Back Issues of Methodus Available On-Line

I've just discovered the International Network for Economic Method (INEM). They publish the Journal of Economic Methodology. This journal replaced Methodus, INEM's bulletin. Back issues of Methodus are freely available. I've barely begun sampling what's here - for example, a 1992 Geoff Harcourt comment on political economy or a 1991 Kevin Hoover review of Mirowski's More Heat Than Light.

Edward, You Ignorant Arse

In an email exchange with a graduate student, Edward Prescott proves himself to be an impolite, ignorant, arrogant fool. Prescott's correspondent, Leonid Teytelman, doubted this must be Prescott in full possession of his faculties - maybe an adolescent niece or nephew had somehow gotten ahold of Prescott's account. He could not be drunk, since the interchange took place over several days. Myself, I have no problem in believing that Prescott understands neither the science of economics nor basic facts about the United States economy.

Apparently Prescott, in his professional work with Kyland, is equally incoherent. Jim Hartley documents that

"In five different programmatic manifestos over a span of 15 years, Kydland and Prescott have offered five different—and in many ways mutually incompatible—justifications for the models they were advocating." -- James E. Hartley (2006) "Kyland and Prescott's Nobel Prize: the Methodology of Time Consistency and Real Business Cycle Models", Review of Political Economy, V. 18, N. 1 (January): 1-28

At one point, business cycles are caused by the time-to-build capital equipment. No, they are caused by technology shocks in a growth model. You should believe this because "the smoothed series and the derivations from the smoothed series are quantitatively consistent with the observed behavior". No, only because the model explains co-movements of the deviations. No, because the newly interpreted model follows from "standard" theory (Solow-Swan growth modeling). And deviations from the model are because the measurements are bad. No, the model was built to explain previously observed facts, which are observed not by looking at deviations from the Solow-Swan growth model, but from deviations from the output of the Hodrick-Prescott filter. In particular, the model explains the observed acyclical nature of movements in real wages. That is, the model explains the observed strong procyclical nature of movements in real wages. And the model is merely an application of Computable General Equilibrium modeling. The parameters of the model are based on observed values. No, they are chosen so the model outputs "mimic the world".

"Macroeconomics as an Autonomous Discipline"

"Paradoxically, the main result obtained by the new classical economists is the demonstration - against their wishes and expectations - that a satisfactory synthesis of macroeconomics and microeconomics is not yet mature. As a matter of fact, the micro-foundations of macroeconomics which they suggest are by now far from satisfactory. They rely on the heroic assumption that the decision-makers of the models are representative agents, whose behavior fairly well approximates the aggregate behavior of the economy. Unfortunately this assumption surreptitiously eliminates the main object that should be studied by macroeconomics: aggregation problems and failures of coordination between the behavior of individuals. Even so, the suggested micro-foundations work only under very special assumptions which actually deny any importance to the main problems considered by Keynes's macroeconomics: uncertainty, disequilibrium, instability, structural change, etc. As we have seen, disequilibria are assumed to be non-intelligible and are therefore ignored; uncertainty is emasculated by the 'certainty equivalence' hypothesis; instability is defined away by arbitrarily restricting the analysis to stationary and ergodic processes and taking account only of the subset of stable solutions...

The failure of this reductionist research programme may be due to the immaturity of current macroeconomics, but it may also be due to weaknesses in existing microeconomic theory. Notwithstanding the widespread belief in its intrinsic solidity, the micro theory currently accepted by the new classical economists may prove on closer examination to be insufficiently powerful to provide solid foundations for a satisfactory macroeconomics. To take the preliminary steps towards a real synthesis between macro and micro theories, it is necessary to consider not only the micro-foundations of macroeconomics but also the macro-foundations of microeconomics (Hicks 1983).

The history of scientific thought shows that whenever a synthesis between different disciplines has been successfully accomplished, the result has been a new discipline with features not reducible to those of the original disciplines. Such a synthesis between micro and macroeconomics, if it is possible, is still far away. In the meantime the reciprocal autonomy of disciplines should be carefully safeguarded. It is particularly important to defend the autonomy of macroeconomics, as today this is greatly jeopardized by views like those mentioned above. Therefore we should revert to the original Keynesian concept of macroeconomics as an autonomous discipline. This does not imply that we should give up making serious efforts to provide rigorous micro-foundations for our macroeconomic statements, if that means searching for greater consistency between the two disciplines. In other words we should continue to pursue a full synthesis between microeconomics and macroeconomics. Many things have been learned from past attempts, unsuccessful as they were, and many others may be learned through future efforts.

But in the meantime one should not reject as non-scientific any contribution that lacks proper 'micro-foundations,' particularly in the restricted sense of a 'reduction to current Walrasian microeconomics.' As a matter of fact, though it may be found impossible to provide proper micro-foundations to a given macroeconomic statement, this might become possible in the future. Such developments have occurred many times in the past and it could happen again, especially if microeconomics extends its range well beyond its Walrasian bounds. To reject this view would be as irrational as to reject as non-scientific any biological statement not yet reducible to chemical statements. Unfortunately, as has been wisely remarked, the only known way to reduce biology to chemistry is murder." -- Alessandro Vercelli, Methodological Foundations of Macroeconomics: Keynes & Lucas, Cambridge University Press, 1991.

Koopmans On Friedman's Claimed Methodology

Over on Crooked Timber, "reason" says he likes a James Galbraith quotation I refer to. Galbraith mentions Koopmans. I suppose Galbraith is talking about this:

"Here the 'direct' implications of the postulates, their accuracy in describing directly observed individual behavior, are placed [by Friedman] in a category with which we need to be less concerned.

There are several objections to such a concept of theory construction. In the first place, in order that we shall have a refutable theory at all, the postulates then need to be supplemented by a clear description of the class of implications by which the theory stands or falls. Otherwise, every contradiction between an implication and an observation could be met by reclassifying the implication as a 'direct' one.

This objection is met by Friedman's suggestion that there should in each case be 'rules for using the model,' that is, a specification of the 'class of phenomena the hypothesis is designed to explain.' But a second objection arises out of this answer to the first. To state a set of postulates, and then to exempt a subclass of their implications from verification is a curiously roundabout way of specifying the content of a theory that is regarded as open to empirical refutation. It leaves one without an understanding of the reasons for the exemptions. The impression of ingeniousness that this procedure gives is reinforced by the fact that in each of Professor Friedman's examples he knows more about the phenomenon in question than he lets on in his suggested postulates. He is willing to predict the expert billard player's shots from the hypothesis that the player knows the mathematical formulae of mechanics and computes their application to each situation with lightning speed, even though he (Friedman) knows that most experts at billards do not have these abilities. He is willing to predict the distribution of leaves on a tree from the hypothesis that each leaf seeks a position of maximum exposure to sunlight (given the position of all other leaves), although no one has reported observing a leaf change its location on a tree.

One cannot help but feel uneasy in the face of so much ingenuity. Truth, like peace, is indivisible. It cannot be compartmentalized. Before we can accept the view that obvious discrepancies between behavior postulates and directly observed behavior do not affect the predictive power of specified implications of the postulates, we need to understand the reason why these discrepancies do not matter. This is all the more important in a field such as economics where, as Friedman also emphasizes, the opportunities for verification of the predictions and implications derived from the postulates are scarce and the outcome of such verification often remains somewhat uncertain..." -- Tjalling C. Koopmans (1957). Three Essays on the State of Economic Science, McGraw-Hill: 139-140

Koopmans also discusses methodology, in an attack on American institutionalism, in his "Measurement without Theory" (Review of Economic Statistics, V. 29, N. 3 (August 1947)). I have already pointed out some more recent criticisms of Friedman's methodology.

Phenomenology

"One of the embarrassing dirty little secrets of economics is that there is no such thing as economic theory properly so-called. There is simply no set of foundational bedrock principles on which one can base calculations that illuminate situations in the real world." -- Brad DeLong

My title does not refer to an approach in continental philosophy associated with Husserl and Heidegger. Rather, I refer to a term used in physics and engineering by practitioners who know they are not trying to develop models derived from fundamental laws, but only modeling the phenomena.

I find it of interest that Brad DeLong has recently described economics as phenomenology. A noted "rocket scientist" on Wall Street came to the same conclusion:

"The techniques of physics hardly ever produce more than the most approximate truth in finance because 'true' financial value is itself a suspect notion. In physics, a model is right when it correctly predicts the future trajectories of planets or the existence and properties of new particles, such as Gell-Mann's Omega Minus. In finance, you cannot easily prove a model right by such observation. Data are scarce and, more importantly, markets are arenas of action and reaction, dialectics of thesis, antithesis, and synthesis. People learn from past mistakes and go on to make new ones. What's right in one regime is wrong in the next.

As a result, physicists turned quants don't expect too much from their theories, though many economists naively do. Perhaps this is because physicists, raised on theories capable of superb divination, know the difference between a fundamental theory and a phenomenological toy, useful though the latter may be. Trained economists have never seen a really first-class model. It's not that physics is 'better', but rather that finance is harder. In physics you're playing against God, and He doesn't change his laws very often. When you've checkmated Him, He'll concede. In finance, you're playing against God's creatures, agents who value assets based on their ephemeral opinions. They don't know when they've lost, so they keep trying." -- Emanuel Derman (2004) My Life as a Quant: Reflections on Physics and Finance, John Wiley & Sons.

I think one can read intimations of Soros' reflexitivity or Joan Robinson's historical time in the above quote. Derman is even more direct about a Post Keynesian concept elsewhere:

"Slowly it began to dawn on me that what we faced was not so much risk as uncertainty. Risk is what you bear when you own, for example, 100 shares of Microsoft - you know exactly what those shares are worth because you can sell them in a second at something very close to the last traded price. There is no uncertainty about their current value, only the risk that their value will change in the next instant. But when you own an exotic illiquid option, uncertainty precedes its risk - you don't even know exactly what the option is currently worth because you don't know whether the model you are using is right or wrong. Or, more accurately, you know that the model you are using is both naive and wrong - the only question is how naive and how wrong." -- Emanuel Derman (2004)

The Map Is Not The Territory

Suppose an orthodox economist hands you a map and says, "This is a map of New York City." You look at it and say, "It is not. It is a map of the London tube system."

Or suppose an orthodox economist hands you a map. And you look at it and say, "This cannot be right. Here are two interesecting contour lines supposedly of different elevations."

Suppose the orthodox economist responds, "Assumptions do not need to be realistic."

I have encountered several economists who distract from those pointing out the logical inconsistencies and factual errors in their theories. They make dismissive non sequiturs about methodology, as illustrated in the parables above.

The Con Left In Economics?

The Spring 2010 issue of the Journal of Economic Perspectives has a debate among some mainstream economists on changes in economics since Edward Leamer's 1983 American Economic Review paper, "Let's Take the Con Out of Econometrics". Developments since then include more reliance on sensitivity analysis; randomized experiment designs, both in laboratories and in the field; natural experiments; and Instrumental Variables (IVs). Contributors to this symposium consist of Joshua D. Angrist & Jön-Steffen Pischke, Edward E. Leamer, Michael P. Keane, Christopher A. Sims, Aviv Nevo & Michael D. Whinston, and James H. Stock.

Formalism in Economics

I think many mainstream economics equate formalism with use of equations. But analytical categories that are not easily set out as the value of a variable in a numerical equation can provide a kind of formalism. And, if you want mathematics, one could, I suppose, set out an ontology, using model theory, for such categories. (I'm not sure what would be the point of that.) To illustrate my claim, I point to two sets of triples that some economists have developed.

Structure, Organization, and Agency need to be analyzed if one wants to understand the provisioning process in capitalist economies. The interindustry dependencies shown in Input-Output tables, macroeconomic income flows, and money flows show some structures important for understanding capitalist economies. Business enterprises, government and quasi-government bureaus, and families are important organizations in such economies. Agency occurs, that is, decisions are made by individuals, in a context provided by such structures and organizations (Lee 2009).

Oligopoly involves a small number of firms maintaining special privileges in a market environment where other firms might enter (Rothschild 1993). Ever since the work of Joe Bain and Paolo Sylos Labini (Modigliani 1958), economists have analyzed oligopoly on the basis of Structure, Conduct, and Performance. The structure of a market is more or less stable in time, observable, and influences the conduct of market participants. Conduct includes the choice of which commodities to buy, the prices to post, decisions about advertisement, etc. Performance is a matter of comparing market results with some sort of ideally efficient results (Schmalensee 1987).

References

• Frederic Lee (2009) A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century, Routledge
• Franco Modigliani (1958) "New Developments on the Oligopoly Front", Journal of Political Economy, V. 66, N. 3 (June): pp. 215-232.
• Kurt W. Rothschild (1993) "Oligopoly: Walking the Sylos-Path", in Markets and Institutions in Economic Development: Essays in Honour of Paolo Sylos Labini (Edited by S. Biasco, A. Roncaglia, and M. Salvati), St. Martin's Press
• Richard Schmalensee (1987) "Industrial Organization", in The New Palgrave: A Dictionary of Economics (Edited by J. Eatwell, M. Milgate, and P. Newman), MAcmillan

Friedman Blinded Me With Science

Scientists aspire to develop theories that observations can potentially demonstrate to be wrong. Here I examine whether this aspiration can possibly be achieved when economics is practiced in keeping with one of two views on methodology, the deductive-nomological or the instrumental view. I get the argument below from Donald P. Green and Ian Shapiro, Pathologies of Rational Choice Theory: A Critique of Applications in Political Science (Yale University Press, 1994).

Consider the covering law model, also known as the deductive-nomological view of scientific methodology. In this view, scientists formulate universal laws, in some sense. In an application of a scientific law, the hypotheses or antecedents are asserted to be true. That is, the statement of scientific law is conjoined with initial conditions. One then checks that the consequent holds. If observation is inconsistent with the consequent and one is sure that the initial conditions are true, the law is refuted.

Milton Friedman advocates instrumentalism, in which the assumptions of a scientific theory are false. (Actually, his famous essay, "The Methodology of Positive Economics", is so incoherent, Friedman can be interpreted as advocating almost any methodology you care to name. But let's stick with a widely argued view.) In Friedman's view the antecedents are always false in a significant theory:

"Truly important and significant hypotheses will be found to have 'assumptions' that are wildly inaccurate descriptive representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions" -- Milton Friedman

Thus, if one holds that economic theories state covering laws and that economists are and should be instrumentalists, economic theories cannot be refuted by observation. The logical implications of false antecedents need not be true.

Can economics be a science if it is practiced in keeping with Friedman's strictures?

The Sociology Of Mainstream And Non-Mainstream Economics

"I admit that my criteria of falsifiability does not lead to an unambiguous classification. Indeed, it is impossible to decide, by analyzing its logical form, whether a system of statements is a conventional system of irrefutable implicit definitions, or whether it is a system which is empirical in my sense; that is, a refutable system. Yet this only shows that my criterion of demarcation cannot be applied immediately to a system of statements - a fact I have already pointed out... The question whether a given system should as such be regarded as a conventionalist or an empirical one is therefore misconceived. Only with reference to the methods applied to a theoretical system is it at all possible to ask whether we are dealing with a conventionalist or an empirical theory. The only way to avoid conventionalism is by taking a decision: the decision not to apply its methods. We decide that if our system is threatened we will never save it by any kind of conventionalist stratagem." - Karl Popper (1968): 81-82

John Davis (2009) distinguished between two ways of dividing economists up: based on the content of their theories and based on more sociological criteria of citation networks, conference attendance, professional society membership, textbooks, etc. I think Davis' taxonomy remains of interest even if one does not agree with his views on trend in the economics profession.

Davis distinguishes between orthodox and heterodox economics on the basis of the substances of their theories. In the last column of Table 1, I have listed some distinguishing precepts of orthodox economics. The last three precepts roughly correspond to the opposite of the distinguishing features, according to Davis, of heterodox economics around 1980. I think one could also call orthodox economics "neoclassical". Heterodox economics rejects some combination of the precepts of orthodox economics. For Davis, mainstream economics is a sociological category. The first two columns of Table list some examples. Mainstream heterodox economics may become orthodox in time, with game theory perhaps already having succeeded, at least partially. At any rate, mainstream heterodox economists have access to the leading journals, a presence in the graduate schools generally rated to be the top, and so on.

Table 1: Divisions Among Economists

Non-Mainstream Economists	Mainstream Economists
Heterodox Economics		Orthodox Economics
Marxism Radical political economy Institutionalism Post Keynesianism Austrian school Regulation schools Circuitists Feminist economics	Game theory(?) Behavioral economics Experimental economics Evolutionary economics Neuroeconomics Complexity economics	Formal models Atomistic, non-socially embedded individuals Equilibrium models set out of historical time Methodological individualism, social structures explained by aggregation over individuals

Both mainstream and non-mainstream heterodox economics can be broken down further. This can be seen in the table. The first two columns each contain more than one school of thought as an exemplar of that category. Davis makes further schematic distinctions. One is between an inward or outward orientation of heterodox economists. Another is among differents ways schools of economists can become heterodox. With these distinctions, Davis argues that the content and understanding of mainstream, non-mainstream, orthodox, and heterodox economics has been evolving over time.

Davis argues that non-mainstream economists should work harder to engage mainstream heterodox economists and that mainstream economists are more open to theoretical innovation than some non-mainstream economists claim. Without such engagement, he thinks, mainstream economists might be excessively conservative, with consequences that mainstream economists will continue to fail to incorporate worthwhile insights of non-mainstream heterodox economists. In the present historical conjuncture, I think, the odds of mainstream economics being suddenly swept away have increased. If so, Davis's strategy might be unnecessary, though I am not very optimistic either way.

By the way, I could have cited previous work by Davis for this post. I wanted to mention that Davis's is the second essay I've read in Fullbrook (2009). McFarling (2009), which is at least a stretch for me, is the first essay I read in this book. So far, I find in the little I've read in this book a broad agreement that heterodox economists reject the orthodox overemphasis on social explanations from atomistic, non-socially embedded individuals.

References

• John B. Davis (2009) "The Nature of Heterodox Economics", in Fullbrook (2009)
• Edward Fullbrook (editor) (2009) Ontology and Economics: Tony Lawson and His Critics, Routledge
• Bruce R. McFarling (2009) "Finding a Critical Pragmatism in Reorienting Economics", in Fullbrook (2009)
• Karl R. Popper (1968) The Logic of Scientific Discovery, Revised edition, Harper

J. S. Mill on Method

1.0 Introduction
John Stuart Mill wrote an essay on the methodology of economics or rather, in the language of his day, Political Economy. I look at it in a Whiggish fashion to show some of his ideas are still around today, namely:

• The distinction between positive and normative propositions
• The notion of economic man as being motivated solely by monetary considerations (Homo Economicus)
• The argument that economics should be a deductive, not an inductive, science
• The complexity of society and the nature of humankind precludes controlled experimentation

(I do not claim that Mill was original with any particular concept here.) Some of these distinctions you will find critics of mainstream economics imposing on the mainstream, while mainstream economists say that they have been long rejected. I am thinking especially of Mill's claim that economics examines the logical implications of a separate economic motive. Humankind has other motives that are altruistic or not directed towards money. Lionel Robbins, for example, rejected this distinction. (Whether economists' pronouncements about what they do matches what they do is a question not examined here.)

2.0 Positive Versus Normative Propositions
J. S. Mill introduces a distinction between positive and normative propositions. He uses the terms "science" and "art". Mill thinks political economy is and should be a science.

"... the essentially distinct, though closely connected, ideas of science and art. These two ideas differ from one another as the understanding differs from the will, or as the indicative mood in grammar differs from the imperative. The one deals in facts, the other in precepts. Science is a collection of truths; art, a body of rules, or directions for conduct. The language of science is, This is, or, This is not; This does, or does not, happen. The language of art is, Do this; Avoid that. Science takes cognizance of a phenomenon, and endeavours to discover its law; art proposes to itself an end, and looks out for means to effect it.

If, therefore, Political Economy be a science, it cannot be a collection of practical rules; though, unless it be altogether a useless science, practical rules must be capable of being founded upon it." -- J. S. Mill, "On the Definition of Political Economy; and on the Method of Investigation Proper to It", in Essays on Some Unsettled Questions of Political Economy (1844: 312).

This particular essay was originally published in the October 1836 issue of the London and Westminster Review. The page numbers refer to the fourth volume of The Collected Works of John Stuart Mill, from 1967.

In discussing the relationship of art to science, Mill echoes a distinction between "empirics" and "technique" (if I guess correctly from my knowledge of the greek alphabet) to be found in the "Gorgias" of Plato. Technique, in this sense, is art founded on science.

Mill, in discussing an analogy accompanying a definition of economics that he ultimately rejects, writes:

"domestic economy, so far as it is capable of being reduced to principles, is an art. It consists of rules, or maxims of prudence, for keeping the family regularly supplied with what its wants require, and securing, with any given amount of means, the greatest possible quantity of physical comfort and enjoyment." -- J. S. Mill (1844: 313)

And Mill proposes a definition for criticism:

"Political Economy [is] the science which treats of the production and distribution of wealth, so far as they depend upon the laws of human nature." -- J. S. Mill (1844: 318)

3.0 Homo Economicus
Mill says economics is a type of moral or psychological science, as opposed to a physical science (p. 316 for the distinction). Mill decomposes the subject matters of the moral sciences:

"We may inquire what belongs to man considered individually, and as if no human being existed besides himself; we may next consider him as coming into contact with other individuals; and finally, as living in a state of society, that is, forming part of a body or aggregation of human beings, systematically co-operating for common purposes." -- J. S. Mill (1844: 319)

Mill, insofar as he is interested in the social sciences, is concerned with the "laws of human nature in the social state" (p. 320). Here is an important grouping of the moral sciences:

"The science of social economy embraces every part of man's nature, in so far as influencing the conduct or condition of man in society; and therefore may it be termed speculative politics ..." -- J. S. Mill (1844: 320)

Mill then defines a part:

"'Political Economy' is not the science of speculative politics, but a branch of that science. It does not treat of the whole of man's nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging of the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive; except those which may be regarded as perpetually antagonizing principles to the desire of wealth, namely, aversion to labour, and desire of the present enjoyment of cosily indulgences." -- J. S. Mill (1844: 321)

"Political Economy considers mankind as occupied solely in acquiring and consuming wealth; and aims at showing what is the course of action into which mankind, living in a state of society, would be impelled, if that motive, except in the degree in which it is checked by the two perpetual counter-motives above adverted to, were absolute ruler of all their actions." -- J. S. Mill (1844: 322)

I think Mill's language here is echoed by some "libertarians":

"[Political economy] shows mankind ... establishing laws to prevent individuals from encroaching upon the property of others by force or fraud" -- J. S. Mill (1844: 322)

Mill draws an analogy between the effects of the motives treated by political economy and all other motives with the superposition of forces in Newtonian astronomy (p. 322). And he states that the motives not treated in Political Economy are "disturbing causes" resembling "frictions in mechanics" (p. 330).

Here is Mill's approved definition of Political Economy:

"The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object." -- J. S. Mill (1844: 323)

Mill has much else to say of interest, e.g.:

"... those who are accused of despising facts and disregarding experience build and profess to build wholly upon facts and experience; while those who disavow theory cannot make one step without theorizing." -- J. S. Mill (1844: 324)

4.0 Economics as a Deductive Science
Mill characterizes Political Economy:

"as essentially an abstract science, and its method as the method a priori." -- J. S. Mill (1844: 325)

5.0 Economics as Not Supporting Controlled Experimentation

"There is a property common to almost all the moral sciences, and by which they are distinguished from many of the physical; this is, that it is seldom in our power to make experiments in them. -- J. S. Mill (1844: 327)

Mill talks about the "circumstances, moreover, of great complexity" (p. 327) in which observations for Political economy are generated. And he refers to the inability of "rarely obtain[ing] an experimentum crucis." -- J. S. Mill (1844: 328).

Economists have recently been performing controlled experiments. I refer not only to behaviorial economics, but also to field experiments.

Anti-Intellectualism Among Mainstream Economists

I find these comments to be anti-intellectual:

• John Quiggin rejects the Austrian school of economics on the ground that partisans of that school discuss political philosophy and the epistemology and methodology of economics.
• Roberto Perotti critizes Post Keynesians and neo-Ricardians on the grounds that they don't spend their time exclusively constructing formal models and estimating correlations. (I used Google's translation feature. Sergio Cesaratto answers from a Sraffian perspective.)
• Commentators at Mark Thoma reject discussions about what Adam Smith wrote.

