## Lucas’ FORTRAN caricature of economics

14 May, 2016 at 19:33 | Posted in Economics | 3 CommentsLucas … internalized the caricature he extracted from Samuelson’s Foundations: that mathematical analysis is the only legitimate way of doing economic theory, and that, in particular, the essence of macroeconomics consists in a combination of axiomatic formalism and philosophical reductionism (microfoundationalism). For Lucas, the only scientifically legitimate macroeconomic models are those that can be deduced from the axiomatized Arrow-Debreu-McKenzie general equilibrium model, with solutions that can be computed and simulated in such a way that the simulations can be matched up against the available macroeconomics time series on output, investment and consumption.

This was both bad methodology and bad science, restricting the formulation of economic problems to those for which mathematical techniques are available to be deployed in finding solutions.

Lucas hope of being able to mathematically model the economy as “a FORTRAN program” and “gain some confidence that the component parts of the program are in some sense reliable prior to running it” seems totally misdirected. The failure in the attempt to anchor the analysis in pure mathematics shows that if you neglect ontological considerations pertaining to the target system, ultimately reality returns with a vengeance when at last questions of bridging and exportation of mathematical model exercises are laid on the table. No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in “modern mathematical form” they do not push science forwards one millimeter if they do not stand the acid test of relevance to the target. No matter how rigorous the inferences delivered inside these models are, they do not *per se* say anything about their external validity.

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If by ontological considerations this note means bring realistic, then we are getting nowhere, since even what goes for true science is no more close to reality than what an intuitive approach brings. Reality is so subjective a thing that we might as well make our economics theories out of the same fresh air as the bankers are supposed to use for producing money.

However, if and when we use a process of setting axioms, making provisional assumptions, picking good definitions and specifying useful indicators as variables (all so we can tell what we are arguing about), then by the use of algebra can we actually develop a scientific theory of macroeconomics. I know because I’ve been there, and you can too if and when you see my book about it. And don’t expect that there is such thing as pure mathematics. If every theory was 100% true it would be called a faith!

Comment by David Chester— 14 May, 2016 #

“However, if and when we use a process of setting axioms, making provisional assumptions, picking good definitions and specifying useful indicators as variables (all so we can tell what we are arguing about), then by the use of algebra can we actually develop a scientific theory of macroeconomics.”

David, I think a point David Glasner is making is that by developing such axioms you are excluding knowledge that is not suited to such expression, but is nevertheless a vital, perhaps the vital, piece of the jigsaw in understanding what we need to know.

The mathematician of economics has almost become an end in itself and formalisation is being conflated with scientific development.

Comment by Nanikore— 15 May, 2016 #

Lars Syll

The ontological approach would immediately win all minds and hearts if a proponent could lay on the table a non-trivial economic proposition that fits reality and pushes science forwards one or two millimeters.

Because profit theory is in a dismal state (Desai, “A satisfactory theory of profits is still elusive”; Mirowski, “… one of the most convoluted and muddled areas in economic theory”) it would be helpful to learn what the ontological solution looks like. After all, profit is the pivotal phenomenon of the target system.

Egmont Kakarot-Handtke

Comment by Egmont Kakarot-Handtke— 15 May, 2016 #