Key Issues: Critique of legacy economics

Logical inconsistency:

... Keynes was simply arguing that microeconomic theory is false! Presumably, it is false because it is not logically consistent with all macrophenomena – such as persistent disequilibria – and thus, by modus tollens, at least one of the assumptions of microtheory is false and hence microtheory as a whole is false. (Boland, 2003, p. 143)

Shoddy argumentation:

The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking. (Dennis, 1982, p. 698)

 Inappropriate copying of physics:

Thus many are inclined to blame inappropriate copying of physics for the willingness of neoclassicals to tolerate bizarrely unrealistic assumptions and to place everything historical, cultural, institutional, and even psychological outside the framework of economic analysis. (Porter, 1994, p. 128)

The drive to incorporate the formalism of Hamiltonian dynamics is one pertinent example of the triumph of technique over theoretical insight. (Mirowski, 1995, p. 376)  

Borrowing the wrong concepts from mathematics:

The discipline of economics has so far successfully resisted all efforts to alter its character as an exercise in how to reason deductively from axiomatic principles. That is, it has insisted on remaining the Euclidean geometry of the social sciences. (Eichner, 1979, p. 172)

Overemphasis of the mathematical method:

It is thus not at all surprising that mainstream contributions are found continually to be so unrealistic and explanatorily limited. The (mathematical) method, or rather the emphasis placed upon it in the modern economics academy, is the overriding problem.  (Lawson, 2012, p. 3)

Misapplication of mathematics:

A second class of economists contain those who have abundantly employed mathematical apparatus, but, misunderstanding its true use, or being otherwise diverted from a true theory, have built upon the sand. (Jevons, 1911, p. xxv)

Mock precision:

Much economic theorising to-day suffers, I think, because it attempts to apply highly precise and mathematical methods to material which is itself much too vague to support such treatment. (Keynes, quoted in Chick, 1998, p. 1864)

Lack of facts:

Next, the empirical background of economic science is definitely inadequate. Our knowledge of the relevant facts of economics is incomparably smaller than that commanded in physics at the time when the mathematization of that subject was achieved. ... It is due to the combination of the above-mentioned circumstances that mathematical economics has not achieved very much. (von Neumann and Morgenstern, 2007, p. 4)

Inconclusiveness of facts:

Even econometricians using identical, or almost identical, data sets are regularly found to produce quite contrasting conclusions, usually with little attempt at explanation. The systematic result here, as the econometrician Edward Leamer observes, is that: "hardly anyone takes anyone else's data analysis seriously". (Lawson, 2012, p. 9)

Denial of empirical refutation:

... suppose they [the economists] did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics. (Hands, 2001, p. 404)

Misleading principles:

Now the rationality principle, which in the social sciences plays a role somewhat analogous to the universal laws of the natural sciences, is false, and if in addition the situational models are also false, then both the constituent elements of social theory are false. (Popper, 1994, p. 173)

Mistaken beliefs:

The notion that microeconomics is a branch of applied mathematics does economists more credit than several possible alternative explanations for its empirical weakness. ... It isolates the limitations of the theory in a factual supposition about the determinants of human behavior, one that economists share with all of us. But the supposition we all share is false, and so economics rests on a purely contingent, though nevertheless central, mistaken belief .... (Rosenberg, 1992, p. 247)

Lack of realism:

Upon leaving office, each new president of the American Economic Association gives the expected speech, showing that he knows full well it is all just a game, and chastises his colleagues for not being more realistic. (Hudson, 2010, p. 9)

Assumptionism:

Cunningham in 1891 remarked that in the choice of premises, “it is not always easy to tell when a professor of the dismal science is making a joke” and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself. (Viner, 1963, p. 12)

And no economist, if I may say so, has ever been helped toward its solution by starting his investigation on the basis of some general theory of value, particularly any theory of value which rested upon marginal utility or upon marginal disutility or upon some combination of the two. (Parry, 1921, p. 128)

Ignorance of time and history dependence:

