December 31, 2014

From opinion recycling to real scientific progress

A general comment on this blog's [The Slack Wire] content

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It is widely known that the representative economist does not understand how the economy works. Many explanations have been advanced. Putting aside all individual specifics and exceptions for the moment, the main reason is this.

Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit (cf. Desai, 2008). Hence, 'they fail to capture the essence of a capitalist market economy' (Obrinsky, 1981, p. 495).

Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014b; 2014a). Because of this economists have nothing to offer in the way of a scientifically founded advice.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

It is important to distinguish between political and theoretical economics. In political economics 'anything goes'; in theoretical economics scientific standards are observed. The fundamental rule that guarantees the self-government of the scientific community demands to accept refutation. Refutation refers to material and formal consistency.

“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, p. 369)

Political economics is ignorant of this rule and preoccupied with recycling 'dead ideas' (Quiggin, 2010). This explains the secular stagnation of economics.

Because they lack the correct profit theory the contributions to this blog cannot claim to offer more than personal opinion. Of opinions, though, economics always had plenty. What is needed is knowledge -- scientific knowledge, that is.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume
(Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave
Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political
Economy, 49(3): 361–393. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics,
3(4): 491–502. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us.
Princeton, NJ, Oxford: Princeton University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
Method in Economics and Econometrics. Cambridge, MA: MIT Press.

No choice

Comment on 'Mainstream macroeconomics distorts our understanding of economic reality'


There is almost universal consent that orthodox economics is a failure. This leaves anyone with the option to ignore or to replace it. To filibuster about it is not a real option.

It is pretty obvious that the failure of theoretical economics is neither the only nor the worst problem of humankind. Under the broader perspective, the problem whether the earth is blown up by human wickedness/stupidity, a natural cataclysm, or by an unknown extraterrestrial entity is the ultimate problem.

However, being economists, we have to admit that -- at the moment at least -- we cannot solve the existential problem of humanity. As a matter of fact, we have not yet answered the question of how the economy works. And this, certainly, was not due to a lack of good will. Science is a trial and error process and so far the trials were not successful.

Since Orthodoxy is a failure and Heterodoxy has not yet come up with a better paradigm the actual option is either to establish a more balanced pluralism of false theories or to promote the required paradigm shift.

By definition, the one and only thing economists owe the world and humankind is the true economic theory.

Egmont Kakarot-Handtke

Scientific thinking: Aristotle is right, Leijonhufvud is wrong

Comment on 'Mainstream macroeconomics distorts our understanding of economic reality'

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Each paradigm stands or falls with its premises:
“When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle, Analytica)

The axiomatic foundations of Orthodoxy are wrong and this fully explains its failure. From this does not follow that axiomatization is wrong. This is Leijonhufvud's error.

Egmont Kakarot-Handtke

Deflation, saving, and employment

Comment on  'Why does aggregate demand collapse?'

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Of course you are right that deflation may become a problem. The crucial point is that the popular idea of the functioning of the price mechanism is mistaken. What is needed first is the correct price theory (2014) which delivers the correct employment equation (2014, p. 9, eq. (22)). Roughly speaking, if the product price (for the economy as a whole) falls faster than the wage rate the employment effect is positive under the condition that all other parameters remain unchanged. If the wage rate falls faster the employment effect is negative. On closer inspection it turns out that there are two types of deflation. As you rightly pointed out, there are also secondary effects on the real value of debt but this is a separate issue. Resume: neoclassical economics got the price mechanism wrong.

Of course Wolfgang Waldner is also right. If the relation between saving and income increases the employment effect is negative.

All these effects are  captured by the employment equation (2014, p. 9, eq. (22)).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

The universal Profit Law and the multitude of unique historical circumstances

Comment on 'Piketty and the elasticity of substitution'

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The crucial point is to distinguish between total profit for the (world) economy as a whole and the distribution of profit among firms. The theoretical point to start with is conventional profit theory which asserts that total profit is zero.

“The consensus to date has been that it is mathematically impossible for capitalists in the aggregate to make profits.” (Keen, 2010, p. 2)

This assertion is fully accepted by methodologists.

“But, from the macro perspective of Walrasian general equilibrium, the total profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) but this does not preclude the possibility of short-run profits and losses of individual firms canceling each other out.” (Boland, 2003, p. 150)

The curious thing is that aggregate profit has been greater than zero for most of the time in most of the known market economies up to the present. This is an empirical fact. Hence there is something wrong with conventional profit theory (Desai, 2008, p. 10). And, clearly, when the profit theory is wrong then distribution theory is wrong too (2014a). This is the main argument against Piketty.

Now for the constructive part.

First of all, it is necessary to show how positive overall profit comes into existence and how it can be maintained over any stretch of time. The structural axiomatic paradigm achieves this in a formally rigorous way (2013; 2011). For total profit there exists a testable Profit Law.

Now, the second point is the distribution of total profit among the firms that constitute the economy. Here additional factors come into play. For example: firm A increases productivity, firm B slashes wages, firm C gets a big contract to build weapons etc. All these historical events effect a redistribution of total profit which is given by the Profit Law. It is quite clear that there is no such thing as a historical law.

“That is why Descartes said that history was not a science — because there were no general laws which could be applied to history.” (Berlin, 2002, p. 76)

How Ricardo or Bailey made their individual profits is a historically unique story that unfolds within the framework of structural laws. How universal economic laws and unique historical events play together has been shown in (2014b).

All feathers are subject to the Law of Gravitation, but the trajectory of a flying feather is a unique historical event. Scientists are not primarily interested in the latter but in the underlying law. Likewise in economics, there is the Profit Law (= scientist's real reality) and the history of the distribution of overall profit among individual firms (= laymen's commonsensical reality).

Egmont Kakarot-Handtke


References
Berlin, I. (2002). Freedom and Its Betrayal. London: Chatto Windus.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York, NY: Routledge, 2nd edition.
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–23. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014a). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2014b). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
Keen, S. (2010). Solving the Paradox of Monetary Profits. Economics E-Journal, 4(2010-31). URL

Deconfusing confused confusers

Comment on  'Economic Realism'

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With reference to the thread 'Mainstream macroeconomics distorts our understanding of economic reality' (here) you write “I don’t want to get dragged into what appears to be an endless, and pointless, debate … but.”

So you do not want to participate in the discussion but instead do a bit of meta-communication. This is not exactly the way to steer a discussion to worthwhile conclusions.

In the style of a film critic you sum up: endless and pointless. As a matter of fact, the discussion arrived at some clear-cut results. Everybody can convince himself that your resume is far beside reality. These were the major results (here):

• Orthodoxy is a failure.
• Heterodoxy is a failure.

In more detail, there can be no longer any reasonable doubt about:
  • Neither orthodox nor heterodox economists have a clear idea of the fundamental concepts income and profit.
  • The profit theory is false since Adam Smith.
  • Because economists fail to capture the essence of the market system they have no valid theory about how the economy works.
  • Keynes's fundamental equations of macroeconomics, i.e. Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment, are indefensible. That is why Keynesianism is a failure.
  • At present, economics is not built upon a set of acceptable premises or axioms. 
  • Heterodoxy does not meet the formal minimum standards of theoretical economics.
  • Psychology / sociology / philosophy are out of science.
  • Orthodoxy is built upon unacceptable behavioral axioms, therefore, a paradigm shift is inevitable.
  • The definition ‘Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses’ has misled research in the direction of pseudo-sociology and pseudo-psychology.
  • Economics is the science which studies how the economic system works.
First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem of economics is that many economists are not scientists but agenda pushers of one sort or another.

Political economics is, as everybody knows, scientifically worthless.

You write: “But, of course, humans are inherently political. We were political before we were economical.”

This is true, of course. But this is the subject matter of politics/psychology/sociology / anthropology -- NOT of economics. The task of economists is to explain how the actual economy works. Economics is not a science of behavior. No way leads from any assumption about human behavior to the understanding of the economic system.

There is only one way to get out of the scientific slums of political economics and that is: to move from subjective to objective axiomatic foundations.

While political economics is indeed thriving on endless confusion, theoretical economics has an answer that is unsurpassable in its definitive clarity
• there is no alternative to the Structural Axiomatic Paradigm.

That is down-to-earth scientific realism.

Egmont Kakarot-Handtke

Still alive in some heads: equilibrium

Comment on  'Still dead after all these years  general equilibrium theory'

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You describe the equilibrium metaphor. This is storytelling. The question is whether this metaphor is applicable to the economy. And the definitive answer is: IT IS NOT.

“The mathematical failure of general equilibrium is such a shock to established theory that it is hard for many economists to absorb its full impact.” (Ackerman, 2004, p. 19)

Some people, however, simply cannot get their heads around it.

“And so  faithful to the theory's conceptual cornerstones and hoping against all hope that the unthinkable may still be achieved (i.e., a satisfactory theory of the price mechanism)  the tormented upholders of the validity of the paradigmatic core of economic equilibrium theory appear singularly reluctant to face the problem of comparing expectations and results and assessing the consistency of the theory.” (Ingrao and Israel, 1990, p. 346)

You seem to be one of those people. Just in case you are really interested in the correct theory of the price mechanism see (2014).

Egmont Kakarot-Handtke


References
Ackerman, F. (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. In F. Ackerman, and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, pages 14–32. London, New York, NY: Routledge.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL

First Fundamental Law vs. Fundamental theorem of income distribution

Comment on RWER issue 69 on Piketty's Capital

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“In the early pages of Capital in the Twenty-First Century, Thomas Piketty states a 'fundamental law of capitalism' that α = rxβ, where α is the share of profit in income, β is the capital/output ratio, and r is the rate of return on capital, or the rate of profit. Thus: r = α/β.” (Galbraith, 2014, p. 145)

The fundamental law does not hold because the fundamental theorem of income distribution states: Profit is not a factor income (2012, p. 4).

Piketty does not realize that profit and distributed profit are fundamentally different economic entities. Therefore, there is no such thing as “a share of profit in income” but there is “a share of distributed profit in income”.

The correct Profit Law reads:

(i) for the pure consumption economy
Qm = Yd-Sm (2012, p. 4, eq. (5))

(ii) for the investment economy
Qm =Yd+I-Sm: (2014, p. 8, eq. (18))

Legend: Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditure

The structural axiomatic Profit Law gets a bit more sophisticated when foreign trade and government is included. By summing up investment expenditures over time and taking depreciation into account (ii) ultimately yields the profit rate (2011b, Sec. 6.2).

Note that profit for the economy as a whole does not depend on productivity. What holds for a single firm does not hold for the economy as a whole. One has to be careful here not to commit a fallacy of composition.

Changes of the valuation price of assets are captured by nonmonetary profit Qn. This is a different and lengthy issue (2011a).

From the fact that Piketty's profit theory is not correct follows logically that his First fundamental law is not correct either.

Time to get the formal foundations right (see here).

Egmont Kakarot-Handtke


References
Galbraith, J. K. (2014). Unpacking the First Fundamental Law. real-world economics
review, (69): 145–148. URL
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working
Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). Squaring the Investment Cycle. SSRN Working Paper
Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN
Working Paper Series, 2012793: 1–13. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

The 'First fundamental law of capitalism' is the Profit Law (see here).

The profit theory is false since Adam Smith. What can you expect from distribution theory?

Comment on RWER issue 69 on Piketty's Capital

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Critical economists never bought into marginalism as a theory of income distribution (Syll, 2014, p. 40) and it is clear by now that the orthodox approach is a failure. Quite naturally, Heterodoxy is drawn to Marx. Unfortunately, Marx also got it wrong. For the formal proof see (2014).

All major economic schools lack a consistent profit theory and therefore all distribution theories are hanging in the air. Piketty is no exception.

As Hicks already observed with regard to profit: economics is “a science still groping in the dark” (1931, p. 170). Economists have no true conception of the most important phenomenon in their universe. What is immediately obvious is that the theories of income distribution and wealth distribution are wrong by logical necessity.

The first step out of the cul-de-sac is (2012)

Egmont Kakarot-Handtke


References
Hicks, J. R. (1931). The Theory of Uncertainty and Profit. Economica, (32):
170–189. URL
Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN
Working Paper Series, 2012793: 1–13. URL
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series,
2414301: 1–25. URL
Syll, L. P. (2014). Piketty and the Limits of Marginal Productivity Theory. realworld
economics review, (69): 36–43. URL


For an overview about the desolate state of profit theory, which has been known for
a long time but never rectified, see the web page here

From behavior to structure

Comment on  'Why does aggregate demand collapse?'

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It is important to distinguish between political and theoretical economics. In political economics 'anything goes'; in theoretical economics scientific standards are observed. 

The crucial point is: political economics is based on behavioral axioms (McKenzie, 2008) and this is not a solid enough foundation.

“. . . if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362)

To start with behavioral assumptions like the profit motive invariably leads to a gossip model of the world. This is not to say that the profit motive is 'unrealistic'. What is said is that second-guessing the agents is a pointless exercise.

“... there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman, 1992, p. 320), (Rosenberg, 1980, pp. 2-3)

Many economists tend to think that they are doing science while they never get above the level of gossiping about what the agents want or think or expect.

The upshot is that no way leads from the understanding of how agents behave to the understanding of how the economic system behaves (2014).

This fully explains the failure of behavior based approaches -- including, of course, the Austrians.

Egmont Kakarot-Handtke


References
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
Cambridge University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working
Paper Series, 2418851: 1–19. URL
McKenzie, L. W. (2008). General Equilibrium. In S. N. Durlauf, and L. E. Blume
(Eds.), The New Palgrave Dictionary of Economics Online, pages 1–18. Palgrave
Macmillan, 2nd edition. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford:
Blackwell.

Listen to the EconoPhysicists

Modern macroeconomics and the perils of using 'Mickey-Mouse' models

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When Econophysicists take a look at theoretical economics from their distinct point of view the conclusions are always interesting. Take this one about the future of conventional economics.

“What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse.” (McCauley, 2006, p. 17)

Or this one about the art of model-building.

“There is little or nothing in existing micro- or macroeconomics texts that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way.” (McCauley, 2006, p. 16)

I think Heterodoxy can agree with all this. My main point with the econophysicists is this: conventional economics is largely the product of old-school econophysicists (see also 2013). There is a lot of irony here.

Beginning with the Classicals economists have shaped economics in the image of physics. Mirowski has brilliantly retold the story (1995).

While it is legitimate to copy from physics one has to make sure that one gets the crucial point. In most cases the copying remained on the surface.

“Now there is simply no doubt that whatever was the source of inspiration for Jevons, Menger and Walras, all three invoked whatever physics they knew to lend prestige to their theoretical innovations. Unfortunately, with the exception of Jevons, that was the physics of Newton, not the physics of Helmholz, Joule and Maxwell; Adam Smith, Ricardo, James Mill and McCulloch had been just as eager in earlier days to invoke the name of Newton to legitimise their theoretical claims.” (Blaug, 1989, p. 1226)

On the whole the copying amounts regularly to take the powerful tools that have been invented elsewhere (Darwinism is also popular) and to apply it to economics. It is a bit like Schwarzenegger grabbing the cruise missile and then going to wipe out the rather unpleasant guy next door.

In my mind, the best lesson physics has to offer is that you have to think for yourself and to create your own tools.

“The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein, quoted in Schmiechen, 2009, p. 368)

The take-home message is: theory first!

So I have some qualms about whether the Affine Robust Measurement Feedback Non-linear H-infinity Control is the appropriate tool in economics. In any case it sounds good. But is this real progress compared to the old-school econophysicists who messed the whole thing up in the first place?

Egmont Kakarot-Handtke


References
Blaug, M. (1989). Review. Economic Journal, 99(398): 1225–1226. URL
Kakarot-Handtke, E. (2013). Toolism! A Critique of Econophysics. SSRN Working
Paper Series, 2257841: 1–13. URL
McCauley, J. L. (2006). Response to "Worrying Trends in Econophysics". Econo-
Physics Forum, 0601001: 1–26. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited,
volume 1. Norderstedt: Books on Demand, 2nd edition. URL

Shocking: methodology is a tricky business

Comment on 'Study the shocks'

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What is the core problem of economics? Bagehot made it clear back in 1885:

“It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls 'unreal words,' -- that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark -- sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend 'how any one can talk such nonsense.' Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.” (Bagehot, 1885, PE.13)

Take-home message: There are two types of economists but neither has a clue.

This, indeed, was not news then because J. S. Mill reported already in 1874 about the two classes of inquirers.

“It has been again and again demonstrated, that those who are accused of despising facts and disregarding experience build and profess to build wholly upon facts and experience; while those who disavow theory cannot make one step without theorizing. But, although both classes of inquirers do nothing but theorize, and both of them consult no other guide than experience, there is this difference between them, and a most important difference it is: that those who are called practical men require specific experience, and argue wholly upwards from particular facts to a general conclusion; while those who are called theorists aim at embracing a wider field of experience, and, having argued upwards from particular facts to a general principle including a much wider range than that of the question under discussion, then argue downwards from that general principle to a variety of specific conclusions.” (Mill, 1874, V. 43)

Take-home message: There are two types of economists, the upwarders and downwarders, but neither is particularly successful.

Mill was confronted with a quite unsatisfactory situation. He was well aware of the “backward state” of the social sciences in general and of economics in particular. Being one of the finest methodologists of his time -- and far beyond -- he took sides.

“Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of "abstract speculation".” (Mill, 1874, V.55)

Mill had the great triumph of the downwarders before his eyes and he certainly concurred with Galileo.

“I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ...” (quoted in Popper, 1994, p. 84)

In contrast, the defeat of the upwarders was evident and their good advice rung hollow.

“Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis. Don't theorize, he said, but open your eyes and observe without prejudice, and you cannot doubt that the Sun moves and that the Earth is at rest.” (Popper, 1994, p. 84)

Take-home message: Common sense and open eyes can be very misleading in scientific matters.

Or, as Marx put it: “That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.” (Marx, 1990, p. 677)

Mill knew quite well that methodology can point out errors, mistakes, nonentities, fallacies, and green cheese assumptionism but that it is beyond the means of the methodologist to tell researchers how to solve their scientific problems. And if any methodologist should ever think he knows how to do better there is a straightforward way to demonstrate it.

“Doubtless, the most effectual mode of showing how the sciences of Ethics and Politics may be constructed, would be to construct them ...” (Mill, 2006, p. 834)

The downwarders of Orthodoxy have failed to explain how the actual economy works. This, however, does not prove that the methodology of the upwarders is superior. Heterodoxy cannot claim that it has performed better.

My good advice to Peter Radford could be: Never give good advice in methodological matters, but this would be much like one of these logically shocking ancient Greek paradoxes.

Egmont Kakarot-Handtke


References
Bagehot, W. (1885). The Postulates of English Political Economy. Library of
Economics and Liberty. URL
Marx, K. (1990). Capital, volume I. London: Penguin Classics. (1876).
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On
the Definition of Political Economy; and on the Method of Investigation Proper
To It. Library of Economics and Liberty. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected
View of the Principles of Evidence and the Methods of Scientific Investigation,
volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
(1843).
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and
Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111.
London, New York, NY: Routledge.

Between the devil and the deep blue sea: on framing false alternatives

Comment on  'The DSGE emperor has no clothes. But he does have a hat. And a rabbit.'

Blog-Reference

Imagine for a moment that you drop into a discussion. Two experts talk about the respective merits and demerits of the A-car and the B-car. There is a lot of technical argument about acceleration, fuel consumption, operating distance, cylinder capacity, electronic injection, etcetera. Both debaters are engaged and obviously conversant with the technicalities. At the end the A-car proponent seems to have the better arguments. Good discussion, applause. Then you learn that the original question was: How can we get to the moon?

Much of the discussion about DSGE and WUMM is of this sort. The question was: After the recent spectacular failure of macroeconomics, how can we do better in the future? How to proceed theoretically and analytically and empirically? Is DSGE or WUMM more promising? This is false framing. The correct answer is, neither DSGE nor WUMM, both have to be abandoned.

Why? Because there is something like falsification.

