Does economics need axiomatic foundaions?

In my previous posts on secular stagnation I noted the common threads between the New Classical effort to build macroeconomics on the foundations of neo-Walrasian general equilibrium theory and the ways in which mainstream Keynesians have found themselves in a decades long cul de sac of ad hoc reasoning. While I agree with the arguments that the axiomatic core of mainstream theory is unrealistic, I will argue that the problem is much deeper: the problem lies in the commitment to economic as an axiomatic discipline.

Mainstream (and even sometimes heterodox) Economics is a discipline that is founded on the basis of an axiomatic core. This axiomatic core is used to build formal mathematical models which are presented as simplified versions of reality. These models are then used to provide advice on which set of buttons for policy makers to push, or not to push. Notably, not all mainstream economists would agree on what the core axioms are and are not. In addition, not all mainstream economists would necessarily agree that economics should be done in this way. Nor do heterodox economists even agree on what distinguishes heterodox from orthodox theory.

That said, I would characterize mainstream economics as committed to a set of axioms built around the idea of agents as rational and making decisions in a competitive environment in which information about incentives is readily and equally available to all. In addition, agents do not make any fundamental errors in information processing. Where competition is present, this leads to efficient equilibria. This is the ideal case. Mainstream Keynesian economists differ as to what they see as the limits of rationality, competition, availability of information and the results of interaction of decision making. If you want a concrete example of how this plays out in the teaching of economics, one need only read Chapter One of Krugman’s principles text.

There are several issues here, all of which seem to get intertwined.

The first question is: why do economists view it as necessary for theory to have a well-defined axiomatic core? My short explanation is that it is a combination of:

  1. A long history of economics trying to ape theoretical and mathematical physics of which Paul Samuelson was probably the most explicit advocate;
  2. The rise of formalist mathematics and its acceptance by economists;
  3. A vague and often unexamined allegiance to something resembling Imre Lakatos’ “hard core” of a scientific research program:
  4. An explicit and clearly articulated adaptation of Lakatos to economics a la Mark Blaug.

Notably, when economists use the term “axiom” they are for the most part using the word in a very loose sense to mean something vaguely like a principle in the hard core of an SRP. And the idea, which is prevalent in economics and predates Lakatos or Friedman, that one does not directly test assumptions but instead tests the predictions of the theory serves to illustrate the similarity.

There is nothing inherently wrong in my opinion about using the term axiom in a loose sense, provided one is clear about what is being done. In fact, there is probably some virtue in being clear about the nature of one’s assumptions.

A discussion of what I think is right and what is wrong with Lakatos’ is well beyond one blog entry. But for now, let me say that my objection is not to the idea that there are paradigms or research programs in economics. Nor is it to the idea that good social theory should be built around general principles. My objection is to the idea that general principles that are used to describe empirical reality are often:

  1. Taken as given and self evidently true or false;
  2. Taken as sort of kind of true enough and then insulated from any negative information;
  3. Or simply taken as given because well, that’s the way economists do things.

And there in, I think, lies much of the problem with contemporary mainstream economics. This is why we can have a general model that assumes the economy will return to a normal, long run equilibrium of target rates of inflation and natural rates of unemployment spiced with an occasional recognition that reality is sometimes more complex.

I’ll end with an acknowledgement that appraising competing schools of thought is a bit more complicated than just finding an anomaly in the larger structure or coming up with a single instance of empirical disconfirmation. But what good is a theoretical apparatus that at rests on general principles that are kind of, sort of “trueish” under limited circumstances and that can never be reexamined or refuted?

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