February 19, 2016

How economics finally became a science

Comment on Geoff Davies on ‘Capitalism’s growth problem’


Thank you for the link to your post ‘Finding a framework for a New Economics’ of Nov 2012. Your broad-brush description of the old and the new framework is correct. Clearly, the task of Heterodoxy is — in methodological parlance — to perform the overdue paradigm shift, that is, to move from the old to the new framework.

Therefore, the one and only question is: How is it done? Certainly NOT by wasting more time with beating the dead horses of Walrasianism, Keynesianism, Marxianism, or Austrianism. The forward-looking answer is: ‘Doubtless, the most effectual mode of showing how the Science of Economics may be constructed, would be to construct it.’ (cf. J. S. Mill).

And this is how a paradigm shift is done in the methodologically correct way.

These are the hard core propositions, a.k.a. axioms, of the Neo-Walrasian paradigm:
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)

The set of old axioms has to be fully replaced by a new set.

This methodologically correct set constitutes the new foundations of economics:
(0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(i) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(ii) O=RL output O is equal to productivity R times working hours L,
(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimalist, that is, it cannot be reduced further, only expanded. The set contains NO nonentities like maximization or equilibrium and NO normative assertions,* and this is exactly how it should be.

The whole theoretical superstructure, which includes the evolution of the economic system in historical time, real capital formation, profit and income distribution, money, land, resources, the financial sector etcetera has to be reconstructed starting with the set (i) to (iii). This minimalist foundational set has to be consistently expanded.

This, in brief, is how the paradigm shift had to be initiated.** Walrasianism, Keynesianism, Marxianism, and Austrianism are now out for good, and with the new axiomatic foundation economics finally became a science.

Egmont Kakarot-Handtke

* For details see the AXEC-blog in particular the post ‘How to restart economics’ and the working papers on SSRN.
** For details see cross-references Paradigm shift