Trust economic textbooks? Not on your life!

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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.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, 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 private debts accumulated globally, and our very low rate of inflation.