September 22, 2016

The identification problem and the dumping of the old guard

Comment on David Ruccio on ‘Phlogiston, the identification problem, and the state of macroeconomics’

Blog-Reference and Blog-Reference on Sep 23 adapted to context

There is political economics and theoretical economics. The founding fathers were straightforward people and called themselves political economists, that is, they left no doubt that their main business was agenda-pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda-pushing). And this is how economics became one of the most embarrassing failures in the history of scientific thought.

Now, Paul Romer argues: “A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.” (See intro)

The keyword is scientific truth. Why is scientific truth suddenly the uppermost value? Actually, it is not! Since the founding fathers, theoretical economics is dominated by political economics. What Romer is communicating with his critique of DSGE/RBC/ mathiness is nothing less than a change of policy which means that theoretical economics has now speedily adapted to a new agenda. To wrap the new task for the economics community in a critique of the identification problem, which is as old as Econometrica (1933), proves a strong sense of humor.

There is a policy change in the offing which requires a redecoration of the scientific fig leaf. The severe critique of the old authority (Lucas, Sargent, Prescot, et al.) makes it clear that there is a new authority and that the old loyalties are obsolete.

With regard to the scientific status of economics (= material and formal consistency), the situation is UNCHANGED for half an eternity. Methodologically, the maximization-and-equilibrium approach has always been axiomatically unacceptable but economists swallowed it hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The microfoundations approach is not a degenerate research program but has already been dead in the cradle.#1

This is the current state of economics: Walrasian microfoundations are false for 150+ years and the Keynesian macrofoundations are false for 80+ years.#2 As a consequence, all models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and together this is roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks.

Because they either do not fully realize that their research program has already been dead in the cradle or because they have not the slightest idea about what a progressive alternative could look like, the present generation of orthodox and heterodox economists has not made and cannot make a significant contribution to the discussion about how the actual economy works.#3 These folks are not part of the solution they ARE the defunct research programs.#4

Egmont Kakarot-Handtke

#1 No future for axiomatically false economics
#2 Marshall and the Cambridge school of plain economic gibberish
#3 The trouble with economics prizes
#4 For details of the big picture see cross-references Paradigm Shift

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