Keynes was pretty clear: “Walras’ theory and all the others along those lines are little better than nonsense!” Nonetheless, economics moved further along those lines until DSGE/RBC/New Keynesianism.
What Keynes not fully realized was that the Walrasian approach had been based on two axioms: equilibrium and constrained optimization.#1 “For it would not be too much of an oversimplification to present the field as having progressed smoothly and steadily, developing theories of ever greater power and broader scope within an essentially unchanged explanatory framework, based on the concepts of optimizing individual behavior and market equilibrium, that were already central to economic thought in the previous century.” (Woodford, 1999, p. 2)
Accordingly, the actual state of economics is “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman). And because equilibrium has already been nonsense in Keynes’s days, this indeed is nonsense squared.
The methodological crux, though, is this: after having declared equilibrium as nonsense Keynes and the Keynesians should have no longer applied this fallacious concept (which implies to skip disequilibrium also). But they did. Neither equilibrium nor constrained optimization was completely abolished but only softened. As a result, Keynesianism became 'prozaced' Walrasianism: imperfect competition instead of the pure madness of the auctioneer, sticky prices instead of the physical impossibility of instantaneously adaptable prices, satisficing instead of maximizing, uncertainty instead of rational expectation and so on.
What should instead have happened was a completely new approach based on a set of axioms which neither contains equilibrium nor constrained optimization nor any softened versions thereof. This is what a genuine paradigm shift is all about:
- “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)
- “If we feel misgivings ..., all we have to do is to start appropriate research. Anything else is pure filibustering.” (Schumpeter, 1994, p. 577)
- “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)
- “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)
- “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)
Nonsense is not worth much arguing against and about but should be speedily eclipsed by the superior alternative.#3
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics. Mimeo, pages 1–32. URL
#1 Confused Orthodoxy vs. confused Heterodoxy
#2 How to restart economics
#3 For details of the big picture see cross-references Paradigm Shift
Related 'Heterodoxy and the nullity of dead horse beating' and 'How Heterodoxy keeps the Naked-Emperor-Zombie alive' and 'Every thinking economist is heterodox by default, but how do we proceed from here?' and 'Why the Naked-Emperor-Zombie cannot die' and 'The tragedy of Heterodoxy' and 'Heterodoxy as superior alternative' and 'Heterodoxy, too, is scientific junk' and 'Heterodoxy: important decisions ahead' and 'The scientific self-elimination of Heterodoxy'