April 18, 2015

Unfit in all dimensions

Comment on ‘Models, math and macro’

Blog-Reference

Schumpeter remarked some time ago: “We are not yet out of the wood; in fact, we are not yet in it.” (1994, p. 7)

Schumpeter understood well what science is and saw clearly that, in his time, economics was still at the proto-scientific stage or — at best — that it had made it to the threshold of science.

“The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (1994, p. 9)

Are we much more advanced nowadays with DSGE models? Can economists explain better how the actual economy works? Not really.

“The last thirty years seem to this observer to have been downhill almost all the way. So much of the literature ... I see as silly beyond all expectation and unscholarly beyond all endurance.” (Leijonhufvud, 1998, p. 234), see also (Quiggin, 2010)

True, many economists are prepared to admit that what passes as economics is probably false and certainly insufficient but ...
“Critics of DSGE are however dismissed because — in a nutshell — there’s nothing better out there.” (See intro)

This, indeed, is the traditional last line of defense.
“There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)

In plain words this says: until some superior economics comes along we are doing the accustomed inferior economics. This is not what real scientists do.

“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)

After more than 200 years it is pretty obvious that economists are unfit for science. Of course, there are different degrees of unfitness between the student who naively accepts the pivotal blunder of supply-demand-equilibrium and the heterodox economist who is clueless about what a superior alternative to current Orthodoxy looks like.

The ultimate proof of unfitness, though, is that neither orthodox nor heterodox economists can tell until this day the difference between income and profit (2014). Without a demonstrably correct profit equation, what are the chances that any macro model could be enlightening or of practical use? What do you understand about the economy if you do not understand the profit phenomenon?

Egmont Kakarot-Handtke


References
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
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
Leijonhufvud, A. (1998). Discussion: Involuntary Unemployment One More Time. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),
Economics and Methodology. Crossing Boundaries., pages 225–235. Houndmills, Basingstoke, London: Palgrave.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.