June 1, 2016

Making tools work in economics

Comment on Lars Syll on ‘Econometrics — a Keynesian perspective’

Blog-Reference

Isn’t it curious, mathematics which worked so awesome in the genuine sciences, came down to the caricature of mathiness in economics. Same with the state-of-art statistical tools of testing. Has any of the grand economic issues ever been settled by a statistically compelling appeal to facts? Same with simulations, which are prima facie the ideal tool for economics. There is a lot of fooling around with modeling packages but no generally accepted canonical simulation exists.

So, why do sophisticated tools that work everywhere in the sciences regularly fail in economics? One reason is, that the majority of economists is more oriented towards politics than towards science and for political purposes common sense and rhetoric have always been sufficient. Keynes instinctively opposed rigorous method and clear-cut results: “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context.’ (Coates, 2007, p. 87). As a consequence: “In the early thirties he [Keynes] confessed to Roy Harrod that he was ‘returning to an age-long tradition of common sense’.” (Coates, 2007, p. 11). Until this day, people who have qualms with math and Econometrics find a quotable advocate in Keynes.

Apart from the traditionally strong preference of economists for inconclusive wish-wash in the no man’s land between true and false, the primary reason for the ineffectiveness of mathematical and statistical tools are elementary methodological mistakes with regard to theory construction. It is pretty obvious that a theory which is built upon axioms that contain more nonentities than entities can neither be properly formalized nor effectively tested. Take the neo-Walrasian axiom set as an example: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147). HC2, HC4, HC5 are apparent nonentities and nothing testable can ever come of them.

What is needed as the very first step is a replacement of the formal foundations of economics (2014). From the correct macrofoundations then follows (i) a number of testable structural relationships, and (ii), a concise formula that represents the canonical simulation of the pure consumption economy.*

The way forward for heterodox economists is to emancipate themselves from Keynes’s misjudgment of formal modeling and statistical testing.

Egmont Kakarot-Handtke


References
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, NY, etc.: Cambridge University Press.
Kakarot-Handtke, E. (2014). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* Simulation, download of the Excel spreadsheet from Dropbox
Wikimedia, exemplary depiction of the drifting consumption economy