July 30, 2016

Economics: The chief demerit is inconsistency

Comment on Lars Syll on ‘How evidence is treated in modern macroeconomics’

Blog-Reference and Blog-Reference on Aug 4

Scientists know it but economists do not: “The chief demerit is inconsistency, including inconsistency with the results of experiments that a competing theory can explain.” (Popper, 1994, p. 160)

Scientists know it but economists do not: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

So, science is about formal AND material consistency ― BOTH simultaneously, NOT either/or. The outstanding characteristic of economists is that they still think there is something to choose: “Is it better to start deductively from axioms or inductively from facts? When the time comes to choose between internal consistency and consistency with observations, which side should we take? (Blinder, 1987, p. 135)

BOTH SIDES, blind Blinder! There is NO trade-off in science, neither between formal and material consistency nor between rigor and relevance nor between theory and practice. As Kant famously put it: “There is nothing so practical as a good theory.”

Needless to emphasize that the DSGE folks never got the pivotal point of methodology: “The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.” (Wren-Lewis, see intro)

Never had methodological moronism been expressed so clearly. Mind you, a theory that does not fit the data is falsified and has to be abandoned. Economists, though, do not abandon their scientific garbage but desperately cling to it. This is the Original Sin: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, p. 369)

The fact of the matter is that economics is a failed science. This is well-known among scientists but economists simply have no idea how to get out of the cul-de-sac: “And so ― faithful to the theory’s conceptual cornerstones and hoping against all hope that the unthinkable may still be achieved (i.e., a satisfactory theory of the price mechanism) ― the tormented upholders of the validity of the paradigmatic core of economic equilibrium theory appear singularly reluctant to face the problem of comparing expectations and results and assessing the consistency of the theory.” (Ingrao et al., 1990, p. 346)

One tends to think that Heterodoxy is methodologically superior to Orthodoxy but this is not the case. Keynes, too, played material consistency against formal consistency: “... the brave army of heretics ..., who, following their intuitions, have preferred to see the truth obscurely and imperfectly rather than to maintain error, reached indeed with clearness and consistency and by easy logic but on hypotheses inappropriate to the facts.” (Keynes, 1973, p. 371)

Brave Post Keynesians echoed the master’s methodological kitsch with their silly motto: “... it is better to be roughly right than precisely wrong!” (Davidson, 1984, p. 574)

Roughly right is NOT a scientific criterion. Science is bivalent true/false with nothing in between. Roughly right = roughly wrong. Non-scientists, of course, are at home in the morass of wish-wash and inconclusiveness between true and false where anything goes and “nothing is clear and everything is possible.” (Keynes, 1973, p. 292)

It is a methodological tragicomedy that Keynes spotted the all-decisive point correctly: “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.” (Keynes, 1973, p. xxi)

Krugman clearly spoke out what the premises are: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Like Keynes, Keen got the decisive point: “... real progress involves radically revising or even abandoning that starting point.” (Keen, 2011, p. 35)

Twisting and doctoring and tampering with assumptions, equations and/or data is not compatible with scientific standards. A paradigm shift is inevitable, which means in concrete and unmistakable term: abandoning microfoundations.#1 And this is what Keynes attempted: he replaced microfoundations by macrofoundations.#2

Keynes, too, got it provable wrong, yet neither Keynesians nor Post Keynesians nor New Keynesians nor the Anti-Keynesians ever spotted the logical inconsistency in Keynes’s macrofoundations. Not very profound thinkers these Walrasian, Keynesian, Marxian, Austrian folks. There is NO HOPE that these dilettantish orthodox or heterodox economists will ever understand what the unity of formal AND material consistency means (2013).#3 After all, they did not get it in the last 200 years. There is only one option left: to evict economics from the sciences.

Egmont Kakarot-Handtke


References
Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic Review, 77(2): 130–136. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
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. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.

#1 Orthodoxy is built upon this set of hard core propositions, a.k.a. premises, a.k.a. starting point, a.k.a. axioms: “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)
#2 Keynesianism is built upon this set of foundational propositions: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (Keynes, 1973)
#3 For more details and references see ‘The problem with macro in two words’.