May 31, 2015

At the Robinson Line

Comment on Lars Syll on ‘Consistency and validity is not enough!’

Blog-Reference

There is political economics and theoretical economics. People see a problem or are shocked by a great evil and begin to move heaven and earth to improve the situation. This is political economics and nothing is wrong with it.

Science is different — it tries to find out how things work from the universe via society and the economy to the quark — and nothing is wrong with this either.

Confusion results when the realms of political and theoretical economics are not properly kept apart. What the history of economic thought from Smith, to Marx, to Hayek or Keynes shows is that political economics has more or less successfully tried to hijack theoretical economics. This is the main reason why economics is a failed science.

The goal of theoretical economics is to understand how the actual economy works. Every theory has an architectural structure which can be described as follows (the keywords are fact and logic):
“When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts .... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework.” (Hilbert, 2005, p. 1107)

This necessarily leads to J. S. Mill's Starting Problem:
“For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

This, then, is the key question of theoretical economics:
“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)

The propositions which may reasonably be received without proof are called axioms. Orthodoxy starts with behavioral axioms (McKenzie, 2008). In order to go beyond failed Orthodoxy, behavioral axioms have to be replaced. This was Keynes's most valuable methodological insight.

“The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight — as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

Unfortunately, Keynes's own formal foundations are also defective (2011), therefore there is nothing to choose between Walrasianism and Keynesianism. With regard to the accustomed approaches it incontrovertibly holds what Joan Robinson concluded: "Scrap the lot and start again."

Nobody accepts Orthodoxy because it is true beyond reasonable doubt but because traditional Heterodoxy is even more clueless.
“The main reason for the considerable acceptance of the approach is that fundamental rule of scientific combat: it takes a theory to beat a theory.” (Stigler, 1983, p. 541)

This leads back to Mill's Starting Problem.

The formal foundations of Constructive Heterodoxy consist in seven propositions* which can be reduced for a start to the following three axioms.
  • Income of the household sector Y in period t is the product of wage rate W and working hours L: Y=WL
  • Output of the business sector O is the product of productivity R and working hours: O=RL. The productivity R depends on the underlying production process. The 2nd axiom should therefore not be misinterpreted as a linear production function.
  • Consumption expenditure C of the household sector is the product of price P and quantity bought X: C=PX.
The first three structural axioms represent the pure consumption economy with one firm and one product, that is, no investment, no foreign trade, and no government. No nonentities like utility, optimization, rational expectation, supply/demand function, production function, equilibrium, etcetera are taken into the premises. This has always been the inexcusable methodological blunder. The three objective equations are the minimum requirement of every economic model whatsoever. They solve Mill's Starting Problem and provide the rock-solid basis for a comprehensive theoretical superstructure that consists of testable propositions.

Theoretical economics must satisfy the criteria of material and formal consistency. The Robinson Line demarcates science from non-science. To go on with the obsolete approaches is not an option.

Egmont Kakarot-Handtke


References
Hilbert, D. (2005). Axiomatic Thought. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, volume II, pages 1107–1115. Oxford, New York, NY: Oxford University Press.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2011). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. 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.
McKenzie, L. W. (2008). General Equilibrium. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–18. Palgrave Macmillan, 2nd edition. URL
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, IN: Liberty Fund. URL
Stigler, G. J. (1983). The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL

* The complete and consistent set of foundational equations — six structural axioms
and one behavioral function — is given here