September 12, 2014

Barzilai and the crumbling of the unsafe citadel

Comment on Barzilai's ‘Demand theory is founded or errors’
New paper 'Slutsky’s Mathematical Economics'  Feb 2016

Blog-Reference

The unifying bond of heterodox economists is the conviction that there is something fundamentally wrong with Orthodoxy. With this comes the expectation that Heterodoxy is in some unspecified sense better. Better, clearly, has two meanings: morally better or scientifically better. And here the confusion begins.

What has to be strictly kept apart is political economics and theoretical economics. Hence, there are two kinds of Heterodoxy: those economists who reject Orthodoxy ultimately for moral reasons and those who reject it ultimately for methodological reasons. To simply state that conventional economics is bad science blurs this distinction.

With Adam Smith economics had an inauspicious start. Smith was a moral philosopher with a shallow scientific understanding. His ambition consisted in copying Newton. Heterodoxy never bought into this. Veblen, for example asked: Why is Economics not an Evolutionary Science? The question indicates that there is something fundamentally wrong with equilibrium economics. However, it claims also that economics is a science.

This is crucial. Veblen signals that he is in a scientific discourse which means by implication that he is not in a political debate.

Why is this crucial? Because this blog, like many others, constantly mixes politics with science. There is nothing wrong with politics, of course, but the hijacking of science by folks with a political agenda is simply unacceptable.

It is my understanding that this blog is about theoretical economics and not political economics.

The criteria of theoretical economics are formal and material consistency. From this follows for Heterodoxy, first, to identify the errors/mistakes of orthodox economics, and second, to develop a paradigm that complies better with the two criteria of science.

Heterodoxy has to be praised for being good at the first task. However, there are differences of quality. The greater part of heterodox critique goes in the right direction but is easy to neutralize. Hahn, who knew from his own research about the fundamental methodological problems of Orthodoxy, was rather comfortable with this type of critique:

“For as I said at the outset, the citadel is not at all secure and the fact that it is safe from a bombardment of soap bubbles does not mean that it is safe.” (Hahn, 1984, p. 78)

The effective part of heterodox critique goes to the heart of the matter, that is, to the foundational assumptions of Orthodoxy.

We have two criteria to assess a theory: material consistency and formal consistency. A theory must satisfy both criteria, that is to say, it can be rejected either on empirical or on logical grounds alone.

Barzilai has single-handedly brought down the entire theoretical superstructure of marginalism from exchange to growth and distribution by exposing the fundamental formal flaw of utility theory: conventional economics is out of mathematics, out of logic, and therefore out of science. In a diffuse way, heterodox economists have always felt this. However, feeling does not count for much in science. What counts is proof. Barzilai has accomplished the first and foremost task of heterodox economics. Hahn's premonition has literally come true.

The orthodox citadel has never been safe and Barzilai has provided the ultimate formal argument.

Egmont Kakarot-Handtke


References
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge, MA: MIT Press.


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REPLY Circular reasoning  comment on Grieve's ‘Right back where we started from’ on Sep 13

Growth of knowledge is the characteristic of science. This growth is mostly smooth, but sometimes it takes the form of a disruptive paradigm shift. In marked contrast, secular stagnation is the outstanding characteristic of economic thinking.

Economics still stands at what may be called Keynes's juncture:
“The classical 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 and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

This insight is Keynes's most valuable methodological contribution. In no uncertain terms he called for a paradigm shift. However, Keynes did not follow his own advice. And what his followers put into practice was his political program which indeed has a weak theoretical foundation because Keynesians never came forth with the non-Euclidean axioms. There are a lot of new assumptions and commonsensical assertions in the General Theory, but there is no way around it: the formal foundations are logically defective (see 2013 and 2014).

Since the 1930s, when Keynes saw more clearly than his fellow economists that the classical axioms had been refuted once and for all by the Great Depression, economics is in dire need of new formal foundations. There is no way back before Keynes; and to stay any longer at Keynes's juncture is equally impossible. New Classicals have not got the first point, New Keynesians not the second (cf. Quiggin, 2010). Lacking correct formal foundations, both approaches are agonizing detours.

