Blog-Reference and Blog-Reference
After 200+ years, economists still do not have the true theory/model. The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science and later on with this very specific guideline: “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)
This translates into the neo-Walrasian 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)
Of course, economists did not stick slavishly to HC1/HC5 but varied the one or the other axiom. This, though, never to the point of abandoning the neoclassical paradigm completely. Arrow’s definition, therefore, covers General Equilibrium Theory, Marshallian partial analysis, Behavioral Economics, DSGE, RBC, New Keynesianism, Agent-Based Models, and a whole grab bag of verbalized/common sense/ad hoc/special purpose models. In effect, everybody starts from his own do-it-yourself set of premises and the inevitable result is a heap of inconsistent and incoherent models with a lost common core.
While the failure of economics is beyond a reasonable doubt, the representative economist still suffers from the delusion that what he does is science. Economics is nothing but a cargo cult science which Feynman described as: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”
Christian Arnsperger/Yanis Varoufakis see the crucial methodological blunder in methodological individualism: “So, the first feature of the ‘body of theory’ we think of as neoclassical is its methodological individualism: the idea that socio-economic explanation must be sought at the level of the individual agent.”
This is accurate but a bit shallow. While methodological individualism is indeed false in all dimensions, the problem goes deeper. And here is where Heterodoxy’s own failure comes into view.
The common understanding of neoclassical models is that they are behavioral. The representative economist traditionally takes Human Nature/motives/behavior/action, i.e. a mixture of folk psychology and folk sociology, as a starting point and then tries to explain the behavior of the economy as a whole. The crucial methodological defect of the behavioral approach is that NO way leads from the explanation of Human Nature/motives/ behavior/action to the explanation of how the economic system works. All behavioral/ microfounded approaches crash against the methodological wall that is known as the Fallacy of Composition.
Economics does not conform to Aristotle’s general definition of science: “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.” The neoclassical premises = microfoundations have NEVER been certain/true/primary. This is why orthodox economics a.k.a. the mainstream is an axiomatic failure.
The only reason why Orthodoxy is still around is that Heterodoxy has failed to develop a suitable alternative: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)#1
Heterodoxy habitually criticizes/rejects methodological individualism but shares the underlying methodological tenet that economics is a social science. It is not. Economics is a systems science. The subject matter of economics is not human behavior but the behavior of the economic system.#2
So, there is NO use to change the one or the other neo-Walrasian axiom and keeping the rest. A Paradigm Shift is indispensable, and this means that the neoclassical approach has to go out of the window for good. Economics has to move from behavioral axioms/ microfoundations to systemic axioms/macrofoundations. Keynes tried but failed.#3
The state of economics is as follows: (i) all neoclassical/microfoundations approaches are axiomatically dead, (ii) all Keynesian approaches are defective with regard to the definition of macroeconomic profit/income, (iii) neither Orthodoxy nor Heterodoxy has consistent axiomatic foundations, (iv) it holds: If it isn’t macro-axiomatized it isn’t economics#4, (v) in the scientifically strict sense, economics is still at the level of a proto-science.
Heterodoxy has exhausted itself with the repetitive critique of detail but never got to the point of wholesale and definitive refutation which is the hallmark of a Paradigm Shift: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug) and “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)
In fact, this has always been too hard for traditional Heterodoxy and this is why it has to be buried at the same scientific graveyard as neoclassical economics.
#1 The stupidity of Heterodoxy is the life insurance of Orthodoxy
#2 For details of the big picture see cross-references NOT a Science of Behavior
#3 For details of the big picture see cross-references Keynesianism
#4 The core of macroeconomic premises/axioms reads: (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) Ec=PX consumption expenditure Ec is equal to price P times quantity bought/sold X.