Home > The Economics Profession > Modern macroeconomics and the perils of using ‘Mickey Mouse’ models

Modern macroeconomics and the perils of using ‘Mickey Mouse’ models

from Lars Syll

The techniques we use affect our thinking in deep and not always conscious ways. This was very much the case in macroeconomics in the decades preceding the crisis. The techniques were best suited to a worldview in which economic fluctuations occurred but were regular, and essentially self correcting. The problem is that we came to believe that this was indeed the way the world worked.

To understand how that view emerged, one has to go back to the so-called rational expectations revolution of the 1970s … These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations.

Thinking about macroeconomics was largely shaped by those assumptions. We in the field did think of the economy as roughly linear, constantly subject to different shocks, constantly fluctuating, but naturally returning to its steady state over time …

From the early 1980s on, most advanced economies experienced what has been dubbed the “Great Moderation,” a steady decrease in the variability of output and its major components—such as consumption and investment … Whatever caused the Great Moderation, for a quarter Century the benign, linear view of fluctuations looked fine.

Olivier Blanchard

Blanchard’s piece is a confirmation of  what I argued in my paper Capturing causality in economics and the limits of statistical inference —  since “modern” macroeconom(etr)ics doesn’t content itself with only making “optimal” predictions,” but also aspires to explain things in terms of causes and effects, macroeconomists and econometricians need loads of assumptions — and one of the more  important of these is linearity.

So bear with me when I take the opportunity to elaborate a little more on why I — and Olivier Blanchard — find that assumption of such paramount importance and ought to be much more argued for — on both epistemological and ontological grounds — if at all being used.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we “export” them to our “target systems”, we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems. As the always eminently quotable Keynes wrote (emphasis added) in Treatise on Probability (1921):

The kind of fundamental assumption about the character of material laws, on which scientists appear commonly to act, seems to me to be [that] the system of the material universe must consist of bodies … such that each of them exercises its own separate, independent, and invariable effect, a change of the total state being compounded of a number of separate changes each of which is solely due to a separate portion of the preceding state … Yet there might well be quite different laws for wholes of different degrees of complexity, and laws of connection between complexes which could not be stated in terms of laws connecting individual parts … If different wholes were subject to different laws qua wholes and not simply on account of and in proportion to the differences of their parts, knowledge of a part could not lead, it would seem, even to presumptive or probable knowledge as to its association with other parts … These considerations do not show us a way by which we can justify induction … /427 No one supposes that a good induction can be arrived at merely by counting cases. The business of strengthening the argument chiefly consists in determining whether the alleged association is stable, when accompanying conditions are varied … /468 In my judgment, the practical usefulness of those modes of inference … on which the boasted knowledge of modern science depends, can only exist … if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appears more and more clearly as the ultimate result to which material science is tending.

Econometrics may be an informative tool for research. But if its practitioners do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fulfill its tasks. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics will continue to consider its ultimate argument as a mixture of rather unhelpful metaphors and metaphysics. Maintaining that economics is a science in the “true knowledge” business, yours truly remains a skeptic of the pretences and aspirations of econometrics. So far, I cannot really see that it has yielded very much in terms of relevant, interesting economic knowledge.

The marginal return on its ever higher technical sophistication in no way makes up for the lack of serious under-labouring of its deeper philosophical and methodological foundations that already Keynes complained about. The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that neither Haavelmo, nor the legions of probabilistic econometricians following in his footsteps, give supportive evidence for their considering it “fruitful to believe” in the possibility of treating unique economic data as the observable results of random drawings from an imaginary sampling of an imaginary population. After having analyzed some of its ontological and epistemological foundations, I cannot but conclude that econometrics on the whole has not delivered “truth”. And I doubt if it has ever been the intention of its main protagonists.

