syllogism of macroeconomics.

“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

Since theories have an architectonic structure it is clear that if there is a fault in the formal foundations the whole superstructure of the theory is vulnerable. Actually, the fault in Keynes's two-liner is in the premise income = value of output. This equality holds only in the limiting case of zero profit in both the consumption and investment good industry (2014).

Profit does not appear in Keynes's elementary formalism. That is, he in effect talks about a market economy without profit. Note well that Walras's original economy was also a zero profit economy. No such thing existed ever on this planet.

“Rather surprisingly, therefore, the nature of profits remains something of a mystery in contemporary economics; indeed, in the realm of ‘advanced’ theory —  namely the perfectly competitive general equilibrium models —  profits have disappeared altogether.” (Obrinsky, 1981, p. 491)

Neither New Classicals nor New Keynesians provide a consistent description of the market economy. The representative economist is intensely involved in discussions about nonentities like equilibrium, auctioneers, intertemporal optimization, rational expectation, real exchange and other features of his economic Disneyworld. Yet he has not the slightest idea about what profit really is.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

There can be no microfoundation of macroeconomics because microeconomics is itself unfounded. In technical terms: the behavioral axioms of microeconomics and macroeconomics are unacceptable.

“Cunningham in 1891 remarked that in the choice of premises ‘it is not always easy to tell when a professor of the dismal science is making a joke’ and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself.” (Viner, 1963, p. 12)

Time to leave the auctioneer and all the jokes and fools behind and to make economics a science.

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of Economic Perspectives, 15(1): 145–164.
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2014). 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. (1936).
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp. 1–22. URL

* Post on mainly macro has been shortened because of space restrictions.