April 12, 2015

Methodology as Force Majeure

Comment on ‘Do not underestimate the power of microfoundations’

Blog-Reference

Wren-Lewis writes: “First, economists are usually not comfortable talking about methodology.” (See thread intro)

As a matter of fact, there is not much to talk. All that is necessary to know about methodology is this. “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Now, everybody who looks at economics can convince himself that over more than 200 years economists have failed to produce a formally and materially consistent theory.

Worse, economists do not even understand that science always has to satisfy two criteria. What are they told instead?

“So, for example, you will be told that internal consistency is clearly an essential feature of any model, even if it is achieved by abandoning external consistency. You will hear how the Lucas critique proved that any non-microfounded model is inadequate for doing policy analysis, rather than it simply being one aspect of a complex trade-off between internal and external consistency.” (See intro)

Methodology says there is no trade-off. You always have to deliver both.

Wren-Lewis writes: “In essence, many macroeconomists today are blind to the fact that adopting microfoundations is a methodological choice, rather than simply a means of correcting the errors of the past.” (See intro)

True, but unfortunately economists have made the wrong choice. They second-guess the behavior of agents and do not come to grips with the behavior of the economy. This is the consequence of the self-imposed imperative that all explanations must run in terms of the actions and reactions of individuals (Arrow, 1994, p. 1).

The decisive point is that no way leads from the understanding of the actions and interactions of individuals to the understanding of the working of the economy as a whole. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the invisible hand.

Methodology demands a paradigm shift which consists in abandoning the obsolete subjective-behavioral axioms of standard economics and in adopting objective-structural axioms (2014).

Until now, the majority of economists has been unfit for a paradigm shift and this neatly explains why proto-scientific NK, NC, and RBC modeling is still around. This has nothing to do with explanatory power but much with intellectual inertia.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.