## Wren-Lewis on macroeconomic eclecticism

13 Jan, 2016 at 20:39 | Posted in Economics | 8 CommentsOxford macroeconomist Simon Wren-Lewis has a post up today on his blog discussing whether mainstream macroeconomics is eclectic or not. His answer is — both yes and no:

Does this mean academic macroeconomics is fragmented into lots of cliques, some big and some small? Not really … This is because these models (unlike those of 40+ years ago) use a common language …

It means that the range of assumptions that models (DSGE models if you like) can make is huge. There is nothing formally that says every model must contain perfectly competitive labour markets where the simple marginal product theory of distribution holds, or even where there is no involuntary unemployment, as some heterodox economists sometimes assert. Most of the time individuals in these models are optimising, but I know of papers in the top journals that incorporate some non-optimising agents into DSGE models. So there is no reason in principle why behavioural economics could not be incorporated …

It also means that the range of issues that models (DSGE models) can address is also huge …

Mainstream academic macro is very eclectic in the range of policy questions it can address, and conclusions it can arrive at, but in terms of methodology it is quite the opposite.

Wren-Lewis tries to give a picture of modern macroeconomics as a pluralist enterprise. But the change and diversity that gets Wren-Lewis approval only takes place within the analytic-formalistic modeling strategy that makes up the core of mainstream economics. You’re free to take your analytical formalist models and apply it to whatever you want — as long as you do it with a modeling methodology that is acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. If you haven’t modeled your thoughts, you’re not in the economics business. But this isn’t pluralism. It’s a methodological reductionist straightjacket.

To most mainstream economists you only have *knowledge* of something when you can *prove* it, and so ‘proving’ theories with their models via deductions is considered the only certain way to acquire new knowledge. This is, however, a view for which there is no warranted epistemological foundation. Outside mathematics and logics, *all* human knowledge is conjectural and fallible.

Validly deducing things in closed analytical-formalist-mathematical models — built on atomistic-reductionist assumptions — doesn’t much help us understand or explain what is taking place in the real world we happen to live in. Validly deducing things from patently unreal assumptions — that we all know are purely fictional — makes most of the modeling exercises pursued by mainstream macroeconomists rather pointless. It’s simply not the stuff that real understanding and explanation in science is made of. Had mainstream economists like Wren-Lewis not been so in love with their smorgasbord of models, they would have perceived this too. Telling us that the plethora of models that make up modern macroeconomics ‘are not right or wrong,’ but ‘just more or less applicable to different situations,’ is nothing short of hand waving.

So, yes, there is a proliferation of macromodels nowadays — but it almost exclusively takes place as a kind of axiomatic variation within the standard DSGE modeling framework. And — no matter how many thousands of models mainstream economists come up with, as long as they are just axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and explanation of real economies.

Wren-Lewis seems to have no problem with the lack of fundamantal diversity — not just path-dependent elaborations of the mainstream canon — and vanishingly little real world relevance that characterize modern mainstream macroeconomics.

Wren-Lewis obviously shares the view of his mainstream colleagues Paul Krugman and Greg Mankiw that there is nothing basically wrong with ‘standard theory.’ As long as policy makers and economists stick to ‘standard economic analysis’ — DSGE — everything is fine. Economics is just a common language and method that makes us think straight and reach correct answers.

And just as his colleagues, when it really counts, Wren-Lewis shows what he is — a mainstream neoclassical economist fanatically defending the *insistence* of using an axiomatic-deductive economic modeling strategy. To yours truly, this attitude is nothing but a late confirmation of Alfred North Whitehead’s complaint that ‘the self-confidence of learned people is the comic tragedy of civilization.’

**Added January 15: **Wren-Lewis has a post up today commenting on some of the critique put forward here. Writes Wren-Lewis:

My post ended with the following sentence:

‘Mainstream academic macro is very eclectic in the range of policy questions it can address, and conclusions it can arrive at, but in terms of methodology it is quite the opposite.’

