Against anti-economics

Simon Wren-Lewis and commenters on Tim’s blog are complaining about ideologically-motivated attacks on conventional economics – one from the left and one from the right. I want to agree with both these complaints.

First, the question of the merits or demerits of economics should be independent of one’s political ideology.  You can be well to the left politically whilst cleaving to orthodox economics: open borders and anti-managerialism, for example, don’t require heterodox economics. Or you can be well to the right without indulging in the quackery of which Simon complains: small-state Keynesianism is a tenable position – it was good enough for Keynes himself.

Secondly, the ideological attacks upon mainstream economics misunderstand how economics progresses.

Let’s take an example from financial economics. The dominant position used to be the efficient market hypothesis – the idea that share prices embody all available information and so you cannot beat the market unless you take extra risk*. However, we now know that this isn’t right. Both momentum stocks and defensive (pdf) ones (pdf) do better than they should. Granted, this might be a pay-off for taking on benchmark risk, but it’s strong evidence that some investors can indeed beat the market without taking a risk that troubles them.

There are, though, two key points about this successful challenge to the once-orthodox position.

First, it is based not in theory or hand-waving, but in the discovery of hard facts. By facts, I mean not anecdotes or even single (pdf) academic papers, but rather findings that are consistent across many different data sets. Thomas Gradgrind’s educational philosophy might have left a little to be desired, but critics of economics should heed his words**:

Now, what I want is, Facts.  Teach these boys and girls nothing but Facts.  Facts alone are wanted in life.  Plant nothing else, and root out everything else.  You can only form the minds of reasoning animals upon Facts: nothing else will ever be of any service to them.

Secondly, context matters. Although the EMH is wrong in the sense that we can beat the market without taking on extra risk, it is correct in other contexts. If you are asking the question “should I buy an actively managed fund?” you should behave as if the EMH were correct.

This point generalizes (to a degree!). As Simon says, channelling  Dani Rodrik, “there are many valid models, and the goal is to know when they are applicable to the problem in hand.” For example, I’ll concede that there have been times – and there might well be in future – when expansionary fiscal austerity works. It’s just that those times and places are not here and not now.

Which brings me to my third gripe with the anti-economics brigade. Economics is – or at least should be – a practical discipline, aimed at helping individual people to make better decisions in specific contexts**. A (futile) hunt for big-T truth or grand theories can distract us from this job.

 * I’m talking about the pricing of individual stocks here, not of the whole market. Paul Samuelson, for example used to believe markets were “ micro efficient but macro inefficient.” Even this isn’t wholly true though.  

 ** In fact, economics is becoming more (pdf) Gradgrindian – and rightly so.   

 ** Most of my day job consists in doing just this.

Comments

[Luis Enrique]

... and, whilst I sympathise to an extent with the complaint that this eclectic approach flounders because you still don't know which model to use when (although often I think the choice can be fairly easily motivated), the question is still, as opposed to what? Are heterodox critics going to build one model to rule them all? somebody at SWL's place was complaining DSGE models are limited because they don't help us predict what the Chinese communist party is going to do next. Or the alternative is competing narrative accounts with accompanying data analysis, which are equally hard to choose between. The fact is the economy is terribly large and complicated, and one way or another you cannot avoid picking out only a few aspects of it at a time, and assuming much away. Formal economics just attracts flak because it does that explicitly.

[aragon]

I am not an economist but the more I learn of economics the more ridiculous the discipline becomes.

'Facts are not enough', which may tell you where I got my degree.

Don't talk about facts when we have excel gate.

http://blogs.ft.com/gavyndavies/2013/04/19/how-much-of-reinhartrogoff-has-survived/

"The work of Carmen Reinhart and Ken Rogoff (RR) on public sector debt ratios, and their relationship with GDP growth, has been extraordinarily influential in academic and policy circles since 2010."

[...]

"The moral of this story is that it is an illusion to expect that the complicated relationship between public debt and GDP growth will always and everywhere be the same."

The moral is it suited some peoples world view and regardless of the facts or the fact checking.

The vast majority of Economists are not Keynesian, but Neoclassical and believe that peoples preference for leisure is the fundamental problem!

As Steve Keen argues, role of the banks, money and debt, are irrelevant is in economics are ridiculous.

As for finance read all "The devils are here" or "The Big Short", the idea that the actors in finance are efficient or even rational, unless you presume that banks think can loot society, repeatedly and forever."

http://robertreich.org/post/137109198285
Robert Reich recommends the film "The Big Short".

The current economic system is broken in such a fundamental way that it's policies are destroying the real economy and inflicting huge opportunity costs on society in general.

Permanent recession, with repeated crashes, and government policy, ratcheting society further downwards.

I could go on and on...

[aragon]

BBC Analysis.
Steve Keen why economics is bunk.
http://www.bbc.co.uk/programmes/b01j5h51

[aragon]

BBC Analysis.
The Economist's New Clothes - Stephanie Flanders.

http://www.bbc.co.uk/programmes/b00nk0gc

[gastro george]

"... the question is still, as opposed to what?"

@Luis - I think that you do a stout job defending against heterodox economists (or should that be broader, mainstream sceptics) I think you have a problem here. The thing is, while it would be nice if the heterodox had fully-formed theories, they are not the ones in a position of dominance here. If mainstream modelling is crap, and at the same time is used to reinforce hegemonic political positions, then there is little point in saying "what have you got"? It's still crap, and in effect you're supporting the status quo.

[Luis Enrique]

gastro,

defending what we have does not mean being blind to its limitations or not seeing where it needs to improve. What else are mainstream researchers doing, if not trying to improve what we already have?

I just do not accept mainstream econ is 'crap'. Even economics weakest fields - macro - has lots of good stuff.

One thing I have observed about heterodox critics is that they barely show any interest in or awareness of what economists are actually doing, and just go after the same old methodological canards

this is a good mainstream paper.
https://www.aeaweb.org/aea/2016conference/program/retrieve.php?pdfid=207
It is not crap. I think it's excellent.

[Luis Enrique]

sorry meant to give an example of good macro work:
http://economics.mit.edu/grad/mrognlie/research

[Luis Enrique]

if you want to see what economists actually do, sign up to NBER working paper alerts
http://www.nber.org/new.html
there are usually some very interesting papers (not all of them are) ... the belief that mainstream econ is rubbish is largely held by people who form their ideas of what economics is by reading Steve Keen or articles in the Guardian, not by people who are reading what economists are actually producing.

[Deviation From The Mean]

So if I am reading this correctly the biggest enemies of economics are economists and the economics profession!

This certainly chimes with my experience of University education in the UK.

Except, this article assumes we live in a neutral world, with economics as honest arbiter, but there is a mega-tonne of facts to say this isn't the case.

My advice to the author of this article is to re-check the facts and then re-write the article!

[Bob]

"small-state Keynesianism is a tenable position – it was good enough for Keynes himself."

The rest of social science is very aware of bias and creating religious icons. They have publishing rules that require every paper to details connections and bias so that the results can be interpreted in the correct light. In Economics you have the 'what would Keynes have said' and 'what would Marx have said' religious cults. If you said 'what would Newton have said' in Mathematics you'd be laughed out of the room.

All of this is 'appeal to authority' which demonstrates that what they are actually doing is politics not science.

As to "small state Keynesianism" please take a look at this:

http://www.bondeconomics.com/2015/06/economic-stability-and-size-of.html

[Neil Wilson]

I read a lot of what Justin Welby and Pope Francis says and writes. I agree with a lot of it and much of it is applicable to the current world.

But that doesn't mean the axioms underlying their religious beliefs are correct.

[Bob]

"I’ll concede that there have been times – and there might well be in future – when expansionary fiscal austerity works. It’s just that those times and places are not here and not now."

Who is going to do the require borrowing to offset the usual paradox of thrift and why?

