Finding a progressive methodology

from Asad Zaman

Ever since the Global Financial Crisis, there have been an increasing number of voices calling for change in the economics curriculum/syllabus. However, even people who are sharply critical of mainstream (Rodrik, Stiglitz, Krugman) merely suggest minor and peripheral changes, and do not question the fundamental methodological basis on which neoclassical economics rests. In fact, a radical paradigm shift is required. According to current nominalist methodology, any model which produces a match to observables is a good model. The economists have lowered the bar further by not even requiring a good match, and not even comparing model results to reality. See “Friedman’s Methodology: A Stake through the Heart of Reason.” When the methodology is seriously deficient, people are allowed officially to make crazy assumptions, as long as the model produces a match with reality. For example, Paul Romer says in the Trouble with Macro: (macro) models attribute fluctuations to imaginary forces (like phlogiston), instead of agent behavior.  This methodology is such that a good model can only emerge by a random accident — just as the theory of evolution holds that life emerged by accident. I have explained how this seriously mistaken methodology came to be adopted, as a result of the wrong side winning the battle of methodologies; see “Method or Madness?”

Keynesian models remain substantially superior to modern RBC and DSGE models because they can explain voluntary unemployment, which is ruled out by assumption in the latter models. They can also explain how money, banking, and debt have significant impacts on the real economy, unlike modern macro models. Nonetheless, . . . read more