December 28, 2015

Worthless Canadian model bricolage

Comment on Nick Rowe on ‘Tight money as binding output quota, and upward-sloping IS curves’

Blog-Reference

“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

A long time before he became famous, Einstein worked in the Bern patent office. What he found occasionally on his desk were patent applications for some new kind of perpetual motion machine. Like any other physicist Einstein knew that a perpetual motion machine is a nonentity because it would violate the laws of thermodynamics. Therefore it was a waste of time for him to go dutifully into the details of such an application.

At some point in history physicists had settled the question of perpetual motion machines but inventors continued to design machines ‘as if nothing had happened’.

In economics matters are quite similar. Economists do not get tired of cobbling together models out of nonentities. Nick Rowe’s ‘neat little model’ is a case in point.

As a general methodological rule it holds: before he goes into details the student of economics makes the nonentity check. What he knows from methodology is that all theories/models are false which are built upon the following concepts: 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. All these items are economic nonentities.

Real models are a priori out because the economy constitutes itself through the interaction of real and nominal variables. Models that do not contain profit are a priori out because profit is the pivotal concept of economics.

A nonentity is different from an idealization or simplification. A perpetual motion machine is a physical nonentity, utility maximization or perfect foreknowledge are behavioral nonentities. An economy without profit/loss is a systemic nonentity.

Nonentities have no counterpart in reality and therefore are methodologically inadmissible. All this is well-known among scientists. By ignoring the requirements of material and formal consistency in their mindless model bricolage economists violate scientific standards on a daily basis.

Because Nick Rowe’s metaphor/model fails already the nonentity check (IS curves are nonentities*) it goes into the waste paper basket without further ado. As Morgenstern said: In economics we should strive to proceed exactly according to the standards of science.

Egmont Kakarot-Handtke


References
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

* See preceding thread ‘Another X-mas fantasy about IS curves

Related 'Make no mistake: there can be only one true theory' and 'Walrasian double-blunder' and 'False on principle' and 'Beyond methodological madness' and 'Economics: the honeypot for know-nothings'.