March 31, 2015

How to get rid of supply-demand-equilibrium

Working paper at SSRN

Abstract  This paper provides a substantial reconceptualization of the serial clearing of the product market on the basis of structural axioms. The change of premises is required simply because from the accustomed premises only the accustomed conclusions can be derived and these are known to be inapplicable in the real world. This holds in particular for the still popular idea that the working of a market can be described in terms of the triad supply-function—demand-function—equilibrium. Structural axiomatization provides the complete and consistent picture of interrelated product market events.

Going beyond ink-blot association

Comment on J. W. Mason on ‘Causes and Effects of Wage Growth’

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It is pretty clear that your post lacks an underlying coherent theory. Looking at data without a well-defined theoretical perspective is not different from reading tea leaves or from freely associating about an ink blot. Accordingly, the argument consists of a parade of various popular stories (here five in total, i.e. labor/political, China/robot, Friedman, markup, NAIRU).

Storytelling is the natural mode of communication in political (i.e. proto-scientific) economics. As Hicks once summed up a similar discussion:
“As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong.” (1939, p. 184)

Inconclusiveness is a convenient stratagem because “... you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158). Exactly for this reason, it is methodologically unacceptable

In order to get out of this medieval angels-on-a-pinpoint discussion, a theoretical fixpoint is needed that satisfies the criteria of material and formal consistency. To make a long argument (2015; 2014; 2012) short, the correct employment equation for the investment economy is given here.

The equation says that employment L increases with
• investment expenditures I,
• an increasing expenditure ratio rhoE (=C/Y),
• an increasing factor cost ratio rhoF (=W/PR),
under the condition of product market clearing if price P and productivity R in the consumption and investment good industry as well as distributed profit Yd remain unaltered in the period under consideration. A falling average wage rate for the business sector as a whole increases unemployment.

The testable structural employment equation is general; it includes the working of the wage-price mechanism and contains Keynes's argument as a special case. Finally, it holds under inflationary and deflationary conditions.

The testable structural employment equation terminates inconclusive wish-wash and unambiguously determines the relationship of wage rate, price, productivity, aggregate demand, the income distribution, and employment.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

March 30, 2015

Black holes and white noise

Comment on ‘What’s inside the neoliberal mind? Part 2 — Marketfundamentalist Marxism, kind of’

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Inside the neoliberal mind is the same strange thing as in the marxist mind: a scientific black hole. Constructive Heterodoxy has rigorously demonstrated that both approaches lack the correct profit theory (2015b) and as a matter of logical consequence the correct employment theory (2015a). Employment for the investment economy is given here.

The employment equation says that there is a central defect in the market system, viz. there is positive feedback between wage rate and employment. This explains the greater part of rampant unemployment.

Not much more than rhetorical white noise evaporates from neoliberal or marxist black holes.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL

March 29, 2015

Confused confusers: how to stop thinking like an economist and start thinking like a scientist

Working paper at SSRN

Abstract  The present paper takes it as an indisputable fact that subjective-behavioral thinking leads, for deeper methodological reasons, to inconclusive filibustering about the agents' economic conduct and therefore has to be replaced by something fundamentally different. The key argument runs as follows: (a) the subjective-behavioral approach cannot, as a matter of principle, afford a correct profit theory, (b) without a correct profit theory it is impossible to comprehend how the monetary economy works, (c) without this knowledge economic policy proposals are unjustifiable, (d) thinking like an economist may be hazardous to the economy.

March 27, 2015

Forget Krugman, forget Keynes, forget economists

Comment on ‘Why Paul Krugman is no real Keynesian’

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Keynes wrote in his General Theory:
“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

It can be rigorously demonstrated that this two-liner contains an elementary mistake (2011). By consequence, all models that contain I=S are worthless. This holds for all variants of IS-LM and therefore also for Krugman's model (2014).

Because of defective logic both Krugman and Keynes are out of science. There is nothing to choose.

Constructive Heterodoxy cannot build upon the accustomed concepts but has to dig deeper (2015). This leads to the testable employment function for the investment economy.

This equation helps to answer Keynes's pivotal question: Is the economy self-correcting? The answer is no. This follows from the factor cost ratio rhoFC, which formally represents the price mechanism. This variable is defined as quotient of average wage rate W, price Pc and productivity Rc in the consumption good industry.

The fact of the matter is that a fall of the average wage rate relative to the price reduces employment L under the condition of market clearing in the product market (all other variables fix for the moment). The fatal defect of the price mechanism is that the right (= full employment) factor cost ratio does not come about spontaneously. Just the contrary. If unemployment effects a flexible fall in the average wage rate then unemployment increases. Thus, stickiness is not the problem. There is a positive feedback loop built right into the structural core of the economic system.

