by From Peter Radford – the question is how does economics get its much needed revamp? This caught my eye: “Debreu noted in his Nobel Prize lecture that the success of the mathematization of economic theory depended “on the fact that the commodity space has the structure of a real vector space”. We have shown that this is incorrect. The “price vector” is not a vector, and GET [General Equilibrium Theory] is therefore false. But we may go further and assert that not only was the proof incorrect, what was set out to be proved was not true in the first place. The real economy cannot be brought into equilibrium by adjusting prices. And indeed, the real economy is never in equilibrium.” That’s the concluding paragraph in Philip George’s paper in the recently published Real World
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from Peter Radford
– the question is how does economics get its much needed revamp?
This caught my eye:
“Debreu noted in his Nobel Prize lecture that the success of the mathematization of economic theory depended “on the fact that the commodity space has the structure of a real vector space”. We have shown that this is incorrect. The “price vector” is not a vector, and GET [General Equilibrium Theory] is therefore false. But we may go further and assert that not only was the proof incorrect, what was set out to be proved was not true in the first place. The real economy cannot be brought into equilibrium by adjusting prices. And indeed, the real economy is never in equilibrium.”
That’s the concluding paragraph in Philip George’s paper in the recently published Real World Economics Review #101.
The emperor, apparently, has no clothes.
But, then, we all knew that, didn’t we?
I wrote earlier this week about the difficulty we have in determining the efficacy of a supposed body of knowledge. The arbiters of knowledge have a vested interest in maintaining the outward appearance of whatever it is they study. They act like a priesthood intoning in ancient languages and using secret signs to distinguish themselves from the ordinary folk whom they intend to control or influence. The problem is that we, those of us on the outside, can only rely on those arbiters for assurance that the efficacy they proclaim for themselves is actually, well, efficacious. Worse, within a wide discipline such as economics, or applied mathematics as it has now become, the various sub-specialities are so specialized and the knowledge so arcane that anyone not within close proximity to it is unable to offer an opinion as to its validity.
This has become a fundamental and defining issue within economics. The discipline needs good jolt of reality. It needs a new direction. It needs to shake off the errors of its past and begin anew.
The problem is that those errors, as George points out, are huge and have become iconic components of the discipline at large. General equilibrium is one such component.
It doesn’t exist as a natural phenomenon. It never did. It never could. No one has ever seen one. No one has ever touched one. No one has ever experienced one. It exists only as a concept created for the purpose of allowing exploration of its properties, its values, and its potential as a comparison with the real world. It is a unicorn.
But we don’t use unicorns as a starting point for the study of real-world horses. We don’t say, for instance, that a horse is a unicorn without a horn. No. We study horses. Unicorns are for fun. They are pieces of imaginative excess designed to amuse and tantalize the young. We can hardly argue that general equilibrium exists for fun. Except, of course, for those who want to demonstrate their mathematical virtuosity. Now, if George is correct, their obsession with showing off is revealed to have been a colossal side-show that diverted economics from contact not just with reality but also from mathematical principles. The post-war rush to make economics mathematical was so intense that no one stopped to make sure it made any sense.
It didn’t.
But that manifest truth doesn’t stop economists from blundering along. They live in such a bubble that even a major error, one that debilitates the entire enterprise, is insufficient to stop their momentum. Like alchemists they don’t want mere chemistry to spoil their fun. It would require a re-write of the discipline and would expose a whole lot of argument over the past few decades as being vapor rather than substance. No to mention those august reputations that would need reconsideration.
So the question is how does economics get its much needed revamp? It needs a kick-start similar to that Hutton gave geology. When he wandered around outside and realized that the rocks he was looking at must have accumulated as layers over aeons, and that the odd intrusions into those layers suggested radical action over similarly long periods of time, he did not run home and seek the solace of a unicorn-like model in order to contrast and simplify what he saw. Nor did he concern himself overly with the established timeline drawn as a thought experiment from ancient texts. No. He dealt with reality. He dealt directly with the facts around him. And, by so doing plunged our understanding of the world forward in a great upheaval whose explanatory power is immense and ongoing.
For decades such direct engagement has been lacking substantially in economics. It has, instead, turned within itself and developed a wonderfully sophisticated toolkit to study its own imagination and imagined phenomenon, not those of a real economy. It no longer questions its core assumptions. It has forgotten why it is what it is. It simply keeps building higher and higher into the air whilst paying little to no attention to whether it has a foundation resting on solid ground. Even a giant like Keynes wan’t able to shift the momentum away from fantasy for long.
Perhaps the trouble began in the discipline’s founding myths. Was it Smith’s fault? When he used metaphor to describe the appearance of a coming together of the parts into a smoothly operating whole he was using metaphor. He was not describing reality. The words “as if” had very special meaning. He separated, by using those words, reality from his imagined vision. And he offered it in passing. Yet subsequent economists became lost in the search for that vision. They saw only the calm surface of the world around them and ignored the roiling depths below. An economy is never, ever, in equilibrium. It cannot be. And no power of imagination can make it otherwise.
Now, I understand that the wise elders of the discipline will be chuckling at my naivety and lack of understanding of the arcane structure they know so well. I acknowledge that. To which I retort: what about the financial crisis? What about that strange denizen of the economist’s jungle: “total factor productivity”? Oh, and why admist all the perfection of the marketplace do business firms exist? The elders might say that their constructions of imagination, such as general equilibrium, exist only to act as points of comparison so that they can compare the theoretically perfect with the empirically imperfect to illustrate, elucidate, or to explicate.
But what have they gained by so doing?
All that has happened is that they are where Hutton was when he began. Looking at reality and trying to understand how it got that way. The interim edifice of perfection is a complete waste of time. In all its glorious perfection, it acts as an enormous distraction — the less wary might confuse it with reality. And, as a point of comparison it offers us nothing. It might as well have been a unicorn.
Hutton didn’t need one. Why do economists?