Why have economists not extricated themselves from the circle of stagnation?

First, many economists either do not understand or do not accept the codex of falsification:
“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

Second, it is the ...
“... failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

Neither Classical nor Keynesian economists have transcended (i) supply-function—demand-function—equilibrium, (ii) invisible hand coordination of qualitatively different markets, (iii) the belief that in the end all turns out for the best, and if not, either labor, the central bank, or the government has been sticky or wrong-headed.

As a matter of fact, with regard to formal and material consistency there is not much to choose between the Classical or Keynesian approach:
“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense "science," called "cargo cult science".” (Clower, 1994, p. 809)

In view of this big picture, the finer points of IS-LM and AS/AD are not of particular significance and there is no need to recycle them furthermore (see 2014).


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.


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REPLY Teachers, preachers, scientists  comment on Goodwin's ‘Human element’ on Sep 18

Goodwin finishes her article with the call to contribute to making the world a better place. With this, all economists can agree. In fact, this is what they have done, or claim to have done, since Adam Smith.

“However much economists may evoke their purity, they want to change the world. They want to contribute to the solution of urgent practical problems. ... Of course, they also pursue the consistency of the theories they make, for he who contradicts himself proves nothing.” (Klant, 1988, pp. 112-113)

How do economists contribute to solutions? They first of all try to figure out how the economy works. This is the precondition, because if we do not know how the economy works we do not really understand what the problem is and cannot do anything effective about it.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

The economist's professional contribution to the betterment of the human condition takes the form of a scientific theory. But have economists developed the true theory? Not yet. Goodwin, speaking for many, neither agrees with conventional theory nor with the behavioral assumptions as codified in the textbooks. The ‘sorry state’ of the economic culture, Wall St. in particular, which gradually evolved from the behavioral axiom of rational self-interest, has repeatedly ‘bubbled up into disasters’. That is, economists do not solve problems; to the contrary, they cause them. In order to prevent future crises, a new approach is needed.

“We are now at a time when economics is in need of another 60 year refresh. The heart of this need is in the question: How are human motivations and behavior to be understood in this human science?” (Goodwin, 2014, p. 99)

Goodwin maintains that conventional economics has become a menace to the public. The ultimate reason is that it rests on a questionable behavioral premise. Methodologists, too, have identified this weak spot.

“But a principle that is not universally true is false. Thus the rationality principle is false. I think there is no way out of this. ... Now if the rationality principle is false, then an explanation that consists of the conjunction of this principle and a model must also be false, even if the particular model is true. But can the model be true? Can any model be true? I do not think so. Any model, whether in physics or in the social sciences, must be be an over-simplification. ... I think we have to admit that most successful scientific theories are lucky over-simplifications.” (Popper, 1994, pp. 172-173)

Since J. S. Mill economists have never defended the axiom of rational self-interest as a social norm but excused it as a necessary over-simplification.

“The science then proceeds to investigate the laws which govern these several operations, under the supposition that man is a being who is determined, by the necessity of his nature, to prefer a greater portion of wealth to a smaller in all cases, without any other exception than that constituted by the two counter-motives already specified. Not that any political economist was ever so absurd as to suppose that mankind are really thus constituted, but because this is the mode in which science must necessarily proceed.” (Mill, 1874, V.38)

However, despite all caveats, it was almost inevitable that in the rhetoric of popularizers the rationality axiom mutated from an over-simplification to ‘greed is good’. Therefore, it is of utmost importance to keep political economics and theoretical economics strictly apart. In theoretical economics there is no need to contrast pure selfish behavior with honesty, work for the common good, and caring. The task of theoretical economics is to explain how the economy works and neither to deny nor to preach social values. It is politics, philosophy, and religion — the antipodes of science — where the struggle about values takes place.

