Reformulating the economics curriculum

23 Aug, 2018 at 07:49 | Posted in Economics | 2 Comments

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 mainstream 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 Gérard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equilibrium solution.

So what modern economics textbooks present to students are really models built on the assumption that an entire economy can be modelled as a representative actor and that this is a valid procedure. But it is not, 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 master 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 modelling abstraction! But in this case, it is 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 mainstream 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 ridiculous assumptions). Still after all these years pretending in their textbooks that this theorem does not exist — none of the textbooks I investigated even mention the existence of the Sonnenschein-Mantel-Debreu theorem — is really outrageous.