August 25, 2015

False on principle

Comment on ‘A critique of Samuelson’s and Nordhaus’s Principles of Economics

Blog-Reference

“I often wonder whether other subjects suffer as much from textbook writers.” (Hahn, 1980, p. 127)

You say: “Econ 101 textbooks are misleading more than a million students a year in the U.S. alone because they leave the lasting impression that markets could solve all our economic problems if only they were left to themselves.” (See intro)

The first thing every economics student encountered in Samuelson's textbook was the ‘totem of the micro’, that is, supply-demand-equilibrium. And nothing has changed since then. “Supply and demand are at the heart of how market economies work.” (Mankiw, 1998, p. 519)

Then and now, this first encounter is the all-deciding moment. From a student who accepts supply-demand-equilibrium as an explanation for the functioning of the market system nothing of scientific value can be expected in the future.

“There is little or nothing in existing micro- or macroeconomics texts that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way.” (McCauley, 2006, p. 16)

Nobody with a modicum of scientific instinct can accept the shallow explanations, the logical blunders and the superficial formalization of Samuelson's textbook. The time that elapses before it sinks into oblivion is a straightforward metric for the stupidity of economists.

The first thing to do for Heterodoxy is to get rid of supply-demand-equilibrium and to come forward with the true theory of market interaction (2013; 2014; 2015). This is the cardinal point. What every heterodox economist should have learned by now is that critique and debunking is necessary but not sufficient.

This is the scientifically correct way and there is no shortcut and no royal road: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

What indeed can be learned from Samuelson and the rest of textbook writers is how not to do economics. All theories/models that take at least one of the following nonentities into the premises are dead from the beginning: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/ prices, and ergodicity.

The only valid conclusion one can draw from all Foundations and Principles textbooks is that these foundations are unacceptable. Economics has not been built on methodologically sound foundations and this is why it is a failed science. “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)

Eventually, Heterodoxy has to come up with the set of foundational propositions that displays both formal and material consistency. This will be the day when Heterodoxy legitimately takes over Econ 101. Hurry up!

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, pages 123–138.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
Kakarot-Handtke, E. (2014). The Law of Supply and Demand: Here it is Finally. SSRN Working Paper Series, 2481840: 1–17. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
Mankiw, N. G. (1998). Teaching the Principles of Economics. Eastern Economic Journal, 24(4): 519–524. URL
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL