January 20, 2016

Why the Naked-Emperor-Zombie cannot die

Comment on ‘Deep parameters and microfoundations’

Blog-Reference

All thinking economists are agreed: orthodox economics is, as Keen famously put it, a naked emperor (2011), or as Quiggin put it, a zombie (2010). This calamity is well advanced in years “As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

The list of defects is indeed almost endless — and exactly this is the problem. As a matter of methodological principle, the proof of one inconsistency is enough to refute a theory, as we know from Popper and from a well-known anecdote: When Einstein was told of the publication of a book entitled, ‘100 Authors Against Einstein’, he replied: "Why one hundred? If I were wrong, one would have been enough." (Wikipedia)

Unfortunately, Lars Syll has not yet got the point but repeats the multitude of already known defects. The ‘agreement on the defects of orthodox theory’ is the hallmark of Heterodoxy since Veblen, yet this has obviously not been enough to break the stalemate. Something is missing.

The curious fact is that Keynes already pointed the way: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

These premises are well-known since more than 140 years “For it would not be too much of an oversimplification to present the field as having progressed smoothly and steadily, developing theories of ever greater power and broader scope within an essentially unchanged explanatory framework, based on the concepts of optimizing individual behavior and market equilibrium, that were already central to economic thought in the previous century.” (Woodford, 1999, p. 2)

Or, in the blog-version of Krugman: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”. These are the crucial analytical ‘deep parameters’, a.k.a axioms, all the rest is to a greater or lesser extent decoration. There is no need at all to bother with the silliness of the numerous auxiliary assumptions.

Now, constrained optimization and equilibrium are nonentities and therefore not admissible as axioms.** This is the methodological silver bullet and more is not needed to put the DSGE zombie at rest. All models that are axiomatically based on maximization-and-equilibrium are false by implication.

This clears the ground, next comes the all-decisive part: construction. What is desperately needed is a replacement, that is, a formally and materially consistent approach that is not axiomatically based on maximization-and-equilibrium but on something more solid. This is not an easy task “A new idea is extremely difficult to think of. It takes a fantastic imagination.” (Feynman, 1992, p. 172)

Sad to witness that After-Keynesians still hallucinate that the motto ‘it is better to be roughly right than precisely wrong!’ is a smart substitute for the fantastic imagination of a paradigm shift.

The methodological key point of the brain-dead microfoundation issue is: Orthodoxy has to be criticized for defending the indefensible, Heterodoxy has to be criticized for a lack of imagination. Because that is why economics is scientifically late since Jevons/Walras/ Menger.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY, Melbourne: Cambridge University Press.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.
Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics. Mimeo, pages 1–32. URL

* See ‘Axiomatized nonentities and the failure of methodologists