“In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

Of course, after a severe crisis, economists do not simply continue, they promise to to better in the future. Yes, and they have already an idea. More complexity, for example. Mea culpa, we failed in the past, but this time we fix it.

Not much will come from this cosmetic surgery. Why?

To make a long argument short please accept for a moment the assertion: There is no such thing as a law of human behavior. From this follows trivially:
• historical correlations are unreliable for forecasting purposes, particularly in the case of an entirely new situation, e.g. a regime change,
• demand and supply functions are nonentities,
• preferences change over time,
• parameters change over time,
• there is no equilibrium or steady state.

All these difficulties that make model testing such a challenging task have their root in the foundational assumption that there is such a thing as a behavioral law or at least a regularity. After all, that is what we are ultimately looking for. Because if there is no law nobody can make a prediction (except charlatans and doomsayers).

DSGE claims to be based on “deep structural parameters.” This would be fine if it indeed were the case. Yet the whole microfoundations project is essentially about optimizing behavior. This crucial assumption is put squarely into the premises:

“Modern macro models have the five following properties:
• They specify budget constraints for households, technologies for firms, and resource constraints for the overall economy.
• They specify household preferences and firm objectives.
• They assume forward-looking behavior for firms and households.
• They include the shocks that firms and households face.
• They are models of the entire macroeconomy.”

Two of the five premises are about human behavior and most people are aware that they are far off the mark. This, however, is the minor problem. The Iron Law of Economic Theory Design says: No way leads from the understanding of human motivations and behavior or from purely speculative behavioral assumptions to the understanding of how the economy works (for details see 2014).

Hence, what is needed is not cosmetic surgery but a paradigm shift. The whole set of DSGE premises, which is in the main shared by WUMM, is methodologically mistaken and ultimately indefensible.

Therefore, the choice is not between DSGE or WUMM. The real choice is between the defunct subjective-behavioral approach and a new paradigm. This, though, is obvious since Keynes and the Great Depression. The real problem is not in statistical technicalities but in “... a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

There are many popular and even good reasons to blame Orthodoxy for the latest crisis, but -- to set the record straight -- Heterodoxy, too, did not come up with a “suitable alternative” since Keynes proposed to “throw over” the classical axioms (Keynes, 1973, p. 16).

Heterodoxy has a mission: Don't waste time with blaming and false alternatives; dig deeper; there are economic laws, but there are certainly no behavioral laws.

Egmont Kakarot-Handtke


References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge
University Press.
Kakarot-Handtke, E. (2014). The Synthesis of Economic Law, Evolution, and
History. SSRN Working Paper Series, 2500696: 1–22. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political
Economy, 49(3): 361–393. URL

Yes, orthodox economics is poor science, but can Heterodoxy raise hope?

Comment on 'Modern macroeconomics and the perils of using ‘Mickey Mouse’ models'

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In 1898 the great heterodox economist Thorstein Veblen asked: “Why is Economics Not an Evolutionary Science?”

What Veblen pointed out was that the petty mechanical models of his neoclassical fellow economists were mistaken, useless, and misleading.

He famously ridiculed homo oeconomicus: “The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact.”

Well said, indeed, and true until this day. Yet, then one has to ask back: Why did Veblen spend much time on questioning and ridiculing Orthodoxy instead of developing an evolutionary economics? If he knew what was wrong, why did he not demonstrate how to do it properly? Why is the very personification of Mickey Mouse economics -- homo oeconomicus -- still busy with maximizing utility in our days?

Yes, Orthodoxy is a failure. Yes, the heterodox critique is fully justified. Yes, the emperor has no clothes. Yes, the textbooks are wrong. Yes, linear models are unsatisfactory. Yes, equilibrium is a nonentity and rational expectations are a physical impossibility.

We know all this since Veblen or even longer. Time enough, one would think, to develop something better.

Let all dreams come true and imagine for a moment that each orthodox economics professor is replaced by a heterodox professor. What could he teach? That there is something good and right with the Classics, with Marx, with Walras, with Keynes, with the Austrians, with Sraffa, Kalecki and Minsky, but that we do not know exactly what it is and how it fits together. Is the pluralism of partial or even falsified theories something that can be justified and taught as science?

The fact of the matter is: there is no heterodox alternative. To replace a paradigm means to replace obsolete axioms with new axioms. This effects a change of the whole theoretical superstructure and that is what a paradigm shift is all about. At the moment there exists no heterodox common ground in the form of a set of axioms and therefore nothing to consistently build upon.

Orthodoxy is unacceptable but its proponents have taken the pain to formulate its premises and conclusions in such a way that errors/mistakes can be identified with accepted scientific procedures. This is the minimum condition and this made it possible that General Equilibrium Theory could be refuted by its own proponents.

“The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)

Yes, nobody needs the Mickey Mouse models of Orthodoxy. But this is no sufficient reason to jump to heterodox Donald Duck models.

The common error lies in the assumption that there must be something like behavioral laws or at least regularities. There is no such thing. No way leads from behavioral assumptions to an understanding of how the actual economy works. The problem is not with the econometricans, the problem is with economic theory. From the assumption of utility maximization follows no testable relationship. It is the same with other green cheese assumptions like rational expectations, perfect competition, supply and demand functions, twice differentiable production functions and all the rest (2013). Nonentities are not testable and that is not a weakness of statistical methods with a well-defined field of application. Standard economics simply falls outside this field.

As long as Heterodoxy, or anybody else for that matter, cannot replace the obsolete set of foundational assumptions with a consistent alternative economics is caught in a cul-de-sac.

“Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

Or, as Mirowski put it: “The task of producing knowledge against the grain requires imagination.” (2013, p. 4)

Seems to be a scarce resource in economics.

Egmont Kakarot-Handtke


References
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, pages 123–138.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Mirowski, P. (2013). Never Let a Serious Crisis Go to Waste. London, New York, NY: Verso.

Throwing soap bubbles at time wasters

Comment on 'Microfounded DSGE models -- a total waste of time!'

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One defect is a bad thing, but countless defects are a good thing. This keeps the critics busy, the discussion lively, and the outcome forever inconclusive. Accordingly, Hahn was very happy with the critics of the neoclassical research program.

“The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets.” (Hahn, 1980, p. 127)

He even warned his colleagues of exuberance.

“For as I said at the outset, the citadel is not at all secure and the fact that it is safe from a bombardment of soap bubbles does not mean that it is safe.” (Hahn, 1984, p. 78)

When homo oeconomicus was young and a simpleminded utility maximizer people laughed at him because of his unrealism. Poincaré, to be sure, choose his words.