The claim that the market system is basically an equilibrium system that regulates itself with a tendency to full employment is entirely unfounded (methodologically it is a quite ordinary petitio principii). Politicians who rely on the advice of representative economists to get out of recession or depression are bound to fail.

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. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. 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).

March 26, 2015

Confounding the Quantity Theory and Say's Law

Comment on ‘Money hoarding — an explanation of today’s low inflation’

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The core problem of economics is that the representative economist never managed to keep political and theoretical economics properly apart. The mixture is toxic indeed. The preceding discussion is a fine specimen of the resulting all round confusion.

Let us untangle the mess by starting with Pontus's confession. “Anyhow, I still believe in Say’s law.” Many economists have not understood until this day that science has nothing to do with belief but with knowledge. What can be shown in a formal rigorous way is that Say's Law does not imply full employment but is compatible with any level of employment (2015).

What the believers in Say's Law persistently overlook is the role of the profit mechanism. More general, both the Walrasian and Keynesian profit theory is false (2015).

The correct version of Say's Law implies that the quantity of money is not a determinant of the market clearing price (2015, eq. (4)) and (2015, eq. (7)).

The most urgent task of Constructive Heterodoxy is to rethink pivotal concepts like market, Say's Law, money, profit, etcetera. The reconstruction of the theoretical superstructure from scratch is an absolute methodological necessity.

At the moment both Orthodoxy and traditional Heterodoxy is defended by confused confusers, i.e. proto-scientific believers.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–17. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Kakarot-Handtke, E. (2015c). Essentials of Constructive Heterodoxy: Say’s Law. SSRN Working Paper Series, 2556434: 1–10. URL


For cross-references and direct links see here.

March 25, 2015

Kaput toys

Comment on Nick Rowe on ‘Wren-Lewis Takes a Stab at It’

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You write: “Firms are worker-owned cooperatives, so we don't need to distinguish wages from profits.”

That is, of course, a fatal error/mistake. You have to distinguish between wage income, distributed profit and profit. These are quite different things. It is irrelevant whether the firm is a cooperative or a joint-stock company. Your error/mistake, though, is pardonable because the profit theory is false since Adam Smith and the models of Stephen, Simon, Nick E. and all the rest are not one iota better in this respect. Time to realize that RBC, NK and NC models are logically defective.

For the correct profit theory see first here and for the correct theory of money see then here.

Egmont Kakarot-Handtke

Beyond methodological madness

Comment on ‘On the value of theoretical models in economics’

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Economists are in the state of manifest self-delusion. They are convinced that what they do is science. Time to face reality.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

After summarizing the neoclassical premises Paul Schächterle concludes:
“That is no science. That is madness. In a better world there we would have no reason to even discuss such models.” (Preceding post)

Indeed, no other conclusion is possible for everyone with a modicum of scientific intuition. Economics is a proto-science, at best on the level of medieval physics. That is bad enough, but it gets worse when economists start talking about methodology.

How can anyone take seriously what Krugman, who cannot tell the difference between profit and income (2014), says about the significance of simplicity? Simplicity as such has never been a truth criterion.

“A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein, quoted in Brown, 2011, p. 244)

Note that Einstein talks about the area of applicability. How large is the area of applicability of neoclassical economics in all its current variants? Yes, exactly zero, and this has nothing to do with simplicity but with simple mindedness.

Note also that it is the extent of applicability that makes the difference between Einstein's and Newton's theory. Newton is the limiting case of Einstein for low speeds. This has nothing to do with simplicity.

Beginning with equilibrium, economists borrowed most of their concepts from physics and then misapplied them (Mirowski, 1995). The same holds for methodology. Neither Orthodoxy nor Heterodoxy understands until this day how the axiomatic-deductive method is to be applied correctly.

As Einstein said: ‘A theory is the more impressive the greater the simplicity of its premises ...’. It is Constructive Heterodoxy which displays the greatest simplicity of premises. These premises are objective and have no resemblance at all with the green cheese assumptionism of New Classicals or New Keynesians. The paradigm shift, which leaves theses approaches as well as traditional Heterodoxy behind, is already on the way. See the cross-references here.

Egmont Kakarot-Handtke


References
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.

March 23, 2015

Vacuonomics II

Comment on ‘A Quick Point on Models’

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Economists are in the state of manifest self-delusion. They are convinced that what they do is science.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

Keynes provides as good an example as any classical or neoclassical economist. JW Mason writes:
“According to Keynes the purpose of economics is ‘to provide ourselves with an organised and orderly method of thinking out particular problems’.” (See intro post)

Let us accept this for the moment and see how it plays out in practice. As a centerpiece of his General Theory Keynes formulated the foundational syllogism of macroeconomics.

“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

The fault in Keynes's two-liner is in the premise income = value of output. It can be formally demonstrated that this equality holds only in the limiting case of zero profit in both the consumption and investment good industry (2014b). Keynes himself felt that something was wrong with profit but he could not identify it.

