Re: The Problem with Economics (was: Re: LVT: a discussion with a center/left economist)

In article <1132673978.857193.21330@xxxxxxxxxxxxxxxxxxxxxxxxxxxx>,
"ruetheday@xxxxxxxxxx" <ruetheday@xxxxxxxxxx> wrote:

> >The main problem is in macroeconomics. The appeal for the student is
> >in the mathematical models which themselves are perfectly rigorous.
> >But the models abstract from the real world which is messy and
> >complex. They are necessarily full of simplifying assumptions and
> >ceteris paribus arguments which ignore significant effects.

> The same can be said about microeconomics.

I think neither mainstream macroeconomics nor mainstream microeconomics
is rigorous. The common models are incoherent, not rigorous. They
also are not empirically applicable to actual economies.

Perhaps the main problem is that mainstream economists maintain
their position through bullying and harassment of those who don't
sign onto their fads. The social pressure is for antiscience.

Here's a comment on general equilibrium theory:

"1.1.1. The theory of value and distribution is at present in a
state of uncertainty. Beginners are seldom aware of this fact,
because, with great assurance, most textbooks introduce them to
only one theory: that prices, both of products and of 'factors
of production', are determined by the tendency towards an
equilibrium between supply and demand. But in more advanced
courses students discover that there are cracks and fissures
in this assurance. For example, they may discover that a
respected specialist in general equilibrum has written:

... we are at a turning point in economic theory. Much of the
elegant theoretical structure that has been constructed over
the last one hundred years in economics will be seen over the
next decade to have provided a wrong focus and a misleading
and ephemeral idea of what constitutes an equilibrium (Kirman,
1999, p. 8).

The textbooks that present the rigorous version of supply-and-
demand theory - the advanced theory of general equilibrium in its
various forms - are seldom so negative; but even they cannot hide
that this theory encounters a number of serious difficulties. One
in particular is sure to raise some perplexities in the more
attentive student: namely, the admission - accompanid by no
indication of clearly better solutions - that the study of the
stability of equilibrium through the auctioneer-guided tatonnement
is hardly satisfactory, given its unrealistic assumption of no
transactions and no production until equilibrium is reached. The
question inevitably arises: what is the relevance of conclusions
reached on the basis of so patently unrealistic an adjustment
process?

The ensuing perplexities are usually repressed, or after a while
forgotton. But the attentive student will find it less easy to
forget them if she comes across statements such as the following:

I have always regarded Competitive General Equilibrium analysis
as akin to the mock-up an aircraft engineer might build ...
theorists all over the world have become aware that anything
based on this mock-up is unlikely to fly, since it neglects some
crucial aspects of the world, the recognition of which will
force some drastic redesigning. Moreover, at no stage was the
mock-up complete; in particular, it provided no account of the
actual working of the invisible hand (Hahn, 1981b, p. 1036).

It is a fair question whether it can ever be useful to have an
equilibrium notion which does not describe the termination of
actual processes (Hahn, 1984, p. 48).

The student who happens to read these statements by Frank Hahn may
find herself asking: but isn't the notion that equilibrium is what
the economy tends toward, the basis of most economic theory? What
have they taught us, if, to the contrary, the truth is that the
notion of equilibrium 'does not describe the termination of actual
processes'? What, then, is the use of such a notion of equilibrium?
Indeed, how can one be sure that the equilibrium IS an equilibrium,
if there is still no acceptable account of the working of the
forces which are supposed to come to rest in equilibrium?

Our student may at this point having read, in her first-year
graduate microeconomics course, in a footnote of a textbook she
most probably consulted: 'For an extensive analysis of market
adjustment procedures in real time, see Fisher (1983)' (Mas-Colell
et al., 1995, p. 625). The wording of this sentence did not
suggest that startling novelities could be learned from that book,
and since the workload of graduate students is usually enormous,
our student had not at the time gone on to read Fisher; but now,
after reading those disconcerting sentences by Hahn, she may feel
she may feel she wants better to understand what is going on in the
foundations of the economic theory she has been learning. At this
point she may decide to consult Fisher's book, where she will
discover the following sentence:

In a real economy, however, trading, as well as production and
consumption, goes on out of equilibrium. It follows that, in
the course of convergence to equilibrium (assuming that occurs),
endowments change. In turn this changes the set of equilibria.
Put more succinctly, the set of equilibria is path dependent...
[This path dependence] makes the calculation of equilibria
corresponding to the initial state of the system essentially
irrelevant. What matters is the equilibrium that the economy
will reach from given initial endowments, not the equilibrium
that it would have been in, given initial endowments, had prices
happened to be just right (Fisher, 1983, p. 14).

In all likelihood, our student at this point will find it hard to
avoid succumbing to a feeling of dizziness. Not only is it unclear
how the 'invisible hand' actually works; what is clear is that,
even if the 'invisible hand' takes the economy to some equilibrium,
it is NOT the equilibrium 'corresponding to the initial state of
the system', that is, corresponding to the initial endowments. But
then what of comparative statics? What is the use for example of
the theory of taxation, which studies how the equilibrium
corresponding to given data is altered by the introduction of a
tax, if after the introduction of the tax the economy will NOT
tend to the altered equilibrium? And how can one hope to determine
the equilibrium to which, if at all, the economy will finally
arive, if - according to Frank Hahn, one of the maximum authorities
on the stability of general equilibrium - we still have 'no account
of the actual working of the invisible hand'? Indeed, how can one
be sure that the economy will reach an equilibrium at all?

But then - our student might ask - what sort of foundation is the
edifice of applied economics built upon? In her studies, she has
naturally formed the impression that among economists there is a
whole series of firm beliefs about the tendencies of market economies,
for example the tendency of the price of a good to decrease if its
supply increases, the tendency of the demand for labour to increase
if the real wage decreases, and so on and so forth. Now she cannot
help asking: where have these beliefs come from? Are they all purely
gratuitous? Do these statements on equilibrium theory by Hahn and
by Fisher imply that economic theory can at present make no predictions
and that we should start again from scratch?"
-- Fabio Petri (2004). _General Equilibrium, Capital, and
Macroeconomics: A Key to Recent Controversies in Equilibrium
Theory_, Edward Elgar.

--
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r c
v s a Whether strength of body or of mind, or wisdom, or
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e a e of a man is a question fit perhaps to be discussed by
n e . slaves in the hearing of their masters, but highly
@ r c m unbecoming to reasonable and free men in search of
d o the truth. -- Rousseau
.

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