Oscar Valdes-Viera — The Borrowed Science of Neoclassical Economics

"Science" with an agenda = pseudoscience.

The Minskys
The Borrowed Science of Neoclassical Economics
Oscar Valdes-Viera

Branko Milanovic — A short note on Skidelsky’s interpretation of Schumpeter

Why do we have this “problem” with Schumpeter? Because in his own work, Schumpeter shows a duality, or even a contradiction, between his often unquestionable endorsement of “economics as physics” in HEA where it is hailed as an unambiguous progress toward economics becoming an exact science, and scarce use of this approach in Schumpeter own work. His “Theory of Economic Development” is indeed in its structure very abstract and arid, somewhat similar to Ricardo’s “Principles” (of whose methodology, by the way, Schumpeter was very critical in HEA), but is not mathematical at all. His “Business Cycles” is heavily empirical but shown scant relationship to Walras and is generally anti-theoretical. (I have to confess that I tried three times to read his “Business Cycles” and that I always failed. It seems almost unbelievable that such a splendid writer and beautiful mind produced a work--which moreover he originally saw as a competitor to “The General Theory”—of, yes, such messiness and unreadability.)

Global Inequality
A short note on Skidelsky’s interpretation of Schumpeter
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace

Also

Liberation from the shackles of space

Full text of my New Republic interview

Lars P. Syll — General equilibrium theory — a gross misallocation of intellectual resources and time

Almost a century and a half after Léon Walras founded general equilibrium theory, economists still have not been able to show that markets lead economies to equilibria.
We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient.

But after reading Frank Ackerman’s article — or Franklin M. Fisher’s The stability of general equilibrium – what do we know and why is it important? — one has to ask oneself — what good does that do?

Lars P. Syll’s Blog
General equilibrium theory — a gross misallocation of intellectual resources and time
Lars P. Syll | Professor, Malmo University

Lars P. Syll — The loanable funds fallacy

Keynes and Minksy answer Krugman and Mankiw.

Lars P. Syll’s Blog
The loanable funds fallacy
Lars P. Syll | Professor, Malmo University

Lars Syll — Modern economics — emperor without clothes

Almost a century and a half after Léon Walras founded neoclassical general equilibrium theory, economists still have not been able to show that markets move economies toequilibria. What we do know is that — under very restrictive assumptions — unique Pareto-efficient equilibria do exist.

But what good does that do? As long as we cannot show, except under exceedingly unrealistic assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria – the value of general equilibrium theory is nil.

Modern economics — emperor without clothes
Lars P. Syll | Professor, Malmo University

See also Dumb and dumber in modern macroeconomics and Microfounded angelic agents

Lord Keynes — Lavoie on Administered Prices

The consequences of this are the following:

(1) one of the major (alleged) mechanisms driving an economy to Walrasian full employment equilibrium collapses and the whole notion that market economies have a strong tendency to general equilibrium must be abandoned, and

(2) the Austrian (or Misesian) notion that market economies have a strong tendency to economic coordination effected by firms’ adjusting their prices towards market clearing values is fundamentally flawed and wrong.

As we've argued many times here at MNE.

Social Democracy For The 21St Century: A Post Keynesian Perspective
Lavoie on Administered Prices

Lord Keynes

Peter Radford — Some thoughts on economics

My instinctive entry point into economics is through business....
Economics as it exists today in its mainstream form is of no use whatever to anyone seeking to understand the reality of business. Our extant theories of the firm are failures in that they attempt to see the world through a neoclassical lens whilst that lens obscures anything remotely real from view in an effort to retain the equilibrating perfection of the closed system envisaged by Walras. The contradiction between the pursuit of equilibrium explanations and the open ended nature of the real world defeats neoclassicism at the starting gate and dooms it to subsequent nonsensical irrelevance....

In this context I have to attribute a great honor to the Arrow-Debreu effort to complete the Walrasian episode. Arrow-Debreu deserves our constant indebtedness. It shows, definitively, how the Walrasian tradition cannot be an explanation for a real economy. It achieves completion by imposing such horrendously, and obviously, unreal constraints on itself that it proves Walras wrong. It is thus great science. It is the falsification of a tradition shown to be worthless.

On another matter: mainstream economists have never adequately, in my opinion, responded to Coase’s challenge of 1937. He asked simply: if markets do what classical economists and their followers say they do, why do firms exist? They ought not. That they do suggests something is very wrong at the heart of orthodox thinking. So I add the ‘Coase conundrum’ to Arrow-Debreu as adding weight to the critique. Mainstream economics is alchemy....

