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Filtering nonsense economics

from Lars Syll

Following the greatest economic depression since the 1930s, Robert Solow in 2010 gave a prepared statement on “Building a Science of Economics for the Real World” for a hearing in the U. S. Congress. According to Solow modern macroeconomics has not only failed at solving present economic and financial problems, but is “bound” to fail. Building microfounded macromodels on “assuming the economy populated by a representative agent” — consisting of “one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever” – do not pass the smell test: does this really make sense? Solow surmised that a thoughtful person “faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.”

Conclusion: an economic theory or model that doesn’t pass the real world smell-test is just silly nonsense that doesn’t deserve our attention and therefore belongs in the dustbin.

Rational expectations immediately comes to mind.

Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As yours truly tried to show in his Real-World Economics Review paper Rational expectations — a fallacious foundation for macroeconomics in a non-ergodic world — there is really no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to place macroeconomic models building on representative actors and rational expectations-microfoundations where they belong – in the dustbin.

If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.

 

  1. November 14, 2014 at 4:28 am

    Yes. Yet whatever it is that intrigued a young student led to economics is still there, in the brains of quite a few people, infinity minus one synapse connections. Listen to the astrophysicists, you are the cosmos looking at itself. Economic efficiency on the cosmic scale is concerned with expanding qualitative human potential and leaving profit in the form of an enriched Earth. Economics is fascinating outside the totaltarian box of corporatism.

  2. November 14, 2014 at 9:57 pm

    I totally agree with this view.many economic theories and models should be thrown into the dustbin. Let economics become real and sensible and solve economic problem and not adding to countless existing confusion

  3. November 15, 2014 at 11:31 pm

    A failure of reason
    Comment on Lars Syll’s ‘Filtering nonsense economics’

    More than hundred years ago …
    “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 in the old days. But certainly economics has made tremendous progress. Or has it?

    “An economic theory or model that doesn’t pass the real world smell-test is just silly nonsense that doesn’t deserve our attention and therefore belongs in the dustbin. Rational expectations immediately comes to mind.” (Quote from above)

    It was green cheese assumptionism then, but today it is even worse. Everybody has the greatest peer-reviewed scientific aberration since Geo-centrism before his very eyes. A big chance for Heterodoxy to turn things around one would think. But no. Heterodoxy is quite content with reiterating Poincaré and propagating its own brand of assumptionism.

    The profit theory of Keynes, Kalecki, or Keen, for example, is as far away from reality as any mainstream profit theory (2014; 2011; 2013), “… surely, therefore, they fail to capture the essence of a capitalist market economy.” (Obrinsky, 1981, p. 495)

    Economists owe the world the true economic theory, that is, a theory that satisfies the scientific standards of material and formal consistency and that explains how the economy works.

    Since Poincaré wondered about the premises of Walras’s mathematics a paradigm shift is overdue. But no promising alternative has emerged until now.

    “… the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

    After more than hundred years the talk of nonsense economics becomes itself nonsensical.

    Egmont Kakarot-Handtke

    References
    Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge
    University Press.

    Kakarot-Handtke, E. (2011). What is WrongWith Heterodox Economics? Kalecki’s
    Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
    http://ssrn.com/abstract=1845803.

    Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series,
    2357902: 1–5. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=
    2357902.

    Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
    Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792.

    Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics,
    3(4): 491–502. URL http://www.jstor.org/stable/4537615.

    Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in
    Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic

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