Wednesday, May 17, 2006


Mainstream economists proceed by ignoring that much of what they say has long been shown to be false. A theme of this blog is to point out or to explain some of these demonstrations. This theme raises a question: how is it that "leaders" of economic orthodoxy can just ignore these demonstrations? Perhaps I should be studying up on Friedrich Nietzsche and Michel Foucault.

Part of what prompted me to write this post is the nonsense Greg Mankiw writes. In the (indirectly) linked paper, he writes:
As a result of the three waves of new classical economics, the field of macroeconomics became increasingly rigorous and increasingly tied to the tools of microeconomics. The real business cycle models were specific, dynamic examples of Arrow-Debreu general equilibrium theory. Indeed, this was one of their main selling points.
Why pretend new classical macroeconomists are scientists putting their field on rigorous microfoundations? Doesn't Mankiw know about Alan Kirman's championing of the Sonnenschein-Mantel-Debreu results to point out that representative agent models do not have microfoundations? Or, for that matter, of Hahn's work on the difficulties of introducing money into General Equilibrium theory? Is Mankiw aware that Hahn later teamed up with Solow to write an essay on modern macroeconomics? (Contrary to what one may read in Mankiw, Solow's rebuttal to new classical macroeconomics doesn't consist solely of jokes at Lucas' expense.) These questions don't even get at my favorite literature on the Cambridge Capital Controversy. Does Mankiw, who has written a popular textbook, have the power to have his colleagues just pretend whole literatures do not exist?

Greg Mankiw follows up by illustrating my point with a comment about experimental economics. He cites Vernon Smith's work in experimental economics to assert the scientific nature of economics. Somehow he ignores Smith's fellow "nobel" laureate Daniel Kahneman. And yet experimental economists have shown that Kahneman and Tversky's prospect theory is superior to utility theory in providing a description of how individuals behave.

Not only is the neoclassical theory of the consumer empirically lacking. So is the neoclassical theory of the firm. Steve Keen likes empirical results going back to Hall and Hitch's 1930s work. They show that firms engage in some sort of administrative, full-cost, or markup pricing. Modern industrial corporations do not engage in marginal pricing. So do your microeconomic textbooks teach false theories here too with no indication of alternatives?

1 comment:

forich said...

Macroeconomics is a mess, I can't take it seriously anymore.

Mankiw is, indeed, very popular, his textbook is a bestseller.