[Bob]

"First, the question of the merits or demerits of economics should be independent of one’s political ideology"

Anybody believing that simply doesn't want the politics they inject into the process exposing to the sunlight. The particularly one at the moment is dictatorship by a bunch of technocrats in control of the central bank.

There is no such thing as economics devoid of politics. It is one thing, because the entire topic is about human relations. And human relations are politics.

Politics is about power and control in social relationship. Wherever there are social relationships there is some political structure that distributes power and control.

As Marx observed,distribution of power a function of class structure involving status and privilege in surplus societies. C. Wright Mills examine this phenomena in The Power Elite, showing how it is related to finance and economics as a result of the desire and ability of a power structure to accumulate and concentrate wealth.

Pretending this is not the case is in the furtherance of class interests. Conventional economics is propaganda dupe the rubes by to concealing the obvious through obfuscation. If religion was the opiate of the people in Marx's day, now it is conventional economics.

As a professed "Marxist," you must surely know this.

[Egmont Kakarot-Handtke]

It’s not the ideology, it’s the methodology, stupid!
Comment on ‘Against anti-economics’

You say “ideological attacks upon mainstream economics misunderstand how economics progresses.”

This is a misrepresentation of the ongoing discussion. The critical point to realize first is that economics in effect stagnates “... we know little more now about ‘how the economy works,’ or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower)

The main reason for the dismal state of economics is scientific incompetence. Accordingly, the critique of Wren-Lewis as proponent of DSGE is not ideological but methodological.

In order to make the point at issue transparent it is of utmost importance to distinguish between political and theoretical economics. The main differences are:
(i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
(ii) In political economics anything goes; in theoretical economics scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics, on the other hand, can be summarized as the perpetual violation of well-defined scientific standards.

The fact of the matter is that theoretical economics has from the very beginning been dominated by the agenda pushers of political economics. Smith and Mill fought for liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

Political economics is scientifically worthless. At the moment, orthodox economics does not satisfy scientific criteria, neither does Heterodoxy. For the detailed arguments see the posts

‘Lars Syll creatively destructs Wren-Lewis’
http://axecorg.blogspot.de/2016/01/lars-syll-creatively-destructs-wren.html

and ‘Economists’ last Hurrah’
http://axecorg.blogspot.de/2016/01/economists-last-hurrah.html

Egmont Kakarot-Handtke

[sam]

Keen is a moron. waste your time reading his garbage at your own risk. read this if you don't believe me http://chrisauld.com/2012/12/06/steve-keen-still-butchering-basic-microeconomics/

shout what Luis Enrique says from the rooftops a thousand times. a homework assignment for econ haters: read the first page or two of each of this week's nber wps, and come back and show us all of these horrendous assumptions and beliefs "that peoples preference for leisure is the fundamental problem" that you claim we make and hold.

[Egmont Kakarot-Handtke]

What is economics?
Comment on ‘Against anti-economics’

Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.

Because of this, economists have nothing to offer in the way of a scientifically founded advice. See

‘How the intelligent non-economist can refute every economist hands down’

http://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html

Egmont Kakarot-Handtke

[Bob]

Egmont,
Political economy is all tere is. Any attempt to do anything else is just implicitly injecting your personal politics and morals into the situation. You are not studying gas. You're studying the interaction of people, and that is a social science subject to bias and prejudice.

Hence the mistake in your papers that fails to see profit as the merely the wages of capitalists and therefore 'retained profit' as just financial savings by corporations. viz. 'The crucial conclusion is that the business sector makes a monetary loss which isexactly equal to the household sector’s monetary saving, i.e. Qm = -Sm. Therefore,loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving, that is, of the growth of household sector’s debt.'

[aragon]

Economics is clearly in rude health. Seven years on from 2008 and we face the next seven (eight) year crash.

http://www.telegraph.co.uk/finance/financetopics/davos/12108569/World-faces-wave-of-epic-debt-defaults-fears-central-bank-veteran.html

"The European banking system may have to be recapitalized on a scale yet unimagined, and new "bail-in" rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it."

[...]

