August 28, 2015

Much change, no progress

Comment on ‘The day macroeconomics changed’

Blog-Reference

‘The Council of Nicaea repudiated Arianism and adopted the original Nicene Creed.’ Each belief system redefines itself from time to time and orthodox economics is no exception. Clearly, for others the specification of concepts that have been unacceptable ab initio is not such a memorable event.

Keynes started macro with a repudiation of the classicals: “The classical theorists resemble Euclidean geometers in a non-Euclidean world ...” and pointed the way “... there is no remedy except ... to work out a non-Euclidean geometry.” (1973, p. 16)

This Keynes did but his non-Euclidean axioms were not quite correct (2011a). The inconsistency, however, went unnoticed and Keynes’s foundational concepts became part of the neoclassical synthesis, which in turn lacked consistency because of the heterogeneity of the constituent parts.

So, Keynes made a change, but no real progress, and the same happened with the neoclassical synthesis. Post-Keynesianism, on the other hand, perpetuated the fatal logical mistake that was hidden in the formal groundwork of the General Theory (2011b). Lucas’s critique of the neoclassical synthesis was valid but his return to pre-Keynesianism, too, was change without real progress (2010).

The fact that DSGE is applied in comprehensive econometric models does not prove too much and is analogous to the application of the faulty geocentric model: ‘The astronomical predictions of Ptolemy’s geocentric model were used to prepare astrological and astronomical charts for over 1500 years’ (Wikipedia). Ironically, just because of good empirical fit it took quite a time to find out that the underlying theory was false.

To summarize the memorable day in 1978 from an objective viewpoint: macro has changed three times, but made no real progress. Macro will fail as long as it starts with these, or roughly equivalent, premises: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states. (Weintraub, 1985, p. 147)

No way leads from these behavior-centric premises to an understanding of how the actual economy works. After a long detour, macro is back where nothing really changed: ... there is no remedy except to make a genuine paradigm shift.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

See also 'An epic detour'