Peter Dorman’s post ‘The Problem with Microfoundations: Bad
Micro’ (at http://econospeak.blogspot.de/2012/07/the-problem-with-microfoundations-bad.html)
instantiates a thicket issues that I presume economic science might address in
a more useful manner.
First, let us agree that “all the disciplines where people
study behavior in a scientific way” have safely established that
neoclassicism’s ‘economic man’ does not occur in sufficient proportions for his
behaviors to register in studies of our familiar, everyday interactions.
Second, we would all observe that neoclassicism attributes
the orderliness of our macroeconomic system to a mutual affinity between
marginal revenues and marginal costs. This premise has begotten the conjoined
conceptual twins of utility/optimality (neither can survive the other’s demise)
which in turn necessitates the existence of an ‘economic man’ devoted entirely
to gain and endowed with perfect knowledge.
Current economic thought divides as to what we are to make
of these contradictory verities: orthodoxy somehow manages to dissemble the
first observation, while heterodoxy asserts that it is sufficient to falsify
the second. But have not both these attitudes tacitly accepted a planted axiom
to the effect that micro behaviors must be foundational to our science of
value?
This foundational axiom has had its fullest development by
the Austrians, whose science is sourced in von Mises’ Human Action (at http://mises.org/document/3250/).
Here we see ‘foundationalism’ getting us precisely nowhere: the causal link
between individual behavior and macroeconomics must be interrupted by what von
Mises and his current acolytes persistently describe as “the literal miracle of
the market”. If there is to be a science of economics, then markets must cease
to be the plaything of an omnipotent and inscrutable deity and become data to
be explained.
Comparisons with specifically Western scientific thought reveal
foundationalism to be a remnant of medieval Scholasticism. The medieval mind
required unity of its universe, and this would (for example) logically require that
the utility function for an economic sector be built up from the utility
functions for all the firms or households composing that sector. Conversely, if
the optimization of utility functions cannot be found in the observable affairs
of actual firms or households, then they cannot describe the economic affairs
of larger economic aggregates.
Science in the Western tradition begins with a realization
that such God-like knowledge of the universe is not given to man. Our shamans no
longer proclaim Truth. Rather, they create metaphors that are valid in certain
degrees for certain applications. They accept that observations taken by
instruments having different lengths of focus will reveal different phenomena
requiring their specific, unique, explanatory models, e.g.:
Schrödinger’s wave equation
explains the periodic chart of elements; but it has no grasp of the Newtonian
world that is familiar to us. And Newton’s
mechanics have no application in the sub-atomic world.
However useful Schrödinger and Newton are in their
respective realms, neither is complete even in its own area of application.
Schrödinger does not explain why the number of stable elements should be
limited; and Newton’s
particle – mass without volume – is philosophically absurd.
(While it is true that unified field theories are sought-for
in the hard sciences, these efforts have yet to be productive, and might never
constitute more than an acceptably modern form of seeking the deity.)
Summing to this point, we should conclude that economics’
current (medieval) habits of dispute would, by their very nature, disestablish all
of what we know as ‘science’. So let us try thinking about our discipline as a
Western scientist might.
Economics’ scientific pretensions might begin having some
validity if its tacit ‘foundationalism’ were dismissed for its hostility to
practical application. Liberated from any obligation to microeconomics, a true
creature of macro thought such as the economic sector would be entitled to its own,
unique, descriptive apparatus. Rejecting the utility/optimality premise as
inoperative for actual firms and households would then commend, rather than
disallow, its application in multi-sectoral contexts.
What would this require? First, a reasonable approximation
for neoclassicism’s economic man would have to be identified as operational at
the sectoral level of abstraction. It should not be difficult to project the
securities analyst into this role: he is preoccupied by gain; his placements of
capital among sectors are undertaken for the sake of overall efficiency; and he
has proprietary knowledge of the firms in his sector because he is inevitably among
these firms’ directors. Finally, we note that securities analysts are not
likely to have their unique vocation’s peculiar behaviors reflected in studies
conducted by behavioral psychologists because they are as much a rarity among
the general population as would be the case for any other division of labor.
Second, the utility/optimality duo would have to be shown
emerging as a useful scientific metaphor when viewed at a macroeconomic level
of abstraction. A useful analogy here would be to Newton’s force/mass duo, which emerges into
its own out of its subatomic foundation because ‘mass’ has proven to be an
exploitably consistent property of matter.
Newtonian practice for measuring a theory’s boundary
conditions is to run the theory ‘in reverse’. His notion that force equals mass
times acceleration provides the theory: a unknown mass is subjected to a
standard force; its acceleration is measured; and mass is computed as force
divided by acceleration.
The analogous process for orthodox macroeconomics is a bit
more complex, but the principle is the same: we observe physical transactions with
the prices at which they occur in some general I/O format; we presume the observations
are optimal because actual; and we calculate the utility parameters implied by
our premise. If the utility parameters so measured are usefully consistent, and
change meaningfully over time, then we might conclude that utility is
exploitable as a measure of economic potential. This empirical conclusion would
further indicate that tendencies toward general optimality are objectively real
for processes of macroeconomic adjustment.
While economists might find these possibilities agreeable as
possibilities, they are universally rejected as sterile. To be an economist of
any persuasion one must have professed that neoclassical macroeconomics is
complex to a point that there can be no non-trivial quantification of general
optimally. Hence there can be no formal dynamic representing an economy’s
progress through the chaotic physical states and disequilibrium prices toward
the unique, equifinal general optimum to be realized if (as will never be the
case) utility remained constant. Hence there is no theory that might be run ‘in
reverse’ in order to test the neoclassical premise by Newtonian criteria.
Except that the necessary theory was synthesized more than
forty years ago at a quite prominent institution, MIT/Sloan. Its emulation
prototypes for ordinary Excel workbooks have been downloadable to your desktop
since there has been an internet (see www.sfecon.com).
This SFEcon system has been run in reverse to track the economic potential of
several economies over decades. It was the basis of my course in international
business economics at USF’s less-than-prominent business school. And it has
received peer review in several disciplines at economics’ perimeter, e.g.: complex
non-linear system dynamics, managerial cybernetics, and computable general
equilibrium.
In other words, all of the issues cited through the body of Peter
Dorman’s post have objective, quantified embodiments that have been tested (and
can be re-tested) by the strict scientific criteria he laments as missing from
economics. Indeed. And the 17th Century Curia would not look into
Galileo’s telescope because they reeeeeally wanted Ptolemy confirmed. Methinks
economics’ real problem is its parallel unwillingness to submit its bases for
moral authority to scientific confirmation.