Having identified the weak spot of conventional economics, there are two ways open: (i) to replace the narrow axiom of rational self-interest by a broader set of behavioral assumptions, or (ii), to exclude behavioral assumptions altogether from the axiomatic foundations of economics. Goodwin chooses the first alternative. That is a mistake.

“The purpose of this paper is to criticise the notion that economics is a science of behaviour or that a science of behaviour is fundamental to economics. This plausible and, as I believe, mistaken idea has sometimes been called (methodological) psychologism, and I follow here this terminology. In opposition to psychologism I put forward the notion of economics as a study of spontaneous order independent of any behavioural science. My argument is based on the important contributions of Hayek and Popper. If it is correct, then all the attempts to derive an adequate model of economic behaviour (as practised, for example, by the representatives of ‘behavioural’ or ‘psychological economics’) are misconceived.” (Hudík, 2011, p. 147)

Psychologism leads into the morass of pseudo-science. The general problem with  behavioral propositions is that they are vague and uncertain.

“By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can't be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

There is no behavioral assumption that is strong enough to bear a comprehensive theoretical superstructure. But worse, no way leads from the understanding of human motivations and behavior to the understanding of how the economy works (see 2014). Yes, of course, neoclassical economics claims to have found the way.

“When I was beginning my studies in this field economist Robert Solow commented to me that the great strength of economics is that it is fully axiomatized; the entire edifice can be deduced from the basic rationality axiom, which says that rational economic man maximizes his utility.” (Goodwin, 2014, p. 102)

It is widely known that general equilibrium theory does not represent any feasible economy (Ackerman et al., 2004).

“The great contradiction revealed is as follows: one of the theories greatest strength — its claim to deduce significant results from very general hypotheses about the behavior of economic agents — turns out to be its greatest weakness.” (Ingrao et al., 1990, p. 364)

Because economics is entirely different from psychology, sociology, and ethics the solution to the methodological problem spotted by Goodwin consists in this: theoretical economics must not be based on behavioral axioms but on objective structural axioms  (see 2014 and 2013).

Economists do not make the world a better place by justifying bad behavior or preaching good behavior, only by providing the true theory about how the economy works. It is true/false and not good/bad that science is all about.


References
Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York, NY: Routledge.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Goodwin, N. (2014). The Human Element in the New Economics: A 60-Year Refresh for Economic Thinking and Teaching. real-world economics review, (68): 98–118. URL
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Klant, J. J. (1988). The Natural Order. In N. de Marchi (Ed.), The Popperian Legacy in Economics, pages 87–117. Cambridge: Cambridge University Press.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York, NY: Routledge.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.


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REPLY  Eternal Return  comment on Davar's Rejoinder to Grieve on Sep 24

I would like to inform you that
(i) the Keynesian formalism is defective since the General Theory (for the proof see 2013 or 2014),
(ii) contrary to the popular interpretation, Walras's Law of Markets does not include the labor market (for the restatement see 2013).

What you are in fact comparing and discussing are two obsolete approaches. To me this exemplifies that not only Orthodoxy adheres to the philosophy of the return of eternal return but also Heterodoxy.


References
Kakarot-Handtke, E. (2013a). Walras’s Law of Markets as Special Case of the General Period Core Theorem. SSRN Working Paper Series, 2222123: 1–12. URL
Kakarot-Handtke, E. (2013b). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL


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REPLY  concluding remark on Davar's contributions on Sep 29

My comment of 24 Sep clearly states that both the Keynesian and the Walrasian approaches are defective. Thus, to compare them is like comparing the ether and the phlogiston theory. This is simply not a productive use of scarce resources.

It is obvious that the only way out of the impasse is to develop a new paradigm. To continue the discussion about the finer points of bygones is futile.

It is widely known that the Walrasian approach is a failure (Ackerman et al., 2004) and I have provided the decisive axiomatic arguments in my working papers. There is no good reason left why anyone should occupy himself with any version of conventional equilibrium theory.

My comments are to be understood as an invitation to New Economic Thinking.


References
Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York, NY: Routledge.