<p>Neoclassical economics or rational analysis should always be a starting point for an analysis of how a given system or model works.</p>

<p>However, that is all it is - a starting point. You cannot use a model that is solely rational to predict or infer much about how the real world works, because humans are not rational. That is why rational economics are critized, but do not match up with observed behavior. </p>

<p>Therefore, any real critique has to show how rational economics do match up with observed behavior.</p>

CC BY-SA 3.0
2015-12-09T09:15:26.117Z
Could you please support your first statement?
Giskard
CC BY-SA 3.0
2015-12-09T09:52:18.003Z
I'd like to see some sources on the second paragraph, especially *You cannot use a model that is solely rational to predict or infer much about how the real world works, because humans are not rational. That is why rational economics are critized, but do not match up with observed behavior.*
FooBar
CC BY-SA 3.0
2015-12-09T10:52:51.560Z
I used to think the same way that people are somewhat irrational, but it is a mathematical nightmare to work in such framework. It is much easier to think that people are rational, but some are, mildly spoken, different, and just have weird preferences.
Arthur Tarasov
CC BY-SA 3.0
2016-01-08T09:57:48.070Z
i would have liked to upvote @denesp's comment twice here. but then milton friedman rose from his grave to slap my hand off the mouse
HRSE
CC BY-SA 3.0
2016-01-08T16:14:40.920Z
@ArthurTarasov I am not sure how to model a model with irrational or erratic behaviour. Firstly, what is the percentage of irrational people in society ? another aspect is how to judge if a decision is really rational or not, every decision made by "supposed irrational man" is rational in a subjective way for this man. I am not sure if I was clear or not.
optimal control
CC BY-SA 3.0
2016-01-11T06:35:19.100Z
It is nothing about irrational or erratic behaviour. It is about modelling with well known psychological behavioural bias. Loss-aversion, heureristics, decision fatigue, or a whole number of other known causes. Homo Econonomics does not exists - then why in the world use him as anything but a starting point for a model.
Thorst
CC BY-SA 4.0
2018-05-22T06:30:11.410Z
Models of irrational behavior have a long history in economics, dating back to Strotz 1956.
arsmath
CC BY-SA 3.0
2015-12-09T09:00:57.303Z
2015-12-09T09:00:57.303Z
Thorst
<p>The book "Modern Political Economics" is quite critical about "neoclassical economics", the basic claim being, if I understand correctly, that the models which "neoclassical economics" (armed with mathematical insights starting from John F. Nash Jr, Gerard Debreu and Kenneth Arrow) investigate, are not simplifications of some realistic models, but that they (the models) are just wrong (because of what the authors call "Inherent Error").</p>

<p>Is there a serious criticism of the views such as the ones exposed in this book?</p>

<p><strong>added after a comment asking for citations:</strong></p>

<p>maybe not a successful choice, but nevertheless (the following two citations are short descriptions of chapter 3 and chapter 8 of the book):</p>

<ol>
<li>"Chapter 3 The odd couple: The struggle to square a theory of value with
a theory of growth </li>
</ol>

<p>The odd couple of the title are value and growth. From the very start, political economics found it difficult to square the two; to create models or accounts of how the exchange value of things was determined in a growing economy. The chapter begins at the beginning, with the French Physiocrats, before moving to Adam Smith and David Ricardo’s attempts to tackle this conundrum. The Inherent Error makes its first fonnal appearance in these works, before it returns again and again in the following chapters. The essence of the Inherent Error is the impossibility of telling a credible story about how values and prices are formed in complex (multi-sector) economies that grow through time."</p>

<ol start="2">
<li>"Chapter 8 A fatal triumph: 2008’s ancestry in the stirrings of the Cold War</li>
</ol>

<p>During the Second World War, economic policy was in the hands of the New Dealers, who ran the economy on a trial and error basis and in the light of the accumulated experience of trying, not with great success, to kick-start the ailing US economy during the traumatic 1930s. Meanwhile, a group of scientists (mostly of Central European origin) were manning the agencies, laboratories and divisions of the civilian and military authorities whose job it was to solve practical problems (e.g. logistics, planning of transportation systems, price setting) by means of advanced mathematical methods. However, after the war ended, and the Cold War began to take hold, both the New Dealers and the Scientists lost out in the struggle for the hearts and minds of academic economics. The winners of that ‘game’ were a small group of Formalists, with John F. Nash, Jr, Gerard Debreu and Kenneth Arrow at the helm. The chapter tells the story of that triumph, which gave neoclassical economics a whole new
push, by focusing on the person that the book portrays as the era’s most tragic figure: John von Neumann. His ‘fate’, the chapter argues, was an omen for the type of economics that would prove instrumental in the run up to the Crash o f2008."</p>

