Blog-Reference
It is long known that DSGE is a failed approach and nobody needs the insider critique of Romer et al. which amounts to not much more than the smarter rats abandoning the sinking ship. What is needed is a constructive idea about how to switch from the degenerated neoclassical research program to a progressive paradigm.
Merijn Knibbe asks: “Do I have something to add? Yes. Of the authors above, Romer is clearest ... about the fact that a scientific paradigm does not only need theory but also needs a matching system of measurement, ...” (See intro)
Yes, indeed, this was already obvious to the ancient Greeks: “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)
Establishing material consistency requires observation and measurement. The central economic measuring device is national accounting. From this follows that economic theory must, as a necessary condition, (i) contain as a subset those variables that appear in national accounting, and (ii), the definitions of the variables must be identical in theory and in accounting. This is currently not the case (2012) and this goes a long way to explain why economics has never risen above the proto-scientific level.
The first thing to notice is that standard economics is built upon a set of axioms that do not contain measurable variables at all.* This was already clear to Jevons: “Many will object, no doubt, that the notions which we treat in this science are incapable of any measurement. We cannot weigh, nor gauge, nor test the feelings of the mind; there is no unit of labour, or suffering, or enjoyment.” (1911, pp. 7, 10, 12)
Standard economics dealt for more than 150 years with scientific NONENTITIES: “There is no such measurable quantity as ‘value’ or ‘utility’ (with all due respect to Jevons, Walras, and others) and there is no evaluation of ‘the greatest happiness for the greatest number’ or more flatly, ― there is no such thing.” (Evans, cited in Weintraub, 2002, p. 60)
Accordingly, mathiness can be defined as the formalization of NONENTITIES which is an entirely illegitimate/senseless application of mathematics.#2
From all this follows that economics must be based on premises/axioms that contain only variables that are capable of measurement by national accounting or other measuring devices.
Because of this, the Walrasian axioms#1 have to be FULLY replaced. What is required is a Paradigm Shift and this, in turn, requires the switch from behavior-centered bottom-up, i.e. subjective microfoundations#1, to structure-centered top-down, i.e. objective macrofoundations.
The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is defined by these three objective structural axioms:
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
The investment goods sector comes in at a later stage. So, what we have with (A1) to (A3) is the bare-bones production-consumption economy as the most elementary economic configuration. These premises are certain, true, and primary, and therefore satisfy perfectly all methodological requirements. Note (i) that unacceptable NONENTITIES like utility, maximization, or equilibrium are absent, and (ii), that Yw and C relate to national accounting while W, L, O, R, P, X have to be measured by other devices.
Human behavior, tastes, choices, or society have no durable underlying structure, but the monetary economy has one and it is given in the most elementary case by (A1) to (A3). Economics is not a behavioral or social science but a systems science. A system can be unambiguously defined and measured. All else is proto-scientific garbage.
Egmont Kakarot-Handtke
References
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, London: Duke University Press.
#1 Standard economics is defined by these six hardcore propositions/axioms:
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)
#2 See Barzilai On the Mathematical Foundations of Economic Theory.
***
REPLY to Ken Zimmerman“People who say it cannot be done should not interrupt those who are doing it.” G. B. Shaw
You can constructively contribute to the success of Heterodoxy simply by stopping to reiterate notorious methodological nonsense. Science is about logical/empirical proof/refutation. Empirical proof/refutation presupposes measurement. A central measuring device in economics is national accounting and it works with the precision of two decimal places.
In economics, the problem is NOT that measurement is hard or impossible. In fact, it is much easier and cheaper than building a measuring device like CERN. The problem is that economists of ALL colors are quite happy in the swamp between true and false where “nothing is clear and everything is possible” (Keynes). Walrasian, Keynesian, Marxian, and Austrian proto-scientists are pleased with the inconclusiveness of their debates and the pluralism of false theories. What they fear more than hellfire is a clear-cut empirical test and a definitive refutation of their inconsistent models. Both, orthodox and heterodox economists know very well that they cannot survive serious testing: “... suppose they did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics.” (Hands, 2001)
In fact, there is NO economics, only cargo cult economics, and inconclusive blather.
