Neoclassical economics—another indictment

Alan Kirman has contributed another indictment of the standard—Dynamic Stochastic General Equilibrium—neoclassical macroeconomic model.

One problem is the notion of equilibrium:

Aggregating the behaviour of lots of rational individuals will not necessarily lead to behaviour consistent with that of some “representative agent”. The well-known Sonnenschein-Mantel-Debreu results show this and undermine the foundations of macroeconomics in general. Despite our heroic assumptions on the rationality of individuals, we can guarantee neither the uniqueness nor the stability of equilibria.

The second problem is the assumption of rationality:

The axioms that are used to define “rationality” are based on the introspection of economists and not on the observed behaviour of individuals. Economists from Pareto through Hicks to Koopmans have long made this point. Thus we have wound up in the weird position of developing models that unjustifiably claim to be scientific because they are based on the idea that the economy behaves like a rational individual, when behavioural economics provides a wealth of evidence showing that the rationality in question has little or nothing to do with how people behave.

But Kirman is not optimistic about neoclassical economists’ willingness to discard general equilibrium models and the assumptions of infinite farsightedness and infinite selfishness on which they are based:

To discard equilibrium in the standard sense and study out-of-equilibrium dynamics is perhaps too big a step.

Too big for those attached to the reigning orthodoxy but not for all the other economists out there who have a long history of analyzing capitalism on the basis of historical change, interacting agents, economic and social structures, and nonequilibrium dynamics.