The notion of time is so primitive and basic an element in man’s experience that its neglect by much economic theory constitutes an incredible puzzle. This puzzle is attributable, perhaps, to the almost irresistible lure of formalism – particularly one that cannot adequately handle time. (Rizzo, 1979, p. 1)

History dependence stares us in the face ..., but it is not the stuff of pure theory. (Hahn, 1991, p. 48)

Ignorance of institutions:

In the earlier part of the century there were major conflicts between institutional economists, who saw the particular arrangements by which particular economies conducted their economic affairs as essential, and neoclassical economists, who sought to see through these inessential details to the underlying fundamental forces - the forces of demand and supply. (Stiglitz, 1991, p. 136)

Counterfactual equilibrium and zero profits:

The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. ... But, from the macro perspective of of Walrasian general equilibrium, the total   profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) ... (Boland, 2003, p. 150)

Questionable foundational assumptions and unjustifiable policy advice:

Much of economic theory is based on three questionable assumptions: (1) the world is deterministic; (2) decision makers act as if they know the values of all relevant parameters; and (3) consumers and firms respectively, act as if they were maximizing utility and profit. ... In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion. Economists derive theorems, make predictions, and (!) suggest economic policies using arguments which explicitly or implicitly postulate the validity of the first two assumptions mentioned above. Such endeavors are unjustifiable unless it can be demonstrated that the most important doctrines of economics are insensitive to a relaxation of these two assumptions. (Stigum, 1991, pp. 29-30)

Wrong methodology:

The essence of contemporary mainstream economics does not lie at the level of substantive theory as most of its critics suggest, but at the level of methodology. (Lawson, 1997, p. 282)

Evasion of reality:

The modern history of economic theory is a tale of evasion of reality. Faced with the challenge of these vast changes and vital problems for over a century, it reacted by denying their existence in order to be able to produce a scientific system, a smoothly-functioning self-balancing model. (Balogh, 1982, p. 32)

No predictive capacity:

Economic theory seems permanently stuck at the level of generic predictions – predictions that some change will happen some time and some place, without ever telling us when and where and how much of a change will occur. (Rosenberg, 1994, p. 217)

An unfinished task:

It is good to have [the technically best study of equilibria], but perhaps the time has now come to see whether it can serve in an analysis of how economies behave. The most intellectually exciting question of our subject remains: is it true that the pursuit of private interest produces not chaos but coherence, and if so, how is it done? (Hahn, 1984, p. 102)

Lack of imagination:

Thousands upon thousands of scholars, as well as thousands of statesmen and men of affairs, have contributed their efforts to the attempt to understand the course of events of the economic world. And today this field of investigation is being cultivated more extensively, than ever before. How is it, then, that in all these years, and with all the undoubted talent that has been lavished upon it, the subject of economics has advanced so little? (Schoeffler, 1955, p. 2)

In other words, the main developments in economics of the twentieth century ... had been more a matter of form than of substance. ... Little new of any great significance has been learned about the workings of markets since Adam Smith and ... Smith added much less to the discussion than most economists have commonly supposed. (Nelson, 2006, p. 298)

Yet most economists neither seek alternative theories nor believe that they can be found. (Hausman, 1992, p. 248)

Lack of convincing alternatives:

If one calls those individuals working in the field of microeconomic foundations of Keynesian economics Keynesian-economic theorist, then, as Hahn has said, these Keynesians were not much better. (Morishima, 1984, p. 57)

For as I said at the outset, the citadel is not at all secure and the fact that it is safe from a bombardement of soap bubbles does not mean that it is safe. (Hahn, 1984, p. 78)

No future:

There seems to be a quiet confidence in the profession that we are moving, if only slowly, towards a more scientific basis for economics. ... Paradoxically many of those who have contributed much to the development of general equilibrium theory are less complacent. (Kirman, 1989, p. 126)

... anything based on this mock-up is unlikely to fly. (Hahn, 1981, p. 1036)