Our admiration for technical virtuosity should not blind us to the fact that we have to have a cautious attitude towards probabilistic inferences in economic contexts. Science should help us penetrate to “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts” [Keynes 1971-89 vol XVII:427]. We should look out for causal relations, but econometrics can never be more than a starting point in that endeavour, since econometric (statistical) explanations are not explanations in terms of mechanisms, powers, capacities or causes. Firmly stuck in an empiricist tradition, econometrics is only concerned with the measurable aspects of reality, But there is always the possibility that there are other variables – of vital importance and although perhaps unobservable and non-linear, not necessarily epistemologically inaccessible – that were not considered for the model. Those who were can hence never be guaranteed to be more than potential causes, and not real causes. A rigorous application of econometric methods in economics really presupposes that the phenomena of our real world economies are ruled by stable causal relations between variables. A perusal of the leading econom(etr)ic journals shows that most econometricians still concentrate on fixed parameter models and that parameter-values estimated in specific spatio-temporal contexts are presupposed to be exportable to totally different contexts. To warrant this assumption one, however, has to convincingly establish that the targeted acting causes are stable and invariant so that they maintain their parametric status after the bridging. The endemic lack of predictive success of the econometric project indicates that this hope of finding fixed parameters is a hope for which there really is no other ground than hope itself.

Real world social systems are not governed by stable causal mechanisms or capacities. As Keynes wrote in his critique of econometrics and inferential statistics already in the 1920s (emphasis added):

The atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics. We are faced at every turn with the problems of Organic Unity, of Discreteness, of Discontinuity – the whole is not equal to the sum of the parts, comparisons of quantity fails us, small changes produce large effects, the assumptions of a uniform and homogeneous continuum are not satisfied. Thus the results of Mathematical Psychics turn out to be derivative, not fundamental, indexes, not measurements, first approximations at the best; and fallible indexes, dubious approximations at that, with much doubt added as to what, if anything, they are indexes or approximations of.

The kinds of “laws” and relations that mainstream econ(ometr)ics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and linear (additive). When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of the achievements of econometrics — as most of contemporary endeavours of mainstream economic theoretical modeling — rather useless.

  1. October 15, 2014 at 5:20 pm

    The last paragraph in the above post summarizes the problem of economics, but it can still be amplified. The search for stable fixed-points of linear-time invariant (LTI) constructs started in the pure exchange model of Walras, where it holds. In that model, budget shares and endowments are not constant; hence the attracting set wobbles. The wobbliness is assumed to be random by Bachelier; that erroneous assumption is transferred in extenso to Chicago, and then to Wall Street, with copy to the rest of the Western world. This may be called the ‘tragedy of linearity”.
    I believe that the day a majority of economists will finally recognized that economics is a complex-reflexive-non-linear-input/output construct with non constant coefficients, they will escape the curses of linearity, randomness, stable fixed-point equilibrium, etc. Economics could then become a field of engineering, capable of serving society.

  2. Ben
    October 15, 2014 at 7:40 pm

    I’m not making heads or tails of this sentence:

    So bear with me when I take the opportunity to elaborate a little more on why I — and Olivier Blanchard — find that assumption of such paramount importance and ought to be much more argued for — on both epistemological and ontological grounds — if at all being used.

    • davetaylor1
      October 15, 2014 at 9:57 pm

      Yes, Ben, very convoluted. Try this. Simplify the previous para to Blanchard agreeing that since X and Y, me’s and em’s need lots of assumptions, and one of the most important of these is linearity. “So bear with me when I take the oportunity to elaborate a little more on why I – and Oliver Blanchard – find that assumption of such paramount importance THAT IT ought to be much more argued for … if being used at all”.

  3. October 15, 2014 at 10:09 pm

    Yes, orthodox economics is bad science, but can Heterodoxy raise hope?
    Comment on ‘Modern macroeconomics and the perils of using ‘Mickey Mouse’ models’

    In 1898 the great heterodox economist Thorstein Veblen asked: “Why is Economics Not an Evolutionary Science?”