"Policy makers were seduced into inaction by a set of comforting beliefs, all of which we now see were false. "

Financial crashes are becoming more reliable than the bus service.

[aragon]

"But Mr White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy - call it Keynesian, if you wish - and launch an investment blitz on infrastructure that pays for itself through higher growth."

We are all Keynesian (again) now.

Re: Steve Keen.
When neoclassical economics says recessions are due to people not wanting to work, the credibility is destroyed, with the world economy heavily influenced by economist the mea culpa, are becoming a regular occurrence.

[Egmont Kakarot-Handtke]

What are economists?
Comment on Bob on ‘Against anti-economics’

You say “Political economy is all tere is.”

If this is so, then elementary logic tells you that economics should give up the claim to be a science and leave academia. The first problem with economists is indeed that they never grasped what science is all about.*

This is remarkable because the great economist and methodologist J. S. Mill told them already more than 200 years ago “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (2006, p. 950)

The difference between political economics and theoretical economics is important because alone the latter is strictly committed to scientific standards: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent. (Haack, 1997, p. 1)

The fact of the matter is that the representative economist can, after more than 200 years of much political economics and virtually no proper theoretical economics, still not tell what profit is “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

Let this sink in: people who are utterly confused about the pivotal concept of their discipline claim to be scientists and tell politicians and the general public how to run the economy. Scary, isn’t it.

Egmont Kakarot-Handtke

References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL http://www.dictionaryofeconomics.com/article?id=
pde2008_P000213.
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL http://www.csicop.org/si/show/science_
scientism_and_anti- science_in_the_age_of_preposterism.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected
View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

* See ‘Lousy scientists’
http://axecorg.blogspot.de/2016/01/lousy-scientists.html

[reason]

So are you saying that macro-economics has NOT gone up a blind alley with DSGE (which not only is arguably a blind alley but was made compulsory for publication)?

[Egmont Kakarot-Handtke]

ICYMI reason

Economists messed up both micro- and macroeconomics. For details see ‘The future of economics: why you will probably not be admitted to it, and why this is a good thing’

http://axecorg.blogspot.de/2016/01/the-future-or-economics-why-you-will.html

[Deviation From The Mean]

“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes,”

Well then a scientist is no more than someone following orders. For example, developing the best method for exterminating the Jews was a scientific exercise. If we use X gas then the end result is Y. And if a scientist simply follows orders then he is a puppet of those who order him! I.e. he is a slave to politics.

At least the economist is critical! So from this point of view the economist must be superior to the scientist!

I can’t imagine an economics that doesn’t embody politics. How could that even work? Every model would have to assume 2 people each having 20 apples. If we give 5 apples to Person A then Person B would have 15. Soon as we introduce the fact that Person A has no legs and cannot easily get to the apples we have encountered our first issue with the science of theoretical economics.

Pursuing economics as a pure science is a fool’s errand and will only lead down the path of the economic scientist becoming a puppet in someone else’s political game!

Egmont can talk all he likes but he won’t be able to get out of that conundrum.

[Bob]

"developing the best method for exterminating the Jews was a scientific exercise."

Come on DFTM this is ridiculous.

"Hitler ate sugar!"

The real reason is that economics without politics is a largely pointless exercise, since the majority of things that are interesting are choices, not 'laws'.

Physics really is the worst starting point for analysing social issues. That's what got economics into the bind it is in in the first place. Snapshotting.

[Bob]

"Every model would have to assume 2 people each having 20 apples. If we give 5 apples to Person A then Person B would have 15."

That's pointless. We live in a *monetary* economy.

[Deviation From The Mean]

"That's pointless. We live in a *monetary* economy."

WTF? It wasn't meant to be a serious example! That was the point!

But I could have said, as soon as you introduce payments for apples...

[Deviation From The Mean]

"Come on DFTM this is ridiculous."

WTF again! Is this miss the point day or something!

Bob - you are as dim as Luis Enrique and that is saying something.

The comment about the extermination of Jews was a response to the definition of science given by Egmont. You work the rest out, if you can. Whihc I very much doubt!

