October 15, 2016

Stuck with the economics prisoner’s dilemma

Comment on Peter Radford on ‘Blind leading the blind’


“The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.” (Feynman)

Heterodoxy has always argued that something might be wrong with Orthodoxy. In the discussion about a new curriculum Peter Radford reiterates: “Micro, if anything, is worse than macro. It is so utterly disconnected from reality that it is incapable of anything other than talking about itself.” (See intro)

Heterodoxy’s rejection of Orthodoxy is right. In 2016 no thinking being can defend orthodox economics any longer. The disturbing fact, though, is (i) that traditional Heterodoxy is right but for the wrong reasons, and (ii), that what traditional Heterodoxy has produced as alternative so far is also proto-scientific rubbish.

Traditional Heterodoxy is caught in the same blind alley as Orthodoxy by naively believing that economics is about the behavior of agents and that economics is a social science. Because of this common foundational error, Heterodoxy has been unable to overthrow the orthodox paradigm and to “replace it by something”, which, indeed, “is not so easy”. The critique of unrealism or mathiness is easy but does not go to the root of the problem.

A paradigm is defined by its axioms. Orthodox economics is built upon this set of foundational hard core propositions: “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)

The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the Walrasian hard core contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).

Nowadays, all scientists agree that angels, phlogiston, epicycles, superman, and the Easter Bunny are nonentities. As far as economics is concerned we can agree that utility, constrained optimization, intertemporal optimization, rational expectation, well-behaved production functions or supply-demand-equilibrium are nonentities just like the Easter Bunny. 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 all other nonentities.

Keynes had the right intuition: “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.” The orthodox premises are given with HC1/HC5.

The fact of the matter is that Keynes’s premises, too, are provable false.* As Feynman said, to replace a false paradigm is not so easy. What we have as a result is not only the orthodox ‘blind leading the blind’ but in addition the heterodox blind running after the orthodox blind with the superficial critique of unrealism.

The most ridiculous economist is a Post-New-After-Keynesian who explains the functioning of the economy with SS-curve―DD-curve―equilibrium as, for example, with IS-LM.**

Rethinking economics means to discard the failed paradigms and to fully replace Walrasian microfoundations and Keynes’s flawed macrofoundations by something new which has to be entirely FREE of nonentities and of behavioral assumptions. What BOTH Orthodoxy and Heterodoxy have to realize is that economics is a system science.***

The economics prisoner’s dilemma is: Orthodoxy has to be thrown out of science but traditional Heterodoxy cannot be admitted to science. The problem is how to get rid of all this hopeless ‘throng of superfluous economists’ (Joan Robinson).

Egmont Kakarot-Handtke

* See post ‘How Keynes got macro wrong and Allais got it right
** See paper ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
*** See post ‘From Orthodoxy to Heterodoxy to Sysdoxy