Walras is long gone

Comment on Lars Syll on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

Let me start with your summary. You [Ezra Davar] say: “In development of any science a continuity plays crucial role. So, it is impossible to neglect achievement of such authors as Smith, Marx, Walras, Marshall and so many others eminent authors.”

Since economics is scientifically in secular stagnation most economists, you included, have obviously lost sight of the idea of the scientific revolution: “... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

Apply your argument to Copernicus, Kepler, and Galileo in their relation to Ptolemy and you immediately see that continuity is not exactly the top priority of great scientists. This is especially so when they are confronted with savants (instead of real scientists): “These savants, as Galileo put it, first decided how the world should function in accordance with their preconceived principles. ... He openly criticized scientist and philosophers who accepted laws which conformed to their preconceived ideas as to how nature must behave. Nature did not first make men’s brains, he said, and then arrange the world so that it would be acceptable to human intellects.” (Kline, 1982, p. 48)

So let us, first of all, put the authors Smith, Marx, Walras, and Marshall into the category of savants and place them next to Ptolemy in the scientific Walhalla.

With regard to economics, the most deleterious of the preconceived ideas has been equilibrium: Wherever economics is used or thought about, equilibrium, is a central organising idea.” (Hahn, cited in Boland, 2003, p. 99)

In a previous post, I summarized ‘Because equilibrium is a NONENTITY all equilibrium models are methodologically unacceptable.’ And this means that the differences between the multitude of variants of equilibrium models play no role at all.

So your attempt to argue 'What Walras really meant’ is futile because if anything is indisputable then that Walras was an equilibrist. Of course, I agree with you that there are differences and overlaps between the original Walrasian, the input-output, and the Neo-Walrasian approach (see Mitra-Kahn 2008) but these are only of historical interest.

“At long last, it can be said that the history of general equilibrium theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin ...” (Blaug, 2001, p. 160)

Let Walras rest in peace and equilibrium with him.

Equilibrium in whatever definition must not be taken into the premises. Methodologically, this amounts to a petitio principii (cf. Mill, 2006, pp. 819-827). Not admitted are, in addition, utility, optimization, and rational expectation. The first rule of theory-building says: never put NONENTITIES into the axiomatic premises (2014, p. 11).

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of Economic Perspectives, 15(1): 145–164.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014). The Logic of Value and the Value of Logic. SSRN Working Paper Series, 2399550: 1–20. URL
Kline, M. (1982). Mathematics. The Loss of Certainty. Oxford, New York: Oxford University Press.
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, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Mitra-Kahn, B. H. (2008). Debunking the Myths of Computable General Equilibrium Models. CEPA Working Paper 2008-1, 1–93. URL

For the correct and complete set of macrofoundations — structural axioms and behavioral propensity function — see Wikimedia AXEC137b.

What are the alternatives?

Comment on Lars Syll on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

You [Ezra Davar] ask "Is Input-Output Analysis of Leontief a nonentity?"

As far as it is used as a mathematical device it is not, as far as it abused to illustrate the Walrasian equilibrium of all markets it is. For a formal proof see (2013).

You say "So, our task to change them [the assumptions of general equilibrium] by much more realistic assumptions."

It is not so much a matter of assumptions. Each theory is based on axioms, so we have to move from the obsolete orthodox axiom set to a heterodox axiom set. This is what a Paradigm Shift is all about. Playing with realistic/unrealistic assumptions keeps economists busy without ever leading to worthwhile results.

You ask "What is an alternative?"

I agree with you, Keynes' approach is not an alternative to Walras'. It too suffers from severe methodological deficits. For a formal proof see (2011).

The alternative has already been pointed out by Joan Robinson: Scrap the lot and start again!#1

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN
Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2013). Walras’s Law of Markets as Special Case of the
General Period Core Theorem. SSRN Working Paper Series, 2222123: 1–12. URL

#1 For the new formal start with structural axioms and the behavioral propensity function see Wikimedia AXEc137b.

Rubberneck's reality

Comment on Asad Zaman on ‘Gödel’s theorems and the limits of reason’

Blog-Reference

In his paper ‘Understanding the problems of mathematical economics: A “continental” perspective’ Wolfgang Drechsler quotes: “...scientific concepts are idealizations; they are derived from experience obtained by refined experimental tools, and are precisely defined through axioms and definitions. Only through these precise definitions is it possible to connect the concepts with a mathematical scheme and to derive mathematically the infinite variety of possible phenomena in this field. But through this process of idealization and precise definition the immediate connection with reality is lost.” (Heisenberg, in 2011, p. 52)

What Drechsler suggests throughout his paper is that in the scientific process reality gets lost. Note, however, that Heisenberg speaks of the immediate reality. This reality is dear to so-called social scientists and consists of what the rubberneck sees when he looks out of the window and hears when he listens to his neighbors and the talking heads.

Atoms and quarks do not belong to this immediate reality. Neither does the economy. Nobody can see, touch, hear, or smell the economy. So, nothing of importance is lost through the scientific process but much is gained. It can hardly be denied that Heisenberg and his colleagues reached a higher level of knowledge using the longest mathematical ladder. The same cannot be reported from the adepts of Verstehen. They are forever lost in liguisticality, that is, myth, storytelling, rhetoric, and gossip.