    What Veblen pointed out was that the petty mechanical models of his neoclassical fellow economists were mistaken, useless, and misleading.

    He famously ridiculed homo oeconomicus: “The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact.”

    Well said, indeed, and true until this day. Yet, then one has to ask back: Why did Veblen spend much time on questioning and ridiculing Orthodoxy instead of developing an evolutionary economics? If he knew what was wrong, why did he not demonstrate how to do it properly? Why is the very personification of Mickey Mouse economics — homo oeconomicus — still busy with maximizing utility in our days?

    Yes, Orthodoxy is a failure. Yes, the heterodox critique is fully justified. Yes, the emperor has no clothes. Yes, the textbooks are wrong. Yes, linear models are unsatisfactory. Yes, equilibrium is a nonentity and rational expectations are a physical impossibility.

    We know all this since Veblen or even longer. Time enough, one would think, to develop something better.

    Let all dreams come true and imagine for a moment that each orthodox economics professor is replaced by a heterodox professor. What could he teach? That there is something good and right with the Classics, with Marx, with Walras, with Keynes, with the Austrians, with Sraffa, Kalecki and Minsky, but that we do not know exactly what it is? Is the pluralism of partial or even falsified theories something that can be justified and taught as science?

    The fact of the matter is: there is not heterodox alternative. To replace a paradigm means to replace obsolete axioms with new axioms. This effects a change of the whole theoretical superstructure and that is what a paradigm shift is all about. At the moment there exists no heterodox common ground in the form of a set of axioms and therefore nothing to consistently build upon.

    Orthodoxy is unacceptable but its proponents have taken the pain to formulate its premises and conclusions in such a way that errors/mistakes can be identified with accepted scientific procedures. This is the minimum condition and this made it possible that General Equilibrium Theory could be refuted by its own proponents.

    “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)

    Yes, nobody needs the Mickey Mouse models of Orthodoxy. But this is no sufficient reason to jump to heterodox Donald Duck models.

    The common error lies in the assumption that there must be something like behavioral laws or at least regularities. There is no such thing. No way leads from behavioral assumptions to an understanding of how the actual economy works. The problem is not with the econometricans, the problem is with economic theory. From the assumption of utility maximization follows no testable relationship. It is the same with other green cheese assumptions like rational expectations, perfect competition, supply and demand functions, twice differentiable production functions and all the rest (2013). Nonentities are not testable and that is not a weakness of statistical methods with a well-defined field of application. Standard economics simply falls outside this field.

    As long as Heterodoxy, or anybody else for that matter, cannot replace the obsolete set of foundational assumptions with a consistent alternative economics is caught in a cul-de-sac.

    “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

    Or, as Mirowski put it: “The task of producing knowledge against the grain requires imagination.” (2013, p. 4)

    Seems to be a scarce resource in economics.

    Egmont Kakarot-Handtke

    Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue:
    The Crisis in Economic Theory, pages 123–138.

    Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
    Cambridge University Press.

    Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
    an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
    2207598: 1–16. URL http://ssrn.com/abstract=2207598.

    Mirowski, P. (2013). Never Let a Serious Crisis Go to Waste. London, New York,
    NY: Verso.

    • October 16, 2014 at 12:17 pm

      Spot on. I cannot believe they allow you say this here.

      • John McDonald
        October 19, 2014 at 7:40 pm

        Quote, ” I cannot believe they allow you say this here.”
        You likely know more about “them” than I do, but I am not surprised at all. Do you think “they – we” have already formed a set of boundaries or filters to protect heterodoxy?

  4. Ack Nice
    October 16, 2014 at 11:36 am

    1. Money is the joker good, good for exchanging for almost all goods and services.


    2. Theft of money is theft of just about everything.

    3. Every theft comes with an angry person attached; theft makes people angry. Theft of nearly everything makes people very angry. They try to get their stolen everything back.