Asymmetrical information is another challenge to orthodoxy that is too often ignored. Information about things is patchy in the real world. Very patchy. It is non-existent with regard to the medium and long term future. Yet this never deters the neoclassical theorists. They march along as if asymmetry was an inconvenience that can be assumed away for simplicity’s sake, rather than a dagger in the heart of their work....

Uncertainty and complexity characterize the real world. Certainty and simplicity characterize neoclassical economics. Hence it irrelevance. It is complicated though, as Arrow-Debreu shows. It has to be. Its epicycles weigh it down. But no amount of clever formalism can turn unreality into reality, just as lead is pretty tough to turn into gold. This doesn’t mean that neoclassical economist aren’t very bright. They are. They have to be to to tend to those epicycles. Newton, after all, spent more time on alchemy than on recognizable physics. No indeed, they are very bright. Just wrong. 

Real-World Economics Review Blog

Some thoughts on economics
Peter Radford

This is a seminal article. Not much that we haven't said hundreds of time on this blog and in the comments, but Peter Radford ties it together very nicely — concise, precise and clear.

Note also that what is said about economics, order and entropy wrt to management also applies wrt to governing, and as Norbert Weinberg observes in naming cybernetics. It's also the basis of general system theory developed by economist Kenneth Boulding and others from related fields who understood the fundamental role of information in imposing order and overcoming entropy. See A Curriculum for Cybernetics and Systems Theory by Alan B. Scrivener for a summary of the basics.

Why don't conventional economists read this stuff, or if they do, why don't they use it?

Where I would quibble with Radford is over his assertion,

"The substitution of labor for capital or vice versa tells us that neither if fundamental. The energy and skill are. Energy and knowledge deployed to order resources for subsequent disordering. That’s the economic process." 

Is he forgetting that capital goods are also produced by labor? Labor is basic until capital goods can produce capital goods and innovate while doing so. That level of AI is still  in the dream stage of development, and even then it seems that knowledge workers will still be required in the Age of Artificial Intelligence.

Matias Vernengo — What killed theory? What theory?

So Noah Smith and Paul Krugman are again trying their hand at the history of economic ideas to understand what happened with the profession in the last three decades....

Naked Keynesianism
What killed theory? What theory?
Matias Vernengo | Associate Professor of Economics, University of Utah

Scientific models are (supposed to be) general descriptions of some segment of reality. Their connection with reality is buttressed by correct predictions. But theories are never finally confirmed, since general assertions regarding unbounded sets, and future information is unbounded, are always open to disconfirmation. A single solid disconfirmation is sufficient to falsify a hypothesis, whereas theories are not disconfirmed as such. When problems develop, at first ad hoc solutions are devised within the theoretical framework, but when problems mount or a single issue calls the whole way of looking into question, then theorists look for a better instrument for seeing, i.e., a new theory.

Theories are ways of seeing reality from a particular perspective. The closer they are to a general description that is borne out by testing, with major hypotheses surviving attempts at falsification, the more scientific they can claim to be. Regardless of past successes, anomalies often arise that the theory does not explain, and these become the problem set that defines the cutting edge of the discipline.

No model can be representational for other than a simple bounded system, where anomaly is ruled out. As complexity increases, the potential for representational modeling decreases owing to the uncertainty introduced by unknown unknowns that cannot be foreseen prior to their emergence from analysis of the system based on existing information.

The way of seeing embedded in a theory that attempts to generally describe a complex system is scientific to the degree that it enables accurate prediction and unscientific to the degree it doesn't. The latter condition arises owing to two chief reasons. First, emergence, and secondly, assumptions that are not empirically testable or which testing tends to call into question if not disconfirm. Emergence is not controllable, but assumptions are, at least to a degree.

To the degree that a theory is unscientific and the approach is uncritical, it can be described as mythological. And to the degree that a mythological way of seeing is accepted, the field is dominated by magical thinking.

However, a purely empirical approach focusing only on data is unsatisfactory for it offers no way of seeing the entire data set scientifically, i.e., in terms of a general description. It is not possible to have an integrated field of study without presuming some way of seeing, that is organizing raw data into information. Hence, ignoring the operative way of seeing in using a purely empirical approach invites magical thinking as the method and mythology as the POV.

This is a knotty issue in social science, and conventional economics is deeply affected by it. The assumption of the market as a "natural" phenomenon is a myth based on magical thinking, i.e., "the invisible hand," whose basis is "rationality," functioning as deus ex machina. Homo economicus is a mythological creature.

Nathan Tankus: Krugman von Hayek

More on the "natural rate" of interest.