“Walras approached Poincaré for his approval. ... But Poincaré was devoutly committed to applied mathematics and did not fail to notice that utility is a nonmeasurable magnitude. ... He also wondered about the premises of Walras’s mathematics: It might be reasonable, as a first approximation, to regard men as completely self-interested, but the assumption of perfect foreknowledge 'perhaps requires a certain reserve'.” (Porter, 1994, p. 154)

What happened in the second approximation? Has nonsense been reduced since Walras? It has been multiplied by making it rigorous. This is what we actually have: 'an infinitely lived intertemporally optimizing representative household/consumer/producer, agents with homothetic and identical preferences, etc.' In the early days homo oeconomicus had only perfect foresight, now he has also eternal youth. Scientific progress is something different.

“The last thirty years seem to this observer to have been downhill almost all the way. So much of the literature ... I see as silly beyond all expectation and unscholarly beyond all endurance.” (Leijonhufvud, 1998, p. 234)

Why have critics been so ineffective? Because they focus always on the most obvious weak link of the chain but do not understand the logic of the chain. J. S. Mill did, and he clearly stated the key question.

“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (Mill, 2006, p. 746)

The fault of an approach lies always in the first element of the chain: in the axiomatic foundations. Keynes knew this.

“For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes, 1973, p. xxi)

An effective critique does not waste time with the plain unrealism of some heroic assumption in the middle of the chain. An effective critique finds a new hook to hang an impeccable logical chain on, that is, an effective critique changes the axiomatic foundations (2014; 2014).

After more than a century, it is pointless to repeat Poincarés critique of homo oeconomicus. Homo emotionalis or homo sociologicus are not the solution. Simply take ALL behavioral assumptions out of the formal foundations of economic theory. Second-guessing the agents is a waste of time.

“... there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman, 1992, p. 320), (Rosenberg, 1980, pp. 2-3)

Egmont Kakarot-Handtke


References
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue:
The Crisis in Economic Theory, pages 123–138.
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge, MA: MIT Press.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
Cambridge University Press.
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working
Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).
Leijonhufvud, A. (1998). Discussion: Involuntary Unemployment One More
Time. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),
Economics and Methodology. Crossing Boundaries., pages 225–235. Houndmills,
Basingstoke, London: Palgrave.
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications
to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart
Mill. Indianapolis, IN: Liberty Fund. URL (1866).
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in
Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic
Thought, pages 128–170. Cambridge: Cambridge University Press.
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford:
Blackwell.

Stop talking, start thinking

Comment on  'Seven things that economists could usefully do or call for over the next several years'

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Economists love to give advice. Time to face reality: economists had no solutions, they have no solutions, they are the problem.

“Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner, 1963, p. 1)

There seems to be complete ignorance among both orthodox and heterodox economists that they have nothing to offer in the way of a scientifically founded advice.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

What we currently have are the opinions of folks with political agendas but certainly with nothing resembling a true theory.

It is a unique fact of the history of economic thought that neither Classicals, nor Walrasians, nor Marshallians, nor Keynesians, nor Marxians, nor Institutionialists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists, nor New Keynesians, nor New Classicals ever came to grips with profit (Desai, 2008, p. 10). Hence, 'they fail to capture the essence of a capitalist market economy' (Obrinsky, 1981, p. 495), see also (2013b).

Economists do not understand the two most important phenomena in their universe: profit and income (2014). This is like physics before the proper understanding of the elementary concepts force and mass.

An economist stepping forward and explaining how a crisis could be fixed or how to make the world a better place is in the state of severe self-delusion (2013a). And there is no remedy against this than doing one's scientific homework.

Stop talking, start thinking. This is a manageable agenda for the next several years.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume
(Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave
Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2013a). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
2207598: 1–16. URL
Kakarot-Handtke, E. (2013b). Debunking Squared. SSRN Working Paper Series,
2357902: 1–5. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics,
3(4): 491–502. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp.
1–22. URL

Funny folks in the big omnibus

Comment on 'Macroeconomic aspirations'

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“... economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem in the economics omnibus is that the majority of passengers are agenda pushers of one sort or another. This has always been an impediment to scientific advance.

Currently, economists do not understand how the economy works.

“As Joan Robinson said, our essential object in economics is "to understand how the economic system works"; or, putting the emphasis differently, as did Keynes, "Is the economic system self-adjusting?" Sadly, we economists have so far done little to address, much less provide satisfying answers to the issues posed by Newcomb, Robinson, and Keynes. ... we know little more now about "how the economy works," or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower, 1999, p. 401), see also (2014; 2014)

Keynes, too, was an agenda pusher but he clearly understood that nothing less than a paradigm shift would do in economics. His valuable insights for theoretical economics are:
(i) Conventional (=classical=orthodox) economic theory is false and has been refuted once and for all by the Great Depression.
(ii) The mistakes are located in the premises: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes, 1973, p. xxi)
(iii) The indispensable paradigm shift requires the replacement of old premises by a new set of axioms: “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight -- as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

Outcome of the Keynesian Revolution:
(i) Keynes could not perform the paradigm shift in a formally acceptable way (2011).
(ii) Post-Neo-New Keynesians were so occupied with 'What Keynes really meant' that they could not rectify the General Theory until today (2011).
(iii) Keynes could not 'throw over' the old axioms for good and this made the reappearance of 'dead ideas' (Quiggin, 2010) possible.
(iv) Theoretical economics is still groping in the dark in the no man's land between the obsolete and a new paradigm.

So here we are:
“Nothing is more difficult than to turn an entire discipline around, asking in effect to jettison its own history over the last 200 years.” (Blaug, 1990, p. 205)

The first thing to do is to turn microeconomics around. There can be no microeconomic foundation of macroeconomics because the foundations of microeconomics itself are erroneous. For funny label-sticking Oxford macroeconomists there is still something to learn from Keynes.

Egmont Kakarot-Handtke


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT:
Edward Elgar.
Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post
Keynesian Economics, 21(3): 399–414. URL
Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper
Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Why Post Keynesianism is Not Yet a Science. SSRN
Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us.
Princeton, NJ, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
University Press.



Nonentity: the emptiness of economic thinking

Comment on  'Still dead after all these years -- general equilibrium theory'

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The discussions among physicists, for example, became enormously productive just by no longer applying concepts like perpetual motion machine or epicycle because these words signify nonentities. It took some time to find this out. The specific difficulty with nonentities is sometimes that they cannot be readily recognized or disproved. It is simple with the Easter Bunny and rather demanding with the concept of absolute space.

Likewise, students of economics can gain a wealth of time by immediately stopping to read an article or a book as soon as the concept of equilibrium is introduced.

Equilibrium, or by implication disequilibrium, is a nonentity. Of course, there are some other nonentities in conventional economics but equilibrium is the most wasteful.

Note well that Keynesians could never emancipate themselves from equilibrium thinking.