I argue in the post that “this non-eclecticism in terms of excluding non-microfounded work is deeply problematic.” I then link to my many earlier posts where I have expanded on this theme. So how I can be a fanatic defender of insisting that this modelling strategy be used escapes me. Unless I have misunderstood what an ‘axiomatic-deductive’ strategy is.

Yes indeed, that is a total misunderstanding!

I have two PhDs. I am a professor. I can read.

So, of course, the issue is not about microfoundations or not (on which I have written plenty elsewhere, e.g. here). What I criticize Wren-Lewis and other mainstream economists for, is the *insistence* of using axiomatic-deductive modeling (with or without microfoundations). And I am — in case anyone thought otherwise — not alone in that critique:

The fundamental problem of modern economics is that methods are repeatedly applied in conditions for which they are not appropriate … Specifically, modern academic economics is dominated by a mainstream tradition whose defining characteristic is an insistence that certain methods of mathematical modelling be more or less always employed in the analysis of economic phenomena, and are so in conditions for which they are not suitable.

Fundamental to my argument is an assessment that the application of mathematics involves more than merely the introduction of a formal language. Of relevance here is recognition that mathematical methods and techniques are essentially tools. And as with any other tools (pencils, hammers, drills, scissors), so the sorts of mathematical methods which economists wield (functional relations, forms of calculus, etc.) are useful under some sets of conditions and not others …

Clearly if social phenomena are highly internally related they do not each exist in isolation. And if they are processual in nature, being continually transformed through practice, they are not atomistic. So the emphasis on the sorts of mathematical modelling methods that economists employ necessarily entails the construction of economic narratives – including the sorts of axioms and assumptions made and hypotheses entertained – that, at best, are always but highly distorted accounts of the complex phenomena of the real open social system … It is thus not at all surprising that mainstream contributions are found continually to be so unrealistic and explanatorily limited.

Employing the term deductivism to denote the thesis that closed systems are essential to social scientific explanation (whether the event regularities, correlations, uniformities, laws, etc., are either a prior constructions or a posterior observations), I conclude that the fundamental source of the discipline’s numerous, widespread and long lived problems and failings is precisely the emphasis placed upon forms of mathematical deductivist reasoning.

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Lars Syll creatively destructs Wren-Lewis

Comment on ‘Wren-Lewis on macroeconomic eclecticism’

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1. Destruction

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Boiled down to the essentials Wren-Lewis’s methodological position is “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point …” (Krugman).

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More explicitly and formally, i.e. axiomatically, the position has been defined as “The [neo-Walrasian] program is organized around the following hard core propositions:

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, 1985, p. 109)

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The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is an indefensible methodological blunder. Likewise for HC3.

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HC6 and HC3 are, for reasons given in prior debates, methodologically unacceptable. Because of this the whole set of hard core propositions — the sorta-kinda starting point — breaks apart and with it the whole theoretical superstructure of DSGE.

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2. Keynesian Revolution 2.0

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“The [neo-]classical [sorta-kinda] theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight — as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels [i.e. HC6 and HC3] and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

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3. Creation

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The new set of hard core propositions must not contain the concepts of equilibrium and constrained optimization. The non-Euclidean paradigm is macrofounded instead of microfounded.

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The most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by three hard core propositions:

nHC1. Yw=WL wage income Yw is equal to wage rate W times working hours L,

nHC2. O=RL output O is equal to productivity R times working hours L,

nHC3 C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

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These premises are certain, true, and primary, and therefore satisfy perfectly all methodological requirements. To recall “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 Posterior Analytics)

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For the graphical representation of the new hard core propositions see here https://commons.wikimedia.org/wiki/File:AXEC31.png. At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e. C=Yw, and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY production function. Note also that the wage rate W is an AVERAGE if the individual wage rates are different among the employees, which is the general case.