Naked Capitalism
Nathan Tankus: Krugman von Hayek

Lord Keynes — Kaldor on the Irrelevance of Equilibrium Economics

Walrasian general equilibrium theory is the greatest obstacle to the development of economics as a science.

That is the bold contention of Nicholas Kaldor in his article “The Irrelevance of Equilibrium Economics” (Economic Journal 82 [1972]: 1237–1252), and it is undoubtedly true.

One can summarise Kaldor’s argument as follows:

Social Democracy For The 21st Century: A Post Keynesian Perspective
Kaldor on the Irrelevance of Equilibrium Economics
Lord Keynes

Andrew Lainton — Keen's Modification of Walras’s Law, Applied to Walras’s Theories

I have long argued on this blog that Steve Keen needs to be taken seriously as an economic theorist and he had made a number of contributions that help solve key theoretical puzzles.

I will posit that one of these contributions is a major modification, indeed correction of Walras’s law. But if he is to be taken seriously then we have to see what economic theory looks like with these changes ‘plugged in’ -does it become more or less coherent? Here I look at his correction of Walras’s law and its implications for general equilibrium theory, a track I wonder if Professor Keen is interested in going down as, rightly, he sees the rigid and dogmatic approach to equilibrium theory in the current lucasian hegemony in economics as a major weakness.

Decisions, Decision, Decisions
Keen's Modification of Walras’s Law, Applied to Walras’s Theories
Andrew Lainton

Lainton disagrees with the view that excess reserves don't affect bank lending and has put forward argument for it.

Growth in bank accounts do have an effect on economic activity if it leads to an increase in excess reserves which banks try to offset by increasing lending.  Capital plus excess reserves is the banks budget constraint (we have covered this point, and the fallacy that reserves don’t matter in endogenous money theory, on this blog many times, and we are agreement here with all of the banking theory textbooks written from an endogenous money perspective).  Of course if banks do not lend we get a seizing up of the monetary circuit.

Lord Keynes — Kaldor on Economics without Equilibrium

If one were state the difference between Post Keynesianism and mainstream neoclassical theory, it might be summed up with the idea that Post Keynesian theory is “economics without (Walrasian) equilibrium.”

Social Democracy For The 21st Century
Kaldor on Economics without Equilibrium
Lord Keynes

Kaldor understood how business works and how firms actually respond to signals rather in the highly idealized way of price being the equilibrium between perfectly elastic supply and demand "curves" (behavior) that economics generally assumes as intuitively true. That behavior of firms is just not factual, as every business person knows from experience, much along the lines that Kaldor describes.

Ramanan elaborates with an extended Kaldor quote:

The Case for Concerted Action
The Heavenly Walrasian Auctioneer

Lars P. Syll — Why general equilibrium economics is a dead end

As long as we cannot show, except under exceedingly special assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria - the value of general equilibrium theory is nil. As long as we can not really demonstrate that there are forces operating – under reasonable, relevant and at least mildly realistic conditions – at moving markets to equilibria, there can not really be any sustainable reason for anyone to pay any interest or attention to this theory.

A stability that can only be proved by assuming “Santa Claus” conditions is of no avail.

Read it at Lars P. Syll's Blog
Why general equilibrium economics is a dead end
by Lars P. Syll

Lars concludes:

Continuing to model a world full of agents behaving as economists – “often wrong, but never uncertain” – and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away), is a gross misallocation of intellectual resources and time.

We have to ask why this would continue for so long, when it is clearly unfruitful, and, moreover, both inefficient and damaging.

There are at least three possible explanations.

First, the people involved are excessively stubborn to the degree of being in denial wrt feedback. Check.

Secondly, it might be due to institutional momentum resulting from prior investments. Check.

Thirdly, as Ravi Batra asserts based on his analysis of historical evidence, it results from co-optation of the upper-echelon intelligentsia by the ruling elite, in this case the acquisitors that benefit from and support research recommending policy that favors the elite. Hmmm?

I recall some wag saying that since Marriner Eccles, the elite have never permitted anyone to be appointed as a central banker who actually understood central banking.

It seems like something similar happened in economics after Lorie Tarshis wrote the first introductory exposition of JMK, The Elements of Economics. Tarshis was promptly denounced as a communist sympathizer (sound familiar today?), The book was withdrawn as a textbook and is long out of print. (It's available for free download here).

Paul Samuelson tried to save Keynes by sanitizing him though a "synthesis" whose result was "bastard Keynesianism." Now "Keynesianism" of any sort is synonymous with "socialism."

And we are stuck with policy models that don't work other than for those benefitting from them most, and resistance to change is fierce. Accidental, or coincidental?