January 8, 2018

Microfoundations R.I.P.

Comment on Simon Wren-Lewis on ‘Why the microfoundations hegemony holds back macroeconomic progress’

Blog-Reference and Blog-Reference

Economics of the last 200 years is the most embarrassing failure in the history of modern science.

The goal of economics is to figure out how the actual economic system works and to communicate the results in the format of a materially and formally consistent theory.

Methodologically, there seem to be two ways to attack the problem: microfoundations or bottom-up and macrofoundations or top-down. Economists made the wrong methodological choice 150+ ago. Since Jevons/Walras/Menger they are on the wrong track because NO way leads from the second-guessing of Human Nature/motives/behavior/action to the understanding of how the economic system works.

Economics is a failed science because the definition of the subject matter is false: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)#1

There is, as a matter of methodological principle, NO such thing as microfounded economics. Unfortunately, Keynes messed up the macrofoundations approach and After-Keynesians have not figured out until this day where things went wrong.#2

Wren-Lewis’ attempt to go from DSGE Modeling to Structural Econometric Modeling is bound to fail. Nothing less than a paradigm shift will do.#3, #4 The microfoundations approach and its scientifically incompetent proponents have to be solemnly buried next to the Flat-earth and Phlogiston folks.#5

Egmont Kakarot-Handtke

#1 Microfoundations are formally given with this set of verbalized 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) Every model that applies just one of the axioms is a priori false.
#2 Where modern macroeconomics went wrong
#3 True macrofoundations: the reset of economics
#4 The new macroeconomic paradigm
#5 If it isn’t macro-axiomatized, it isn’t economics