When David Vines asked me to contribute to a OXREP (Oxford Review of Economic Policy) issueon “Rebuilding Macroeconomic Theory”, I think what he hoped I would write on how the core macro model needed to change to reflect macro developments since the crisis with a particular eye to modelling the impact of fiscal policy. That would be an interesting paper to write, but I decided fairly quickly that I wanted to say something that I thought was much more important.
In my view the biggest obstacle to the advance of macroeconomics is the hegemony of microfoundations. I wanted at least one of the papers in the collection to question this hegemony. It turned out that I was not alone, and a few papers did the same. I was particularly encouraged when Olivier Blanchard, in blog posts reflecting his thoughts before writing his contribution, was thinking along the same lines.…
Mainly Macro
Why the microfoundations hegemony holds back macroeconomic progressSimon Wren-Lewis | Professor of Economics, Oxford University
3 comments:
ICYMI
Macro for dummies
https://axecorg.blogspot.de/2017/07/macro-for-dummies.html
#Economics #FailedScience #FakeScience #CargoCultScience #BogusScience #ScientificIncompetence #MicroFoundations #MacroEconomics #ProfitTheory #ParadigmShift #Science #Macrofoundations #Axiomatization
Microfoundations R.I.P.
Comment on Simon Wren-Lewis on ‘Why the microfoundations hegemony holds back macroeconomic progress’
Economics of the last 200 years is the most embarrassing failure in the history of modern science.
The goal of economics is to figure out how the actual economic system works and to communicate the results in the format of a materially and formally consistent theory.
Methodologically, there seem to be two ways to attack the problem: microfoundations or bottom-up and macrofoundations or top-down. Economists made the wrong methodological choice 140+ ago. Since Jevons/Walras/Menger they are on the wrong track because NO way leads from the second-guessing of Human Nature/motives/behavior/action to the understanding of how the economic system works.
Economics is a failed science because the definition of the subject matter is false: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)#1
There is, as a matter of methodological principle, NO such thing as a microfounded economics. Unfortunately, Keynes messed up the macrofoundations approach and After-Keynesians have not figured out until this day where things went wrong.#2
Wren-Lewis’ attempt to go from DSGE Modeling to Structural Econometric Modeling is bound to fail. Nothing less than a paradigm shift will do.#3, #4 The microfoundations approach and its scientifically incompetent proponents have to be solemnly buried next to the Flat-earth and Phlogiston folks.#5
Egmont Kakarot-Handtke
#1 Microfoundations are formally given with this set of verbalized axioms “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. (Weintraub) Every model that applies just one of the axioms is a priori false.
#2 Where modern macroeconomics went wrong
https://axecorg.blogspot.de/2017/09/where-modern-macroeconomics-went-wrong.html
#3 True macrofoundations: the reset of economics
http://axecorg.blogspot.de/2017/05/true-macrofoundations-reset-of-economics.html
#4 The new macroeconomic paradigm
https://axecorg.blogspot.de/2017/09/the-new-macroeconomic-paradigm.html
#5 If it isn’t macro-axiomatized, it isn’t economics
http://axecorg.blogspot.de/2017/02/if-it-isnt-macro-axiomatized-it-isnt.html
Macro for retarded economists
Comment on Simon Wren-Lewis on ‘Why the microfoundations hegemony holds back macroeconomic progress’
“Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.” (Cooper)
Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock-bottom truth of all of economics. Too bad that this statement is materially/logically false.
The foundational error/mistake/blunder consists in the methodological fact that the two most important magnitudes of economics — profit and income — are ill-defined.#1 In order to see this one has to go back to the most elementary configuration, that is, the pure production-consumption economy which consists of the household and the business sector.#2
In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
• In case (i) the monetary saving of the household sector Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e. X=O in all three cases.
• In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
• In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.
It always holds Qm+Sm=0 or Qm=−Sm, in other words, at the heart of the monetary circuit is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition and the definition of household sector saving.
Loss or profit are NOT income. Only distributed profit is income. The profit theory is false since Adam Smith.#3 As a collateral damage, all I=S or IS-LM models are false.
Economists are too stupid for the elementary mathematics of accounting.#4 The statement total income equals total spending is simply false because of the all-important phenomenon of credit. Equipped with credit the household sector can spend MORE than its period income (= dissaving) or in the opposite case LESS (= saving). Total spending and total income are NEVER equal, the foundational intuition of macroeconomics is false ― and so is all the rest. Macroeconomics is dead since Keynes.#5
Egmont Kakarot-Handtke
#1 For details see ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
and ‘Keynes’ Missing Axioms’ Sec. 14-18
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1841408
#2 The elementary production-consumption economy is given by three macro axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
#3 See ‘Essentials of Constructive Heterodoxy: Profit’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2575110
and cross-references Profit
http://axecorg.blogspot.de/2015/03/profit-cross-references.html
#4 See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124415
#5 How Keynes got macro wrong and Allais got it right
https://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html
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