April 12, 2017

What is REALLY wrong with macro

Comment on Lars Syll on ‘Yes — there is something really wrong with macroeconomics’

Blog-Reference and Blog-Reference and Blog-Reference on Apr 13 and Blog-Reference on Apr 20 adapted to context

Ricardo Reis asks in a recent paper “Is something really wrong with macroeconomics?” and gives the answer “everything is wrong with macroeconomics.” But there is no need to worry because “Every hour of my workday is spent identifying where our knowledge falls short and how can I improve it.” And then he goes on to show that most of the heterodox critique of macro is unjustified.

This is indeed the case but from the silliness of heterodox critique does NOT follow by simple reversion that Orthodoxy is — with some obvious corrections, of course — on the right track. Heterodoxy traditionally misses the decisive point as already Hahn noted: “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets.” This is why Orthodoxy is chirpy.

Among the wrong targets is the whole issue of prediction/forecasting and of political bias.#1 The sole criteria to judge a theory/model is material and formal consistency. And the simple fact of the matter is that standard macro is provable false on both counts. Therefore, it is scientifically worthless.

The silliness of traditional heterodox critique has the paradoxical consequence of guaranteeing the survival of Orthodoxy. Ricardo Reis plays this easy game by frankly admitting undeniable blunders, by countering misplaced critique at great length, by cheerfully promising betterment for the future, and by giving the impression that all is under control and on the right track: “Not a single one of these bright young minds that are the future of macroeconomics writes the papers that the critics claim are what all of macroeconomic research is like today.”

The vacuousness of the whole orthodox-heterodox wrestling circus ensues from the fact that macro is axiomatically false. Methodologically speaking, axiomatically false is the death sentence for a paradigm. Traditional Heterodoxy, though, never spotted the lethal defects at the core but exhausted itself with the repetitive debunking of non-lethal defects on the surface. The ultimate failure of traditional Heterodoxy is that it never had a superior alternative to offer: “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

There is only ONE effective critique of a false paradigm and this a new paradigm. The rest is hand waving.

What is REALLY wrong with macro is that it is microfounded. The Walrasian axiom set is given with: “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)

The Walrasian axiom set contains three NONENTITIES (HC2, HC4, HC5) and is forever unacceptable. The false microfoundations have to be fully replaced by true macrofoundations.#2 This is what a paradigm shift is all about. In their scientific incompetence neither Ricardo Reis nor Lars Syll realize what is REALLY wrong with macro and how it can be REALLY fixed.

Egmont Kakarot-Handtke

#1 See ‘ICYMI Prediction/Forecasting
#2 See ‘From false micro to true macro: the new economic paradigm