<p>and yet another citation:</p>

<ol start="3">
<li>"The rest, as they say, is history. Debreu and Arrow emerged from Nash’s seminar and in a few short months applied what they had heard to hammer out their own existence proof in the context of a multiple-sector model economy: one that effectively brought back from the dead Walras’ (fully neoclassical) idea of a General Equilibrium complete with determinate prices for everything, including labour input and capital goods (recall Chapter 6). This they accomplished by procuring General Equilibrium’s ultimate mathematical proof; an existence proof that showed under which conditions a set of relative prices exists such that all
markets (including that for labour) are in equilibrium.
This existence proof was to mark a new neoclassical turn in political economics; a turn that altered the discipline’s course and returned neoclassical obscurantism to the throne from which it had been removed by the combined forces of the fall of 1929, the analysis of John Maynard Keynes, the engineering brilliance of von Neumann and, last but not least, the experiences of economic policy during the New Deal and the Second World War."</li>
</ol>

CC BY-SA 3.0
2016-01-08T14:41:26.040Z
Any chance you could provide us with a couple of quotes from the book that lay out the authors' position? There are many people who know enough about neoclassical economics to defend it but wouldn't have read this book to be able to answer your question as currently written.
BKay
CC BY-SA 3.0
2016-01-10T12:39:04.870Z
@BKay Some quotes added.
John Donn
CC BY-SA 4.0
2018-05-22T06:31:15.417Z
I don't get what the Inherent Flaw is supposed to be.  Models with market clearing and economic growth are routine.
arsmath
CC BY-SA 4.0
2021-05-31T20:12:06.857Z
For a direct argument by Yanis Varoufakis see this paper: **A Most Peculiar Failure: On the dynamic mechanism by which the inescapable theoretical failures of neoclassical economics reinforce its dominance** https://varoufakis.files.wordpress.com/2012/04/neoclassical-economics-as-a-most-peculiar-failure.pdf. "Put simply, the mathematics of defining a person in terms of her relations to others, in addition to her means and ends, is of an order higher than most economists would want to engage with and, worse, offer no determinate solution (i.e. behavioural prediction)."
SystemTheory
<macroeconomics><mathematical-economics><political-economy>
Criticism of "Modern Political Economics" by Varoufakis, Halevi, Theocarakis
John Donn
# Criticism of "Modern Political Economics" by Varoufakis, Halevi, Theocarakis

(Asked by: username_0 on 2015-12-09)

The book "Modern Political Economics" is quite critical about "neoclassical economics", the basic claim being, if I understand correctly, that the models which "neoclassical economics" (armed with mathematical insights starting from John F. Nash Jr, Gerard Debreu and Kenneth Arrow) investigate, are not simplifications of some realistic models, but that they (the models) are just wrong (because of what the authors call "Inherent Error").

Is there a serious criticism of the views such as the ones exposed in this book?

**added after a comment asking for citations:**

maybe not a successful choice, but nevertheless (the following two citations are short descriptions of chapter 3 and chapter 8 of the book):

1. "Chapter 3 The odd couple: The struggle to square a theory of value with
   a theory of growth

The odd couple of the title are value and growth. From the very start, political economics found it difficult to square the two; to create models or accounts of how the exchange value of things was determined in a growing economy. The chapter begins at the beginning, with the French Physiocrats, before moving to Adam Smith and David Ricardo’s attempts to tackle this conundrum. The Inherent Error makes its first fonnal appearance in these works, before it returns again and again in the following chapters. The essence of the Inherent Error is the impossibility of telling a credible story about how values and prices are formed in complex (multi-sector) economies that grow through time."

