by From Lars Syll The DSGE mainstream — which is made up of new classical macroeconomics and neo-Keynesianism — is unanimously based on the core assumptions that characterize the paradigm of social exchange theory. These are rationality, ergodicity and substitutionality, the exclusive acceptance of a formal mathematical-deductive, positivist reductionism. After the ‘empirical turn’ of the last two or three decades, these have been combined with sophisticated micro- and macroeconometrics, or with experimental arrangements, such as are familiar from the leading natural sciences (physics and chemistry). The postulate of stability and optimality (Walras’s law), which is implemented a priori in the core assumptions, serves as a ‘model solution,’ and thus functions as a marker of a negative
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from Lars Syll
The DSGE mainstream — which is made up of new classical macroeconomics and neo-Keynesianism — is unanimously based on the core assumptions that characterize the paradigm of social exchange theory. These are rationality, ergodicity and substitutionality, the exclusive acceptance of a formal mathematical-deductive, positivist reductionism. After the ‘empirical turn’ of the last two or three decades, these have been combined with sophisticated micro- and macroeconometrics, or with experimental arrangements, such as are familiar from the leading natural sciences (physics and chemistry). The postulate of stability and optimality (Walras’s law), which is implemented a priori in the core assumptions, serves as a ‘model solution,’ and thus functions as a marker of a negative heuristic. The apparently very different model prognoses of new classical macroeconomics (hyper-balanced and hyper-stable) on the one hand, and of standard and neo-Keynesianism (unbalanced, open to intervention) on the other hand are based on changes to assumptions in the ‘protective belt’ (e.g. about the speed of adjustment, the rigidity of prices and quantities, the formation of expectations etc.), but do not actually point to a different paradigmatic origin of the two schools of theory.
Maintaining that economics is a science in the ‘true knowledge’ business, yours truly remains a skeptic of the pretences and aspirations of New Classical and ‘New Keynesian’ macroeconomics. So far, I cannot really see that they have yielded very much in terms of realistic and relevant economic knowledge.
The marginal return on its ever higher technical sophistication in no way makes up for the lack of serious underlabouring of the deeper philosophical and methodological foundations of mainstream economics. The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide it cannot give supportive evidence for considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, I cannot but conclude that ‘modern’ macroeconomics on the whole has not delivered anything else than “as if” unreal and irrelevant models.
Science should help us penetrate to “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts” [Keynes 1971-89 vol XVII:427]. We should look out for causal relations. But models can never be more than a starting point in that endeavour. There is always the possibility that there are other variables — of vital importance and although perhaps unobservable and non-additive not necessarily epistemologically inaccessible –- that were not considered for the model.
The kinds of laws and relations that economics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of the achievements of macroeconomics — as most of contemporary endeavours of economic theoretical modeling — rather useless.
Most mainstream economists seem to have no problem with the lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and vanishingly little real-world relevance that characterize modern mainstream macroeconomics. They usually stick to the view that there is nothing basically wrong with ‘standard theory.’ As long as policymakers and economists stick to ‘standard economic analysis’ everything is just fine. Economics is just a common language and method that makes us think straight, reach correct answers, and produce ‘knowledge.’
Although some mainstream economists try hard to give a picture of modern macroeconomics as a pluralist enterprise, the change and diversity that gets their approval only takes place within the analytic-formalistic modeling strategy that makes up the core of mainstream economics. You’re free to take your analytical formalist models and apply it to whatever you want — as long as you do it with a modeling methodology that is acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. If you haven’t modeled your thoughts, you’re not in the economics business. But this isn’t pluralism. It’s a methodological reductionist straightjacket.
No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in modern ‘the model is the message’ form, mainstream economics do not push economic science forwards one millimetre since it simply do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside the models are, that is no guarantee whatsoever they have anything interesting or relevant to say about real-world economies.