“On the use and misuse of theories and models in economics”

“Is there anything worth keeping in standard microeconomics?”

April 14, 2015

from Edward Fullbrook

For me three economists stand out historically as having been the most effective at building resistance to the dominance of scientism in economics.  Keynes of course is one, and the other two are Bernard Guerrien and Tony Lawson, Guerrien because he was the intellectual and moral force behind Autisme Economie which, among other things, gave rise to the RWER; and Lawson because his papers, books and seminars have inspired, joined and intellectually fortified thousands.

It is notable that all three of these economists were or were on their way to becoming professional mathematicians before switching to economics.  When still in his twenties, Keynes’ mathematical genius was already publicly celebrated, most notably by Whitehead and Russell, and he had already published what was to become for his first discipline a classic work.  Guerrien’s first PhD was in mathematics, and Lawson was doing a PhD in mathematics at Cambridge when its economics department lured him over in an attempt to boost its mathematical competence.

The significance for me of Keynes, Guerrien and Lawson being mathematicians first and economists second is that it meant that they were not even for an hour taken in or intimidated by the aggressive scientism of neoclassical economists, and this has enabled them to write analytically about the dominant scientism with a quiet straightforwardness that is beyond the reach of most of us.

An example of this kind of writing that I am talking about is the short essay below that in 2002 Guerrien published in what is now the Real-World Economics Review

Is There Anything Worth Keeping in Standard Microeconomics?
Bernard Guerrien  (Université Paris I, France)

The French students’ movement against autism in economics started with a revolt against  the disproportionate importance of microeconomics in economic teaching. The students complained that nobody had really proved to them that microeconomics was of any use; what is the interest of going through “micro1”, “micro2”, “micro3”, etc., using lots of mathematics to speak of fictitious households, fictitious enterprises and fictitious markets?

Actually, when one thinks about it, it turns out that microeconomics is simply “neoclassical theory”.  Realizing this, I agree with the French students when they say that :

  1. In a course on economic theories, neoclassical theory should be taught alongside other economic theories (classical political economy, marxist theory, keynesian theory, etc.) showing that it is just one among several other approaches;
  2. The principal elements and assumptions of neoclassical theory (consumer and producer choice, general equilibrium existence theorems, and so on) should be taught with very little mathematics (or with none at all). The main reason being that it is essential for students to understand the economic meaning of assumptions made in mathematical language. As they study economics, and not mathematics, students must decide if these assumptions are relevant, or meaningful. But, for that, assumptions must be expressed in clear English and not in abstruse formulas. Only if assumptions, and models, are relevant, can it be of any interest to try to see what “results” or “theorems” can be deduced from them.

I am convinced that assumptions of standard microeconomics are not at all relevant. And I think that it is nonsense to say – as some people do (using the “ as if ” argument) – that relevant results can be deduced from assumptions that obviously contradict almost everything that we observe around us.

The main reason why the teaching of microeconomics (or of “ micro foundations” of macroeconomics) has been called “autistic” is because it is increasingly impossible to discuss real-world economic questions with microeconomists – and with almost all neoclassical theorists.  They are trapped in their system, and don’t in fact care about the outside world any more. If you consult any microeconomic textbook,  it is full of maths (e.g. Kreps or Mas-Colell, Whinston and Green) or of “tales” (e.g. Varian or Schotter), without real data (occasionally you find “examples”, or “applications”, with numerical examples – but they are purely fictitious, invented by the authors).

At first, French students got quite a lot of support from teachers and professors: hundreds of teachers signed petitions backing their movement – specially pleading for “pluralism” in teaching the different ways of approaching economics.  But when the students proposed a precise program of studies, without “micro 1”,  “micro 2”, “micro 3” … , without macroeconomics “with microfoundations” or with a “ representative agent ” -, almost all teachers refused, considering that is was “too much” because  “students must learn all these things, even with some mathematical details”.  When you ask them “why?”, the answer usually goes something like this: “Well, even if we, personally, never use the kind of ‘theory’ or ‘tools’ taught in micoreconomics courses (since we are regulationist, evolutionist, institutionalist, conventionalist, etc.) -, surely there are people who do ‘use’ and  ‘apply’ them, even if it is in an ‘unrealistic’, or ‘excessive’ way”.

