December 16, 2016

Economics, methodology, and the Molehill Impossibility

Comment on Bernard Guerrien on ‘A New “General Theory”? A review of Capitalism by Anwar Shaikh’ #1


All intelligent economists are heterodox. As James Kwak put it on another occasion: “Economism is a logical fallacy ... Intelligent economists know this. Those who don’t realize it are unintelligent. So take your pick between liar and moron.” The unassailable fact of the matter is that Orthodoxy is no longer defensible.

The problem is that simply to be heterodox is NOT enough. From rejecting Orthodoxy one eventually has to move on to fully replace it. The great majority of heterodox economists wants ― as the French students put it ― “to escape from imaginary worlds” but for some reason they fail as their heterodox ancestors did. The current state of economics is that not only Orthodoxy is a scientific failure but traditional Heterodoxy, too.#2

Orthodoxy and traditional Heterodoxy have one thing in common: they do not understand the scientific method. A case in point is the new book Capitalism by Anwar Shaikh who claims to provide a new General Theory.

Guerrien summarizes: “Shaikh belongs to the ‘classical tradition’ that starts ‘from the bottom up, from the actual world that we observe around us, and then build abstractions from there’.” (#1, p. 156)

Now, bottom-up is exactly how Orthodoxy proceeds under the label of microfoundations: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994)

Already Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.#3

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations down through intermediate levels (sectors, branches, firms, households) to the individual. Why? Let us rename the microfoundations approach as Molehill Impossibility: “Although molehills are undeniably part of the universe NO amount of molehill research ever leads to the understanding of how the universe works.” Applied to economics: “NO amount of microeconomic research ever leads to the understanding of how the (world-) economy works.” Alternatively: “NO way leads from the understanding of human behavior to the understanding of how the monetary economy works.” And this explains why the microfoundations approach has been doomed to failure from the very beginning.

The touchstone for the assessment of any new approach is: does it solve the profit puzzle? What neither Orthodoxy nor Keynes ever understood was profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010)

It is pretty obvious that an economists who cannot tell the difference between profit and income is a laughing stock. Shaikh introduces profit as follows: “The distinction made between what happens at an abstract level and at a more concrete level leads to the two important notions of a normal profit rate and of a regulating profit rate.” But Shaikh neither defines overall profit nor explains how it comes that normal profit is greater than zero.

“Shaikh does not claim to start from scratch: he identifies himself with the classical tradition throughout Capitalism even if what is meant by classical is not specified.” (#1, p. 159) Because he does not start from scratch, Shaikh takes the whole conceptual blunder from the classicals on board. One of the worst blunders of the classicals, including Marx, was that they did not understand profit.

The indispensable paradigm shift consists in replacing the false microfoundations of Orthodoxy and Shaikhian Heterodoxy and the false Keynesian macrofoundations by entirely new macrofoundations.#4 This is the way that leads to a valid General Theory. There is NO need for Heterodoxy to re-invent the scientific method but there is an urgent need to apply it properly.#5

Egmont Kakarot-Handtke

#1 RWER, issue no. 77
#2 For details see cross-references Heterodoxy
#3 See ‘The unfinished Keynes
#4 See ‘Macro for dummies
#5 See ‘Heterodoxy and the re-invention of science