    4. This results in endlessly escalating conflict between robbers and robbed, with endlessly escalating weaponry, which produces endlessly escalating misery for all.


    5. Pay justice, the justness of the amount people get paid, is absolutely crucial to happiness. Pay justice is far and away the most important justice.

    6. Pay injustice is inherent in, is built into, transaction itself. The two things exchanged cannot contain exactly equal work. The workvalue in workproducts is not precisely measurable. In every transaction, one party profits a little or a lot and the other loses by that same amount.


    7. There is a drop of pay injustice in every transaction.

    8. Over many transactions, this drop of inequality will make an ocean of inequality. A bell curve of personal net gain or loss will arise and widen endlessly, with a few making large net gains or losses from the sum of their personal transactions, many making smaller net gains or losses.

    9. Those who make net gains will, over time, more and more control the means of production, including land. Gains become levers to operate making more gains. This will accelerate pay injustice exponentially.

    10. The pay injustice in one transaction is too small to be detectable, but the accumulation of transactions will in time make the injustice detectable, and will lead to violence.

    11. Without people aiming to pay justice and getting close enough to it, the violence will increase endlessly, as both sides try to prevail.

    12. This violence is egalitarian. It envelops all, and therefore condemns everyone to misery. The higher the overpay, the more it is attacked. More money gives more power to protect oneself, but it also increases the forces against it. Every plutocracy has fallen.

    13. Pay justice is good for everyone, for both overpaid and underpaid. Justice is a virtue, it does cause happiness, and injustice does cause misery to all.

    14. History has been a succession of rises of inequality to extremes, and falls of same, and re-rises of inequality.

    15. Companies, businesses, are centers of transaction. Inequalities are gathered in them, concentrated by them. Many people buy there, but owners are few. All excess over fairpay for their work is currently gathered by owners. Corporations are just bigger companies, with more power to lever things their way.

    16. Customers have few means to calculate the total costs [the work-input] in work-products. Companies have many means to monitor costs.


    17. In general, companies have the advantage, leading to exacerbation of pay injustice, leading to acceleration of pay injustice, leading to acceleration of violence [war, crime and weaponry], leading to acceleration of misery for all.

    18. History is unanimous in portraying: growth of inequality, leading to violence, leading to fall of states, empires, plutocracies, causing temporarily a degree of reduction of inequality, which then re-grew.

    19. Division of labour created the necessity for trade, to remix the workproducts separated by division of labour.

    20. Before division of labour, everyone mostly consumed their own workproducts, so equality was inevitable.

    21. About the same time division of labour began, wealth began to be more and more nonperishable and therefore storable. So that when trade began the drip-drip-drip of inequality, wealth was storable. If wealth had remained mostly perishable, inequality could not have accumulated endlessly.

    22. When people perceive inequality, they have two choices. They can strive to decrease and remove inequality, or they can try to climb the hill of inequality.

    23. If people fail to see the huge downside of overpay [ceaseless attack from both overpaid and underpaid, causing endless labour to hold on to the overpay and inevitable loss of overpay], and if they do see the apparent advantages of overpay, they will choose the latter course.

    24. The greater the underpay is, the more attractive overpay will look. The greater the underpay, the more desires are frustrated, and so overpay will look that much more attractive. The underpaid have substantial desires unsatisfied, and overpay will satisfy these. The underpaid have no experience of the limits of desire.


    25. People have historically chosen to climb the hill of inequality, rather than aim for equality, causing themselves endless increase of inequality violence misery.

    26. Overpay suffers from the limits of desires, and from the endless security cost [in time, money and labour] in holding on to the overpay, so overpay is necessarily of negative benefit – increasingly negative in proportion to overpay. Fairpay satisfies all desires. This was true before machines and computers, and it is far more true now. The happiness effect of more money declines to zero below US$100,000/year per family, because of the limits of desires, and the world-average pay per family is US$200,000/year. [US$40/hr [2007] for all workers including housewives and students.]

