September 26, 2016

All models are false because all economists are stupid

Comment on David Glasner on ‘Paul Romer on Modern Macroeconomics, Or, the “All Models Are False” Dodge’

Blog-Reference

Theoretical economics is science and science is digital=binary=true/false and NOTHING in between. Political economics is the very opposite of science and it resides in the bottomless morass between true/false where “... nothing is clear and everything is possible.” (Keynes, 1973, p. 292). One will invariably find that political economists adhere to the freak methodology of anything goes/nothing matters.*

What David Glasner does not seem to realize in his laudable refutation of the silly ‘All models are wrong’ excuse is that with regard to simplification and abstraction and the deductive method ALL has been said by the founding fathers:

“Any order of phenomena, however complicated, may be studied scientifically provided the rule of proceeding from the simple to the complex is always observed.” (Walras, 2010, p. 211)

“The conclusions of geometry are not strictly true of such lines, angles, and figures, as human hands can construct. But no one, therefore, contends that the conclusions of geometry are of no utility, or that it would be better to shut up Euclid’s Elements, and content ourselves with ‘practice’ and ‘experience’.” (Mill, 1874, V.48)

“The ground of confidence in any concrete deductive science is not the à priori reasoning itself, but the accordance between its results and those of observation à posteriori.” (Mill, 2006, p. 896)

In his recent paper ‘The Trouble With Macroeconomics’** Paul Romer puts DSGE and its main proponents ― Lucas, Sargent, Prescott ― to rest. In the final section ‘The Trouble Ahead For All of Economics’ he appeals to emotions: “It is sad to recognize that economists who made such important scientific contributions in the early stages of their careers followed a trajectory that took them away from science.”

While it is true that DSGE and its proponents are out of science it is NOT correct to give the impression that an accident happened at some point on the way which led from science to non-science. The fact of the matter is that DSGE has ALWAYS been out of science because economics has ALWAYS been out of science. The leaders of the DSGE/RBC program have done exactly what they were supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

This definition of the subject matter translates into the following set of hard core propositions/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, p. 147)

The critical axioms are HC2 and HC5. Krugman put it nicely: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

It is obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of orthodox economics is methodologically forever unacceptable. The axiom set consists of blatant nonentities but each student generation has swallowed it without turning an eyelid. Lucas, Sargent, Prescott certainly did. This is scientifically disqualifying.

In order to be applicable HC3, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. Taken together, all axioms and auxiliary assumptions crystallize to SS-DD-equilibrium or what Leijonhufvud famously called the Totem of Micro/Macro.

Needless to stress that ALL THREE elements of the standard tool (SS-function, DD-function, equilibrium) are nonentities. The fact that neither SS/DD functions nor equilibrium exist leads with inescapable consequence to the identification problem in Econometrics (see Romer Sec. 4). Romer takes this insurmountable technical difficulty as methodological silver bullet in order to finish off DSGE/RBC. It should be noted, though, that the identification problem has its roots in the Walrasian axiom set HC1/HC5 which is the accepted common ground of orthodox economics.

To throw DSGE/RBC unceremoniously out of science is only the first step because textbook supply-demand-equilibrium, which is built upon the same maximization-and-equilibrium axioms, is rubbish since Jevons/Walras/Menger.

This is the current state of economics: Walrasian microfoundations are false since 140 years and Keynesian macrofoundations are false since 80 years. As a consequence, roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks is false.

To rise above the proto-scientific level requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations (2015). In methodological terms, rethinking macroeconomics requires the replacement of false axioms by true axioms and the dishonorable discharge of the Walrasian, Keynesian, Marxian, Austrian crowd from science.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
Walras, L. (2010). Elements of Pure Economics. London, New York, NY: Routledge.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See also post ‘Eclecticism, anything goes, and the pluralism of false theories
** Paper of Sep 14, 2016


Related 'Economics between mathiness, dyscalculia and idiocy' and 'Schizonomics' and 'Modern macro moronism' and 'The methodological blunders of fake scientists' and 'If it isn’t macro-axiomatized, it isn’t economics' and 'Economics is a science? You must be joking!' and 'New economic thinking, or, let’s put lipstick on the dead pig' and 'Economists and the destructive power of stupidity'