June 12, 2016

Economics is locked in idiocy: How could this happen?

Comment on Noah Smith on ‘Econ theory as signaling?’

Blog-Reference

Economists can explain everything. Accordingly, Noah Smith’s rhetorical question “DSGE models really don’t work, why do so many macroeconomists spend so much time on them?” has been answered long ago with the one-size-fits-all explanation: utility maximization. “Gary Becker has suggested that a substantial resistance to the acceptance of new ideas by scientists can be explained by two familiar economic concepts. One is the concept of specific human capital: the established scholar possesses a valuable capital asset in his command over a particular body of knowledge. That capital would be reduced if his knowledge were made obsolete by the general acceptance of a new theory. Hence, established scholars should, in their own self-interest, attack new theories, possibly even more than they do in the absence of joint action. The second concept is risk aversion, which leads young scholars to prefer mastery of established theories to seeking radically different theories. Scientific innovators, like adventurers in general, are probably not averse to risk, but for the mass of scholars in a discipline, risk aversion is a strong basis for scientific conservatism.” (Stigler, 1983, p. 538)

Economists are well aware that they are scientifically lost in the wood. The problem, though, is not at all that they resist new ideas but that they have none. “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

To explain the conspicuous stagnation of economics with conservatism is a bit euphemistic. The fact of the matter is that the representative economist lacks the defining characteristic of a scientist: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

What Haack calls pseudo-inquiry and Smith calls signaling has been called cargo cult science by Feynman: “They’re doing everything right. The form is perfect. ... But it doesn’t work.”

The representative economist does exactly what he is supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

What does methodological individualism mean in detail? All variants of orthodox economics are built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

It is pretty obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of standard economics is methodologically forever unacceptable. HC2, HC4, HC5 are blatant nonentities, but the representative economist swallows them hook, line and sinker since more than 140 years. To state in 2016 that “DSGE models really don’t work” is an insufficient concession because textbook supply-demand-equilibrium is built upon the same axiom set and does not work since Jevons/Walras/Menger.

By sticking to the microfoundations HC1 to HC5 economists violate scientific standards on a daily basis. And by proudly telling the world “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” Krugman is only signaling his and others utter scientific incompetence.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

Immediately following 'Wrong question, wrong answer'.