The Difference Between Keynesian Kaleido-Static Reasoning and Mainstream Methodology

April 20th, 2015
in macroeconomics

Fixing the Economists Article of the Week

by Philip Pilkington

In order to give an adequate definition of what has been called Keynesian kaleido-statics it is first relevant to define it against that out of which it grew. Keynes’ work, as has been noted many times, grew out of the work of Alfred Marshall. Keynes, in a very real sense, should be seen as an economist working in the Marshallian tradition.

Follow up:

What then defined the Marshallian tradition? Basically Marshall’s work was based on a partial equilibrium approach. The idea was to define an equilibrium position — that is, a position in which all activity had stabilised and come to a point of rest — and then change one variable while leaving everything else constant to see what effect this change had.

This was in contrast to the general equilibrium approach developed by Leon Walras. In the Walrasian approach systems were only really looked at from the point-of-view of full equilibrium. Walras and his followers were less interested in what changes might occur should one variable be altered and more interested in finding complete and total ‘solutions’.

In light of mainstream economics we might say that contemporary DSGE models, apart from being called ‘general equilibrium’ models are actually somewhere in between general and partial equilibrium models. When economists subject such models to random stochastic ‘shocks’ they are, in a sense, doing something similar to Marshall. But they are different from Marshall in that they always seek some sort of teleological ‘end point’ of general equilibrium. We might say that the difference is that while Marshall tried to deal with the movement of historical time — that is, time as it is experienced in the real world — DSGE modellers still do not aspire to do this and remain dealing with purified logical time.

Keynes took leave from Marshall on one very important point: he introduced expectations as not only an active element but the primary driving force behind economic activity. He utilised Marshall’s partial equilibrium method in the General Theory but he introduced changes in expectations that generated almost arbitrary points of partial equilibrium. This is why Shackle likened Keynes’ methodology to a kaleidoscope. In his book A Scheme of Economic Theory he writes,

There is a toy called a kaleidoscope, in which three mirrors face inwards in a tall pyramid and repeat in symmetrical reflections the random mosaic of colour formed by loose pieces of stained glass on the floor of the instrument. This toy seems strangely apt as an analogue of Keynes’s method. Even the randomness of the disposition of the coloured pieces at any moment of repose suggests the conventional character of the economy ‘at rest’. The economy is in the particular posture which prevails, because particular expectations, or rather, particular agreed formulas about the future, are for the moment widely accepted. These can change swiftly, as completely and on as slight a provocation as the loose, ephemeral mosaic of the kaleidoscope. A twist of the hand, a piece of ‘news’, can shatter one picture and replace it with different ones. (p48)

Each new formation that each different mosaic of expectations is, of course, a different employment equilibrium. Each of these employment equilibria is in turn generated by savings and investment decisions made by various people in the society and also by the society’s liquidity preference at any given moment in time. These in turn, as any cursory examination of the real world will tell you, are based purely on kaleidoscopic expectations. This is what Shackle calls the method of kaleido-statics.

There is also another method that, I think, supersedes Keynes’ method. That is what might be called kaleido-dynamics. This was developed by Gunnar Myrdal and Erik Lindahl from the work of Knut Wicksell. This method is similar to Keynes’s in that expectations — which are entirely contingent and, in a sense, exogenous to the system — play the key role in determining how the economy moves through time, but it also places an emphasis on dynamic movement. That is, it is not as concerned with each stationary employment equilibrium but rather the movement between them; a movement which, Shackle noted, Keynes never dealt with.

