LARS P. SYLL

Debunking mainstream economics

Heterodoxy and pluralism in economics

A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …

Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …

Highlighting the points we have may seem like simple griping by a special interest. But there is far more involved than that. Remember we are talking about the failure of a discipline and how it is to be transformed. The marginalisation of heterodoxy has real consequences. In a general sense the marginalisation creates manifest problems that hamper teaching economics in a plural and critically aware way. For example, the marginalisation promotes a Whig history approach. It is also important to bear in mind that heterodoxy is a natural home of pluralism and of critical thinking in economics … Unlike the mainstream, heterodoxy does not have to be made compatible with pluralism and with critical thinking; it is predisposed to these and is already a resource for their development. So, marginalising heterodoxy really does narrow the base by which the discipline seeks to be renewed. That narrowing contributes to restricting the potential for good teaching in economics (including the profoundly important matter of how economists disagree and how they can be in error).

The Association for Heterodox Economics

Carpe diem (personal)

Early morning walk with Hedda on our island today.

Economic reality — a virulent virus afflicting mainstream economics

The WHO today warned of a virulent new virus affecting vulnerable groups in the Mid‐West and Eastern USA. The outbreak, which began in the Mid‐West’s extensive Great Lakes “Freshwater” river system, has recently jumped the “Saltwater” barrier, meaning that the entire population of its target species—“Mainstream” economists—is now at risk.

Speaking on behalf of the WHO, Dr Cahuc explained that the virus works by turning off the one genetic marker that distinguishes this species from the rest of its genus, the Human Race. This is the so‐called “Milton” gene (Friedman, 1953), which goes dormant in other Humans as they pass through puberty. Its inactivity reduces their imaginative capacity, making it impossible for them to continue believing in such endearing infantile fantasies as the Tooth Fairy and Santa Claus. While regrettable, this drop in imagination is necessary to prepare Humans for the adult phase of their existence.

“Professor Milton Friedman found a way to re‐activate this gene during PhD training, using his ‘as if’ gene splicing technique”, Dr Zylberberg elaborated. “This enabled a wonderful outpouring of imaginative beliefs by Mainstream Economists, which gave birth to concepts like NAIRU, Money Neutrality, Rational Expectations, and eventually even DSGE models. This wealth of imagination was regarded by Mainstream Economists as a more than sufficient compensation for returning to the child‐like phase of the Human species.”

Steve Keen

Looking at what famous mainstream economists — like e.g. Paul Samuelson and Gerard Debreu — have come up with, there is no indication at all they produce rigorous and successful explanations or predictions of real-world phenomena. In physics, it’s all different. There one has often been able to, by the use of mathematics, to produce both rigorous and successful explanations and predictions. But then, of course, the material world is something quite different from the social world …

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This mathematical modelling activity is considered useful and essential. Since fully-fledged experiments on a societal scale, as a rule, are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build mathematical models and make things happen in these ‘analogue-economy models’ rather than engineering things happening in real economies.

Formalistic mathematical-deductive ‘Glasperlenspiel’ can be very impressive and seductive. But in the realm of science, it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

Mainstream economists love to depict heterodox economists’ views on the use of mathematics as coming from sadly misinformed and misguided people who dislike and do not understand much of it. This is really a gross misapprehension. We do not misunderstand the crucial issues at stake — and many of us have spent decades on using mathematics and statistics in our research and teaching.  To be careful and cautious is not the same as to dislike. Quite the contrary. We know the crucial issues all too well — and are not satisfied with the validity and philosophical underpinning of the assumptions made for applying mathematical methods in economics.

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science.  Let us not forget what Paul Romer — someone I guess not even the most outré mainstreamer would call a heterodox economist — said in his masterful attack on ‘post-real’ economics a couple of years ago:

Math cannot establish the truth value of a fact. Never has. Never will.

We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule, none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become the standard modelling assumption made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth.

So — let’s hope the reality virus will keep on infecting mainstream economics!

In Britain austerity is changing everything

Wren-Lewis — the flimflam anti-pluralist

Again and again, Oxford professor Simon Wren-Lewis rides out to defend orthodox macroeconomic theory against attacks from heterodox critics. In one of his latest attacks on heterodox economics and students demanding pluralist economics education he writes:

The danger in encouraging plurality is that you make it much easier for politicians to select the advice they like, because there is almost certain to be a school of thought that gives the ‘right’ answers from the politicians point of view. The point is obvious once you make the comparison to medicine. Don’t like the idea of vaccination? Pick an expert from the anti-vaccination medical school. The lesson of the last seven years, in the UK in particular, is that we want mainstream economists to have more influence on politicians and the public, and not to dilute this influence through a plurality of schools of thought.

And  a couple of years ago he wrote the following:

Attacks [against mainstream economics] are far from progressive.