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Under the conditions of market clearing and budget balancing in each period the price follows from the three equations as P=W/R (1), i.e. the market clearing price is always equal to unit wage costs. This is the elementary form of the Law of Supply and Demand. Note that the price is explicitly taken as the dependent variable, of course, it can be treated as an independent variable. Note also that the INITIAL conditions of market clearing and budget balancing have to be lifted eventually.

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The elementary economy works as follows. If the wage rate W is lowered, the market clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price P rises. If productivity increases the price falls. In any case, labor gets the whole product, the real wage W/P is invariably equal to the productivity R according to (1), and profit for the business sector as a whole is zero. ALL changes in the system are FULLY reflected by the market clearing price P. The elementary economy is reproducible for an indefinite number of periods.

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Given the minimalist hard core propositions nHC1 to nHC3 one has to proceed top-down by successive DIFFERENTIATION until one arrives at the individual agent. The Copernican turn in economics consists in the methodological switch from behavior-centered bottom-up, i.e. microfoundation, to structure-centered top-down, i.e. macrofoundation.

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HC1 to HC6 is fully REPLACED by nHC1 to nHC3. There is no such thing as pluralism or eclecticism. Only one set can be the true one — and it is definitely NOT Wren-Lewis’s sorta-kinda maximization-and-equilibrium.

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Egmont Kakarot-Handtke

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References

Keynes, J. M. (1973). The General Theory of Employment Interest and Money.

The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:

Macmillan.

Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New

York, NY, etc.: Cambridge University Press.

Comment by Egmont Kakarot-Handtke— 17 Jan, 2016 #

Confused Orthodoxy vs. confused Heterodoxy

Comment on ‘Wren-Lewis on macroeconomic eclecticism’

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It is widely known, except among economists, how science works “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

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Or, in simplified Popperian terms, science is an upward spiraling two-step process of conjecture, i.e. formulation of a theory/model, and either refutation or eventual admittance to the corpus of knowledge until a better theory/model appears.

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Accordingly, refutation can take TWO routes (i) proof of logical inconsistency, and (ii) proof of empirical inconsistency. The proof of one inconsistency is sufficient for the rejection of the whole theory/model.

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The logical consistency of a theory/model is secured by applying the axiomatic-deductive method which is well-established since the ancient Greeks defined science as knowledge in contradistinction to mere opinion “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, Posterior Analytics)*

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The fundamental methodological mistake of Lars Syll consists in rejecting Orthodoxy BECAUSE it applies the axiomatic-deductive method. Orthodoxy indeed has to be rejected because of gross methodological defects but NOT for the application of the axiomatic-deductive method. So, in his rejection of Orthodoxy Lars Syll is right but for the wrong reason.

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Heterodoxy in turn has to be criticized for completely ignoring the requirement of logical consistency. It can readily be shown that the profit theories of Keynes, Kalecki, Minsky, and Keen are different. Elementary logic tells one that not all four can be true, in fact all four are provably false.** So, Heterodoxy in its present shape and form has to be rejected because of logical inconsistency.

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It is NOT possible to idealize inconsistency and conceptual confusion as pluralism or eclecticism. Scientific truth is strictly exclusive “There cannot be both opinion and knowledge of the same thing at the same time.” (Aristotle, Posterior Analytics)

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Orthodoxy has been based on a properly defined axiom set “The [neo-Walrasian] program is organized around the following hard core propositions:

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, 1985, p. 109)

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The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is a quite primitive methodological blunder. Likewise for HC3.

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Clearly, when one axioms fails the whole formal basis breaks apart and with it the whole theoretical superstructure. The Orthodox microfoundation approach is axiomatically flawed, and because of this ALL variants of DSGE models are false and have to be rejected. There is no such thing as eclecticism of false models — except in Wren-Lewis’s confused methodology.

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Egmont Kakarot-Handtke

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References

Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT:

Edward Elgar.

Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New

York, NY, etc.: Cambridge University Press.