[UnlearningEcon]

While I agree with your point that attacks on economics should in general not be ideologically motivated, I disagree with your choice of theory to defend economics (the EMH) and even more strongly with this new 'economics is about choosing models' fad.

Firstly, economics has a habit of using extremely unrealistic models to make wrong predictions, then describing the disconnect between the unrealistic model and the world as a 'puzzle'. Then, after some time and with a lot of mathematical tinkering, the 'puzzle' may be solved in any number of ways.

The problem is that these 'puzzles' are only 'puzzles' if you believe the ridiculously unrealistic models in the first place. In the case of the EMH, one of the puzzles might be 'excess volatility'. The type of papers you link to have discovered that investors tend to herd, follow rules of thumb, act on wrong/imperfect information etc. Well, surprise surprise! My mum could have told you that. So how has economic theory advanced our knowledge here?

To be sure, there's benefit to testing and sometimes formalising our intuitions. But when formalising theory takes centre stage, even when the theory contradicts the knowledge we have and does not have evidence to support it, it pushes our understanding backwards rather than forwards. Going on to shoehorn things we already knew into this theoretical framework only gets us back to where we were before - unless the theory can make another clear, sound, nontrivial prediction.

Similar examples are the equity premium, life cycle hypothesis, allais 'paradox' etc.

Secondly, and in partial reply to Luis' first comment, heterodox economists do not claim to have the one true theory at all. What we would prefer is that (a) our theories get a hearing alongside neoclassical ones and (b) there are clear conditions for using theories, including some conditions for when we simply do not have a good enough theory!

Economists are ultimately in a state of dissarray about their use of models and as a result they are producing mutually conflicting assertions:

- The claim that maths adds rigour and precision to theory;
- The claim that they should choose between these theories based on vague, arbitrary and unstated hunches;
- The dismissal of heterodox theories outright.

Do I really have to detail why any 2 of these 3 are contradictory?

[Bob]

"But I could have said, as soon as you introduce payments for apples..."

You couldn't. A barter economy and a monetary economy are completely different. Plus you are comparing apples and pears :D

As both Marx and Keynes point out, capitalism is not chiefly about production for consumption but rather increasing capitalists' wealth. It's not C-M-C' in a barter economy with money as a veil as classical and neoclassical economics assumed but rather M-C-M (money for the sake of more money) in a monetary economy as Marx and Keynes analyzed.

The fundamental issue in economic is distribution of the surplus over subsistence. The foundational assumption of capitalism and the reason it is called capitalism is that distribution should favor capital.

The basis of economics lies in accounting representing the real accurately.

The accounting is widely available and price reduces the real to a common denominator.

Assuming that money is neutral, price is assumed to be an accurate reflection of what actually goes on in the production-distribution-consumption cycle. Conventional economics regards money as a veil over barter, so the entries on accounting statements are representative of the real stuff through price. There is nothing else to see, other than the central banks' handling of the money supply since there is the source of the money illusion (confusing nominal with real when price level is not stable).

If money is neither neutral and nor exogenous as assumed, then the whole enterprise of conventional economics is built on sand.

That money is not neutral was the fundamental insight of Keynes. Say's "law" is a special case.

That money is neither neutral and nor exogenous is elaborated in MMT.

There is a dumb analogy that explains the difference well if you would be so kind as to have an open mind and listen:

http://www.3spoken.co.uk/2014/06/why-mmt-is-electric.html

"Clearly we use a monetary economy, not a barter one. Just like we use AC electricity not DC. Therefore using ideas that only apply to DC systems on an AC system is going to be a shocking mistake (sorry).

We clearly need a generation system (the government sector) that has to circulate more money around the system (KVA) than would otherwise be the case to energise our advanced mechanised production system and ensure that it can deliver full output. If it doesn't then the system just generates less output."

