Some unfounded expectations of economic theory

9 November, 2015 at 21:51 | Posted in Economics | 7 Comments

The weaknesses of social-scientific normativism are obvious. The basic assumptions refer to idealized action under pure maxims; no empirically substantive lawlike hypotheses can be derived from them. Either it is a question of analytic statements recast in deductive form or the conditions under which the hypotheses derived could be definitively falsified are excluded under ceteris paribus stipulations. Despite their reference to reality, the laws stated by pure economics have little, if any, information content.51T4SXX4DSL._SX326_BO1,204,203,200_To the extent that theories of rational choice lay claim to empirical-analytic knowledge, they are open to the charge of Platonism (Modellplatonismus). Hans Albert has summarized these arguments: The central point is the confusion of logical presuppositions with empirical conditions. The maxims of action introduced are treated not as verifiable hypotheses but as assumptions about actions by economic subjects that are in principle possible. The theorist limits himself to formal deductions of implications in the unfounded expectation that he will nevertheless arrive at propositions with empirical content. Albert’s critique is directed primarily against tautological procedures and the immunizing role ofqualifying or “alibi” formulas. This critique of normative-analytic methods argues that general theories of rational action are achieved at too great a cost when they sacrifice empirically verifiable and descriptively meaningful information.

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  1. Habermas, Albert, Robinson, Syll are right — now scrap the crap
    Comment on ‘Some unfounded expectations of economic theory’
    .
    Standard economics is a failed approach and the root cause can be located with unsurpassable precision here: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: 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. By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. ‘Taken to be true’ means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, p. 147)
    .
    Essentially the same assertion in Krugman’s scant blog-post: “So, what is neoclassical economics? … I think we mean in practice economics based on maximization-with-equilibrium.”*
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    Both, constrained optimization and equilibrium are nonentities like Superman and the Easter Bunny. And this is the reason why standard economics is a cartoon science.
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    Because economics theory cannot be based on nonentities the propositions HC1 to HC5 have to be thrown out of economics and replaced by something better. In Joan Robinson’s words: “Scrap the lot and start again”.
    .
    Habermas, Albert, Robinson, and Syll have to be criticized for elaborating endlessly on model Platonism and not taking the all decisive second step, that is, to put economics on new and rock-solid axiomatic foundations.**
    .
    There are huge rewards: the world will assuredly become a better place when Krugman retires with his sorta-kinda maximization-with-equilibrium mumbonomics.
    .
    Egmont Kakarot-Handtke
    .
    References
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal.
    American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    http://www.jstor.org/stable/1805586
    .
    * See
    http://krugman.blogs.nytimes.com/2012/08/28/neo-fights-slightly-wonkish-and-vague/?_r=0
    ** For more traction see cross-references Paradigm Shift
    http://axecorg.blogspot.de/2015/02/essentials-cross-references.html

  2. “There are huge rewards: the world will assuredly become a better place when Krugman retires with his sorta-kinda maximization-with-equilibrium mumbonomics.”

    We have a great choice. You can have economists like Sargent and Fama who are at least explicit in their belief in stupid things, or you can have the New Keynesians whose theories at their core essentially assert the same thing but are obfuscated.

    • Comment on Nanikore

      If you think you have a choice between Krugman or Sargent you are utterly mistaken. Both approaches are only variants of the same underlying sorta-kinda maximization-with-equilibrium.”

      As a heterodoxy economist you have only the choice to successfully develop the new economics paradigm or to fail like Krugman, Sargent and — face the fact — your heterodox forerunners.

      • Although I do not like Krugman’s models, as I think they are a distraction from engaging with real world (qualitative and quantitative) knowledge, as Habermas says above, I have a lot of respect for Krugman as a person and what he is doing. He has used his position as a prominent public figure to take on the economics establishment. Believe me criticising Sargent, Prescott and Lucas when he did was a brave move ( in the NYT article “The Dark Age of Macroeconomics”), even if he had a Nobel prize. It is a sure way to put yourself on the margins of the profession (and in many ways I think he has been ostracised). He has also used his position to champion the likes of Piketty.

        But Sargent (in particular) and his autistic methodology still reigns supreme in macro. I do not know how much worse things have to get before this changes.

        Krugman and his column and blog has put the spotlight on the economics profession, in fact this is how I found Lars’s blog!

      • On this we certainly agree🙂

  3. “This critique of normative-analytic methods argues that general theories of rational action are achieved at too great a cost when they sacrifice empirically verifiable and descriptively meaningful information.”

    I think Habermas gets to the crux of the issue here.

  4. There is no like/dislike button in science
    Comment on Nanikore on ‘Some unfounded expectations of economic theory’
    .
    You write “Although I do not like Krugman’s models … I have a lot of respect for Krugman as a person and what he is doing.”
    .
    That is far-far-far beside the point. This thread is about economic theory/methodology and there is only one criterion for a theory and that is true/false.
    .
    Most people do not understand what science is. Economists are no exception. Here is how Feynman explains it: “… We compare the implications of theory to Nature/experience/experiment/observation. If it disagrees with experiment — it’s wrong. In that simple statement is the key to science. It does not make a difference how beautiful your guess is, it does not make a difference how smart you are who made the guess, or what his name is, if it disagrees with experiment — it’s wrong. That’s all there is to it.”*
    .
    So it does not make a difference whether the name is Krugman, Sargent, Prescott or Lucas, if there is no counterpart of the theory in reality it’s wrong. Not the highest personal qualities of an author can make a false theory true.
    .
    Imagine, a nice guy comes to you and says he has constructed a perpetual motion machine. The fact that you like him cannot change the fact that he is a scientific retard.
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    And here is Krugman’s perpetual motion machine “So, what is neoclassical economics? … I think we mean in practice economics based on maximization-with-equilibrium.”
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    That is a clear enough statement of self-disqualification. As I said in the preceding post “Both, constrained optimization and equilibrium are nonentities like Superman and the Easter Bunny. And this is the reason why standard economics is a cartoon science.”
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    The differences between Krugman’s and Sargent’s approaches consists of superficialities like flexible/sticky prices.
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    The first step of the student of economics is to realize that all theories/models are false that are built upon the following concepts: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities.
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    The real wonder of economics is that each new generation of students has had a fair chance to realize that supply-demand-equilibrium is scientific junk, yet for unknown reasons each generation up to the present has liked what is forever scientifically unacceptable. This explains the dismal state of economics.
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    The second step is to replace all nonentities with concepts that have a counterpart in reality (2014).
    .
    There are huge rewards: economics will get out of the proto-scientific cul-de-sac when not only Krugman retires but all the other sorta-kinda-maximization-with-equilibrium guys.
    .
    It is incompetent economists who ultimately bear the responsibility for the social devastation of unemployment since the Great Depression. Most of them have been agreeable colleagues, friendly teachers, and likeable coevals. That has never been the core problem of economics. Indeed, the core problem has always been that economics is scientifically worthless.
    .
    Egmont Kakarot-Handtke
    .
    References
    Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working
    Paper Series, 2418851: 1–19. URL http://papers.ssrn.com/sol3/papers.cfm?
    abstract_id=2418851.
    .
    * See YouTube https://www.youtube.com/watch?v=EYPapE-3FRw


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