2. "Chapter 8 A fatal triumph: 2008’s ancestry in the stirrings of the Cold War

During the Second World War, economic policy was in the hands of the New Dealers, who ran the economy on a trial and error basis and in the light of the accumulated experience of trying, not with great success, to kick-start the ailing US economy during the traumatic 1930s. Meanwhile, a group of scientists (mostly of Central European origin) were manning the agencies, laboratories and divisions of the civilian and military authorities whose job it was to solve practical problems (e.g. logistics, planning of transportation systems, price setting) by means of advanced mathematical methods. However, after the war ended, and the Cold War began to take hold, both the New Dealers and the Scientists lost out in the struggle for the hearts and minds of academic economics. The winners of that ‘game’ were a small group of Formalists, with John F. Nash, Jr, Gerard Debreu and Kenneth Arrow at the helm. The chapter tells the story of that triumph, which gave neoclassical economics a whole new
push, by focusing on the person that the book portrays as the era’s most tragic figure: John von Neumann. His ‘fate’, the chapter argues, was an omen for the type of economics that would prove instrumental in the run up to the Crash o f2008."

and yet another citation:

3. "The rest, as they say, is history. Debreu and Arrow emerged from Nash’s seminar and in a few short months applied what they had heard to hammer out their own existence proof in the context of a multiple-sector model economy: one that effectively brought back from the dead Walras’ (fully neoclassical) idea of a General Equilibrium complete with determinate prices for everything, including labour input and capital goods (recall Chapter 6). This they accomplished by procuring General Equilibrium’s ultimate mathematical proof; an existence proof that showed under which conditions a set of relative prices exists such that all
   markets (including that for labour) are in equilibrium.
   This existence proof was to mark a new neoclassical turn in political economics; a turn that altered the discipline’s course and returned neoclassical obscurantism to the throne from which it had been removed by the combined forces of the fall of 1929, the analysis of John Maynard Keynes, the engineering brilliance of von Neumann and, last but not least, the experiences of economic policy during the New Deal and the Second World War."

**Tags:** macroeconomics, mathematical-economics, political-economy

> **Comments:**
> **username_1**: Any chance you could provide us with a couple of quotes from the book that lay out the authors' position? There are many people who know enough about neoclassical economics to defend it but wouldn't have read this book to be able to answer your question as currently written.  
> **username_0**: @username_1 Some quotes added.  
> **username_2**: I don't get what the Inherent Flaw is supposed to be.  Models with market clearing and economic growth are routine.  
> **username_3**: For a direct argument by Yanis Varoufakis see this paper: **A Most Peculiar Failure: On the dynamic mechanism by which the inescapable theoretical failures of neoclassical economics reinforce its dominance** https://varoufakis.files.wordpress.com/2012/04/neoclassical-economics-as-a-most-peculiar-failure.pdf. "Put simply, the mathematics of defining a person in terms of her relations to others, in addition to her means and ends, is of an order higher than most economists would want to engage with and, worse, offer no determinate solution (i.e. behavioural prediction)."  

---

## 1 answers

### Answer by username_4 on 2015-12-09. Score: -1

Neoclassical economics or rational analysis should always be a starting point for an analysis of how a given system or model works.

However, that is all it is - a starting point. You cannot use a model that is solely rational to predict or infer much about how the real world works, because humans are not rational. That is why rational economics are critized, but do not match up with observed behavior.

Therefore, any real critique has to show how rational economics do match up with observed behavior.

> **Comments:**
> **username_5**: Could you please support your first statement?  
> **username_6**: I'd like to see some sources on the second paragraph, especially *You cannot use a model that is solely rational to predict or infer much about how the real world works, because humans are not rational. That is why rational economics are critized, but do not match up with observed behavior.*  
> **username_7**: I used to think the same way that people are somewhat irrational, but it is a mathematical nightmare to work in such framework. It is much easier to think that people are rational, but some are, mildly spoken, different, and just have weird preferences.  
> **username_8**: i would have liked to upvote @denesp's comment twice here. but then milton friedman rose from his grave to slap my hand off the mouse  
> **username_9**: @ArthurTarasov I am not sure how to model a model with irrational or erratic behaviour. Firstly, what is the percentage of irrational people in society ? another aspect is how to judge if a decision is really rational or not, every decision made by "supposed irrational man" is rational in a subjective way for this man. I am not sure if I was clear or not.  
> **username_4**: It is nothing about irrational or erratic behaviour. It is about modelling with well known psychological behavioural bias. Loss-aversion, heureristics, decision fatigue, or a whole number of other known causes. Homo Econonomics does not exists - then why in the world use him as anything but a starting point for a model.  
> **username_2**: Models of irrational behavior have a long history in economics, dating back to Strotz 1956.  

---

