August 17, 2015

The moral of the story

Comment Lars Syll on ‘Robert Solow kicking Lucas and Sargent in the pants’

Blog-Reference

Lucas et al. diagnosed the ruling paradigm of the 1970s with a crushing curse “wildly incorrect, fundamentally flawed, wreckage, failure, fatal, of no value, dire implications, failure on a grand scale, spectacular recent failure, no hope.”

This is roughly what Keynes said about the ruling paradigm of the 1930s.

Both diagnoses were spot on. Now Solow tells us roughly the same about the New Classical paradigm. He, too, is spot on.

Let us synthesize the recurring small light bulb moments over the last 200 years to one gigantic light bulb moment. All theories/models that contain at least one of the following concepts fall under the Lucas curse: utility, expected utility, rationality/bounded rationality, 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, and ergodicity. All these items are nonentities like the perpetual motion machine, unicorns, or dancing-angels-on-a-pinpoint.

The first thing to notice is that Solow himself employed nonentities. Therefore, his growth theory falls also under the Lucas curse. Let us make it short: economics is a failed science, there is nothing to choose. This is the situation: the critique of the at any one time ruling paradigm has always been spot on, but the proposed alternative has not been much better or even worse. This explains the secular stagnation of economics.

“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)

The new economic paradigm must not contain any of the cursed nonentities enumerated above (2014). That much is clear: in the history of economic thought pants kicking has never led to real progress. Solow is a case in point.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL

Relates to 'Secular intellectual stagnation'

For more details of the big picture see the cross-references Incompetence and Proto-science