    27. Overpay causes underpay, so uncontrolled growth of pay injustice exhausts the buyer base, leading to collapse. The cycle of money between buyers and sellers is broken.

    28. The purpose of money is to facilitate trade. Money is an artificial barter item, with the advantages of portability, divisibility, nonperishability over time and distance. Money in a transaction is ideally equal to the workvalue of items traded. People shouldn’t come out of a trade either better off or worse off simply due to the act of trading, they should come out of a trade equally as well off as they were before trade, when each consumed as much as he produced. The impossibility of measuring workvalue precisely lets the ‘imp of transaction’, the drop of inequality, into trade.

    29. The ever-growing defense costs of overpay force the ever-increasing extortion from the underpaid, accelerating violence.


    30. The overpaid promote and support inequalities in the system.

    31. The underpaid also support inequalities in the system, because they hope to repair their underpay by them. Also, they feel justified in their own injustice by the injustice [overpay] in the system.


    32. Everyone becomes increasingly entrenched in defense of injustice, and everyone becomes increasingly averse to justice, although justice would release the overpaid from escalating danger and defense costs, from oppression from both the overpaid and the underpaid, and certain fall [the greatest fortune is finite, and the attacks are relentless till the fortune is gone], and would release the underpaid [now 99% of people] from the miseries of underpay, and from the oppression from overpay. With the present super-extreme inequality, everyone is super-extremely averse to justice. Super-overpay is a beacon of hope to the underpaid, the pinion of their hopes and dreams. Justice, the demolition of overpay, seems to them the demolition of their only hope. People are psychologically blocked from examining justice and injustice objectively. They cling desperately, mindlessly, to injustice.

    33. The pressure, on both overpaid and underpaid, to participate in injustice ensures that everyone has guilt, which they cannot face. This strengthens the psychological block.

    34. It prevents people from criticizing overpay. People cannot look at overpay, at present up to 100,000 times average, and say: this has to be wrong. The common-sense reflection that, if you gave people the same tools, materials, information, etc, and 100 varied tasks, the production of individuals would not be very different and would fall within a far smaller range than present pay from 100,000 times average pay per unit of time to 10,000th of average – is blocked. People cannot take to heart the justice implications.

    35. The sense of pay justice, of equal pay for equal sacrifice made to working, is indestructible. Overpay will always be under attack, under erosion. Pay injustice, robbery of virtually everything, the joker injury, the total injury, will always produce reaction. The underpaid have less power, but they never settle for being robbed. Injury energises. As doormats, people are totally unreliable. The underpaid can only throw sand, but sand erodes rocks. None enjoy unless all enjoy. The underpaid have lost many battles, they have never lost the war. All conquerors have merely begun a war with finite plunder against a tireless host. The person who has, by whatever cause, the workproducts of 1000, merely has 1000 times what he can use, and has gained 1000 enemies and lost 1000 friends. The golden rule is harder than steel, utterly unbreakable: hurt people and they hurt back, equally or excessively.


    36. Pay injustice is impractical.

    37. Weaponry is now at 60 times PDC [planet death capability] and rising.

    38. Inequality [ratio of highest to lowest pay for equal work] is now at one billion, and rising.

    39. Finance, communications, transport, weaponry are global. Global means every house. Money and goods flow easily through national borders. Though there are few countries with more than trillion dollar GNPs, trillions are traded daily. Therefore a national perspective is unreal.

    40. Happiness is everyone’s everything. Happiness depends totally on reality. There is no real happiness in unreality. Unreal happiness is a nonentity. Reality is in the big picture, in the perspective that takes in every part of the field that affects the individual. Having part of the picture is nothing like having the whole picture.

    41. Pursuit of happiness depends totally on pursuit of the big picture. Being content to operate seeing part of the picture is complete blindness, complete abdication of pursuit of happiness.