But when you ask those scholars who do “use these tools”, especially those who do a lot of econometrics with “representative agent” models, they answer (if you insist quite a bit): “OK,  I agree with you that it is nonsense to represent the whole economy by the (intertemporal) choice of one agent – consumer and producer – or by a unique household that owns a unique firm; but if you don’t do that, you don’t do anything !”.

There are also, some microeconomists who try to prove, by experiments or by some kind of econometrics, that people act rationally.  But, to do that you don’t need to know envelope theorems, compensated (Hicksian) demand or Slutsky matrix! Indeed, “experimental economics” has a very  tenuous relation with “theory”: it tests very elementary ideas (about rational choice or about markets) in very simple situations – even if, in general, people don’t act as theory predicts, but that is another question.

Microeconomics: “unrealistic ” or  “irrelevant” ?

Most of the time microeconomics is criticized because of it’s “lack of realism”.  But “ lack of realism” doesn’t necessarily mean irrelevance ; the expression is usually understood as  meaning that the theory in question is “more or less distant from reality”, or as giving a more or less acceptable proxy of reality (people differing about the quality of the approximation).  The idea is implicitly this: “if we work hard, relaxing some assumptions and using more powerful mathematical theorems, microeconomics will progressively became more and more realistic. There are then – at least – some interesting  concepts and results in microeconomics, that a healthy, post-autistic, economic theory should incorporate”.

That’s what Geff Harcourt implicitly says in the post-autistic economics review, no.11, when he writes:

Against this macroeconomic background, modern microeconomics has a bias towards examining the behaviour of competitive markets (as set out most fully and rigorously in the Arrow-Debreu model of general equilibrium), not as reference points but as approximations to what is actually going on.  Of course, departures from them are taught, increasingly by the clever application of game theory.  Moreover, the  deficiencies of real markets of all sorts are examined in the light of the implications, for example, of the findings of the asymmetric information theorists (three of whom – George Akerlof, Michael Spence, and Joe Stiglitz – have just (10/10/01) been awarded this year’s Nobel Prize.  From Amartya Sen on, the Nobel Prize electors seem to be back on track).

What is Harcourt saying?  He is telling us that the Arrow-Debreu model has something to do with “ the behaviour of competitive markets ”; he is saying that  game theory can be cleverly “applied ”;  he says that there are “ findings ” made by Akerlof, Spence and Stiglitz.  If all this is true, then students have to learn general equilibrium theory (as giving “ approximations to what is actually going on”), game theory, asymmetric information theory, and so on.  That means that they need micro 1, micro 2, micro 3… courses (consumer and producer choice, perfect and imperfect competition, game theory, “ market failures ”, etc.).

I don’t agree at all with Geff Harcourt because:

  1. The Arrow-Debreu model has nothing to do with competition and markets: it is a model of a “highly centralised” economy, with a benevolent auctioneer doing a lot of things, and with stupid price-taker agents;
  2. Game theory cannot be “ applied ”: it only tells little “ stories ” about the possible consequences of rational individuals’ choices made once and for all and simultaneously by all of them.
  3. Akerlof, Spence and Stiglitz have no new “findings”, they just present, in a mathematical form, some very old ideas – long known by insurance companies and by those who organize auctions and second hand markets .
  4. Amartya Sen, as an economist, is a standard microeconomist (that is what he was awarded the Nobel Prize for): only the vocabulary is different (“ capabilities ”, “ functionings ”, etc.).

But, perhaps, all “post autistic” economists won’t agree with me.

It would be good then that they give their opinion and, more generally, that we try to answer, in detail, the question: Is there anything worth keeping in microeconomics – and in neoclassical theory?  If there is, what?

______________________________

Bernard Guerrien is the author of  La Théorie des jeux (2002), Dictionnaire d’analyse économique (2002) and La théorie économique néoclassique. macroéconomie, théorie des jeux, tome 2 (1999).

This entry was posted in Neoclassical and Neo-liberal Economics, rise and fall of empires, EPISTEMOLOGY AND SCIENTIFIC METHOD, HOW TO LIE WITH STATISTICS, ideological classrooms, Contradictions of U.S. Imperium, Real World Economics, Academic Left, petit-bourgeois freedoms, Comparative Systems and Constitutions. Bookmark the permalink.

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