Neoclassical economics is metaphorically boxed in, and cannot extricate itself. (Mirowski, 1995, p. 389)

The disciplines that we currently call “social sciences” may accumulate gossip or spot correlations, but Rosenberg believes they will never succeed in formulating laws and theories with the force and fruitfulness of those in the natural sciences. (Hausman, 1992, p. 326)

What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work ... (McCauley, 2006, p. 17)

Ideological bias:

Evidently, the tools are not strong enough to discriminate among fundamentally different hypotheses, or at least not strong enough to overcome differences in prior beliefs, beliefs which are often influenced by ideological concerns. (Stiglitz, 1991, p. 134)

Political bias:

Broadly speaking, policies fall into two categories: laissez-faire or interventionist public regulation. Each set of advocates has its own preferred mode of mathematical treatment, choosing the approach that best bolsters their own conclusions. (Hudson, 2010, p. 6)

Lack of public assurance:

... it is clear that the public's lack of faith in the scientific nature of economic knowledge is a fact, past and present. (Benetti and Cartelier, 1997, pp. 211-212)

Pseudo-science:

Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense "science," called "cargo cult science". (Clower, 1994, p. 809)

Pre-science:

The position I now favor is that economics is a pre-science, rather like astronomy before Copernicus, Brahe and Galileo. I still hold out hope of better behavior in the future, but given the travesties of logic and anti-empiricism that have been committed in its name, it would be an insult to the other sciences to give economics even a tentative membership of that field. (Keen, 2011, p. 158)

Economics is a peculiar subject. It looks like a science both in its formal structure and its basic concern with observable reality. And yet economics does not reveal the sort of cumulative progress in the practical manipulation of reality that is one of the abiding characteristics of physics, chemistry, geology and parts of biology. (Blaug, 1990, p. 233)

Within the whole of his [the economist's] science, or what he insists on calling science, no generally recognised result is to be found, as is also the case for theology and for roughly the same reasons; there is no single doctrine taken to be a scientific truth without the diametrically opposed view being similarly upheld by authors of high repute. (Wicksell, quoted in Deane, 1983, p. 8)

We are merely at the threshold of an economic science. (Morgenstern, 1941, p. 374)

Sloppiness:

Few people, and least of all we economists ourselves, are prone to offer us congratulations on our intellectual achievements. Moreover our performance is, and always was, not only modest but also disorganized. Methods of fact-finding and analysis that are and were considered substandard or wrong on principle by some of us do prevail and have prevailed widely with others. (Schumpeter, 1994, p. 6)

I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences. (von Neumann, quoted in Mirowski, 2002, p. 146 fn. 49)

Hubris:

... the economists, like the theoretical sociologists of old, only more so, tried to solve the largest possible problems from the least possible knowledge. (Postan, quoted in Viner, 1963, p. 12)

Counterproductive organization:

It could be argued, moreover, that the present organization of the profession is itself a negative factor to the extent that the requirement of rapidly obtained results discourages researchers from entering the domains that are most uncertain (even if they are essential). (Benetti und Cartelier, 1997, p. 215)

We are in danger of losing our grip on the concepts of truth, evidence, objectivity, disinterested inquiry. The preposterous environment in which academic work is presently conducted is inhospitable to genuine inquiry, hospitable to the sham and the fake.  (Haack, 1997, p. 1)

Increasing incompetence:

The last thirty years seem to this observer to have been downhill almost all the way. So much of the literature ... I see as silly beyond all expectation and unscholarly beyond all endurance. (Leijonhufvud, 1998, p. 234)

 Reluctance to scrap obsolete intellectual capital:

