January 8, 2016

Addendum to ‘Musings on Whether We Consciously Know More or Less than What Is in Our Models’

Blog-Reference (adapted from Blog-Reference) and Blog-Reference Economic hallucinations, comment on ‘DeLong, Summers & Krugman on models’

In the Middle Ages savants were heavily occupied with questions like had Adam a navel? or how many angels can dance on the head of a pin? Methodologically economics is roughly at the same stage. Since more than 100 years economists are senselessly employed with the nonentities equilibrium and constrained optimization.

As loudspeaker of the profession, Krugman recently confirmed on his blog “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point ...”.

This starting point has been properly codified as axiom set “The [neo-Walrasian] program is organized around the following hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is a quite primitive methodological blunder. In 1990 equilibrium has been declared dead and the historians of economic thought ‘have finally hammered down the nails in this coffin’ (Blaug, 2001, p. 160).

Clearly, when one axioms fails the whole formal basis breaks apart and with it the whole theoretical superstructure.

There is no other way out of the calamity than to reconstruct economics without the concept of equilibrium. In methodology this is called a paradigm shift “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 et al., 1990, p. 362)

Obviously, there is until this very day ‘no indication of what it might mean’ to do economics without the nonentity equilibrium and the green cheese behavioral assumptions of constrained optimization and rational expectations.

The problem is not at all located where Krugman erroneously assumes: “The trouble is that the macroeconomic evidence can’t tell us when and where maximization-and-equilibrium goes wrong, ...”. The point is that these assumptions are not admissible in the first place. To admit nonentities to the set of economic axioms is even more bloodcurdling than to admit the Easter Bunny to the founding fathers of the United States.

A competent methodologist recognizes a petitio principii or a fallacy of composition or a nonentity when he sees one. And Popper did so “Now the rationality principle, which in the social sciences plays a role somewhat analogous to the universal laws of the natural sciences, is false, and if in addition the situational models are also false, then both the constituent elements of social theory are false.” (Popper, 1994, p. 173)

For the competent methodologist there is only one logical consequence: he has to see to it that no economics paper that applies the rationality principle, constrained optimization or equilibrium is accepted in the peer review process or else he compromises the integrity of science which he is supposed to protect.

How Popper could throw away his own methodology and praise utility maximizing economics on another occasion (1994, p. 154) is a question worthy of the further scrutiny of methodologists like Rosenberg who correctly assessed the cognitive status of economics.

“Economics is a perplexing subject. Though I have spent the better part of my academic career thinking about its aims and methods, I have never been confident that I or anyone else for that matter really understand its cognitive status. ... Without assurance about the cognitive status of the theory, there is no basis of confidence in it.” (1994, pp. 216-217)

The cognitive status of a theory that is axiomatically based on nonentities is roughly the same as a hallucination.

That Krugman as ‘sorta-kinda maximization-and-equilibrium guy’ is still accepted as scientist is scary enough but that the majority of economic methodologists lets this happen without much comment is the ultimate proof of the professional implosion of economics.

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of Economic Perspectives, 15(1): 145–164.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York, NY: Routledge.
Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pages 216–235. London, New York, NY: Routledge.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

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