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* http://en.wikipedia.org/wiki/Posterior_Analytics

** See ‘Heterodoxy, too, is scientific junk’

http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html

Comment by Egmont Kakarot-Handtke— 16 Jan, 2016 #

I have read your posts on Rodrik´s book and the follow up on the methodological debate. One of the things on the book that struck me was the models before theory tenet. Don´t you think that this is one of the weakness in his line of reasoning? There is theory in every model and perhaps the predicament comes from seeking nice, tractable and determinist models instead of theories that help explain the way real economies work. It is a problem of hierarchy; modelling is a means not an end, which has to be subordinated to the usefulness of the theoretical undertaking.

Comment by Gonzalo— 15 Jan, 2016 #

I think one of the great problems with both Wren-Lewis and Rodrik is that the ‘pluralism’ they both subscribe to does not include methodological pluralism. If you don’t build your theories/policies around the standard mathematical models, then in their eyes you’re not speaking the ‘language’ of economics. They insist you have to (at least) use the standard models as a benchmark. You’re free to question specific theories (there are lots of them on the smorgasbord …). But if you dare question the axiomatic-deductive model building endeavour

per se, then their pluralism halts. If you dare to question the methodological foundations, then — as when questioning the received view on money — you’re academically dead. Or even worse — you’re considered a heterodox …Comment by Lars Syll— 15 Jan, 2016 #

Wren Lewis has given a very considered counter-response which I think also deserves a considered response from Lars. I personally read Simon’s original post and interpreted it rather similarly to the way Lars did. However, I find Simon’s concluding statement in his latest post most reasonable:

“… their criticism should be directed at the limitations implied by microfoundations formalism.”

Actually this is a very open-minded view and one that most of us here, and I think Professor Syll too, actually agree on.

Comment by Nanikore— 15 Jan, 2016 #

Bruce, for sure Wren Lewis is a very decent person, and I particularly take my hat off to his efforts to advise Corbyn despite understandable misgivings he may have about the current Labour Party leadership, but nonetheless he felt the need as a means of countering Tory austerity policies and the lack of debate in the media about their consequences. Unlike most DSGE modellers he is capable of reflection and welcomes engagement with people from other disciplines.

However, I do have problems with his post. It is not acceptable to have eclectic subject matter with non-eclectic methodology. We need different products, not differentiation on the same product. Most importantly we need a healthy awareness about the limitations of positivist approaches and how it can force upon analysis inappropriate thought processes. A lot of the reasons we missed the coming Financial crisis in the 2000s I think was a result of a methdology that is prone to confirming an appearance of stable relationships between variables when there is in fact no such stable relationship underlying them.

Comment by Nanikore— 15 Jan, 2016 #

Simon Wren-Lewis exemplifies what I think of as the “reasonable man” pose. In fairness, I think he is less doctrinaire than your descriptive restating of his position indicates. As an example: S W-L:

“One of the most depressing conversations I have is with bright young macroeconomists who say they would love to explore some interesting real world phenomenon, but will not do so because its microfoundations are unclear. We need to convince more macroeconomists that modelling choices can be based on what you can see, and not just on what you can microfound.”.

So, as a “reasonable man” he can nod sagely and agree with you that a lack of diversity on some dimensions is indeed troubling. Even while touting the variety of assumptions possible within the DSGE paradigm.

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The problem with the eclecticism of the “reasonable man” variety is that it entails an eclipse of critical thought in an orgy of ad hocery. S W-L:

“The big models/schools of thought arenot right or wrong, they arejust more or less applicable to different situations. You need New Keynesian models in recessions, but Real Business Cycle models may describe some inflation free booms. You need Minsky in a financial crisis, and in order to prevent the next one. As Dani Rodrik says, there are many models, and the key questions are about their applicability.”.

It is not “diversity” to study the actual economy. It is science. And, so is rejecting theories with substantial flaws.

Comment by Bruce Wilder— 14 Jan, 2016 #

You’ll appreciate this: On the Brittleness of Bayesian Inference∗

Houman Owhadi†

Clint Scovel‡

Tim Sullivan

Comment by Dwayne Woods— 14 Jan, 2016 #