    42. The “third” world is rising to 90plus% of population and of world wealth by 2100.

    43. Humanity will learn the sense of pay justice, or the third world will move to overwhelm and destroy or enslave the first world, probably in the next 30 years, give or take 30 years, and the first world will be forced to use the global bombs in self-defense, and kill everything.


    44. We cannot afford the luxury of unrealism, of clinging to familiar mindsets. We must immediately begin to be heroically mature in thought, or perish. We must face and accept a steep learning curve, and dig out long held and deeply accepted ideas that don’t stand up to examination by cold hard rational sense.

    45. Technological progress would be, via pay justice, many times present rates, because at the moment 90% of educated brains are tied up in the consequences of the super-extreme inequality, in governments, espionage, military-industrial complex, legal systems, universities and hospitals, and 90% of brains are too poor to become educated. [90% of people getting between 100th and 10,000th of average pay/hr.]

    46. If a government took 90% of income off 90% of people and gave it all to 1%, there would be the loss of 81% of happiness just in the loss of the money, and on top of that, there would be the misery of the extreme violence, the severe loss of productivity from the violence and the destruction, and the extreme loss of safety for the 1%. The 1% would not gain any happiness from the overpay because of the limits of desires.


    47. Loss of happiness in this situation could reasonably be said to be around 99%.


    48. Reversal of this policy could reasonably be expected to increase happiness by a factor of 100.

    49. The inequality factor [ratio of highest to lowest pay/hr] in this example is only 820.

    50. The inequality factor in the real world is one billion, over a million times greater than 820.


    51. Happiness can very reasonably be expected to increase very conservatively by a factor of 100 with pay justice.

    52. Decrease of happiness over 3000 years would be imperceptibly slow [1% per 30 years], and lacking an objective measure of levels of happiness over that period, we have no way of knowing the levels of happiness of former times. We assume that things have always been as they are for us. But given that violence misery is caused by inequality, and that inequality has grown over that period from equality, it is reasonable to believe that former ages experienced levels of safety, peace, and fraternity that we cannot imagine, that wars affected few beyond those who chose to participate. [It is believed by archeologists of Crete [at the point in time when division of labour, trade and nonperishable wealth were in their infancy] that Crete had 3000 years of peace, and we know that everyone on Crete had multi-room houses with plumbing, whereas now 40% of people live in terrible slums, and nuclear extinction hangs over us all. War has grown to world wars and ICBMs. It is only in the 20th Century that civilians were embroiled in war in great numbers.]

    53. Violence [war, crime and weaponry] has grown for 3000 years, while human nature has not changed.


    54. There is no correlation between war and human nature. Non-correlation proves non-causality. [Correlation does not prove causality.]


    55. War violence misery is not inevitable, and resignation to it is not appropriate.

    56. Violence correlates with inequality, and there are sound reasons to believe inequality is the cause of violence. [Money is the joker good, good for virtually everything, including social power.]

    57. Inequality is very bad for both overpaid and underpaid.


    58. There is good hope that clarification of this reality can effect change in human culture. Culture is rooted in, and driven by, ideas. Change of ideas changes culture.

    59. If everyone who masters this clarification teaches it to just two people, every adult will master it in just 31 times the time it takes to teach two.

    60. If everyone, or the vast majority, masters this clarification, there is no effective opposition, and equality can be restored. 99% are underpaid, and so will be better paid, and equality will prevent nuclear extinction, and vast unhappiness to both overpaid and underpaid, so the majority for equality will be 99+%, and so any opposition will have no muscle to oppose it.


    61. The change can be made by education, and without conflict.

    62. The above assumes that the fundamental will of humanity is still towards happiness and not to self-harming. The vast, evil mess we have got into may have so perverted our fundamental natural will that we do wish self-harming. The author hopes this is not so.

    63. The above also assumes that we can face, and forgive ourselves for, and put behind us, the unkindnesses that the pressures of inequality have led us to do.

