April 24, 2018

Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?

Comment on Brian Romanchuk on ‘Forecastability And Economic Modelling

Blog-Reference and Blog-Reference

“The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future . . .” (Schumpeter, 1946)

The future is now and economists still do NOT have the paradigmatic simple core model but a heap of incommensurable and contradicting constructions. Pluralism may have its merits elsewhere but is the worst thing that can happen in science. As the ancient Greeks already observed: “There are always many different opinions and conventions concerning any one problem or subject-matter…. This shows that they are not all true. For if they conflict, then at best only one of them can be true.” (Popper)

The fact is that, in economics, ALL models are axiomatically false. It holds: “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, 300 BC) The fact is that the premises of current models are neither certain, true, nor primary.

Brian Romanchuk’s SIM model is a case in point. He enumerates his key premises as follows.
  • The model is a straightforward three-sector model, with a household sector, business sector, and government. 
  • The household consumption function is defined in terms of a pair of propensity to consume parameters (out of income, out of wealth). …
  • The business sector is constrained to break even, …
  • Government policy is specified in terms of government consumption and a fixed tax rate.
Brian Romanchuk starts with macrofoundations, which is correct. But then he assumes a consumption function, which is a NONENTITY, and break-even for the business sector, which kills the model already at this early stage because a zero profit economy is the most idiotic NONENTITY of them all.

Let us contrast this with the standard microfoundations approach. The whole analytical superstructure of Orthodoxy is based upon this set of hardcore propositions a.k.a. axioms:
  • HC1 There exist economic agents.
  • HC2 Agents have preferences over outcomes.
  • HC3 Agents independently optimize subject to constraints.
  • HC4 Choices are made in interrelated markets.
  • HC5 Agents have full relevant knowledge.
  • HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub)
HC3 introduces marginalism which is the all-pervasive principle of Orthodoxy. HC3, though, and HC5 and HC6 are plain NONENTITIES.#1

In order to be applicable HC3, requires a lot of auxiliary assumptions, most prominently a well-behaved/differentiable production function.#2 Taken together, all axioms and auxiliary assumptions then crystallize to supply-function/demand-function/equilibrium or what Leijonhufvud famously called the Totem of Micro.#3

The methodological fact of the matter is that ALL models that take just one NONENTITY into the premises are a priori false.#4

So, because these premises are NOT “certain, true, and primary” they cannot be used for model building: expected utility, rationality/bounded rationality/animal spirits, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, equilibrium, first/second derivatives, total income=value of output, I=S, real-number quantities/prices, ergodicity. Every theory/model that contains just one NONENTITY goes straight into the wastebasket.

The standard microfoundations approach with all its variants and derivatives up to DSGE is methodologically false. The same holds for Keynes’ macrofoundations and all After-Keynesian variants.

To put NONENTITIES into the premises is the defining characteristic of fairy tales, science fiction, theology, Hollywood movies, politics, proto-science, and the senseless model bricolage of scientifically incompetent economists.#5

Egmont Kakarot-Handtke

#1 The solemn burial of marginalism
#2 Putting the production function back on its feet
#3 Equilibrium and the violation of a fundamental principle of science
#4 The future of economics: why you will probably not be admitted to it, and why this is a good thing
#5 How to restart economics


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