[chris]

@ Unlearning - I share your impatience with abstract theory. When I advise my readers to avoid actively managed funds, I'm not doing so because of fancy theory, but hard fact - that normally most such funds don't beat the market.
This poses a real puzzle: if people are as irrational as your mum claims, how come the professionals don't take advantage of their stupidity to out-perform (but exploit it instead by charging high fees!)?
I'm not wholly sure that the "which model which context" choice is settled arbitrarily. I took the EMH example to suggest it's settled by facts. The fact active managers don't out-perform means we should treat the EMH as right if we have a choice between active and passive funds. But the fact that momentum stocks out-perform suggests we should treat it as (partly?) false if the qn is: can you beat the market without taking on extra risk?
I fear we're at cross-purposes here. If you're looking for a satisfactory grand science then the (Lucasian/Friedmanite?) style of economics you're attacking does indeed fall short. But as I say, I'm interested in more humble dentistry-style economics.

[Egmont Kakarot-Handtke]

Agenda pushing or science?
Comment on Bob of Jan 20 on ‘Against anti-economics’

To speak of economics in the singular is misleading because there is political and theoretical economics. The main differences are:
(i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
(ii) In political economics anything goes; in theoretical economics scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and nothing else: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Economists do not have the true theory because they are scientifically incompetent. This means that their economic policy proposals have no sound theoretical foundation. Ultimately this means that economists have no legitimacy whatever to speak in the name of science. What they bring to the table is roughly at the same level as Joe Sixpack’s opinion. This applies to Walrasians, Keynesians, Marxians, and Austrians.

You say “As both Marx and Keynes point out, capitalism is not chiefly about production for consumption but rather increasing capitalists’ wealth. It’s not C-M-C’ in a barter economy with money as a veil as classical and neoclassical economics assumed but rather M-C-M (money for the sake of more money) in a monetary economy as Marx and Keynes analyzed.”

This is a good example for the abysmal scientific level of economics. Both Marx’s and Keynes’s profit theory is provably false (2014; 2011). Both approaches are scientifically worthless. But for agenda pushing they are good enough and they still have some entertainment value in political sitcoms or economics blogs.

The Classicals called themselves Political Economists and Adam Smith developed his economic theory in order to support his political agenda. This is not how science proceeds. A genuine scientist tries to figure out how the economy works. His aim is the true theory -- not less, not more. A genuine scientist refrains from agenda pushing.

All this is the exact opposite of what economists actually do. Neither Walrasians, nor Keynesians, nor Marxians, nor Austrians have the true theory. In fact, what they have developed thus far is scientific junk. Yet this does not hinder them to pester the world with ill-founded proposals/advice and to feed their students with theories/models that a provably false.

Political economics is anti-science, because of this genuine scientists are anti-economics.

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL http://ssrn.com/abstract=1966438.
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

[Luis Enrique]

unlearning

I am not sure I see the contradiction - if you are in the business of needing to find the right model for the right situation, and the choice involves judgement is not completely determined by objective criteria, then why isn't the precision of maths desirable in the set of models you are choosing between?

I didn't really think heterodox critics are going to build a simulacrum of the world to answer all and every question (which is what some critics of economics seem to blame us for) but in that case we - mainstream and heterodox - are all in the business of choosing the right model for the job in hand - it's not a 'fad' it's the way it's always been.

I'm also not convinced by the idea that the mainstream dismisses all heterodox theories outright - I think very many ideas that were once heterodox that are now part of mainstream. There's a big difference between been heterodox and constructive (Bowles and Gintis etc.) and being Steve Keen. Keen might get dismissed out of hand, he's only got himself to blame.

[UnlearningEcon]

Chris,

I don't believe that assuming people are not rational, as defined by economics, is tantamount to assuming they are stupid. Investors are dealing with a remarkably complicated situation and, being human, have no choice but to use heuristics and cognitive shortcuts.

I also think my mum would say that the market is hard to beat and she would have no idea how to invest! But of course there are those who consistently beat the market, which contradicts the EMH.

One thing I forgot to mention is the fact that we have multiple theories leading to the same prediction in economics. So EMH implies the market is unpredictable but so does the theory of fractal markets, albeit for different reasons. How does Dani Rodrik choose between these two in any sort of rigorous way?

