Home > Uncategorized > Methodology of Modern Economics

Methodology of Modern Economics

from Asad Zaman

My paper is a survey of the huge amount of solid empirical evidence against the utility maximization hypothesis that is at the core of all microeconomics currently being taught today in Economics textbooks at universities all over the world. It is obviously important, because if what it says is true, the entire field of microeconomics needs to be re-constructed from scratch. Nonetheless, it was summarily rejected by a large number of top journals, before being eventually published by Jack Reardon as: ” The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,”  in International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414.   Speaking metaphorically, my paper documents the solid evidence that the earth is a round sphere in world where educational institutions teach the widely held belief that the earth is flat. Readers of RWER blog will recall that when challenged on the failure of macroeconomics after the Global Financial Crisis, economists retreated to the position that while macro theory may be in a bad shape, at least Microeconomics is solidly grounded. My paper blows this claim out of the water. As a result, nothing is left of Micro and Micro, and of economics as whole. This supports my earlier claim that a Radical Paradigm Shift is required to make progress — patching up existing theories cannot work.

None of the several leading journals that I sent the paper to made any comments about any mistakes in my arguments. There were two main reasons which were stated for rejections.  read more

  1. August 6, 2018 at 7:54 pm

    Of course utility max-n as main criterion of decision making is a BS. The main criterion is catastrophe avoidance. Utility comes when risks are reasonably managed.

    • August 7, 2018 at 4:01 am

      I agree that catastrophe avoidance SHOULD BE the main principle of decision theory. However, this is NOT taught in textbooks and not practiced in the marketplace. This is because people are blind to uncertainty and have replaced it by risk. Nicholas Nessim Taleb of Black Swan fame has written a lot about these issues.

  2. Ctesias62
    August 6, 2018 at 9:57 pm

    At the risk of sounding pedantic the earth is actually an oblate spheroid.

    • August 7, 2018 at 4:01 am

      That is why the sentence starts with “Speaking metaphorically”

  3. Helen Sakho
    August 7, 2018 at 2:02 am

    The greatest catastrophic wars through all human history have accrued over simple definitions relating to value, Judgment, and survival of all species under the same sun.
    I sincerely believe this is still the same? Do, please, correct me if I am wrong.

    • August 7, 2018 at 4:16 am

      I dont know about all of human history. The Trojan War was apparently fought over Helen — who knows. However, I do believe that in modern history — colonization, world wars etc. — wars have been fought for profits and justified by a cover story which involves ideals. This is most clearly expressed by Smedley Butlers in War is a Racket, and a recent Foreign Policy article re-iterates that War is Still A Racket (See my post on The Business of War). You make up hoky slogans and ideals, or conjure up frightful enemies to induce young people to die, while the military-industrial complex make billions of dollars. See my post on: Disinformation: Manufacturing Monsters. Wars are caused by the search for profits and power, but a deeper analysis provides a much greater role to the nature of money and finance — wealth. See the documentary All Wars are Bankers Wars , or read the article

  4. August 8, 2018 at 4:17 pm

    We should not think Arrow’s response as a mere compliment: the remaining question is, what should take the place of that theory? Why do we not argue about constructing a new theory? I believe Asad Zaman is sincere enough but I wonder why he continue criticizing mainstream economics instead of presenting a new good theory. I have the similar sentiment vis-a-vis Lars Syll, who constantly blames mainstream economics and emphasize that reality is full of uncertainty but never tries to produce any positive hints to solutions. If the world is uncertain, it is necessary to try to construct a theory which explains human behavior and economic processes in such a world. The case of consumer demand theory would be difficult because it depends too much on whims of consumers but we may find some empirical formula. But, as there are a variety of fields that economics should explain, we may produce a theory which may not crucially affected by uncertainty. Human being is a species who survived in an uncertain world. Economy is a part of such human activities. We should explain why and how human economy could have developed from a primitive gathering and hunting economy to the present complex economy.

    Zaman’s discontents are directed on two pillars of neoclassical economics:

    (1) All decision makers must maximize,
    (2) We must look for equilibria that result from this process of maximization by all.

    I totally agree with him. But, this kind of objections is not new at all. In the first half of 1970’s, we have read full of such articles, many of them being president addresses of powerful economics associations. DSGE theory came after those arguments, although most of proponents have ignored such contentions and economists who came after may not have learned such objections or have forgotten them.

    If human agents are not maximizing, how can we formulate their behavior? How does the total process of their interactions behave? What can be an alternative of equilibrium framework? There are already many works and results in this direction. Those who do not want to study these results are idle economists. They seek many reasons to complain but never try to do constructive works.

    Let me add a comment on Zaman’s point:

    if we equip all agents with heuristic behavior and try to compute what will happen, this can only be done within an Agent Based Model using computer simulations ? which will generally lead to disequilibrium outcomes.

    This is almost true, but we cannot say it a total truth. ABS (Agent-Based Simulation) is a necessary and hopeful tool to be developed in economics (See my paper: A Guide Tour of the Backside of Agent-Based Simulation:

    I argued there that ABS is the third mode of scientific method after theory and experiments (or observations). However, as many people say, computer simulation easily becomes GIGO (Garbage In, Garbage Out). We should have a good theory which may lead us in ABS studies. It must go with theory and empirical works.