One of the key problems with mainstream economics today is its evasion of the fact that expectations play a key role in determining the trajectory of the economy. Mainstream economists evacuate expectations because they want rigidly deterministic systems that they can study. This is because, in the main, rigidly deterministic systems are the easiest way to apply a very particular type of mathematics to the study of the economy. In an interview Tony Lawson laid this out rather clearly when he said,

The first thing to note is that all these mathematical methods that economists use presuppose event regularities or correlations. This makes modern economics a form of deductivism. A closed system in this context just means any situation in which an event regularity occurs. Deductivism is a form of explanation that requires event regularities. Now event regularities can just be assumed to hold, even if they cannot be theorised, and some econometricians do just that and dedicate their time to trying to uncover them. But most economists want to theorise in economic terms as well. But clearly they must do so in terms that guarantee event regularity results. The way to do this is to formulate theories in terms of isolated atoms. By an atom I just mean a factor that has the same independent effect whatever the context. Typically human individuals are portrayed as the atoms in question, though there is nothing essential about this. Notice too that most debates about the nature of rationality are beside the point. Mainstream modellers just need to fix the actions of the individual of their analyses to render them atomistic, i.e., to fix their responses to given conditions. It is this implausible fixing of actions that tends to be expressed though, or is the task of, any rationality axiom. But in truth any old specification will do, including fixed rule or algorithm following as in, say, agent based modelling; the precise assumption used to achieve this matters little. Once some such axiom or assumption-fixing behaviour is made economists can predict/deduce what the factor in question will do if stimulated. Finally the specification in this way of what any such atom does in given conditions allows the prediction activities of economists ONLY if nothing is allowed to counteract the actions of the atoms of analysis. Hence these atoms must additionally be assumed to act in isolation. It is easy to show that this ontology of closed systems of isolated atoms characterises all of the substantive theorising of mainstream economists. It is also easy enough to show that the real world, the social reality in which we actually live, is of a nature that is anything but a set of closed systems of isolated atoms.

What Lawson refers to as ‘closed-systems’ inhabited by ‘atoms’ are the models of economists that have evacuated phenomena like expectations. If we take expectations into account then one individual’s decision is influenced by another individual’s decision. Most of these decisions react to what Shackle calls the ‘news’. People are thus not deterministic, closed off ‘atoms’ or Leibnizian ‘monads’. Rather they are open onto the world around them and they, in a very real sense, make their own history.

Lawson goes on to pin the blame for this, correctly I think, on the form of the mathematical constructions that mainstream economists use. He says,

The defining feature of modern mainstream economics, as I see it, is its insistence on methods of mathematical modelling. It is this dogmatism that both defines the mainstream and is the problem. I see nothing wrong with individual economists experimenting with mathematical methods here and there in the hope that in the contexts of analysis, the relevant conditions hold. The mainstream does not own the methods or approaches they employ any more than they own mathematics. There is nothing wrong with mathematical methods per se only with the manner in which they are used. The problem of the mainstream is one of application of methods in inappropriate conditions. Mainstream economists insist that their mathematical methods be applied to all problems. They fail to differentiate the conditions of legitimate and illegitimate application. So ultimately the failure is one of ontological neglect, no doubt grounded in a cultural-ideological presupposition that mathematics is somehow necessary to all scientific activity, understanding and rigour. In this they are just misguided.

This, in turn, is tied up with how economists see themselves as ‘scientists’ of a certain sort. They believe that doing ‘science’ involves forming these rigidly deterministic systems and then applying them to data. Without getting into the issue about whether economics is a ‘science’ like physics — I don’t think that it is — even in sciences like physics there is a dimension of taking the contingent human observer into account; as in the case of Heisenberg and his uncertainty principle or, to a lesser extent, Einstein and his relativistic physics.

Why then do economists equate their method with doing ‘science’? This, I think, is largely a mystery. It seems based almost wholly on self-assertion. My feeling is that many of the conclusions of mainstream economics are so preposterous that they have felt the need to insist very loudly that they are doing science (much to the amusement of real scientists, I should add). The irony here is enormous, of course, because every faction seems to think that they are the only ones doing real science. So, New Classicals think that their New Keynesian colleagues are unscientific and vice versa. Ditto for behaviorist microeconomists and their more classical colleagues. When science is defined arbitrarily it simply becomes a stick with which to beat the other side. Needless to say, the real scientific disciplines are not plagued by this particular problem; disagreements are not voiced by saying that the interlocutor is not engaged in science. In this sense, modern mainstream economics less so resembles a bastion of science than a circus in which the clowns have taken over.









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