October 31, 2016

How the mainstream vanished in the gutter

Comment on Lars Syll on ‘What is mainstream economics?’

Blog-Reference and Blog-Reference on Nov 3

Krugman succinctly explained what mainstream economics is: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

More explicitly, the starting point has been defined by the following hard core propositions, 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)

From these premises follows what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium. This construct is the analytical workhorse of economics and it is used by both orthodox and heterodox economists.

It should be pretty obvious that the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).

Every model that contains a nonentity is A PRIORI false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the waste basket. The same holds for utility maximization and all other nonentities.

Economics from Jevons/Walras/Menger to DSGE contains HC1/HC5 and therefore is proto-scientific junk. Each textbook that applies the supply-demand-equilibrium explanation is proto-scientific junk. In sum, what Krugman “and many others do” is cartoon science.

Scientific standards are well-defined: “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)

Because TWO criteria must be satisfied at any time it suffices for a refutation to prove that a theory/model is either formally inconsistent or materially inconsistent. So, there is no need to empirically refute a theory that has been proven to be formally defective.

Mainstream economics is formally defective because it is built upon an axiom set that contains THREE nonentities. From the fact that mainstream economics is axiomatically false it follows that the WHOLE analytical superstructure of marginalism is false from market theory to distribution theory to growth theory. There is no need to refute these theories individually.

The scientific incompetence of economists lies (i) in the acceptance of HC1/HC5 and supply-demand-equilibrium, (ii) in the inability to replace the false Walrasian axiom set by the true axiom set and to reconstruct economics without ever using the concepts constrained optimization, rational expectations and equilibrium again.

At the moment, about 90 percent of peer-reviewed papers in mainstream journals contain nonentities, which is to say that they are scientifically worthless.

To rise above the proto-scientific level requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations.* Needless to emphasize that this is entirely beyond the means of the representative economist. The proven fact is that neither orthodox nor heterodox economists got the foundational concepts of economics right since Adam Smith.**

Egmont Kakarot-Handtke

* For details see ‘From microfoundations to macrofoundations
** See ‘Economics for Economists