Gary Becker has suggested that a substantial resistance to the acceptance of new ideas by scientists can be explained by two familiar economic concepts. One is the concept of specific human capital: the established scholar possesses a valuable capital asset in his command over a particular body of knowledge. That capital would be reduced if his knowledge were made obsolete by the general acceptance of a new theory. Hence, established scholars should, in their own self-interest, attack new theories, possibly even more than they do in the absence of joint action. The second concept is risk aversion, which leads young scholars to prefer mastery of established theories to seeking radically different theories. Scientific innovators, like adventurers in general, are probably not averse to risk, but for the mass of scholars in a discipline, risk aversion is a strong basis for scientific conservatism. (Stigler, 1983, p. 538), see also (Sy, 2012, pp. 71-73)

Failed axiomatization:

The formal foundations of legacy economics are indefensible. (AXEC)

 

References

Balogh, T. (1982). The Irrelevance of Conventional Economics. London: Weidenfeld and Nicolson.

Benetti, C., and Cartelier, J. (1997). Economics as an Exact Science: the Persistence of a Badly Shared Conviction. In A. d’Autume, and J. Cartelier (Eds.), Is

Economics Becoming a Hard Science?, 204–219. Cheltenham, Brookfield: Edward Elgar.

Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield: Edward Elgar.

Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.

Chick, V. (1998). On Knowing One’s Place: The Role of Formalism in Economics. Economic Journal, 108(451): 1859–1869. URL

Deane, P. (1983). The Scope and Method of Economic Science. Economic Journal, 93(369): 1–12. URL

Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.

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Eichner, A. S. (1979). A Look Ahead. In A. S. Eichner (Ed.), A Guide to Post-Keynesian Economics,  165–184. London, Basingstoke: Macmillan.

Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7.

Hahn, F. H. (1981). Review: A Neoclassical Analysis of Macroeconomic Policy. Economic Journal, 91(364): 1036–1039.

Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge: MIT Press.

Hahn, F. H. (1991). The Next Hundred Years. Economic Journal, 101(404): 47–50.

Hands, D.W. (2001). Reflection without Rules. Economic Methodology and Contemporary Science Theory. Cambridge, New York, etc: Cambridge University Press.

Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.

Hudson, M. (2010). The Use and Abuse of Mathematical Economics. real-world economics review, (55): 2–22.

Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition.

Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.

Kirman, A. (1989). The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes. Economic Journal, Conference Papers, 99(395): 126–139.

Lawson, T. (1997). Economics and Reality. New York: Routledge.

Lawson, T. (2012). Mathematical Modelling and Ideology in the Economics Academy: Competing Explanations of the Failings of the Modern Discipline? Economic Thought, 1(1): 3–22.

Leijonhufvud, A. (1998). Discussion: Involuntary Unemployment One More Time. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),

Economics and Methodology. Crossing Boundaries, 225–235. Houndmills, Basingstoke, London: Palgrave.

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Related 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist'

© 2013 EKH, except original quotes 

How to get rid of supply-demand-equilibrium {42}

Working paper at SSRN

Abstract  This paper provides a substantial reconceptualization of the serial clearing of the product market on the basis of structural axioms. The change of premises is required simply because from the accustomed premises only the accustomed conclusions can be derived and these are known to be inapplicable in the real world. This holds in particular for the still-popular idea that the working of a market can be described in terms of the triad supply-function—demand-function—equilibrium. Structural axiomatization provides the complete and consistent picture of interrelated product market events.

Toolism! A critique of EconoPhysics {41}

Working paper at SSRN

Abstract  Economists are fond of the physicists' powerful tools. As a popular mindset, Toolism is as old as economics but the transplants failed to produce the same successes as in their aboriginal environment. Economists, therefore, looked more and more to the math department for inspiration. Now the tide turns again. The ongoing crisis discredits standard economics and offers the chance for a comeback. Modern EconoPhysics commands the most powerful tools and argues that there are many occasions for their application. The present paper argues that it is not a change of tools that is most urgently needed but a Paradigm Shift.

Hanging in the air

Comment on Lars Syll on 'IS-LM is bad economics no matter what Krugman says'

Blog-Reference

There seems to be consensus that it is alone IS-LM that concerns us here.

