Economics textbooks – scandalous intellectual dishonesty

30 August, 2012 at 14:41 | Posted in Economics | 15 Comments

As is well-known, Keynes used to criticize the more traditional economics for making the fallacy of composition, which basically consists of the false belief that the whole is nothing but the sum of its parts. Keynes argued that in the society and in the economy this was not the case, and that a fortiori an adequate analysis of society and economy couldn’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

This fact shows up already when orthodox – neoclassical – economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if there was in essence only one actor – the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!

How has neoclassical economics reacted to this devastating findig? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.

Having gone through a handful of the most frequently used textbooks of economics at the undergraduate level today, I can only conclude that the models that are presented in these modern neoclassical textbooks try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent.
That is, with something that has absolutely nothing to do with reality. And – worse still -something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equlibrium solution.

So what modern economics textbooks present to students are really models built on the assumption that an entire economy can be modeled as a representative actor and that this is a valid procedure. But it isn’t, as the Sonnenschein-Mantel-Debreu theorem irrevocably has shown.

Of course one could say that it is too difficult on undergraduate levels to show why the procedure is right and to defer it to masters and doctoral courses. It could justifiably be reasoned that way – if what you teach your students is true, if The Law of Demand is generalizable to the market level and the representative actor is a valid modeling abstraction! But in this case it’s demonstrably known to be false, and therefore this is nothing but a case of scandalous intellectual dishonesty. It’s like telling your students that 2 + 2 = 5 and hope that they will never run into Peano’s axioms of arithmetics.

For almost forty years neoclassical economics itself has lived with a theorem that shows the impossibility of extending the microanalysis of consumer behaviour to the macro level (unless making patently and admittedly insane assumptions). Still after all these years pretending in their textbooks that this theorem does not exist – no one of the textbooks I investigated even mention the existence of the Sonnenschein-Mantel-Debreu theorem – is outrageous.

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  1. Mankiw is showing beyond a shadow of a doubt that there is a disproportional relationship between his abstract intelligence and dishonesty. By the way, I’m reading a very good article by Robert J. Gordon titled “The History of the Philips Curve: Consensus and Bifurcation,” Economica, (2011) 78: 10-50. It is somewhat similar to the article/present of his in Brazil that I had mentioned to you. The interesting thing about Phelps is that he puts the rational expectation literature and people like Sargent and Sims in context. While I do not buy their rational expectation claims, Sargent is interesting because he believes that you can capture the rational agent in models and that corresponds with something real/empirical. Gordon shows why he is off bass but you at least appreciate his Don Quixote endeavour.

  2. Kreps, at least, states the results: “Aggregate demand will be homogeneous of degree zero in prices and (everyone’s) income. And if all consumers are locally insatiable, Walras’ law will hold with equality for the entire economy. But beyond that, everything is possible for aggregate demand. In the advanced literature of demand theory, this result is stated and proven formally”

    • Yes, stated, but rather convoluted and not primarily on an undergraduate level as far as I remember (I guess it is his A Course in Microeconomic Theory you are referring to).

      • I agree that actually mentioning SMD theorem would have made this passage more clarified.
        I think that SMD is mostly not mentioned in the undergraduate micro textbooks because they are written from the point of the partial equilibrium analysis a la Marshall. For the small scale markets (something like flat-renting problem in the first chapter of the Varian’s Intermediate Economics) the Law of Demand more or less works, I think.

      • Well, maybe you are right, but I think for die-hard neoclassical economists – priding themselves of being precise and rigorous – “more or less works” is a weak solace.

      • All in all, I believe that SMD is one of the least important critiques of the neoclassical economics. There are plenty of other scientifically bad things in the undergraduate textbooks. Take production functions, for example. The writers of those textbooks assume that they all have a form of Q=Q(K,L), but conveniently forget to mention just how they aggregate machines and workers into K and L. And I am not even talking of J. Robinson’s critique of the circularity of the definition of capital; Leontief’s 1947 theorem directly forbids aggregating in all realistic cases.

      • I don’t quite agree (although the critique you refer to is absolutely fundamental). SMD gets right to the heart of what is the core of NC economics – supply and demand. SMD shows that one part of the Marshallian scissors (demand)is inconsistent or not really there. And add to that Sraffa ‘s seminal critique of the other part of the scissors (supply) and the emperor is right there in all his nakedness.

  3. I say Phelps but I meant Gordon. Phelps is an interesting economist as well. Interesting thing about Phelps is that he thinks you can get at non-traditional mainstream economic ideas through mainstream economic methods.

  4. IMO SMD should not necessarily be interpreted as a critique of downward sloping demand curves per se; moreso as a critique of reductionism.

    • SMD is both, but since I’ve already had a couple of posts up on the microfoundational/reductionist aspect, I thought it could be nice also showing that SMD actually even cripples the Marshallian demand-supply scissors when aggregated to the market level :)

      • It reminds me of reswitching, in that it creates the logical possibility for complex behaviour that shatters many of the core tenets of economics.

      • Absolutely, but I think re reswitching it might (?) be argued that the problem doesn’t show up in the most abstract general equilibrium models (that’s at least how I remember the conclusions reached when discussing this hot issue in the 1970/80s; on the other hand, portraying capital as “clay” also says something of the enormity of the assumptions in those models). When it comes to SMD there is not even that evasive possibility!

  5. [...] In summary, Keen is correct that neoclassical economists could not rigorously ‘prove’ the existence of downward sloping demand curves. Keen himself says that it is reasonable to assume that demand will go down as price does, and classical economists were also content with this an observed empirical reality. Neoclassical economists themselves ended up having to defer to empirical reality when faced with the SMD conundrum  and thus they had gained no insight beyond the classical economists, except to prove that their preferred technique - reductionism – does not work. For this reason, I interpret the SMD conditions primarily as a demonstration of the limits of reductionism (though some fellow heterodox economists might disagree). [...]

  6. Yes, re-switching does not have an impact on the “more abstract GE models” because Arrow-Debreu models do not have something called ‘capital’ and there is no single rate of profit, etc. The controversy of capital theory did not touch these models, as Frank Hahn was quick to point out in the aftermath of the debate. But A-D models have another set of ugly problems and clearly, SMD points at one basic issue. However, and this is my two cents on this interesting exchange of views, much before SMD general equilibrium theory was in trouble: no results in stability analysis (except with gross substitution or the weak axiom of revealed preferences at the market level: this already hinted at SMD), the proof of existence relied on an abusive and erroneous interpretation of the mappings used (for the fixed point theorem) and the impossibility to introduce money. I agree with you, SMD does crown this long list of problems.

  7. […] microeconomics we know that aggregation really presupposes homothetic an identical preferences, something that almost […]


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