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The teaching of economics — captured by a dangerous sect – Lars Syll

University of Chicago – Department of Economics (Wikipedia cc)

The fallacy of composition basically consists of the false belief that the whole is nothing but the sum of its parts. In society and in the economy this is arguably not the case.

An adequate analysis of society and the economy a fortiori can’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

This reality shows up when mainstream economics tries to argue for the existence of The Law of Demand – i.e. that when the price of a commodity falls, the demand for it will increase – in the aggregate. Although it may be said that one can succeed in establishing The Law for single individuals it soon turned out – using the Sonnenschein-Mantel-Debreu theorem firmly established in 1976 – that it wasn’t possible to extend The Law of Demand to apply at the market level, unless one made ridiculously unrealistic assumptions – such as that individuals have homothetic preferences, which actually implies that all individuals have identical preferences.

This could only be conceivable if all of the agents are identical (i.e. in essence there is only one actor) – the (in)famous representative actor. So, it was possible to generalize The Law of Demand – as long as we assumed that in the aggregate there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. It is nonsense!

How has mainstream economics react- ed to this devastating finding? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.

Having gone through a handful of the most frequently used textbooks of economics at the undergraduate level today, I can only conclude that the models that are presented in these modern main-

stream textbooks try to describe and analyze complex and heterogeneous real economies with a single rational- expectations-robot-imitation-representative-agent.

That is, with something that has absolutely nothing to do with reality. And — worse still — something that is not even amenable to the kind of general equilibrium analysis that they are believed to have given a foundation for. This is because Hugo Sonnenschein (1972), Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally demonstrated that there does not exist any condition by which assumptions about individuals can guarantee stability or uniqueness of the equilibrium solution.

So what modern economics textbooks present to students are really models built on the assumption that an entire economy can be modeled as a representative actor and that this is a valid procedure. But it isn’t a valid procedure at all — as the Sonnenschein-Mantel-Debreu theorem irrevocably has shown.

Of course one could say that it is too difficult at the undergraduate level to show why the procedure is right and to defer it to postgraduate courses. It could justifiably be reasoned that way – if what you teach your students is true, if The Law of Demand is generalizable to the market level and the representative actor approach is a valid modeling abstraction!

But it’s demonstrably false in this case, and therefore it’s nothing but a case of scandalous intellectual dishonesty. It’s like telling your students that 2 + 2 = 5 and hoping they will never run into Peano’s axioms of arithmetic.

“ Once the dust has settled, there is a strong case for an inquiry into whether the teaching of economics has been captured by a small but dangerous sect.” – Larry Elliott, The Guardian

Commentary from Econoclast

“There is a strong case for an inquiry into whether the teaching of economics has been captured by a small but dangerous sect”.

There is a strong case and the sect is dangerous, but it is anything but small.

I’ve known about the Chicago Boys, the university, and its famous people like Becker and Friedman for a long time. One of my grad school professors was a Friedman protege. We were taught price theory from Friedman’s book of the same name.

The popular notion that market fundamentalism is limited to Chicago and such people as Ayn Rand is erroneous. I was trained at one of the most left-wing universities in the world (University of California at Berkeley) in the 1960s. With extremely few exceptions (the aforementioned Friedman protege and socialist Abba Lerner), my professors at both undergrad and graduate levels were centrist Democrats of the Hubert Humphrey ideology.

To a man (and all were male), they acted like true believers, dismissing both institutional and labor economics, along with Thorstein Veblen, Karl Marx and Henry George.

Several of my grad school colleagues, highly skilled in math and model building, were marginalized in their careers because they didn’t toe the market-fundamentalist line.

This true-believing sect has ruled for 150 years, continues to rule, and has utterly failed to serve the broader economics profession, at least in the United States.

Source: Real World Econ Rev, 29 Jun 2019

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