The main point is rather simple: the General Theory (GT) is a loose composition of formal and verbal arguments. The problem is that most of Keynes's verbal arguments cannot be derived from the foundational formalism. This is not to say that the verbal arguments are factually wrong, it means that, in the best case, they are hanging in the air. This does not diminish the value of the GT as a piece of political opinion making but certainly as a piece of theoretical economics.

In the GT the original formalism and the original interpretation (oK) do not match. In addition, the formalism is indefensible with regard to the treatment of income and profit. With IS-LM Hicks provided a second interpretation (H). The (oK)-interpretation and the (H)-interpretation do not match either. What is more, we have a new interpretation but the foundational formalism is still defective. That is, the (H)-interpretation is also hanging in the air.

Krugman has been reprimanded for not admitting that interpretations (oK) and (H) are incompatible. The salient point is, instead, that Krugman and Hicks before him have not realized that, to begin with, Keynes's formal foundations are indefensible with regard to the treatment of income and profit. This is the oversight that counts from the viewpoint of theory building.

In sum: Keynes, Hicks, and Krugman provide different interpretations of the same flawed formalism. In order to advance economics from a talk-show to a science, all three interpretations have to be rejected on purely formal grounds.

Flawed logic

Comment on Lars Syll on 'IS-LM is bad economics no matter what Krugman says'

Blog-Reference

Lars Syll and Paul Davidson argue (a) that IS-LM is bad economics and (b) that it has not much in common with Keynes' economic reasoning in the General Theory.

I agree with both points. My question is a more fundamental one. Does this clarification make the General Theory look much better?

Let me resume the point that I have made at length in: Why Post Keynesianism is Not Yet a Science, Economic Analysis and Policy, March 2013, pp. 95-106. There is no need to lose many words about equilibrium, ergodicity, or the finance motive because Keynes' formalism is logically defective. This is sufficient to refute it and with it all illegitimate IS-LM derivatives.

Hence we have to go one step further: it is not such simple that IS-LM is bad economics and Keynes is good economics; both are bad economics and for the same reason.

Keynes' profit theory is false. The correct relation reads Qret≡I−S, i.e. retained profit is equal to the difference of business sector's investment and household sector's saving. Since retained profit for the economy as a whole is always different from zero we have empirical proof that investment and saving are, as a corollary, never equal. The ex-ante/ex-post argument can be shown to be logically defective. Because the IS schedule of IS-LM is formally unacceptable the whole argumentation built upon it is vacuous. Free association, interpreting IS-LM, or reading tea leaves is scientifically on the same level. What unites Keynes, Hicks, and Krugman, as well as his critics, is the same logical flaw in the formal foundations.

Egmont Kakarot-Handtke


Related 'How Keynes got macro wrong and Allais got it right'.

The calculating auctioneer, enlightened wage setters, and the fingers of the Invisible Hand {40}

Working paper at SSRN

Abstract  The formal foundations of theoretical economics must be nonbehavioral and epitomize the interdependence of real and nominal variables that constitutes the monetary economy. This is a cogent conclusion from the persistent collapse of behavioral and real models. Conceptual rigor demands, first, to take objective-structural axioms as a formal point of departure and, secondly, to clarify the interrelations of the fundamental concepts of income and profit. The present paper reconstructs the characteristic properties of a Walrasian economy in structural axiomatic terms, generalizes them, and explores the consequences for our understanding of the working of the economy we happen to live in.

Walras's Law of Markets as special case of the General Period Core Theorem {39}

Working paper at SSRN

Abstract  From the set of the first three structural axioms follows the Period Core Theorem. It asserts that the product of the key ratios, which characterize the firm, the market outcome, and the income distribution, is always equal to unity. The theorem contains only unit-free variables, is testable in principle, and involves no behavioral assumptions. The differentiated Period Core Theorem applies to an arbitrary number of firms. Therefrom Walras's Law can be derived without recourse to demand and supply functions or the notion of equilibrium. It is shown that the familiar interpretation is methodologically illegitimate.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see Wikimedia AXEC61.