    Pursue your happiness with all mindfire.
    Pass this on to people you love if you love life.

  5. Macrocompassion
    October 16, 2014 at 2:40 pm

    There is a method of modelling the macro-economy that works. I have developed it, but my book on this subject is not yet out. The trouble with past models is in the assumptions and definitions that have been taken/used. These assumptions were usually implied not stated and no proper definitions were used, it being thought that we all know about what we are discussing. Such an approach is unscientific and intuitive rather than logical, with the resulting analysis being either oversimplified (i.e. Micky Moused) or econometricized (i.e. past behavior based).

    Neither of these approaches aims at the mechanism by which our social system is organized, the mechanics of its possible response to change. The argument that I adopt for obtaining this model starts with a question that disregards the motley kinds of individual actors in the system. Instead it concentrates of the limited kinds of actions these fellows are able to perform. (If you like analogies it is like a reverse-flow meat grinder. The diverse mixture of the whole community goes in at the bottom and at the top out comes certain idealized and homogenous performing chunks of entities, each having its individual and specialized functions.) Only 19 exist.

    The method shows that there is a limited number of ways that its entities are connected. My model does and is unique because after a 240 year old interval it actually contains all 3 of Adam Smith’s factors of production and their resulting outputs. No other simplified model does this. At last macroeconomics theory becomes a proper science!

    You can visit this model as a flow/block diagram on Wikimedia, commons, macroeconomics, DiagFuncMacroSyst.pdf There are only 6 entities and 19 kinds of dual flows of money, goods, services and valuable documents.

  6. Macrocompassion
    October 16, 2014 at 2:42 pm

    Forgot to state that the 6 entities involved provide the 19 macro-economic activities.

  7. davetaylor1
    October 16, 2014 at 3:53 pm

    Egmont, if you think “To replace a paradigm means to replace obsolete axioms with new axioms” you’ve got a Mickey Mouse concept of paradigm change, and as Geoff Hodgson put it, “forgotten history”.

    In the context of Bacon c.1604 criticising the outcomes and methods of scholastic science much as we are now criticising academic economics, Galileo discovering telescopes 1609 and Descartes c.1637 inventing coordinate geometry, one person – Newton, a student of optics – had an insight c.1666, worked out how to test and calibrate it trigonometrically by a method of successive approximations (his fluxions or calculus of tangents), and in 1887 (twentyone years later) explained planetary orbits by reducing them to his three laws of motion. What have become axioms for applied physics were outcomes for telescopic cosmology. The Newtonian paradigm involves all four stages: new technology permitting new perceptions, a new insight, a new method of dealing with it, a new explanation. The occasion for the explanation was that someone was interested enough to ask for it, and for its publication, admirers in high places.

    You say: “As long as Heterodoxy, or anybody else for that matter, cannot replace the obsolete set of foundational assumptions with a consistent alternative economics is caught in a cul-de-sac”.

    Well, Heterodoxy is not anybody, it is lots of people less talented than Newton yet perhaps able to contribute to one phase of the development of a complete paradigm in the context of Shannon discovering computer logics and redefining information as Descartes had geometry. For purpose of discussion, take somebody – me, a student of Shannon’s information science – as having had an insight c.1983, worked out how and where to apply it, but (having developed my writing style in a military context where leaders required briefs to be limited to one side of A4), find myself thirty years later, having used Mirowski’s imagination incessantly to explore examples which potential readers might be expected to understand, still in your Hausman trap: “most economists neither seek alternative theories nor believe that they can be found.”

    You, Egmont, are a bright guy with a delightful writing style, but aren’t you a Hausmanite, depriving yourself of insight by using axiomatically the Newtonian mathematics of light radiating in free space and neither seeking nor being willing to believe that the mathematics of the directed channels of 20th century information systems might actually be different, simpler, more intelligible and more obviously appropriate?