“Keynesian economics also provided crucial impetus to the development of two other key developments of the middle part of the century — general-equilibrium reasoning in economic theory, and simultaneous-equation modelling in econometrics.” (Woodford, 1999, p. 7), see also (2014)

Identifying nonentities is one of the defining activities of science. In took the physicists about eighteen centuries to find out that epicycles are nonentities. As J. S. Mill put it: "Mankind in all ages have had a strong propensity to conclude that wherever there is a name, there must be a distinguishable separate entity corresponding to the name; ..."

General equilibrium is the economic counterpart of a perpetual motion machine; no real thing could possibly correspond to the name. The scientific content of all variants of equilibrium models is nil — it is superstition wrapped in mathematics. The fact that conventional economics clings to equilibrium does not testify for equilibrium but against conventional economics.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics.
Mimeo, pages 1–32. URL

From theory collapse to economic collapse

Comment on  'Why does aggregate demand collapse?'

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The litmus test for every economist is whether he takes the Walrasian approach seriously. Since the days when Keynes saw more clearly than his fellow economists that the 'classical' axioms had been refuted once and for all by the Great Depression this is self-disqualifying. There is no way back before Keynes.

However, Keynesianism has to be developed further. It is not such a good idea to cling to the General Theory. Keynes started the overdue paradigm shift but he did not finalize it in a formally acceptable manner (2011).

You ask two important questions, first about aggregate demand, second about the price mechanism. Both are, of course, interrelated but the crucial point is that the popular idea of the functioning of the price mechanism is mistaken. Loosely speaking: it is the profit mechanism that is decisive, not the price mechanism. Even if the adaptation of the product price and the wage rate for the business sector as a whole is perfectly flexible, this cannot turn the losses that result from insufficient aggregate demand into profit. Therefore, the price mechanism cannot prevent the self-dissolution of the economy.

Hence it is the familiar story of supply-demand-equilibrium that has to be replaced by the correct price theory (2014). The correct employment equation contains both aggregate demand and the interplay of the price mechanism (2014, p. 9, eq. (22)).

It is proverbial that the representative economist does not know how the economy works. Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income. Because of this economists have nothing to offer in the way of a scientifically founded advice.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Not to forget, before you tell students about the economy you need the true theory.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN
Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
Method in Economics and Econometrics. Cambridge, MA: MIT Press.

Economics: science for the confused

Comment on  'DSGE is a plutocratic tool'

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If, as Nixon's adviser Roger Stone once quipped, politics is Hollywood for the ugly, then economics is science for the confused.

“Thousands upon thousands of scholars, as well as thousands of statesmen and men of affairs, have contributed their efforts to the attempt to understand the course of events of the economic world. And today this field of investigation is being cultivated more extensively, than ever before. How is it, then, that in all these years, and with all the undoubted talent that has been lavished upon it, the subject of economics has advanced so little?” (Schoeffler)

Could it be that there is something deeply wrong with economics? Could it be that economics has never emancipated itself from agenda pushers of all sorts? Could it be that economists have caught themselves in the endless circle of apologetics and debunking? Could it be that economists feel quite at home in the 'thickness of confusion' (Suppes)?

Economists owe the world the true economic theory, that is, a theory that satisfies the scientific standards of material and formal consistency and that explains how the economy works.

When Joan Robinson summarized the output of political economics she needed only six words: Scrap the lot and start again!

If she had to characterize the current DSGE discussion one word would be enough.

Egmont Kakarot-Handtke

Agenda pushers, hijackers, and scientists

Comment on  'DSGE is a plutocratic tool'

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It is trivial but worth repeating: political economics and theoretical economics are different things. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the economy works. The core problem of economics as a science is, of course, that by its very nature it is closely entangled with politics. The biggest threat to theoretical economics is that it gets hijacked by those with a political agenda. It does not matter whether this agenda is good or bad in preset moral terms. Science is committed to its own criteria or it ceases to be science.

But are we not all inescapably involved in the struggle between good and evil? Politics, religion, and philosophy say so. But even if this were true this would be no justification to hijack science or to let it be hijacked. What has to be recognized is that science is about true/false and not about good/evil. This distinction is part of the demarcation problem, which is the fundamental problem of methodology (Popper, 1980, p. 34). Since the ancient Greeks the first act of science is to throw out politics, religion, and philosophy.

Because there is theoretical and political economics there are two types of inquirers.

“A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

Let us make no mistake: politics is legitimate, to influence public opinion is legitimate, yet all this has nothing to do with science.

“Apologetics may be a laudable objective. Its practical importance is unquestioned. People need to be shown that the institutions of their own society are good, those of others bad. But there is no place for apologetics in science. Scientific economics inquires only into the How and Why, not into the Good or Bad, of what is. From the scientific point of view preoccupation with Good and Bad is worse than useless since it not only fails to illumine anything but keeps the lightbeam of inquiry from being turned in directions where answers to significant questions can be found.” (Murad, 1953, p. 2)

The classical economists started openly as agenda pushers. They had only different agendas.

Smith: “But in the introduction to Book IV we read that Political Economy ‘proposes to enrich both the people and the sovereign,’ and it is this definition which expresses both what Smith wanted above everything and what interested his readers more than anything else.” (Schumpeter, 1994, p. 186)

Mill: “... John Stuart Mill wrote ..., that in the years around 1830 his circle (the so-called Philosophical Radicals) had adopted the following programme: they wanted to achieve an improvement in human society by ‘securing full employment at high wages to the whole labouring population’.” (Popper, 1994, p. 188)

The rest: “The old-fashioned political economist adored, as alone capable of redeeming the human race, the glorious principle of individual greed, although, as this principle requires for its action hypocrisy and fraud, he generally threw in some dash of inconsistent concessions to virtue, as a sop to the vulgar Cerberus.” (Peirce, 1931, 1.75)

Marx and Keynes, too, were noteworthy agenda pushers. The same holds for Hayek and Friedman. All these economists used economics for political purposes. This is unacceptable. Note well, it does not matter what the respective agenda is -- each attempt to instrumentalize science is unacceptable.

Since Adam Smith all economists are committed to science as they understand it.

“Now there is simply no doubt that whatever was the source of inspiration for Jevons, Menger and Walras, all three invoked whatever physics they knew to lend prestige to their theoretical innovations. ... Adam Smith, Ricardo, James Mill and McCulloch had been just as eager in earlier days to invoke the name of Newton to legitimize their theoretical claims.” (Blaug, 1989, p. 1226)

What exactly does this commitment entail?

“Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Therefore, the core question of theoretical economics is not who benefits from a theory. The core question is how the actual economy works. By consequence, the decisive argument against DSGE is not that it benefits the Plutokrats but that it does not meet the criteria of material and formal consistency. DSGE is simply out of science.

