October 23, 2013

Redemption and depression {45}

Working paper at SSRN

Abstract  According to prevailing methodological criteria, standard economics is definitively refuted. Joan Robinson's wake-up call “Scrap the lot and start again” has therefore lost nothing of its original freshness and urgency. Yet, how can the restart succeed? This inquiry builds on structural axioms. First, conceptual consistency is assured and the confusion about profit and income is dissolved. The question of interest is then how a recession or depression develops as a result of the normal functioning of the monetary economy. This involves the identification of positive feedback. A very effective mechanism consists of the circular interaction of profit and distributed profit.

October 14, 2013

Heterodoxy: promising or hopeless?

Comment on Edward Fullbrook on ‘New Paradigm Economics’


Edward Fullbrook has undertaken the task of distilling from numerous contributions to the Real-World Economics Review a synopsis of the core tenets of present-day Heterodoxy (2013, p. 129). This is a good thing. However, he, unfortunately, characterizes a motley of opinions as NPE, New Paradigm Economics. There is at the moment nothing that deserves the title of a heterodox paradigm in the sense of Kuhn. What is more, Kuhn has argued: “that there are no, nor can there be any, paradigms in the social sciences.”

What we have before us resembles more a manifesto than anything else. The first item in the compilation, pluralism, confirms this impression.

A paradigm/theory/model makes assertions about the world (is deterministic, consists of atoms, expands inflationary, etcetera) or parts of it (society consists of antagonistic classes, of utility-maximizing individuals, is ruled by an invisible hand, etcetera) and implicitly or explicitly insists that this view is the correct one. A paradigm/theory/model without a truth claim is a contradiction in terms.

Hence pluralism is a meta-claim that cannot be used by any specific paradigm. Heterodoxy is not the arbiter and by no means in the position to decide that, for example, classical, Marxian, neoclassical, or Keynesian approaches are, in the name of pluralism, legitimate constituents of economics ― understood as a science. Just like astrology, geocentrism, or creationism cannot claim to be part of pluralistic physics or biology. Note that Dawkins refuses occasionally to discuss with creationists about evolution. Science constitutes itself by proper demarcation from nonscience (cf. Popper, 1980, p. 34).

Physics is pluralist at the cutting edge of research as long as the matter has not been settled according to accepted criteria (logical and material consistency, cf. Klant, 1994, p. 31). There is no pluralism, though, with regard to the Law of the Lever. To compare economics, which has not yet got hold of something analogous to the Law of the Lever, with cutting-edge physics is preposterous.

The defining characteristic of Heterodoxy is, trivially, the rejection of the neoclassical approach. The rejection is borne either by a well-founded conviction or at least the distinct feeling that there must be something better. Hence Heterodoxy epitomizes the promise to eventually come up with a superior alternative. This is what makes Heterodoxy attractive. In Lakatos' terms, Heterodoxy is to be understood as the progressive research program and Orthodoxy as the degenerating research program.

Heterodoxy, therefore, consists of a destructive and constructive part. However, both parts are not symmetric: “... there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

Heterodoxy was very successful with debunking (cf. Fullbrook, 2004; Keen, 2011) but it cannot be said that it was equally successful with construction: “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)

To explain this unacceptable state of theoretical affairs at least in part it is useful to study New Paradigm Economics in more detail. The methodological comment starts with a noncontroversial assertion: “Whether you can observe a thing or not depends on the theory which you use. It is theory which decides what can be observed.” (Einstein, quoted in Fullbrook, 2013, p. 130)

However, this consensus is immediately contradicted in Section 3 which claims that Heterodoxy “priorizes the empirical over apriorism.” Einstein was as clear as possible that this is the wrong priority: “... any attempt logically to derive the basic concepts and laws of mechanics from the ultimate data of experience is doomed to failure.” (1934, p. 166)

This is exactly what John Stuart Mill said long before with regard to economics: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one or that of “abstract speculation”.” (Mill, 2004, p. 113-114)

Being an apriorist, Einstein of course never denied the crucial role of the empirical: “Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics. In a certain sense, therefore, I hold it to be true that pure thought is competent to comprehend the real, as the ancients dreamed.” (1934, p. 167)

Is there any indication that physicists will abandon the deductive method in the future and instead turn to pluralism? “Some day, when physics is complete and we know all the laws, we may be able to start with some axioms, and no doubt somebody will figure out a particular way of doing it so that everything else can be deduced.” (Feynman, 1992, p. 50)

Was Einstein blind to the pitfalls and limitations of the deductive method which indeed have paralyzed the neoclassical approach? “If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way?” (Einstein, 1934, p. 167)

Economists have yet to find the correct way. This is not attributable to the deductive method as such but to its clumsy application.

As always when they are clueless, economists turn to physics (Mirowski, 1995), and always they miss the point. Heterodox economists are no exception: “... progress entails a movement away from faith-based to empirical-based economics” (quote from Fullbrook, 2013, p. 130).

My impression from the NPE compilation is that Edward Fullbrook is currently too occupied with a rather hopeless rearguard of Heterodoxy. “Many people have a passionate hatred of abstraction, chiefly, I think, because of its intellectual difficulty; but as they do not wish to give this reason, they invent all sorts of others that sound grand. They say that all reality is concrete and that in making abstractions we are leaving out the essential. ... Those who argue in this way are, in fact, concerned with matters quite other than those that concern science.” (Russel, 1961, p. 626)

In economics, those other matters have been political agenda-pushing. This holds for both Orthodoxy and Heterodoxy.

Egmont Kakarot-Handtke

Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Fullbrook, E. (Ed.) (2004). A Guide to What’s Wrong With Economics. London: Anthem.
Fullbrook, E. (2013). New Paradigm in Economics. real-world economics review, 65: 129–131. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Mill, J. S. (2004). Essays on Some Unsettled Questions of Political Economy, chapter On the Definition of Political Economy; and the Method of Investigation Proper to It, 93–125. Electronic Classic Series PA 18202: Pennsylvania State University. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, 1–16. Cambridge, New York, Melbourne: Cambridge University Press.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
Russel, B. (1961). The Basic Writings of Bertrand Russel, chapter Limitations of Scientific Method, 620–627. London: Routledge.

Related 'Heterodoxy ― an axiomatic failure just like Orthodoxy' and 'Microfoundations are dead for 150+ years: high time to move on' and 'Economics ― the science that never was' and 'The canonical macroeconomic model'. For details of the big picture see cross-references Heterodoxy and cross-references Constructive Heterodoxy.

October 12, 2013

The structural price mechanism {44}

Working paper at SSRN

Abstract   Standard economics rests on behavioral assumptions that are formally expressed as axioms. With the help of additional assumptions like perfect competition and equilibrium, a price vector is established that displays a host of desired properties. This approach is tightly stuck in a cul-de-sac. Conceptual rigor demands to discard the subjective-behavioral axioms and to take objective-structural axioms as the point of departure. The present paper reconstructs the price system in structural axiomatic terms for the most elementary economic configuration. The generalization of the structural price mechanism supplants the collapsed Walrasian and Keynesian attempts to formulate a consistent price and value theory.