Economics fits Heisenberg's characterization of the scientific process, but only superficially. This has often been noticed.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

As far as Wolfgang Drechsler's and Asad Zaman's critique of mathematics and the scientific method is appropriate it hits the look-alike.#1

To apply the method correctly and to state ‘axioms and definitions precisely’ is the task of Constructive Heterodoxy.#2

Egmont Kakarot-Handtke


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Drechsler, W. (2011). Understanding the Problems of Mathematical Economics: A "Continental" Perspective. real-world economics review, (69): 45–57. URL

#1  For the refutation of Zaman’s arguments see cross-references Burn The Mathematics
#2 For details of the big picture see cross-references New Curriculum

Essentials of Constructive Heterodoxy: behavior {72}

Working paper at SSRN

Abstract  For a host of compelling methodological reasons, homo oeconomicus has to be replaced. This is consensus, the open question is how this could be accomplished. What is required first is the separation of the formal foundations into a structural and a behavioral part. This paper introduces the propensity function as a general formalization of Economic Man/Woman. The propensity function is a compact formal expression of random, semi-random, and deterministic behavioral assumptions. It is shown how, in a random environment, target-oriented behavior produces stochastic stability and optimality in the product market. With homo oeconomicus, the conception of simultaneous equilibrium, too, vanishes.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see Wikimedia AXEC61.

Essentials of Constructive Heterodoxy: institutions {71}

Working paper at SSRN

Abstract  What do economists understand about the economy if they do not understand the profit phenomenon? Next to nothing. Therefore, the first task in theoretical economics is to clarify the difference between profit and wage income and their respective determinants. It was Ricardo who tackled the problem first, but neither Orthodoxy nor Heterodoxy solved it until this day. The need for a paradigm shift is indisputable. The structural axiomatic approach is more comprehensive as it embraces the consistent interaction of real and nominal variables of the monetary economy and the economic consequences of alternative variants of institutions, e.g. land ownership.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see Wikipedia AXEC61.

Make no mistake: there can be only one true theory

Comment on Simon Wren-Lewis on ‘Received wisdom in macroeconomics’

Blog-Reference

Once upon a time in Vienna, what set Popper's young brain in motion was that he stumbled upon the curious fact that psychoanalysis could explain everything including its own failure. From this, he famously derived the basic rule of science that a theory must be refutable in principle. Or, to put it the other way round, a theory that explains everything explains nothing.

We know that economists never understood this methodologically crucial point because they were and still are very proud that they can explain everything — if only with some tweaking after the fact. One of the great methodologists told economists in no uncertain terms that this is always a red-hot indicator of scientific dilettantism.

“Everything can be ‘explained’ if we place no restrictions on what we mean by ‘explanation’.” (Blaug, 1994, p. 123)

Wren-Lewis, for one, is entirely unaware of his methodological self-debunking: “Yet as anyone who is involved in modern macro knows, pretty well whatever X is, there are models that have those things. If you want chapter and verse on this, see Tony Yates. Indeed, one of the characteristics of modern macro, as opposed to the stuff I dimly remember from my youth, is the huge variety of approaches on offer. In that sense, academic macro is flourishing.” (See thread intro)

Yes, but only in that senseless sense. Just imagine you ask a physicist how the lever works and he answers: “Oh, physics is flourishing, there is a huge variety of approaches on offer.”

From the fact that you can construct a model about everything follows only one thing for sure: that you know NOTHING.

Let us become concrete. Here is the scientific self-test. You apply one of these items:
• supply-demand-equilibrium,
• general equilibrium,
• marginal utility,
• well-behaved production functions,
• total income = value of output,
• total income = wages + profits,
• I=S,
• behavioral axioms,
• microfoundations?

Then your received wisdom is for the birds #1 and you have nothing of scientific value to offer.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

For 200+ years now, received wisdom has been far off the true theory.

Egmont Kakarot-Handtke


References
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepentant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 109–136. London, New York: Routledge.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

#1 For the axiomatically correct approach see cross-references Refutation of I=S and cross-references Paradigm Shift.

The synthesis of institution and math

Comment on Lars Syll on ‘Wicksell on the use of mathematics in economics’

Blog-Reference

Heterodoxy is not merely critical of Orthodoxy but regards it — applying the scientific true/false code — as false. This implies that Heterodoxy is not a corrective that improves Orthodoxy at the margin or an alternative view that can coexist in an anything-goes pluralism but that Heterodoxy replaces Orthodoxy just as heliocentrism has replaced geocentrism.

This was also the original goal of Institutionalism as formulated by Veblen (1961). Now, when one can safely conclude that Orthodoxy is a failure then, by the same token, one has to admit that not much of real scientific value has come from the Institutionialists.

One reason is that Heterodoxy has always clearly seen the numerous abuses of mathematics (including statistics) in standard economics but has never figured out how to apply it correctly and with good effect to its own cause. As a result, Heterodoxy somehow landed in the Cambridge School of Loose Verbal Reasoning which has Marshall's silly slogan Burn the mathematics above its entrance.

This slogan has been updated by the Post Keynesians to "it is better to be roughly right than precisely wrong!" (Davidson, 1984, p. 574)

This slogan sounds plausible in political economics but it is not acceptable in theoretical economics because it amounts to abandoning scientific standards.

For Heterodoxy it is high time to get out of the populist anti-math camp and at long last to accomplish the synthesis of Institutionalism and formalization (see 2015).

"I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. ... Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. ... In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial." (Suppes, 1968, pp. 654-655)

Heterodoxy either becomes a science or goes down the drain arm in arm with Orthodoxy.

Egmont Kakarot-Handtke


References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Institutions. SSRN Working Paper Series, 2598721: 1–18. URL
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.
Veblen, T. (1961). The Place of Science in Modern Civilisation, chapter Why is Economics Not an Evolutionary Science? 56–81. New York: Russel and Russel. (1898).