Saturday, November 5, 2016

The Hard Core of Neoclassical Economics

There has been an ongoing debate over whether the very notion of a mainstream, neoclassical economics is still valid.  As many commentators have pointed out, various departures have been embraced by portions of the profession which, by sociological standards, have to be considered mainstream: these include game theory and interactive expectations with multiple equilibria, behavioral departures from homo oeconomicus, importation of biological and psychological measures of well-being, and so on.  So where are we now?

First, note that each item on this list constitutes a relaxation of a default assumption that other economists, not directly engaged in that departure, typically rely on in their own work.  Those who are not themselves behavioral economists generally invoke “U-max” unthinkingly, those who are not personally constructing game-theoretic or similar models invoke convexity assumptions to ensure stable, mono-equilibria, etc.  The violation of the core axioms coexists with the default status of those same axioms.  I think in this paragraph I am simply describing what currently takes place, not theorizing or explaining it.

Second, here’s a hypothesis.  Neoclassical economics has evolved to serve an ideological function which is promoted through incentives, the selection of new adepts, and a conceptual hegemony: the purpose of economics is to solve economic problems with minimum, and ideally no, recourse to politics.  Thus welfare economics in particular plays a central role, since it is the basis for proposing economic solutions that don’t depend on a political deliberation or selection process.  What the theoretical departures that don’t migrate to the core have in common is their incompatibility with welfarism.  The exception proves the rule here.  Consider the case of the new institutional economics largely centered on transaction cost theory.  This has arguably entered the core of the discipline despite having once taken the form of a departure.  Is it coincidental that practitioners in this field have no difficulty modifying welfarism to account for institutional frictions?

Reinforcing these ideological pressures are the network externalities associated with core doctrines: like computer programs they gain in value as more users employ them.  (I’m indebted to a manuscript I’m currently reviewing for this insight.)  That said, the example of NIE convinces me that pure lock-in is not the only consideration in the inertia at the heart of economic doctrine; ideology is also important.

UPDATE: Google is not indexing this post!  I wonder if it's because of the header?  Poor Imre Lakatos must be turning over in his grave.

UPDATE^2: Imre can relax.  Google, after a long hiatus, hoovered me up.


Bruce Wilder said...

Perhaps economics exists to solve political problems with no recourse to knowledge of the institutional details or state of the actual economy.
I usually understand "neoclassical economics" to designate the heritage of the Marginal Revolution of the 19th century and Samuelson's Euclidean system as laid out first in his Foundations and later, his series of college textbooks. The core of that approach is not the content of its assumptions, but the methodological commitment to relying on analysis to the exclusion of synthesis. The whole point is the schizophrenia of, say, a macroeconomics preoccupied by an esoterica without actual money or a growth theory fixated on the magical properties of "technology". The new institutional economics of transaction costs gains special admittance by means of a jargon with no certain referents.

Thornton Hall said...

1. Participants in economic discourse are stringently screened such that you are not allowed to participate unless you have mastered mathematical reasoning of the sort employed in physics.
2. The distribution of mental skills--thanks to genetics and the requirement of extensive practice--is such that no one who is skilled at understanding social phenomena is sufficiently talented at physics/math to be allowed into the discourse.
3. Therefore, if economics is the study of social phenomena, then the barriers to entry guarding the discourse are perfectly designed to ensure that no one has any idea what they are talking about.
Small piece of evidence:
A. our culture directs intelligent women to develop their ability to understand social phenomena.
B.Women are rarely allowed into economic discourse.

AXEC / E.K-H said...

The father of modern economics and his imbecile kids
Comment on Peter Dorman on ‘The Hard Core of Neoclassical Economics’

“If we can single out one person as the father of modern economics, it would have to be Paul Samuelson. His Economics: An Introductory Analysis ... became the best selling textbook in history.”#1

Samuelson laid the foundations of what developed into DSGE, which represents the momentary mainstream. Lucas, the public face of DSGE, fondly remembered that “he was bewitched by the beauty and power of Samuelson’s Foundations of Economic Analysis.” We know by now that DSGE in all its variants is an abysmal failure. The actual state is that there is no such thing as an economics that fits the scientific criteria of material and formal consistency.

The point is that Samuelson messed up economics back in 1947 but his intellectual children did not realize it until this very day, to say nothing about rectification.

Initially, things moved into the right direction: “As an undergraduate in the 1930s, Samuelson saw the economics he studied as a disparate collection of ad hoc explanations. ... What the discipline needed, he believed, was a set of unifying, fundamental principles, like those Euclid had provided for geometry and Newton for physics.” (see #1)

Samuelson realized clearly that the enormously productive and successful physics/mathematics of the first part of the century were driven by the idea of first principles/ultimate reality/axiomatization with Einstein and Hilbert as key figures.

“When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts .... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ” (Hilbert)

No doubt, Samuelson’s basic idea was right. Economics was ripe for axiomatization and unification. But then he went off to make economics what Feynman called a cargo cult science, that is, he copied the outer form from wildly successful physics/mathematics without ever grasping the methodological essentials.

And this is what we have today. There is Orthodoxy with ― behavioral ― microfoundations and it has been nicely defined by Krugman: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”#2

Methodologically, these premises are forever unacceptable.#3 One tends to think that some smart person would, for example, soon have realized that it is inadmissible to take equilibrium into the premises. This is what is known since antiquity as petitio principii. Yet, it did not happen.

Next, there is Keynesianism with ― structural/systemic ― macrofoundations.#4

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit. Methodologically, Keynes’s hard core premises are forever unacceptable.

In Samuelson’s synthesis the defective Walrasian microfoundations and the defective Keynesian macrofoundations were cobbled together. Samuelson’s textbook consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves did not logically fit together.

See part 2

AXEC / E.K-H said...

Part 2

Science is committed to material and formal consistency. Samuelson’s textbook had ― with a probability close to 1 ― the lowermost scientific content of all textbooks ever written. Supply-demand-equilibrium will forever stand out as the silliest model in the history of sciences.

The fact of the matter is: the micro axioms are inconsistent, the macro axioms are inconsistent, and the synthesis of the two sets is by consequence also inconsistent. No hard core wherever one looks.

By implication, economic policy guidance NEVER had sound theoretical foundations. Whatever economists in general or Samuelson in particular have argued for or against the market economy has no scientific content at all. Whatever one hears from the right side or the left side about how the economy works is not more than unfounded political blather.

Contemporary economics in its orthodox and heterodox variants is the epitome of a collective aberration that started with the father of modern economics 69 years ago and is still going on. Scientifically rather untalented, Samuelson’s professional offspring never figured out the methodological hard core of economics.#5 Until this day, economics in its actual realization as Walrasianism, Keynesianism, Marxianism, Austrianism is a heap of proto-scientific rubbish.

Egmont Kakarot-Handtke

#1 See ‘Euclidean economics’, Kelvin Rowley profiles the leading figure in postwar economics, Paul Samuelson

#2 More detailed, the starting point is given with these hard core 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)

#3 For details and proofs see blog and working papers

#4 Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.”

#5 The solution consists in new macrofoundations. For the correct axiomatic hard core see ‘From Orthodoxy to Heterodoxy to Sysdoxy’