Blog-Reference and Blog-Reference on Feb 25
The aspiring student is not much helped with this description of economics: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectacular recent failure,” “no hope”. (See intro)
Clearly, the description is spot on and it holds for Walrasianism, Keynesianism, Marxianism, Austrianism. Everybody knows by now that economics is a failed science. The lack of sound theoretical foundations, though, has never stopped an economist from giving his scientifically worthless economic policy advice.
The question of the aspiring student is: Given that economics is a failed science, I am not so much interested in who messed up what in the last 200+ years, or whether the incompetence has been greater in Chicago than in Cambridge, what I need to know is how the actual economy works. So, do not waste more time with pants kicking, tell me what the fatal mistake/error/blunder is and how to get over it.
Here is ― for the last time ― the bone of contention: “The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals. To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations ― without ever presenting neither ontological nor epistemological justifications for this claim ― has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if ― after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem ― these economists want to resurrect the omniscient walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.” (See intro)
In brief, Walrasian microfoundations are false. Methodologically, the iron law applies: Because the axiomatic foundations#1 are false the whole analytical superstructure from constrained maximization to DSGE/RBC/New Keynesianism is false.
Unfortunately, Keynesian macrofoundations are false, too.#2 So, there is NO valid economics.
This is the current state of economics: economists give policy advice without having a scientifically sound theory.#3 Economic theory is a failure because it has been based on methodologically unacceptable axiomatic foundations. Therefore, there is no way around a Paradigm Shift. In other words, the false Walrasian microfoundations and the false Keynesian macrofoundations have to go out of the window and have to be completely replaced by true macrofoundations.#4
There is no other way out of the scientific mess economics is in. As Hilbert put it: “The axiomatic method is indeed and remains the one suitable and indispensable aid to the spirit of every exact investigation no matter in what domain; ... To proceed axiomatically means in this sense nothing else than to think with knowledge of what one is about.”
Until this very day, neither Orthodoxy nor Heterodoxy got the basic economic concepts and their relations right. And this is why economics is still on the proto-scientific level of incoherent blathering with NO idea ‘of what one is about’.
How science is done is known for more than 2300 years ― except to economists: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle) Because of this “... it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison)
The new general rule to apply for economic research, discussion, peer-review, and textbooks is: If it isn’t macro-axiomatized, it isn’t economics. This rule vaporizes roughly 99 percent of what has hitherto been accepted as economics. Forgetting all this proto-scientific garbage enhances scientific productivity enormously.
#1 The microfoundations approach is defined with these five hardcore 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)
#2 How Keynes got macro wrong and Allais got it right
#3 Paul the Menace’
#4 From false micro to true macro: the new economic Paradigm
Related 'The methodological blunders of fake scientists' and 'Wikipedia, economics, scientific knowledge, or political agenda pushing?' and 'Your economics is refuted on all counts: here is the real thing'. For details of the big picture see cross-references Axiomatization.