May 24, 2015

From one roadside ditch straight into the other

Comment on ‘Modelling consistency and real world non-coherence in mainstream economics’

Blog-Reference

Walras has to be credited for making great methodological progress in comparison to what he called the English School, or, what may be called with more accuracy the Cambridge School of Loose Verbal Reasoning.

What Walras correctly pointed out was (i) that partial analysis does not allow for generalizations and therefore had to be replaced by total analysis and (ii) that the forbidding wish-wash of his contemporaries had to be replaced by rigorous argument.

The methodological credo of the Cambridge School of Loose Verbal Reasoning comes in different wordings but always with the same irresistible message for muddle heads.

“Marshall followed the maxim: Better to be ambigous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

“Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

“For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’" (Davidson, 1984, p. 574)

The Elements are quite clear on multiple occasions about Walras's take on proto-scientific economics.

“To state a theory is one thing; to prove it is another. I know that in economics so-called proofs which are actually nothing more than gratuitous assertions are doled out and find acceptance again and again. And precisely for this reason, I submit that economics will not attain the status of a science until economists are compelled to demonstrate that which they have hitherto been content, in the main, mainly to assert.” (Walras, 2010, p. 427)

Walras's critique, no doubt, was valid and still is. He got economics out of a deep roadside ditch — but only to steer it into the other. He based his approach on assumptions like utility, optimization, perfect foreknowledge, production function, supply/demand function, perfect competition, capital, equilibrium, etcetera. All these notions are nonentities.

Now the problem is: one can formulate a green-cheese assumption as vivid or colorful or suggestive or precise or rigorous as one likes — it does not help.

As Lawson put it: “It is a form of modelling consistency ... that underpins the notion of equilibrium itself. In modern mainstream economics the category equilibrium has nothing to do with the features of the real economy.” (See intro)

To paint dancing angels-on-a-pinpoint or supply-demand-equilibrium does not make either real. The crucial methodological mistake, however, is not so much in the painting or the formalism but in the underlying green-cheese assumptions.

Equilibrium is a nonentity and therefore all equilibrium models are false. There are many differences between Walras and the post-Walrasians. These do not count at all. Both approaches are based on the same set of nonentities. Therefore both are irrelevant.

Unfortunately, heterodox methodologists simply do not get the crucial point. “Tony Lawson traces this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.” (See intro)

The irrelevance of economics since Walras is not due to the deductive-axiomatic method but to green-cheese assumptionism.

Note in passing that Walras's general equilibrium is a zero profit economy (2015). Since his time economists have not become tired of presenting and discussing models which every intelligent layman could immediately dismiss as irrelevant.

Economics is still in the scientific roadside ditches — one half of economists is trapped in the Cambridge ditch the other in the Laussane ditch, neither moves along the real-world road.

Egmont Kakarot-Handtke


References
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and
the Social Sciences. Cambridge, New York, NY, etc.: Cambridge University Press.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Walras, L. (2010). Elements of Pure Economics. London, New York, NY: Routledge. (1874).