December 31, 2014

Gold-making, wine from water, M-C-M+, perpetuum mobile, free lunch, beating the stock market, and the perennial human dream

Comment on Peter Radford on 'Superior Economists'


The psychological and sociological underpinning of the economists's role in society is based on the archetypical idea of something-for-nothing or the creation of value out of base stuff. In contradistinction to medieval gold-makers, however, economists claim that they are scientists and that they have found the principle of wealth creation. This guarantees that economists always have an interested and impressible audience.

“... 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)

Of course, there was always the problem of credibility since physics has shown that because of the law of energy conservation something like value creation is impossible in principle. Physical reality is a zero sum game (with entropy ignored). This irritation was defused with the assertion that economics, too, is a science.

“That Political Economy is a science which teaches, or professes to teach, in what manner a nation may be made rich. This notion of what constitutes the science, is in some degree countenanced by the title and arrangement which Adam Smith gave to his invaluable work.” (Mill, 1874, V.7)

What, then, turned out to be the economist's magic formula? It was exchange that squared the circle. Two agents exchange equivalents (remember physics) yet both increase their utility. No swindle, no exploitation, no environmental degradation, win-win all around through reallocation of goods. The elementary two-person value creation is then multiplied enormously by market exchange. Not nature, not labor ― the market creates wealth.

What about the moral side of richness? The economist's job description strictly excludes moralizing.

“It has been well said by M. Say that it is not the province of the Political Economist to advise -- he is to tell you how you may become rich, but he is not to advise you to prefer riches to indolence, or indolence to riches.” (Ricardo, quoted in Redman, 1997, p. 303)

That the scientific content of economics was rather poor from the very beginning was not much of a problem.

“But though the Wealth of Nations contained no really novel ideas and though it cannot rank with Newton's Principia or Darwin's Origin as an intellectual achievement, it is a great performance all the same and fully deserves its success.” (Schumpeter, 1994, p. 185)

After all, anybody can see that something-out-of-nothing works on the stock market, the real estate market and other less spectacular places. But there is no free lunch (remember physics). What can be expected from non-economists? Should they care about whether general equilibrium theory is nonsense or not? As long as no economic crisis proves the contrary, the economists's stories and claims are socially accepted.

What about the scientific claims?

The fact of the matter is, that economists have no scientifically valid theory about how the economy works.

“Surely the greatest oddity in contemporary economics, granted that ‘Smith's Problem’ is the central issue of economics, is the absence, more than 200 years after the publication of Smith's Wealth of Nations, of an intellectually satisfying account of the modus operandi of the ‘invisible hand’; so the question whether actual monetary exchange economics are in some relevant sense self adjusting ... not only remains to be resolved, it has yet to be seriously addressed.” (Clower and Howitt, 1997, p. 24)

According to scientific criteria economics is a failure. 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). See also: (2014b; 2014a).

Economics is a proto-science and still stands where physics stood in the Middle-ages before the elementary concepts of force and mass were properly defined and clearly understood.

The economist's combination of sense of mission, flawed theory, and self-delusion is ― not exactly superior ― but certainly unique among the sciences.

Egmont Kakarot-Handtke

Clower, R. W., and Howitt, P. (1997). Foundations of Economics. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, pages 17–34. Cheltenham, Brookfield, VT: Edward Elgar.
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
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
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and the Classical Economists. Cambridge, MA, London: MIT Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.