Lars Syll’s ‘elegant’ fantasies

Yesterday I came across one of the lates blog posts of well-known mainstream critic Lars Syll. Prof. Syll is a very interesting figure of modern economic thinking, even if I cannot appreciate his rather passive and destructive critique. I think I can understand his most fundamental claim: neoclassical orthodoxy is irrelevant to real-world economic problems, thus we should drop the whole consruct as completely useless. The reason why I find his critique troublesome and destructive is that he discredits something without suggesting a more approriate framework. It is okay that neoclassical economics was aimed at imitating Newtonian physics. It is okay that Newtonian physics – similarly to neoclassical economics – as a direct description of reality is erroneous. But to say that neoclassical economics and Newtonian physics are failures is something different. Admittedly, the connection between these theories and reality is complex and subtle and one needs to perform a careful analysis in order to assess this relationship. This is the analysis Prof. Syll refuses to carry out. Instead, he draws his conclusions without building a solid footing. Why is economics a failure in understanding reality? Prof. Syll fails to underpin even his own ideas. Philosophy of science and philosophy of physics have been analysing this relationship for centuries. Modern methodology of economics in the realist tradition is in a favourable position for philosophers have a plethora of arguments for the relevance of abstract mathematical sciences such as physics or economics. Any counterarguments that miss considering these powerful philosophical foundations are troublesome . Prof. Syll’s arguments have only one basis: his insistance on the claim that mainstream economics describes nothing. This is almost nothing.

Now let me turn my attention to his current topic, the DSM-theorem.

DSM-theorem (referred to as SMD-theory sometimes) can be regarded as really disturbing, but it rather concentrates on the contradicting relationship between micro- and macroeconomics and not on the (micro-level) postulates of neoclassical. However, it would be a huge mistake to play down the significance of the DSM-theorem (named after the elaborators, Gérard Debreu, Rolf Ricardo Mantel, and Hugo Freund Sonnenschein), since, eventually, it questions the justification of the microfoundations of macroeconomics. The fundamental problem was posed by the relationship between individual and aggregate excess demand functions. As aggregate-level excess demand functions are important for macroeconomics, huge efforts were made to ground these functions at a micro-level. The seminal papers on this topic (Sonnenschein 1972, 1973; Mantel 1973; Debreu 1974) called attention to the fact that however precise we are in specifying the micro-level characteristics, the excess demand function for an economy is not restricted at all by these features. A consequence of the mathematical demonstration of the DSM-theorem was that the general equilibrium of a multi-market macro-system is not necessarily unique (the lack of uniqueness), i.e., we can find multiple price vectors that guarantee equilibrium and the emerging equilibrium states may be unstable in dynamic terms (Giraud 2009). It seems as if DSM-theorem could have dealt mainstream economic theory a final and destroying blow. The relation of mainstream economics to DSM-theorem is portrayed well by the Handbook of Monetary Economics (B. Friedman and Hahn 1990), in which the achievements underlying the theorem were not mentioned even in the References. Mainstream economics disregarded DSM-theorem the same as the inconsistency from the quantity theory and Walras’ law. Frank Hahn (1975) was one of the few who regarded DSM-theorem as the most dangerous critique of mainstream economics. It is understandable somehow, if we consider that the object of the critique, viz. mainstream economics, is an economic theory—while DSM-theorem (however impressive it is) is a mathematical demonstration. Even if we admit that the mathematical grounds of mainstream economic theory are wrong in some respects, the theory was still successful in resolving a lot of economic problems—while DSM-theorem could hardly support us in such a context. The prevailing paradigm is not required to be perfect at all but only to give solutions to several scientific problems. After all, mainstream theory performed well in these terms, and it is also sure that DSM-theorem is never going to help us (say) establish the theoretical grounds for the best operative monetary policy or finding the ultimate causes of cyclical fluctuations to found countercyclical economic policies.

References

Debreu G (1974) Excess demand functions. J Math Econ 1(1):15–21

Friedman BM, Hahn FH (1990) Handbook of monetary economics. North-Holland, Amsterdam

Giraud G (2009) From non-tâtonnement to monetary dynamics within general equilibrium theory. The limit-price exchange process. CNRS–Paris School of Economics, Paris

Hahn F (1975) Revival of political economy–the wrong issues and the wrong argument. Econ Rec 51(135):360–364

Mantel RR (1973) On the characterization of aggregate excess demand. J Econ Theory 7(3):348–353

Sonnenschein H (1972) Market excess demand functions. Econometrica 40(3):549–563

Sonnenschein H (1973) Do Walras’ identity and continuity characterize the class of community excess demand functions. J Econ Theory 6(4):345–354

Gérard Debreu

gerard-debreu-9269193-1-402

Hugo Sonnenschein

sonnenschein

Rolf Mantel

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