    If the required paradigm change is to get under way, isn’t the onus on the likes of you to draw out the insights of the likes of me and to use your superior verbal presentation skills to translate their vision into words the verbal majority can enjoy learning from?

  8. October 16, 2014 at 5:33 pm

    “Let all dreams come true and imagine for a moment that each orthodox economics professor is replaced by a heterodox professor. What could he teach? That there is something good and right with the Classics, with Marx, with Walras, with Keynes, with the Austrians, with Sraffa, Kalecki and Minsky, but that we do not know exactly what it is? Is the pluralism of partial or even falsified theories something that can be justified and taught as science?”

    “What would I teach?” A question that I have often pondered. I would begin by advising students to be less ambitious. Next, I would use an Affine Robust Measurement Feedback Non-linear H-infinity Control to show them that the sets of parameter variations and uncertainty can not be properly characterized. I would not waste time with utility maximization and concave production functions. Instead, I would use proven methods of complexity detection to identify either laws (if any) or correlates thrown-off by the system. In the end, my students should be able to do as well as meteorologists.
    It might also be informative to say that these methods were recently applied to the US economy from 1972-2011. The results show that from 1972-80 and 2003-11, the US economy was living in a state of high-dimensional chaos (Hyperion International Journal of Econophysics, vol. 7 (1), 2014, pp. 45-55).

    • October 18, 2014 at 5:40 pm

      Yes, listen to the Econophysicists
      Comment on C-R D

      When Econophysicists take a look a theoretical economics from their distinct point of view the conclusions are always interesting. Take this one about the future of conventional economics.

      “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: were it engineering, the bridge would collapse.” (McCauley, 2006, p. 17)

      Or this one about the art of model-building.

      “There is little or nothing in existing micro- or macroeconomics texts that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way.” (McCauley, 2006, p. 16)

      I think Heterodoxy can agree with all this. My main point with the Econophysicists is this: conventional economics is largely the product of old-school Econophysicists (see also 2013). There is a lot of irony here.

      Beginning with the Classicals economists have shaped economics in the image of physics. Mirowski has brilliantly retold the story (1995).

      While it is legitimate to copy from physics one has to make sure that one gets the crucial point. In most cases the copying remained on the surface.

      “Now there is simply no doubt that whatever was the source of inspiration for Jevons, Menger and Walras, all three invoked whatever physics they knew to lend prestige to their theoretical innovations. Unfortunately, with the exception of Jevons, that was the physics of Newton, not the physics of Helmholz, Joule and Maxwell; Adam Smith, Ricardo, James Mill and McCulloch had been just as eager in earlier days to invoke the name of Newton to legitimise their theoretical claims.” (Blaug, 1989, p. 1226)

      On the whole the copying amounts regularly to take the powerful tools that have been invented elsewhere (Darwinism is also popular) and to apply it to economics. It is a bit like Schwarzenegger grabbing the cruise missile and then going to wipe out the rather unpleasant guy next door.

      In my mind, the best lesson physics has to offer is that you have to think for yourself and to create your own tools.

      “The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. … The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein, quoted in Schmiechen, 2009, p. 368)

      The take-home message is: theory first!

      So I have some qualms about whether the Affine Robust Measurement Feedback Non-linear H-infinity Control is the appropriate tool in economics. In any case it sounds good. But is this real progress compared to the old-school Econophysicists who messed the whole thing up in the first place?

      Egmont Kakarot-Handtke

      Blaug, M. (1989). Review. Economic Journal, 99(398): 1225–1226. URL

      Kakarot-Handtke, E. (2013). Toolism! A Critique of Econophysics. SSRN Working
      Paper Series, 2257841: 1–13.
      URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257841.

      McCauley, J. L. (2006). Response to “Worrying Trends in Econophysics”. EconoPhysics Forum, 0601001: 1–26. URL http://www.unifr.ch/econophysics/paper/show/id/doc_0601001.

      Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.

      Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL

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