September 5, 2017

Economic methodology for the little man

Comment on Lars Syll on ‘Methodological arrogance’

Blog-Reference and Blog-Reference

It is a fact that the little man has an ego problem. Worse, this psychological disadvantage is exploited in all kinds of discussions. To position oneself as the humble friend of the people and to call the opponent an arrogant elitist is a sure way to win standing ovations in every sitcom, no matter what the issue is.

These age-old rhetorical maneuvers, though, are entirely misplaced in a discussion about the methodology of economics. David Glasner disqualifies himself with this argument: “So what do I mean by methodological arrogance? I mean an attitude that invokes micro-foundations as a methodological principle — philosophical reductionism in Popper’s terminology — while dismissing non-microfounded macromodels as unscientific.” Note that the introduction of the psychological notion of arrogance adds nothing of relevance but merely emotionally distracts from the point at issue.

The point at issue is whether Walrasian microfoundations or Keynesian macrofoundations are the correct starting point of economic analysis. And the short and simple answer is, without humbleness or arrogance, that BOTH are unacceptable proto-scientific rubbish.

Microfoundations are given with these verbalized Walrasian 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)

From these premises follows supply-demand-equilibrium and all the rest of microeconomics.

Obviously, the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. By consequence, economics from Jevons/Walras/Menger to DSGE/RBC is false.

Keynes has to be credited for realizing that Orthodoxy was false at its core and that nothing less than a paradigm shift was needed.

The Keynesian Revolution, though, failed because Keynes messed up the move from microfoundations to macrofoundations. Keynes’ own methodological blunder can be exactly located in the General Theory: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with 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.)

Because profit and income are ill-defined the whole theoretical superstructure of Keynesianism is false. It was Allais who identified and rectified Keynes’ lethal foundational blunder.#1 After-Keynesians have not noticed anything until this very day.

What the team Glasner/Syll has not realized is that BOTH Walrasian microfoundations and Keynesian macrofoundations have to be buried. The former is already dead since 140+ years, the latter for 80+ years.

By consequence, there is only ONE worthwhile task in today’s economics: the paradigm shift from false micro and false macro to the true macrofoundations.#2 It holds: If it isn’t macro-axiomatized, it isn’t economics.

Do not expect this urgent paradigm shift from the self-declared champions of the little man, long-standing proto-scientific blatherers, and cargo cult scientists David Glasner and Lars Syll.

Egmont Kakarot-Handtke

#1 How Keynes got macro wrong and Allais got it right
#2 First Lecture in New Economic Thinking