Devoting a lot of time to exposing students to contrasting economic frameworks (feminist, Austrian, post-Keynesian) to give them a range of ways to think about the economy, as suggested here, means cutting time spent on learning the essential tools that any economist needs … Economics is a vocational subject, not a liberal arts subject …

This is the mistake that progressives make. They think that by challenging mainstream economics they will somehow make the economic arguments for regressive policies go away. They will not go away. Instead all you have done is thrown away the chance of challenging those arguments on their own ground, using the strength of an objective empirical science …

Replacing [mainstream economics] with schools of thought is not the progressive endeavor that some believe. It would just give you more idiotic policies …

Mainstream economics is depicted by Wren-Lewis as nothing but “essential tools that any economist needs.” Not a theory among other competing theories. Not a “separate school of thoughts,” but an “objective empirical science” capable of producing “knowledge.”

I’ll be dipped!

Validly deducing things from patently unreal assumptions — that we all know are purely fictional — makes most of the modelling​ 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 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.

Wren-Lewis seems to have no problem with the lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and vanishingly little real-world relevance that characterize modern mainstream macroeconomics. And he obviously shares the view that there is nothing basically wrong with ‘standard theory.’ As long as policymakers​ and economists stick to ‘standard economic analysis’ everything is just fine. Economics is just a common language and method that makes us think straight,  reach correct answers, and produce ‘knowledge.’

Contrary to what Wren-Lewis seems to argue, I would say the recent economic and financial crises and the fact that mainstream economics has had next to nothing to contribute in understanding them, shows that mainstream economics is in dire need of replacement.

No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in modern ‘the model is the message’ form, mainstream economists like Wren-Lewis do not push economic science forwards one millimetre​ since they simply do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside their models are, that is no guarantee whatsoever they have anything interesting or relevant to say about real-world economies.

Simon Wren-Lewis’ warped view of ​modern macroeconomics

There is something that just does not sit very well with Oxford macroeconomist Simon Wren-Lewis’ view of modern macroeconomics. On more than one occasion has this self-proclaimed ‘New Keynesian’ macroeconomist approvingly written about the ‘impressive’ theoretical insights New Classical economics has brought to macroeconomics. In one of his latest blog posts he once again  shows how devoted  he is to the Chicago übereconomists and their modelling endeavours (emphasis added):

DSGE models are firmly entrenched in academic macroeconomics, and in pretty well every economist that has done a PhD, which is why the Bank of England’s core model is DSGE … Have a look at almost any macro paper in a top journal today, and compare it to a similar paper before the NCCR, and you can see we have been through a methodological revolution … If you are expecting me at this point to say that DSGE models where were macroeconomics went wrong, you will be disappointed … Moving to DSGE involved losses as well as gains. It inevitably made models less rich and moved them further away from the data in areas that were difficult but not impossible to model in a theoretically consistent way. The DSGE methodological revolution set out so clearly in Lucas and Sargent’s paper changed the focus of macroeconomics away from things we now know were of critical importance.

If moving to DSGE meant not being able to tackle things of “critical importance,” and makes economic models “less rich” and further away from real-world data, why still ultimately defend it? And does “consistency” really trump every other model​ consideration? You do, of course, expect that of New Classical Chicago economists. But a ‘Keynesian’ macroeconomist?

To Wren-Lewis the ‘New Keynesian’ acceptance of rational expectations, representative agents and microfounded DSGE models is, at the end of the day, something good, perhaps even a “gain.” Not all economists (yours truly included) share that view:

While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Neither New Classical nor ‘New Keynesian’ microfounded DSGE macro models have helped us foresee, understand or craft solutions to the problems of today’s economies.

If macroeconomic​ models – no matter of what ilk – assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists – regardless of being ‘New Monetarist’, ‘New Classical’ or ‘New Keynesian’ – ought to do some ontological reflection and heed Keynes’ warnings on using thought-models in economics

Wren-Lewis ought to be much more critical of the present state of macroeconomics — including ‘New Keynesian’ macroeconomics  — than he is.  Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists like Wren-Lewis there still are some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:

For many years now, the main alternative to Real Business Cycle Theory has been a somewhat loose cluster of models given the label of New Keynesian theory. New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy. The “New Keynesian” label refers back to the “rigid wages” brand of Keynesian theory of 40 or 50 years ago. Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it …

I conclude that dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise. But this does not mean that we should revert to the old Keynesian theory that preceded it (or adopt the New Keynesian theory that has tried to compete with it). What we need to learn from Keynes … are about how to view our responsibilities and how to approach our subject.

Wren-Lewis is keen on trying to give a picture of modern macroeconomics as a pluralist enterprise. But the change and diversity that gets Wren-Lewis approval only take​ place within the analytic-formalistic modelling 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 modelling 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 modelled​ your thoughts, you’re not in the economics business. But this isn’t pluralism. It’s a methodological reductionist straightjacket.

If there really is a proliferation of macromodels nowadays, it almost exclusively takes place as a kind of axiomatic variation within the standard DSGE modelling​ framework. And — no matter how many thousands of models economists like Wren-Lewis 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.

When it really counts, Wren-Lewis shows what he is — a mainstream economist fanatically defending the insistence of using a Chicago-style axiomatic-deductive economic modelling​ 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.’