August 21, 2015

No foundations

Comment on ‘Lucas’ caricature of economic science’

Blog-Reference

You quote: “As Lucas himself wrote ... he was bewitched by the beauty and power of Samuelson’s Foundations of Economic Analysis ...” (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 and the superficial formalization of Samuelson's textbook.

On the next higher level, nobody with his logical apparatus intact can accept the following behavioral assumptions as foundations of economic research. “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: 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. By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program.” (Weintraub, 1985, p. 147)

What should be almost self-evident is that HC1 is vacuous and that HC2 to HC5 are simply green cheese assumptions. This holds independently from and prior to any formalization.

The only conclusion one can draw from Samuelson's Foundations of Economic Analysis and the neo-Walrasian hard core propositions is that these foundations are unacceptable. If the foundations are unsound, then in the course of time nothing remains standing. This what Heterodoxy can learn from Lucas’s epic failure.

“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 correct set of foundational propositions.

Egmont Kakarot-Handtke


References
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
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
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* For the correct way see the working papers 'Essentials of Constructive Heterodoxy: The Market' and 'How to Get Rid of Supply-Demand-Equilibrium'