Egmont Kakarot-Handtke


References
Blaug, M. (1989). Review. Economic Journal, 99(398): 1225–1226. URL
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism.
Skeptical Inquirer, 21(6): 1–7. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT:
Edward Elgar.
Murad, A. (1953). Questions for Profit Theory. American Journal of Economics
and Sociology, 13(1): 1–14. URL
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce,
volume I. Cambridge, MA: Harvard University Press. URL
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne,
Sydney: Hutchison, 10th edition.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and
Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111.
London, New York, NY: Routledge.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
University Press.

Moral incompetence or scientific incompetence?

Comment on 'University economics departments must share the blame'

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Hugh Goodacre blames academic economics for its indirect or even direct justification of the financial sector's culture of ruthless money making. And he gives weight to his argument by quoting Krugman stating that 'the economist is a maximising-minimising kind of guy.'

It is simply naive to suggest that people of the financial sector (i) need a justification for money making, and (ii) that they need academic economics for that purpose.

History shows that for any ruthless person in whatever walk of life Darwinism delivers a far stronger justification than the extremum principle. Economics has copied this principle simply from physics and physics ultimately had it from religion.

“Already Maupertuis considered his minimum principle as proof that the world, where among many virtual movements the one leading to maximum effect with minimum effort is realized, is the ‘best of all worlds’ and work of a purposeful creator. Euler made a similar remark: ‘Since the construction of the whole world is the most eminent and since it originated from the wisest creator, nothing is found in the world which would not show a maximum or minimum characteristic.’ ...” (von Bertalanffy, 1969, p. 75)

Nobody blames physics or religion for the latest financial crisis.

The extremum principle is an almost instinctive and tautological way of explanation.

“Throughout its history, the idea of some ‘Fundamental Assumption’, some basic ‘Economic Principle’ about human conduct, from which much or most of economics can ultimately be deduced, has been deeply rooted in the procedure of economic theory. Some such notion is still, in many quarters, dominant at the present time. For example, it has recently been stated that the task of economics is ‘to display the structure and working of the economic cosmos as an outgrowth of the maximum principle’.” (Hutchison, 1937, p. 636)

When Krugman states that 'the economist is a maximising-minimising kind of guy' he affirms the trivial fact that he has studied economics and that he thinks that he has understood what economics is all about. And here the problem begins.

Let us make it short: No way leads from a behavioral assumption (optimization or otherwise) to the understanding of how the economy works (2014). The crucial point is that standard economics is based on behavioral axioms (McKenzie, 2008) and this is not a solid enough foundation.

“. . . if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362)

Economists owe the world the true economic theory, that is, a theory that satisfies the scientific standards of material and formal consistency and that explains how the economy works.

Economists have not delivered. That economics is not yet a science is the only fact that university departments justly can be blamed for.

Egmont Kakarot-Handtke


References
Hutchison, T. W. (1937). Expectation and Rational Conduct. Zeitschrift für Nationalökonomie / Journal of Economics, 8(5): 636–653. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
McKenzie, L. W. (2008). General Equilibrium. In S. N. Durlauf, and L. E. Blume
(Eds.), The New Palgrave Dictionary of Economics Online, pages 1–18. Palgrave
Macmillan, 2nd edition. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
von Bertalanffy, L. (1969). General Systems Theory. New York, NY: Braziller.

The pluralism of nonsense is still nonsense

Comment on 'Pluralism is not enough'

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According to scientific criteria conventional economics is a failure. From this you draw the conclusion: “Sack the economists and disband their departments.” This seems to be a straightforward conclusion, however, it is not because it takes us beyond the realm of science into the realm of politics. Within the confines of science the only legitimate and praiseworthy action is to replace a theory/paradigm by a better one.

Again, it is a logical mistake to conclude from the fact that conventional economics is defective that the curriculum can be improved by counterbalancing it with other defective approaches.

We can agree, for example, that the orthodox profit theory is false (Desai, 2008). But what about Heterodoxy? The profit theories of Marx, Schumpeter, Keynes, Kalecki, Davidson, Minsky, Keen are also demonstrably false (2014; 2011a; 2011c; 2011b; 2013). Despite the obvious fact that they cannot all be correct at the same time, all are propagated under the banner of pluralism as heterodox alternatives. As it happens, they are all different and false. Real scientists would feel the need to clear up this internal contradictions and not to advertise them as pluralism.

As there is only one Law of the Lever, there can be only one objective Profit Law for the economy as a whole as long as profit cannot be created by wishful thinking. And, being a scientist, you know this quite well: “Coherence in economic theory will only come from deeper insights into how economies work.” (see intro)

As it happens, this coincides perfectly with my recent post: “This, then, could be the new directive: Economics is the science which studies how the monetary economy works.” See here.

What is needed is a paradigm shift. The problem is that Heterodoxy has no clue how to achieve this. And because it cannot be claimed that the heterodox paradigm is better it is claimed that heterodox policy is better.

While this may be the case, it begs the question. To argue that orthodox theory is false but heterodox policy is right is simply a category mistake.

There is no way around it: "In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum, 1991, p. 30)

What is expected from economists is the true theory and not the pluralism of false theories. After Orthodoxy has failed, quite naturally all hopes rest on Heterodoxy.

Don't dally until someone demands: Sack them all!

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011a). Schumpeter and the Essence of Profit. SSRN Working Paper Series, 1845771: 1–26. URL
Kakarot-Handtke, E. (2011b). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2011c). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

Pluralism and the thickness of confusion

Comment on 'Pluralism is not enough'

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We agree that the neoclassical paradigm has to be replaced. Unfortunately there is no alternative paradigm. The minimum requirement of a paradigm is that it is logically consistent. A heap of critique, well-meant proposals, and incoherent theories is not a paradigm.

So, my point is that Heterodoxy does not satisfy scientific standards. You argue, as social scientists have argued before you, yes but then let us lower the standards. Blaug called this playing tennis with the net down.

This softening of standards started with Mill's characterization of economics as an inexact and separate science. There is no such thing. Either you conform to the criteria of material and formal consistency or you are out of science.

Therefore, the Einstein-Newton story is entirely misplaced. Economics does not resemble Newton's theory but Ptolemy's epicycle theory. Therefore, it cannot become the special case of a more general theory but has to go out of the window.

That “Truth is a hoary old myth that unfortunately is still widely believed” is a widely employed self-deception among social scientists.

Economists do not really want to get out of the 'thickness of confusion' (Suppes) because wish-wash and inconclusiveness helps passably against outright refutation. After all: “... you cannot prove a vague theory wrong.” (Feynman). This saves a lot of jobs.

Egmont Kakarot-Handtke

Pluralism and truth

Comment on 'Pluralism is not enough'

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Despite appearances to the contrary I agree with almost all you have said.

However, it is one thing when physicists who have developed Quantum and Relativity Theory wonder about whether we can know the ultimate Truth. It is quite another thing when you tell confused confusers (2013) that we can never know whether we have arrived at the truth with a big T.

It is a bit like telling someone who has troubles going three steps in a straight line that he will never surpass the speed of light.

