Blog-Reference and Blog-Reference
“When Bob Lucas, Tom Sargent, and Ed Prescott remade macroeconomics in the 70s and 80s, what they were rebelling against was reduced-form macro. So you think you have a ‘law’ about how GDP affects consumption? You had better be able to justify that with an optimization problem, said Lucas et al.”
From the accurate realization that there is no such thing as behavioral macro laws Lucas/Sargent/Prescott drew the wrong conclusion that there must be something like behavioral micro laws and marched even deeper into the woods.
There is no such thing as a behavioral law, neither in macro nor in micro. But there are structural laws of the economic system. So the right methodological move is from subjective-behavioral macro to objective-structural macro.
Strictly speaking, economics is since Jevons/Walras/Menger on the wrong microfoundations track. In what has been called Keynesian Revolution, Keynes attempted the paradigm shift from microfoundations to macrofoundations. This attempt failed because Keynes got the formal foundations of macro wrong.
So the right methodological move at the critical After-Keynes junction would have been to put macrofoundations right and not to regress to microfoundations which had been dead in the cradle already more than 100 years ago.
Both, the Walrasian and Keynesian axioms are faulty and have to be replaced by the correct macrofoundations. This is achieved as follows.
(A0) 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.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
This objective structural axiom set leads logically to a testable stable macro employment law, a.k.a. Phillips curve (2012; 2015), which is entirely FREE of brain-dead green cheese assumptions like constrained optimization, rational expectations, equilibrium, etc.
Not by any stretch of the imagination did Lucas/Sargent/Prescott remade macroeconomics — they pulpified it further.
You say: “But few would argue that it [old macro] needed replacing.” Yes, but some are quite sure that new pulp economics needs replacing even more urgently.
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
(i) Economics is a failed science.
(ii) The fault of a theory lies in most cases in the premises = axiomatic foundations and not in the logical derivation of the implications.
(iii) Both, the Walrasian axioms (microfoundations) and the Keynesian axioms (macrofoundations) are provable false and have to be replaced.
(iv) When the underlying theory is false empirical testing in most cases degenerates to an inconclusive curve fitting exercise.*
(v) Therefore, nothing less than a paradigm shift will do, i.e. the replacement of the axiomatic foundations of the accustomed approaches.
(vi) The correct macrofoundations as enumerated above consist of nominal AND real variables. Therefore, they are NO accounting identities, which consist of nominal variables alone (BR’s 1st idiocy).
(vii) The structural axiom set contains output O and quantity sold X. The difference is the change of inventory. Obviously, there is NO claim in the premises that ‘inventories never change’ (BR’s 2nd idiocy).
(viii) From the elementary structural axioms as enumerated in the post above follows that the profit theory is false since Adam Smith.** It does NOT follow that nobody is aware ‘that firms invest out of retained earnings’ (BR’s 3rd idiocy).
The main conclusion is: as long as economists do not get the structural macroeconomic relationships between the foundational concepts profit/income right they will not get above the proto-scientific level or what Feynman famously called cargo cult science.***
For the specific issue under discussion, Longtooth’s summary is spot on: “Parenthetically I believe the highly subjective ‘ease of doing business’ data points used to show deregulation can improve GDP is about as unscientific as it gets. Plotting a highly subjective composite of highly subjective terms against an objective variable is laughable.”
It is more than laughable: for economics as proto-science and economists as incompetent scientists there is no alternative to the expulsion from the sciences.
* See also post ‘From mathiness to empiriness: forget it!’
** See paper ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
*** See post ‘A science without scientists’
Related 'The overdue public clarification of economics’ actual scientific state'