William Paul Bell Queensland University Researcher

Why is mainstream economics not a social science but ideological mathematics?

Posts Tagged ‘agent based model

Real Business Cycle (RBC) and Rational Expectations Hypothesis (REH) contributing to the Global Financial Crisis (GFC) and the Dynamite Prize

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This article discusses how neoclassical economics has contributed to the Global Financial Crisis (GFC).   In particular, how two neoclassical theories, the Real Business Cycle (RBC) and the Rational Expectations Hypothesis (REH) contributed to the GFC and how these theories are false and unscientific.

Edward C. Prescott and Finn E. Kydland were awarded the 2004 Nobel prize in economics for their work in developing the RBC and Robert E. Lucas Jr. was awarded the 1995 Nobel prize in economics for developing the REH. They have been nominated for The Dynamite Prize in Economics that is to be awarded to the three economists who contributed most to enabling the GFC.  The Dynamite Prize in Economics nominates Prescott and Kydland ‘for jointly developing and popularizing “Real Business Cycle” theory, which by omitting the role of credit greatly diminished the economics profession’s understanding of dynamic macroeconomic processes’ and nominates Lucas for ‘his development of the rational expectations hypothesis, which defined rationality as the capacity to accurately predict the future, both served to maintain Friedman’s proposition that monetary factors do not affect the real economy and, in the name of “rigor”, distanced economics even further from reality than Friedman had thought possible.’ Read the rest of this entry »

EU acknowledges the failure of traditional economics to predict so adopts agent based modelling

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“This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”
— John Maynard Keynes
A Tract on Monetary Reform (1923), 80.

Traditional economics has failed to predict the knock on effects of the financial crisis says the EU. The Eurace project is designed to remedy this failure, which uses an agent based modelling methodology as an alternative to the rational representative agent model that is a cornerstone of neoclassical economics.  The post Progressing from game theory to agent based modelling to simulate social emergence further discusses agent based modelling.   Read the rest of this entry »

The G8 protests and the logically inconsistent foundations of neoclassical economics

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Neoclassical economics is deductive, using a mathematical axiom-proof-theory format.   Arnsperger and Varoufakis (2006) list the three basic axioms of neoclassical as methodological instrumentalism, methodological individualism and methodological equilibration.   In such an approach the basic axioms have to be correct otherwise the whole framework becomes unsound.   In contrast to the deductive approach, the scientific approach is inductive, forming theories from observation and using prediction to falsify the theories (Neuman 2003, p. 51).   Neoclassical economists have become adept at avoiding empirical falsification by creating ad-hoc explanations as to why their theories fail to work when confronted with empirical evidence, for example the Efficient Market Hypothesis predicting dividend volatility in excess of price volatility but the converse is observed (Shiller 1981).   Falsification avoidance is the sign of a degenerative research program (Lakatos 1976).   So, rather than use empirical falsification, a more suitable approach to disprove deductive frameworks is to use a logical proof showing their axioms lead to an absurdity.   The Sonnenschein–Mantel–Debreu Theorem (Debreu 1959) proves the basic axioms of neoclassical economics are logical inconsistent.   The Sonnenschein–Mantel–Debreu Theorem (Debreu 1959) shows that starting with the first two axioms leads to a shapeless excess demand curve.   The shapeless excess demand curve means that there are multiple equilibria and equilibrium are unstable making the third axiom untenable.   To fix this problem, it is assumed that all goods have constant Engel curves.   A good would have a constant Engel curve if somebody spends the same proportion of their income on the good as their income grew (Keen 2001).   This is an unlikely scenario as when income grows then people consume more luxury goods and basic goods become a smaller fraction of their income.   Can you think of a good with a constant Engel curve?   Colander (2000, p. 3) equates neoclassical economics “to the celestial mechanics of a nonexistent universe” for using theory outside its domain assumption (Musgrave 1981).   That is neoclassical economics as a pursuit in pure mathematics for intellectual exercise is fine but claiming applicability to the real world is misleading. Read the rest of this entry »