The current problem of economics is to get the elementary concepts right (2014).

Let us agree on this:
“Although nowadays we have given up the idea of absolutely certain knowledge, we have not by any means given up the idea of the search for truth.” (Popper, 1994, p. 202)

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
2207598: 1–16. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and
Rationality., chapter Models, Instruments, and Truth, pages 154–184. London,
New York, NY: Routledge.

Pluralism and the long shadow of Bentham

Comment on Geoff Davies on 'Pluralism is not enough'

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Utility is good enough for engineering but not for science. The methodological problem with truth was that one can arrive at the truth but can never be sure because it is always possible that someone else finds a better theory that contains one's theory as limiting case. Because of this Popper developed the concept of verisimilitude.

Newtonian physics was considered as true and corroborated beyond reasonable doubt until Einstein showed that there is no absolute space and that things become very un-Newtonian at high speeds. So Newton became the limiting case for low speeds of General Relativity Theory. Relativity Theory is closer to truth. It can be taken as truth until somebody else comes up and shows that relativity theory is a limiting case of the Theory of Everything.

Your conclusion: “The Newton-Einstein comparison also shows that science is not about proof, or Truth.” is absolutely false. What do you think physicists are doing at CERN? It is all about proof.

A well known irony of the history of science was that Ptolemy's theory was even superior for the purpose of navigation in comparison to the newly developed Copernican theory. Despite of its practical usefulness Ptolemy's theory is false according to scientific criteria.

To replace truth by usefulness is exactly what Blaug characterized as playing tennis with the net down.

It is surrealistic when economists discuss about truth because after 200 years they still cannot tell the difference between profit and income (see 2014).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

EconoPhysics and pluralism

Comment on 'Pluralism is not enough'

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Econophysicists who intend to apply their methods and tools to economics come in two flavors: either they want to beat one of the financial markets or they want to contribute to the social betterment of mankind.

“Into this unstable situation, propelled largely by contracting opportunities in the physical sciences, but sometimes also by a fervent desire to apply the scientific method to the social betterment of mankind, came an unprecedented wave of trained scientists and engineers into economics. The roll call is stunning, and included Ragnar Frisch, Tjalling Koopmans, Jan Tinbergen, Maurice Allais, Kenneth Arrow and a host of others. For the first time, noted mathematicians such as John von Neumann, Griffith Evans, Harold Thayer Davis, Edwin Bidwell, Wilson and others were induced to turn their attention, however briefly, to economics, and to participate in its elaboration rather than to jeer from the sidelines. When this influx of talent became acquainted with the corpus of neoclassical theory, they discovered that it consisted largely of the formal models which they had already mastered in their earlier training in physics, with the only difference being that the vintage of the model was clearly that of the later 19th century. Thus, with only the most passing acquaintance with the long tradition of economic theorizing, these tyros could jump right in and apply more up-to-date mathematical techniques and metaphors to the neoclassical program and come up with far-reaching results.” (Mirowski, 1991, p. 152)

What got lost in the enthusiasm was that the neoclassical approach was fundamentally flawed to begin with. As a result economics got even deeper in the cul-de-sac. The real task would have been to replace the flawed conceptual core construction of supply-function--demand-function--equilibrium and not to update it.

It is a curious phenomenon that econophysicists habitually overlook the primacy of theory.

“The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein, quoted in Schmiechen, 2009, p. 368)

Before you apply the Omory Law of earthquake aftershocks it would perhaps be a good idea to try some correct economics for a start (2014c; 2014a; 2014b).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Synthesis of Economic Law, Evolution, and
History. SSRN Working Paper Series, 2500696: 1–22. URL
Kakarot-Handtke, E. (2014c). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Mirowski, P. (1991). The When, the How and the Why of Mathematical Expression
in the History of Economic Analysis. Journal of Economic Perspectives, 5(1):
145–157. URL
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited,
volume 1. Norderstedt: Books on Demand, 2nd edition. URL

Prophets of Preemptive Vanitization

Comment on 'Proper use of math in economics'

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You quote the neoclassical economist Erich Schneider saying: “The most that can be said is that a theoretically correct proposition is not relevant because its assumptions do not apply to the present situation.”

This, of course, is absolutely correct for neoclassical theory. In science thing are quite different.

“To give a causal explanation of an event means to deduce a statement which describes it, using as premises of the deduction one or more universal laws, together with certain singular statements, the initial conditions.” (Popper, 1980, p. 59)

Schneider has to be put into the group of people who think because they cannot solve a problem nobody else can. This logical error is known as fallacy of composition. Let us call this large group of annoying bystanders the Prophets of Preemptive Vanitization. Typical statements of these prophets are that bodies that are heavier than air cannot fly or:

“There is no objective truth in economics. Nobody understands the whole picture. Everybody gets a piece of it.” (Roosevelt)

The classical answer to Preemptive Vanitization is:
“People who say it cannot be done should not interrupt those who are doing it.” G. B. Shaw

Egmont Kakarot-Handtke


References
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne,
Sydney: Hutchison, 10th edition.

History and methodology: no trouble of any sort

Comment on 'Proper use of math in economics'

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You say: “If you explain the triumph of theoretical importance as a result of a superior thought system, then you are in deep trouble because almost every day there is a post on this blog that explains that the principles and axioms of neoclassical economics are false.”

You have obviously some trouble to keep things properly apart.
(i) It is one thing to say theory A is true/false.
(ii) It is another thing to say that theory A is supported in various ways in country X to the detriment of theory B, C, ....

Even if we agree perfectly on the historical fact (ii) this does not imply anything about the truth or falsity of theory A. This is an entirely separate question. Scientists focus on (i) and historians on (ii). This is not to deny that both questions get mixed up in the mind of a concrete scientist in a concrete historical setting. However, as a matter of principle, the political success of a theory does not prove anything for or against its scientific value.

What I say is:
(i) Neoclassical theory is a failure.
(ii) The behavioral axioms of the neoclassical approach are not the proper starting point of theoretical economics. This explains (i).
(iii) The set of structural axioms provides the correct formal foundations of theoretical economics. Structural axioms are methodologically superior to behavioral axioms (2014).
(iv) From the structural axiom set follow testable propositions (see the formula above, for example).
(v) If anybody thinks that the structural axiom set is false, he is invited to refute one proposition that follows deductively from it.
(vi) Methodological discussions are no substitute for a test. In fact, they are a distraction. Only the test counts.

Whether some government agency has promoted neoclassical theory during the cold war is irrelevant for the true/false question. Neither government, nor church, nor history has anything to say about true/false, it never had, and never will. This is not to deny that these institutions try to exert illegitimate/incompetent influence on theoretical economics. This is an organizational problem but not a scientific problem.

The best that theoretical economics can give history at the moment is the this formula. Take it, ignore it, or try to refute it.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL