March 4, 2017

Leaving Lucas behind for good

Comment on Lars Syll on ‘Robert Lucas — an example of macroeconomic quackery’

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Lars Syll summarizes: “Lucas is just making himself ridiculous.” (See intro)

Yes, indeed, it is long known that Lucasian economics is a cargo cultic aberration, but just because of this it should be rather straightforward to come up with a superior alternative. Curiously, Heterodoxy has not managed to throw over the multidimensionally defective construct called DSGE.

So both Orthodoxy and Heterodoxy share the responsibility for economics being one of the most embarrassing failures in the history of the sciences: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin. … General  theory is simply a research program that has run into the sands.” (Blaug).

Ingrao et al. concluded already in 1990: “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.”

So, there are some economists who have realized that, in order to get out of the proto-scientific swamp, nothing less than a Paradigm Shift is necessary. Lars Syll is NOT one of them. Instead of abandoning and replacing the current paradigm, he is content with repeating what everybody knows already, that is, Walrasian economics is a failed approach.

We have four major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — and ALL are PROVABLY false. How could this peaceful coexistence of false theories persist for so long?

After all, the Walrasian framework, of which DSGE is the latest incarnation, is easily recognizable as patently absurd. It is defined with this axiom set: “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)

It should be pretty obvious that the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every model that contains a NONENTITY is a priori false. So all the stuff that fills the journals and keeps the discussion going is false, more precisely, axiomatically false.

How does Heterodoxy deal with this fact? With some populist phrase-mongering: “Sound theory based on evidence is surely our best protection against such quackery.”

The best protection against quackery is to apply the scientific method. This is known for 2300+ years: “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). From the obvious fact that the Walrasian axioms are neither certain, true, nor primary follows that they have to be fully replaced. And that is the crux of economics: “As we have seen, this is often spoken of, but there is still no indication of what it might mean.”

To end the painful farce that is called economics requires not so much critical blathering but a constructive act. Keynes already realized that the classical microfoundations approach had led to a dead-end and therefore switched to macrofoundations. This was, in principle, the right first step towards a Paradigm Shift, except for the fact that Keynes messed up the macrofoundations.#1

As a consequence, economics is not only in need of a Paradigm Shift from false Walrasian microfoundations but also from false Keynesian macrofoundations. The whole of economics has to be put on consistent macrofoundations. The straightforward methodological rule for serious scientific work is: If it isn’t macro-axiomatized, it isn’t economics.

Heterodoxy in general and Lars Syll, in particular, have thoroughly proved their incapacity to lead macroeconomics onto a new and more productive path. Their call for more realism and less math is always popular among bumper stick economists but it has not brought economics one single step beyond the proto-scientific swamp of Walrasianism, Keynesianism, Marxianism, Austrianism.

To repeat ad nauseam that Lucas is ridiculous is not exactly a noteworthy scientific feat. Simply forget the man.

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right


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