January 16, 2017

Strange noise in the graveyard of economics

Comment on Noah Smith on ‘Cracks in the anti-behavioral dam?’


Economics is a failed science. More precisely, standard/orthodox economics from Jevons/ Walras/Menger to DSGE/RBC/New Keynesianism is scientific garbage or what Feynman called cargo cult science.

Standard economics is built upon this set of foundational propositions, a.k.a. 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, 1985)

Methodologically, these premises are forever unacceptable: (i) The ultimate reason can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works. Because of this, the microfoundations approach has already been dead in the cradle. (ii) The standard/ orthodox/Walrasian axiom set contains three NONENTITIES: (a) constrained optimization (HC2), (b) rational expectations (HC4), (c) equilibrium (HC5). Every theory/model that contains a nonentity is a priori false. So, standard/orthodox economics is axiomatically false ― it is as simple as that.

The microfoundations speak about human behavior. As a matter of principle, human behavior is the subject matter of psychology, sociology, anthropology etcetera, and NOT of economics (Hudik, 2011). The error/mistake/idiocy of half-witted critics, though, has always been in the belief that it suffices to make behavioral assumptions ‘more realistic’. The classical case is the idea to replace the assumption of perfect rationality with bounded rationality.

What instead has to be done is to FULLY REPLACE the standard/orthodox microfoundations with methodologically correct macrofoundations, that is, to change the very definition of economics.

OLD behavioral definitions: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994) “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935)

NEW objective-systemic definition: “Economics is the science which studies how the monetary economy works.”

The move from the old behavioral definition to the new systemic=behavior-free definition of economics is called a Paradigm Shift. Nothing less will do to get economics out of its proto-scientific deadlock.

Noah Smith has spotted a new trend: “I’m seeing macro people taking behavioral ideas more seriously. ... in macro, most models use Rational Expectations, so let’s think of ‘behavioral’ as just meaning ‘non-RE’.”

To see hope or even progress in this pathetic putting-lipstick-on-a-dead-pig is as self-debunking as it can get. Standard economics is scientifically dead for 150+ years and it will NOT come to life by replacing RE with non-RE.

Egmont Kakarot-Handtke