June 18, 2016

What’s wrong with Econ 101? Economists, of course!

Comment on David Glasner on ‘What’s wrong with Econ 101?’

Blog-Reference and Blog-Reference on Jun 29, adapted to context

Imagine for a moment, you ask a pre-Copernican astronomer directly: Is Geo-centrism true or false? And imagine further he paraphrases David Glasner as follows: ‘Geo-centrism is the distillation of almost 1500 years of rigorous thought about how to analyze the behavior of celestial bodies. What we have come up with so far is very imperfect ― more than 20 epicycles are admittedly a bit awkward ― but it is still the most effective tool we have for systematically thinking about the behavior of celestial bodies.’ (See intro)

This sounds good and reasonable and balanced, except for the fact that the answer is evasive. Worse, it is delusional. With hindsight we know that Geo-centrism had been axiomatically false and that the inconsistencies had not been localized over more than 1500 years but only papered over with epicycle upon epicycle. Eventually, though, Geo-centrism has been withdrawn from the corpus of scientific knowledge and fully replaced by Helio-centrism.

The situation in economics is exactly the same, that is, pre-Copernican. Econ 101 is still at the proto-scientific level: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work ...” (McCauley, 2006, p. 17)

Clearly, David Glasner, Noah Smith, Mark Thoma et al. do not want to go to such extremes. Therefore, they resort to rhetorical autotomy.*

What is the lethal methodological error/mistake of Econ 101? The short answer is that it is behavior-centric, that is, it is based upon folk psychology and folk sociology. This approach does not have some minor weaknesses but is a complete failure. Therefore, the inescapable paradigm shift consists in moving from the behavior-centric approach to the structure-centric approach. This is comparable to the Copernican turn from Geo-centrism to Helio-centrism. Nothing less will do.

The defenders of Econ 101 try to avoid the conclusion of absolute failure by freely admitting the most obvious weaknesses and by issuing a barrage of disclaimers which in sum amount to: If you take this stuff seriously it’s your own fault. Don’t blame us if it does not work.

Many economists are well aware that they are scientifically lost in the wood. The problem is that they have no idea how to get out: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

So, the representative economist continues to do what he is since Jevons/Walras/Menger supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994, p. 1). What does methodological individualism mean in detail? All variants of orthodox economics are built upon this hard core 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. Note in particular that to take equilibrium into the premises is an elementary methodological mistake which is known since antiquity as petitio principii.** Therefore, all equilibrium models are a priori false and by consequence worthless.***

To admit minor weaknesses is insufficient. The fact of the matter is that already elementary supply-demand-equilibrium is scientific garbage because it is built upon the unacceptable axiom set HC1 to HC5.

David Glasner comes close to the crucial point: “The deeper problem that I think underlies much of the criticism of Econ 101 is the fragility of its essential propositions. These propositions, what Paul Samuelson misguidedly called ‘meaningful theorems’ are deducible from the basic postulates of utility maximization and wealth maximization by applying the method of comparative statics.”

The point is: the essential propositions, a.k.a. axioms, are not fragile they are FALSE and forever unacceptable. The solution consists in moving from subjective-behavioral axioms (= microfoundations) to objective-structural axioms (= macrofoundations).

By 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) and by rationalizing the failure of this research programme economists confirm their hopeless scientific incompetence. The maximization-and-equilibrium approach has already been dead in the cradle. Standard economics is scientifically behind the curve since Adam Smith. That’s what is wrong with Econ 101.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* Autotomy: “Self amputation is the behaviour whereby an animal (e.g. gecko, lizard) sheds or discards one or more of its own appendages, usually as a self-defense mechanism to elude a predator’s grasp or to distract the predator and thereby allow escape. The lost body part may be regenerated later.” (Wikipedia)
** For details see ‘Petitio principii — economists’ biggest methodological mistake
*** See ‘Could we, please, all focus on the key question of economics?

***
REPLY to David Glasner on Jun 26

You say: “Physics also makes assumptions that are literally false, e.g., there is no friction. And for some problems that does not invalidate the analysis; in other cases it does.”

Nothing is more ridiculous than to compare economics with physics. Just open the Principia and see that Newton made his counterintuitive “assumptions” (= axioms*) as rigorous as possible and then compare this with Adam Smith: “But he had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter, 1994, p. 185)

Economics did not recover from this abortive start and is still at the proto-scientific level of storytelling. The ultimate reason is that economists cannot tell the difference between an abstraction/limiting case and a nonentity. Your evasive argument delivers the proof. A friction-free motion is NOT literally false but is the normality in outer space; only under the special conditions of gravity and atmosphere is uniform motion an abstraction/limiting case* (see also Cohen, 1994, p. 77 for Newton’s methodology).

So, the concept of friction-free motion does indeed have a counterpart in reality while the concept of constrained optimization or equilibrium has not. This is the defining difference between genuine science and the cargo cult science economics.

Green cheese behavioral assumptions like utility maximization or rational expectations are NONENTITIES like angels, unicorns or the Easter Bunny. Nonentities have no counterpart in reality and are methodologically forever inadmissible. The brain-dead assumptions of standard economics are definitively NOT on the same footing with the abstractions/limiting cases of physics.

Newton is famous for his ‘hypotheses non fingo’ which roughly translates to ‘I do not argue from feigned premises’, i.e., those that have no counterpart in reality. And he had been well aware that from nonentities (here = hypotheses) nothing but storytelling follows: “Those who take the foundations of their speculations from hypotheses, even if they then proceed most rigorously according to mechanical laws, are merely putting together a romance, elegant perhaps and charming, but nevertheless a romance.” (Roger Cotes, Preface, 1999, p. 386)

Because it is based on nonentities Econ 101 is nothing more than a charming romance for scientifically retarded economics students.

The precondition for economics to rise above the proto-scientific level is to replace subjective-behavioral microfoundations by objective-structural macrofoundations (2014). Econ 101 has never produced a “meaningful theorem” and is simply indefensible.


References
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Newton, I. (1999). The Principia; Mathematical Principles of Natural Philosophy. Berkley, CA, Los Angeles, CA, London: University of California Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

* See Wikipedia