Blog-Reference and Blog-Reference on Oct 7 adapted to context
It is long known that economists violate well-defined scientific standards: “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, p. 369)
A case in point is rational expectations. Strictly speaking, the concept is already dead since Walras: “Walras approached Poincaré for his approval. ... But Poincaré was devoutly committed to applied mathematics and did not fail to notice that utility is a nonmeasurable magnitude. ... He also wondered about the premises of Walras’s mathematics: It might be reasonable, as a first approximation, to regard men as completely self-interested, but the assumption of perfect foreknowledge ‘perhaps requires a certain reserve’.” (Porter, 1994, p. 154)
This was a polite thumb down but Walras did not get the point and neither did those who came after him. Not only this: “So RE survives. In Lakatos’ jargon, it’s part of the ‘hard core’ of modern macro.” (See intro)
And this proves the utter scientific incompetence of economists. While it is, of course, legitimate to fool around with hypotheses in the analytical superstructure, it is NOT legitimate for the adherents of a research program to change the hard core. Methodology tells us that it is the hard core which DEFINES the paradigm. A change of the hard core amounts to the abolition of the paradigm. This is allowed, of course, but for the proponents of a paradigm it is equivalent to unintended suicide.
Orthodox economics is built upon this hard core set of 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)
Methodologically, these premises are forever unacceptable. It is pretty obvious that the neo-Walrasian axiom set contains THREE nonentities: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every model that contains only one nonentity is A PRIORI false. The discussion of models that contain nonentities is not different from a medieval angels-on-a-pinpoint discussion. And this is essentially what happens in the quality journals and on this blog.
It is pointless to try to repair RE and keep the rest. The WHOLE thing has to go out of the window. The microfoundations approach has already been dead in the cradle 140 years ago. To put new lipstick on long defunct RE will not work. Face the fact: economics is a failed science and economists are incompetent scientists. The issue has been decided!
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, pages 128–170. Cambridge: Cambridge University Press.
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 'Cheerleading the cargo cult'
You say: “Without prediction there is no ‘science’.” This is a popular misunderstanding among economists who have never grasped what science is all about.* Take notice that Feynman, a genuine scientist, clearly stated: “The future is unpredictable”.
Note also that ― since the ancient Greeks invented science more than 2000 years ago ― the purpose of science has never been to enable traders to make money. Traders know this well, and, being rational, they rely less on science and more on time tested rip-them-off.
Note finally that your prediction “enough folk are rational enough often enough to insure that no other paradigm allows traders to make money with the alternate explanations” is absolutely hallucinatory and as unscientific as can be.
* For details see ‘Science does NOT predict the future’ and ‘ICYMI Prediction/Forecasting’