    • Craig
      August 8, 2018 at 7:44 pm

      I completely agree that we need a new theory….that is truly a RADICAL paradigm shift, and by that I mean bringing fundamental assumptions into question like:

      General equilibrium from a cost accounting and calculus perspective that will show that modern technologically advanced economies are inherently cost inflationary and thus impel continuous borrowing as a means to avoid recession or worse, and yet, because the current enforced paradigm of Debt Only is a continuous flow of costs…is doomed to failure without a new monetary paradigm.

      The economic/productive legitimacy of the private for profit business model of finance-money creation from the fact that so much of the benefits of our modern productive system is unavailable to us except as additional costs post retail sale which is where production becomes consumption and hence is the only actual and legitimate end of the entire economic/productive process. (Note: This is not the crank assumption that interest is the be all and end all of the problem of finance-money creation as additional costs can accrue within the paradigm of Debt Only even if all such indebtedness is at 0% interest.)

  5. August 9, 2018 at 2:25 am

    Craig, thank you for agreeing with the necessity of a completely new theory. Surely it requires a radical paradigm shift. But, I cannot understand what you have written at the second and third paragraphs. I understand that you have one or two problems that you want to approach but your descriptions are so abrupt and I can get no ideas on what you are thinking..

    • Craig
      August 9, 2018 at 7:40 am

      Yes, thank you as well for your reply. My new theory I would call Wisdomics-Gracenomics which denotes that what economics needs is an integration of the truths and only the truths in opposing perspectives (which is the very process of wisdom itself) and those truths and relevant economic policies need to be aligned with the equally economically relevant aspects of the highest concept of wisdom as expressed in the world’s major wisdom traditions, namely grace as in: (monetary) gifting, (monetary) abundance, (monetary) directness and immediacy/nowness of monetary policy effect, thirdness greater oneness/newness which is the result of thorough and continuing integration, inversion of problematic dualities/realities, i.e. from systemic economic scarcity to abundance and from balkiness or stopped to free flowingness and lastly dynamic interactive integrative disequilibrium as opposed to static general equilibrium.

      Grace is a traditionally religious/spiritual concept but I am not in any way claiming any traditionally religious/spiritual significance for it in such theory. Rather I claim that grace and its various aspects are actually the generally unperceived NATURAL/PHYSICAL/TEMPORAL reality and hence are highly relevant to human life and systems which are thoroughly embedded in the universe we all inhabit.

      I claim that macro-economics suffers from excessive abstraction and a failure to look at the the digital nature and relevant economic significances to be found in double entry bookkeeping and various datums to be found in its subset cost accounting. I also claim that when those cost accounting datums are gathered and calculus applied to them it will reveal that modern economies are inherently cost inflationary because they continually produce a ratio and flow of more costs and so prices than they simultaneously produce a flow of individual incomes with which to liquidate those costs/prices, and hence the only way to resolve this most basic economic instability is to implement policies that are costless to both enterprise and the individual. Hence a new paradigm of direct and reciprocal monetary gifting policies of such amount and magnitude that they will also accomplish the effects that result and reflect the aspects of grace known as abundance, inversion of problematic dualities, dynamic interactive integrative disequilibrium and free flowingness.

      Steve Keen has essentially re-discovered this monetary reality in his recognition that the moment the rate of credit increase drops the economy will enter recession, but not having a thorough understanding of accounting (a critique he himself has leveled at economists) and its digital nature in combination with recognition of the significances and policy capabilities at the ending point of the entire economic/productive process (retail sale) has also failed to craft the policies (a universal dividend combined with a discount/rebate at the point of retail sale) that will accomplish all of the signatures of a paradigm change as I have enumerated them many times here.

      Also, as double entry bookkeeping is the utterly basic, integrative infrastructure upon and within which the entirety of the micro-economy operates it is exactly the tool macro-economists must re-discover and mine significances from if there is ever to be an honest and thorough understanding of its micro-foundations which as I understand it is one area you are interested in and investigating.

      I’ve come to believe that the private financial/banking power of money creation is not a legitimate business model because it imposes costs post retail sale which (retail sale) is the end of the economic/truly productive process. It is also ethically problematic being the very power of business and individual survival in a monetary economy which is the economy’s actual reality and not “a veil over barter” as neo-liberal macro currently espouses. Lastly it is simply Occam’s Razor that a publicly administered banking/money creating power is simpler and more functionally possible and workable than the many private money creating entities we currently have and finally, the probably inevitable corruptibility of even a publicly administered absolute economic power like money creation would be best insured against by a concept/paradigm of grace as in benevolence.

  6. August 9, 2018 at 8:45 am

    Thank you, Craig, for the explanation. It seems you are more interested in a normative reconstruction of economics. I am much more oriented toward positive theory, i.e. on how the actual economy is working.

    At any rate, paradigm change requires various attempts. The later person can judge which was the good one and which was the bad one. For the moment, it is important that we all try to present what we think necessary.

    • Craig
      August 9, 2018 at 5:41 pm

      Yes, I’m saying double entry bookkeeping/accounting IS, most essentially, how the economy works and that due to the increased time, complexity and additional costs of modern technologically advanced production wed to the (correct) cost accounting convention that all costs must go into price….a costless means/set of monetary policies is the only thorough way to remedy the problem.

      Further, an ABUNDANTLY costless means that inverts and transforms the present macro-economic scarcity ratio of free and available total individual incomes to total costs/prices will elevate those policies to the level of paradigm change. This is based on a study of the signatures of all historical paradigm changes and reveals that the policies I’ve posted here many times in fact DO fulfill every one of the signatures of same.

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