RWER issue 56: Egmont Kakarot Handtke
Scrap the lot and start again
Egmont Kakarot-Handtke [Germany]
Abstract: In the wake of the recent financial crisis heterodox economists have taken up a time-honored refrain and proposed to abandon the axiomatic method. The present paper argues that this proposal is self-defeating.
An economic crisis is always a crisis of economic theory – of mainstream economics, to be sure – and the latest financial crisis is no exception. This is the day of reckoning for the heterodox camp and, of course, rightly so for quite different reasons. The heterodox economists, though, have a crisis of their own design. That there must be something better than current mainstream economics, all are agreed (including the neoclassical economists), but this consensus is accompanied by a bookshelves-filling disagreement about diagnosis and remedy. Regrettably the better theory is not available when the next crisis hits. Let us take Keynesianism as a case in point.
The Keynesian Revolution was intended as both, a radical change of economic policy and a groundbreaking paradigm shift (Coddington, 1976). Keynes left no doubt about the scientific scope of the General Theory:
The classical theorists resemble Euclidean geometers in a non-Euclidean world (…). Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. (Keynes, 1973 p. 16)
Keynes’s main concern was not market or policy failure but theory failure. He envisioned nothing less than a ‘complete theory of a monetary economy’ (Keynes, 1973 p. 293). While clearly aware that this at the same time required a consistent set of some kind of non-Euclidean axioms, Keynes had no desire that the particular forms of his ‘comparatively simple fundamental ideas (…) should be crystallized at the present state of the debate’ (cited in (Rotheim, 1981 p. 571)).
There remained a huge gap between Keynes’s verbalized theory and its formal basis. His conceptual groundwork consists in the main of the well-known equations Y=C+I and S=Y–C (Keynes, 1973 p. 63). This formal basis is too small and on no account general. The palpable incongruence left too much room for interpretation and precipitated the lengthy dispute about ‘what Keynes really meant’. Some observers felt that this question was beside the point:
L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir. (Allais, 1993 p. 70), see also (Laidler, 1999 p. 281)
Whatever the reasons, the Keynesian camp failed to rectify the incongruence in a satisfactory manner. What we had, then, before the latest financial crisis occurred, was, roughly expressed, a perfectly formalized neoclassical theory with no real-world content on the one hand and an assortment of plausible down to earth approaches with no sound − not to speak of a common − formal basis on the other.
Referring to the crisis Leijonhufvud summed up: ……………
You may download the whole paper at: http://www.paecon.net/PAEReview/issue56/Kakarot56.pdf