Luis, because the use of maths does not just require the maths itself to be precise; it requires you to be precise about what you are mathematising. You can write any mathematical model, attach economicsy-sounding labels to the variables and claim it says something about the world, but ultimately if you have no clearly defined links between the theory and the maths then it's not clear why and when the maths is relevant.

Economics doesn't use maths in this way; it uses it in a more vague, intuitive way and tries to defend every model as potentially valid, depending on the judgement of the economist. But there are two crucial questions missing:

(a) What does this model add over the basic insight it is supposed to represent (behavioural econ is a repeat offender here);

(b) How do I know when to use this model over some other model?

Without well defined domains and boundary conditions, it's difficult to answer (b), particularly if two models yield similar predictions. It's almost as if economics is celebrating having an n=k problem, where n is real world situations and k is models.

If you want evidence economists are resistant to non-standard ideas then how about Cameron Murray's theory of return seeking firms:

http://www.fresheconomicthinking.com/2015/08/the-confused-economic-orthodoxy.html

To me, these seems pretty well substantiated empirically, novel and interesting. But some of the referee's responses are pretty pathetic if you ask me.

[Luis Enrique]

UE

sure, using maths does not solve all problems, but it can still be very helpful clearly articulating what you are trying to say. if you try to describe relationships between multiple variables verbally, it can quickly get confusing. Plus maths allows you to think about magnitudes, and generate predictions you can take to the data. Of course with any theory you have to do some work to show it is of any real world relevance. If you were not so intent on only looking for criticisms of mainstream economics, its merits would be obvious to you.

it's not economists fault that we live in world where there is a large number of potential explanations for what we observe, that we cannot definitively accept or reject (the cannot do experiments problem). We just have to do the best we can. That involves writing down clearly articulated models, seeing how well they are supported by data, trying to think of ways to test them. This is what economists do.

crap reports from referee who completely miss your point are not the preserve of you brave heterodox iconoclasts. I have a collection of them too. Everybody knows stories of this or that great paper getting rejected with rubbish referee reports. Referees are humans.

If you are going to try to do something which amounts to "you economists are doing something extremely fundamental all wrong" you have to motivate that *extremely* well and show something in the data that really cannot be explained by the existing approach but can be by yours. In this case you need to be crystal clear about why the standard profit max approach implies a capitalist would choose one set of prices/inputs/outputs/profits, whereas a capitalist looking to max returns on capital would choose another.

this "If there is a choice between spending $100 to make $40 in profit, and spending $200 to make $41 profit, you choose the latter as a profit maximiser." *really* doesn't do it - "spending $200" is cost you need to deduct to compute profits.

the longer blog post is full of things which are perfectly familiar and are obviously not present in the most highly simplified econ 101 model, but simply saying look things change when you add new features to econ 101 isn't as revolutionary as he seems to imagine. Unfortunate the link to his working paper is broken, but on the basis of those blog posts I am really not surprised he is getting short shrift.

p.s. you lot really need to stop helping yourself to the "we are Copernicus" thing.

[Luis Enrique]

sorry, "cost to deduct" badly put - but neither is capital free / irrelevant in profit max decision.

[Luis Enrique]

from memory think usually easiest to assume capital is rented, so profit max involves rental rate r, in this case profits computed after r*$200, have dim memory that works out the same as assuming capital is owned by some person taking decision, would need to look it up.

[Luis Enrique]

also worth recalling mainstream econ has been *way* beyond simple static optimization by firms for a long time now. This is more like where it's at today:
http://restud.oxfordjournals.org/content/81/3/1102
http://www.sciencedirect.com/science/article/pii/S0165188914002887

I am not going to claim I know established dynamic models of investment are already doing what Cameron wants to see and more (this is not my area) but I'd wager a little on it.

[Egmont Kakarot-Handtke]

You got the point — at least almost
Comment on Luis Enrique of Jan 22 on ‘Against anti-economics’

You say “If you are going to try to do something which amounts to ‘you [orthodox] economists are doing something extremely fundamental all wrong’ you have to motivate that *extremely* well and show something in the data that really cannot be explained by the existing approach but can be by yours.”

