Trust economic textbooks? Not on your life!

flattr this!

Recently Krug­man has been defend­ing text­book eco­nom­ics, argu­ing that if pol­icy mak­ers had sim­ply fol­lowed their advice, the cri­sis would have been far less severe.

It is deeply unfair to blame text­book eco­nom­ics either for the cri­sis or for the poor response to the cri­sis.  (Krug­man, The Trou­ble with Eco­nom­ics is Econ­o­mists)

I don’t dis­pute that aus­ter­ity has made the cri­sis far worse, and that con­ven­tional IS-LM analy­sis argues for gov­ern­ment stim­u­lus, not aus­ter­ity, in a severe reces­sion. But the extrap­o­la­tion that there­fore main­stream eco­nom­ics text­books are fonts of wis­dom is non­sense. They are instead enor­mous exer­cises in often unin­ten­tional mendacity–omitting huge swathes of eco­nomic research or empir­i­cal data when that research or data con­tra­dict main­stream beliefs.

Lars Syll has writ­ten a very good, brief post on this point:

Eco­nom­ics text­books – how to get away with sci­en­tific fraud

It details prob­a­bly the most egre­gious way in which stan­dard textbooks–Krugman’s included–commit effec­tive fraud by omit­ting impor­tant results from eco­nomic research–often because the text­book writ­ers them­selves don’t even know of this cru­cial research because they weren’t taught it by their teach­ers. This is the “Sonnenschein-Mantel-Debreu The­o­rem”, which estab­lishes that the “Law of Demand” does not apply even at the level of a sin­gle mar­ket. And yet Neo­clas­si­cal macro­econ­o­mists believe it is valid to start with a model in which the entire econ­omy is a sin­gle “rep­re­sen­ta­tive agent”.

The whole is more than a sum of parts. This fact shows up already when ortho­dox – neo­clas­si­cal – eco­nom­ics tries to argue for the exis­tence of The Law of Demand – when the price of a com­mod­ity falls, the demand for it will increase – on the aggre­gate. Although it may be said that one suc­ceeds in estab­lish­ing The Law for sin­gle indi­vid­u­als it soon turned out – in the Sonnenschein-Mantel-Debreu the­o­remfirmly estab­lished already in 1976 – that it wasn’t pos­si­ble to extend The Law of Demand to apply on the mar­ket level, unless one made ridicu­lously unre­al­is­tic assump­tions such as indi­vid­u­als all hav­ing homo­thetic pref­er­ences – which actu­ally implies that all indi­vid­u­als haveiden­ti­cal preferences.

This could only be con­ceiv­able if there was in essence only one actor – the (in)famousrep­re­sen­ta­tive actor. So, yes, it was pos­si­ble to gen­er­al­ize The Law of Demand – as long as we assumed that on the aggre­gate level there was only one com­mod­ity and one actor. What gen­er­al­iza­tion! Does this sound rea­son­able? Of course not. This is pure nonsense!

How has neo­clas­si­cal eco­nom­ics reacted to this dev­as­tat­ing findig? Basi­cally by look­ing the other way, ignor­ing it and hop­ing that no one sees that the emperor is naked.

Hav­ing gone through a hand­ful of the most fre­quently used text­books of eco­nom­ics at the under­grad­u­ate level today, I can only con­clude that the mod­els that are pre­sented in these mod­ern neo­clas­si­cal text­books try to describe and ana­lyze com­plex and het­ero­ge­neous real economies with a sin­gle rational-expectations-robot-imitation-representative-agent.

I rec­om­mend read­ing all of Lars’ post. And if you want the Full Monty, you could try my Debunk­ing Eco­nom­ics.

About Steve Keen

I am a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous debts accumulated in Australia, and our very low rate of inflation.
Bookmark the permalink.

5 Responses to Trust economic textbooks? Not on your life!

  1. ken says:

    This reminds me of the eco­log­i­cal fal­lacy in sta­tis­tics. Treat­ing groups like they were a sin­gle indi­vid­ual, that is by using their mean result, often will pro­duce the wrong results. Only by mod­el­ling at the indi­vid­ual level can sen­si­ble results be obtained.

  2. Steve Hummel says:

    The actual and intel­li­gent con­clu­sion to be taken from the Sonnenschein-Mantel-Debreu the­o­rem is not at all that you can­not effec­tively con­clude from aggre­gates, only that you have to con­tin­u­ally be watch­ful, actu­ally inter­vene and inter­vene by bal­anc­ing the cor­rect met­ric in an effec­tive if not math­e­mat­i­cally equiv­o­cat­ing way.

    And con­sid­er­ing the inevitable eco­nomic wed­ding, and inescapable logic of both profit and tech­no­log­i­cal inno­va­tion which are effi­ciency of cost and effort.….think uni­ver­sal indi­vid­ual div­i­dend and com­pen­sated retail discount.

    Why? Because then you’d be uti­liz­ing BOTH sci­ence AND intu­ition, the inte­gra­tion of which is the hall­mark of BOTH Good sci­ence AND Wisdom.

  3. Rentier Fungicide says:

    I love Debunk­ing Eco­nom­ics, but I have a ques­tion about expo­si­tion of basic ideas in eco­nom­ics. Might there not be times when it might still be use­ful to use tra­di­tional text­book argu­ments to explain sim­ple but use­ful (even if highly imper­fect) ideas. What I mean is, for instance, in draw­ing sim­ple labour demand-labour sup­ply graphs, or say depict­ing cross-elasticity of demand, or opti­mal pol­lu­tion as the inter­sec­tion of mar­ginal exter­nal cost and mar­ginal net pri­vate ben­e­fit curves. All this demands wholly unre­al­is­tic down­ward slop­ing demand curves and per­fectly upward ris­ing sup­ply curves (or the equiv­a­lent) — at least that is how I absorbed these ideas. Now I am scarcely the per­son to try to put forth use­ful exam­ples, but are these not use­ful notions con­veyed in an acces­si­ble man­ner EVEN IF they have no rela­tion (as depicted in econ 101 or 201) to any par­tic­u­lar reality?

  4. Derek R says:

    I think that that is part of the prob­lem with supply-demand curves, RF. They’re just so appeal­ing that we want them to be true even when we know they’re not.

    If they could be jus­ti­fied on new foun­da­tions to replace those which Prof Keen has debunked most of us would cheer. But sadly no one has done it yet.

  5. Bhaskara II says:

    Ren­tier and Derek R et al:

    Even if the sup­ply and demand curve were for one item and not “all” we know that there are an enor­mous num­ber of dif­fer­ent prices paid by peo­ple and enti­ties in dif­fer­ent places.

    Rentier’s sug­ges­tion of the labor mar­ket is excel­lent. Peo­ple get paid dif­fer­ent amounts than each other.

    In SLIM, uhhh, IS-LM the­ory there is only one inter­est rate. But dif­fer­ent peo­ple and enti­ties pay dif­fer­ent inter­est rates. The bank pays a dif­fer­ent rate than what they receive for lend­ing. Cor­po­ra­tions, peo­ple, banks, gov­ern­ments, book­ies, gam­blers all pay or receive at dif­fer­ent inter­est rates.

Leave a Reply