More on Microfoundations

by Severin Reissl

Good news first. For anyone who has not noticed yet, it would appear that the Bank of England has (finally) come round to accepting Post Keynesian endogenous money theory, at least partially. People more capable than myself have already commented on this, so I am just mentioning it in passing.

After writing the post in which I criticise my macroeconomics textbook, in particular focusing on its commitment to microfoundations, I came across this article by John E. King, with the same title as his book, ‘The Microfoundations Delusion” (which was recently released as a paperback. Unfortunately, the university library does not hold a copy). The article is really worth reading as, I am sure, is the book, which has been discussed elsewhere. I want to focus on one point King makes at the end of the article:

“Finally, there is the issue of academic economists’ reactions to the global financial crisis that began in 2008. The microfoundations dogma has played an important role in the ‘business as usual’ strategy of the mainstream of the profession, in terms of both theory and policy, and it has exercised an indirect but very important influence on public opinion. This is evident in the widespread popular support for ‘fiscal consolidation’ in many European countries, where public services have been slashed in the name of ‘debt reduction’, reducing effective demand and further increasing unemployment – and government debt.”

Without specifically going into the austerity debate, this is indeed a general attitude I have encountered on various occasions – from academic economists and, more worryingly, also from (advanced) students. Ideas both new and old are dismissed out of hand because they are not based on microfounded models. By the same token, rational expectations in macroeconomics, just as, for example, efficient markets in finance, are not treated as hypotheses to be tested (indeed, these concepts are by their very nature largely untestable, irrefutable and, following Hans Albert’s criteria, utterly devoid of information) but rather as necessary presuppositions upon which any theoretical contribution must be based if it is to be taken seriously.  Alternatives are variously branded “unscientific”, “not rigorous”, or both. What does it mean for an approach to economics to be “scientific”? I think it was shown sufficiently in the previous post on this topic that there is nothing which makes the kinds of models developed in response to the Lucas critique preferable prima facie, and King makes a good case for why they are, in fact, inferior. In truth, such defenses are merely empty phrases, deployed by people unwilling to admit or incapable of recognising that their theories are based on ideological concepts, to reassure themselves that they are good scientists and that theirs is the only correct way. All this is very akin to Joan Robinson’s account in Economic Philosophy of pre-Keynesian attempts to turn economics into a “hard science”. In fact, if you changed a few names and terms, that chapter in her book, although published in 1962, could just as well describe the evolution of the discipline since the 80s. Everybody’s favourite textbook author Greg Mankiw goes as far as seeing the entire development of macroeconomics as a relationship, at times conflictual, between “scientists and engineers” as he puts it.

Another textbook I had to suffer this semester (Introduction to Economic Growth by Charles I. Jones) provides a prime example of this attitude, and specifically of how it is being transmitted at an undergraduate level:

[…] it is helpful to think of the economist as a laboratory scientist. The economist sets up a model and has control over the parameters and exogenous variables. The “experiment” is the model itself.  Once the model is setup, the economist starts the experiment and watches to see how the endogenous variables evolve over time. (p. 27)

Wonderful. Do I get a labcoat as well? This passage might seem trivial, but seen as part of a particular view of the greater whole as exemplified by Mankiw’s article, the objective is clear: there is one right, scientific, rigorous way of doing economics. This is what we will teach you, and everything else can safely be ignored without consideration.

One effect of all this, as King notes, is to stall change among the current mainstream practitioners of the discipline following the exposure of its glaring inadequacies in the wake of the financial crisis. The most devastating effect, though, is that such prejudices, through constant repetition over the course of a typical education in economics, are drilled into the student’s head over and over again, until they seem too self-evident to be open to question. Thus the academic inertia are reproduced. The most dangerous ideologue is the one who will not admit that he is one (closely followed by the one who does not know that he is one).

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