October 19, 2015

Economics in self-paralysis

Comment on Lars Syll on ‘Representative agent models — macroeconomic foundations made of sand’

Blog-Reference and the slightly extended variant Blog-Reference

You summarize: “... Hugo Sonnenschein, Rolf Mantel and Gerard Debreu unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equilibrium solution.” (See intro)

Yes, indeed, since 1972 every smart economist can know this: General Equilibrium Theory is dead. So what? What exactly follows from this proof?

It follows nothing less than this: Orthodoxy is dead. Why? Because it has been defined thus: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

There is not the slightest ambiguity, according to this self-definition of Orthodoxy the representative agent approach is a priori out, inadmissible, a self-contradiction, a methodological absurdity.

What follows from this? Because the microfoundation program is a shot in the foot it has no future. What, in turn, follows from this? “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao and Israel, 1990, p. 362)

So, what could it possibly mean? Hmmm? Which part of ‘a completely new research program’ is unclear?

It simply follows that it is a waste of time to either defend or to attack the microfoundation program because we now know for sure that it was already dead when Jevons/Walras/ Menger started it.

It is not worth the time to criticize again and again different aspects of Orthodoxy because the program is as meaty as Geo-centrism in physics. Yet, what is even worse than ‘finicky scholasticism — getting tied up in little assertions or minor criticism (Popper)’ is to resort to the conclusion that Orthodoxy is scientific junk but that it is, given the complexity/ uncertainty of the subject matter, the best that could be achieved. This, unfortunately, seems to be the resignative deadlock between Orthodoxy and traditional Heterodoxy “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

This self-paralysis explains why economics is still a proto-science. There is no way around this, after the SMD proof there remains only one worthwhile talking point and that is: what does the new economics paradigm look like?*

Egmont Kakarot-Handtke

Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.

* For a start see cross-references Paradigm shift