Equilibrium economics is fundamentally all wrong and you can have as much proof as you wish: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin. (Blaug, 2001, p. 160), see also (Ingrao et al., 1990; Ackerman et al., 2004)

According to the rules of science, the orthodox approach is refuted. Period. Nothing left to do. But economists either do not understand the rules or they ignore it: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened. (Morgenstern, 1941, p. 369)

Methodologically speaking it is inadmissible to take equilibrium and the behavioral assumption of constrained optimization into the set of axioms. Or, put the other way round, you have to do economics without these assumptions. In brief: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)

Has Orthodoxy an indication of what this might mean? No idea! The fly flies unremittingly against the window glass as before: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman).

The future has no place for Krugman and nothing-has-happened-neoclassicals and dull econ101 students who accept supply-demand-equilibrium as a scientific explanation of how markets function.

Egmont Kakarot-Handtke

References
Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York, NY: Routledge.
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of Economic Perspectives, 15(1): 145–164.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL http://www.jstor.org/stable/1824735.

[sam]

I've always found the Unlearning Economics guy to be a great example of counter-advocacy (http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2016/01/on-counter-advocacy.html); if these are the best arguments you can come up with against econ, it must be good!

If you don't believe equilibrium is a useful modeling tool, go find some large persistent shortages or surpluses. Equilibrium means that these don't exist. If you find a shortage, call me and we'll make some money.

I don't get the "economists ignore history" thing. There is an entire field of economic history that uses the theoretical apparatus of neoclassical economics, called Cliometrics or Analytic Narratives. Nowadays we have the work of Nathan Nunn and co. bringing the tools of the credibility revolution to Economic History. Even less formally neoclassical work, for example the work of Barry Eichengreen, clearly inhabits an orthodox framework.

[UnlearningEcon]

Luis,

Maths is useful when things can be quantified. The problem is that econ is full of mathematisations of things which cannot be quantified, such as effort, utility and countless random parameters that have no obvious interpretation (please don't force me to find an example). I've never been against modelling - just against modelling the wrong things.

"That involves writing down clearly articulated models, seeing how well they are supported by data, trying to think of ways to test them. This is what economists do."

This is what economists like to think they do. What I've been learning is that in practice, it's more like 'economists write down clearly articulated but unnecessarily complicated models, impose arbitrary assumptions on them to reach a conclusion they could have come to in a sentence, then look for broad, stylised patterns in the data that are loosely consistent with their conclusions.'

I'm not saying all econ is like this - that's a worst case scenario. But in general econ is nowhere near rigorous empirical testing of models and I don't know if it ever can be.

Obviously, Murray's paper is not the same as his blog post. He doesn't just use thought experiment examples; he refers to a lot of evidence on return-maximising firms to support his case. He also comes to a number of non-standard conclusions with his framework. Off the top of my head these include that perfect competition is not necessarily the most efficient and that firms will not produce unless there are decreasing returns to scale to start.

I don't see how renting capital is the same as having it in the denominator in the maximisation decision, either. It's another annoying habit of economists to respond to any new idea by insisting it's in their model if you interpret this way or that way. It's like a particular sub-category of Romer's 'mathiness'.

sam,

I've not actually said anything about equilibrium or economic history, but I'll bite.

No equilibrium critique has ever concluded "...and therefore, there should be large surpluses and shortages in a capitalist economy". You are not referring to 'equilibrium' as a modelling tool but to an implication of standard demand-supply. Advocating non-equilibrium tools does not mean that you think every conclusion of every equilibrium model is wrong. Although supermarkets do throw away a lot of food and firms tend to keep spare inventories precisely due to dynamic considerations that are absent from this model.

History is simply not a staple part of most economists' training. Individual economists are aware of history; there are fields devoted to studying it; but in general research, education and policymaking is a lot more concerned with modelling than with learning from history. I think this is a sad state of affairs.