I thought the point of scholarship was to attempt to make true statements. If somebody makes an untrue statement about what Keynes or Adam Smith said, one should correct them. This is not to say that that the fact that Keynes or Smith advocated something or other is a justification for policy. I think a historically accurate representation of an old text entails quite a bit of contextualization in terms of its time. To apply policy conclusions to our time would require recontextualization in contemporary terms, as well as empirical work.

I would think different scholars, even within a discipline, would find different questions of interest. Some economists argue for a supposed freedom to choose. Shouldn't some then be legitimately allowed to explore old texts or methodology or whatever? If Thomas Kuhn was somewhat correct, wouldn't one expect more discussion about methodology when the defining paradigm in a field has so obviously broken down, as today among mainstream economists?

The Meaning Of A Word Is Its Use In The Language

The economy is never in equilibrium, or so many heterodox economists say. Being a Joan Robinson fan, I'm likely to agree. To understand the implications of the idea, and the use and abuse of equilibrium analysis, one must understand what economists mean by "equilibrium".

Tyler Cowen and Richard Fink provide an example of abuse, that is, a confusion about the implications of the economy not being in equilibrium. In the following passage, Cowen and Fink explicitly put aside income effects, false prices, strategic behavior, etc.:

"all that the Rothbard-Mises analysis implies is that there is a tendency towards equilibrium in a world with frozen data. Of course, this implies little or nothing about whether there is a tendency towards equilibrium in a world where the data are not frozen. All that [Evenly Rotating Economy] theorists are saying is that, if we freeze the disequilibrating forces, then the equilibrating forces will prevail. But on this basis we may likewise assert a tendency towards disequilibrium. By allowing the data to change just as it does in the real world, and 'freezing' all individual learning, we can demonstrate that the economy would degenerate into a series of successively less-coordinated states of disequilibrium. However, this would clearly be an illegitimate proof of a real world tendency towards disequilibrium..." -- Tyler Cowen and Richard Fink, "Inconsistent Equilibrium Constructs: The Evenly Rotating Economy of Mises and Rothbard", m V. 75, N. 4 (Sep. 1985): 866-869

(Hat tip to Matthew Mueller.) If there were a tendency, with frozen data, towards a ERE, the time path of the ERE corresponding to the data at each moment of time would show the tendency of the economy as a function of time. This is not the only point at which Cowen and Fink are confused.

What economists mean by equilibrium is not a simple question. Economists use the word "equilibrium" in many ways. The number of such ways has proliferated with the development of game theory. In this post, I compare and contrast only two uses of the word "equilibrium". And I think I don't fully explicate even these two uses.

The economy can be said to be in equilibrium when the following two conditions are met:

• The quantity supplied equals the quantity demanded of all commodities with positive prices
• The quantity supplied does not fall below the quantity demanded of all goods with zero prices.

This definition is specific to a particular neoclassical theory (or model).

Another definition comes out of the mathematical abstraction of a dynamical system. A dynamical system specifies how state variables change at any momement of time as a function of the location in state space. For example, a system of differential equations can define a dynamical system:

dx(t)/dt = f(x(t))

A limit point is a location, x, in the state space such that that location does not change with respect to time as function of the system dynamics. In other words, f(x) is zero at a limit point. Certain loci, other than the set of limit points, are of interest in dynamical systems. I am thinking specifically of limit cycles, strange attractors, and non-wandering sets. Consider a model of the economy as a dynamical system. The economy is in equilibrium, by a dynamical systems definition, when it is at a limit point.

The definition of equilibrium as equating supply and demand can be read as a special case of the definition of equilibrium as a limit point in a dynamical system. The tâtonnement process is a model of a type of dynamical system. Equilibrium, in the sense of a limit point in this system, is equilibrium in the sense of no excess demand for goods.

But Keynes can be read as suggesting the dynamical system definition of equilibrium need not equate supply and demand, particularly in the labor market. That is, Keynes' view of the possibility of the existence of an equilibrium with unemployment is more general and points to a non-neoclassical theory of prices.