“His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson and Bezemer, 2010, p. 12)

Keynes was first and foremost a political economists and this means — as a matter of principle — that methodological trivia are never allowed to derail the good cause.

“For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’” (Davidson, 1984, p. 574)

The real scientist's motto is of course ‘It is better to be precisely right than roughly wrong.’ When von Neumann considered the overall poor performance of economics he came to this conclusion.

“I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)

Indeed, when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. It is with profit where the confusion about saving ‘equals’ investment starts. In addition, when income and profit are not correctly defined then distribution theory goes down the tube. And this in turn means that Piketty's study lacks sound conceptual foundations already long before he comes to the definition of capital.

The representative economist is not much disturbed by all this. He builds one zero profit and I=S model after the other (2014a). Economics has its own methodology.

“The test of a good model is not whether it corresponds to the true underlying structure of the world, but whether it usefully captures some of the regularities in the concrete phenomena we observe.” (see intro)

The sun goes up: this model ‘usefully captures some of the regularities we observe.' Indeed. Another regularity since more than two hundred years is that the representative economist cannot tell the difference between income and profit. It can hardly be denied that this distinction is fundamental for all economic models. Yet, neither in the Keynesian nor the Walrasian context it is carried out correctly.

The quickest point on economic models is therefore that they do not satisfy the most elementary methodological requirements. Or, in Joan Robinson's unsurpassable tweet format: Scrap the lot and start again.

Egmont Kakarot-Handtke


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 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).
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

The profit theory is false since Adam Smith. What about the true distribution theory?

Working paper at SSRN

Abstract  All popular schools lack a consistent profit theory. Economists have no true conception of the most important phenomenon in their universe. This methodological defect persists since Adam Smith. Therefore, the theories of income and wealth distribution are wrong by logical implication. If the conclusions of a theory do not find any counterpart in reality the fault lies in the premises. In order to rectify distribution theory it is necessary to substitute the conventional subjective-behavioral axioms by objective-structural axioms. A major result of the present paper is that distribution is not governed by marginal productivity but by the distributed profit ratio.

March 21, 2015

Principal problem solved

Comment on ‘The principal problem of Political Economy’


David Ruccio writes:
“If we look at changes in capital and labor shares ... we can clearly see that, in recent decades, the profit share has been rising and the labor share has been falling. In other words, labor has been losing out to capital — and we need to focus on solving that class problem.” (See intro)

The principal problem of Political Economy is, of course, the scientific incompetence of Political Economists. The fact of the matter is that the profit theory is false since Adam Smith (Desai, 2008). The mistake/error consists — roughly speaking — in naively taking it for granted that profit is a share of total income and that it is attributable to capital. Nothing is further from reality.

The fatal analytical blunder means that (i) economists have no true conception of the most important phenomenon in their universe, (ii) they fail to capture the quintessence of capitalism, (iii) they lack any deeper understanding of how the actual economy works.

To be sure, with regard to profit not only Orthodoxy is groping in the dark but also heterodox economists, e.g. (2011; 2013; 2014a). David Ruccio can be added to the flat-earth crowd because he is obviously convinced that total income is the sum of wages and profits. Traditional Heterodoxy has to be criticized for its failure to get beyond debunking and class rhetoric.

The principal problem of economics, a.k.a. the profit conundrum (Tómasson and Bezemer, 2010), has been solved by Constructive Heterodoxy (2015). For the correct theory of income distribution see (2014b).

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. (2011). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). 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. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

For further cross-references see here

March 20, 2015

Primary and secondary markets

Working paper at SSRN

Abstract  This paper swaps the standard behavioral axioms for structural axioms and applies the latter to the analysis of the emergence of secondary markets from the flow part of the economy. Real and nominal residuals at first give rise to the accumulation of the stock of money and the stock of commodities. These stocks constitute the demand and supply side of secondary markets. The pricing in these markets is different from the pricing in the primary markets. Realized appreciation in the secondary markets is different from income or profit. To treat primary and secondary markets alike is therefore a category mistake.

As Keynes and my taxi driver said: We simply do not know

Comment on ‘Jon Elster on deductivist modeling leading economics astray’

Blog-Reference

The secular stagnation of economics proves that there must be something deeply wrong with economic methodology. This, indeed, is not a new insight. Veblen and many other heterodox economists have made the point. Yet, not much has come of it. It cannot be said that Heterodoxy has developed a better economic methodology in the interim. There is a secular stagnation of critique, too. While Orthodoxy is busy with throwing up one green cheese assumption after the other — beginning with utility maximization and culminating in rational expectation — Heterodoxy has not got tired of playing out its three trump cards: unrealism, deductivism, and uncertainty.

Keynes famously set the tone with this irrefutable argument.
“The sense in which I am using the term [uncertainty] is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention … About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (1937, p. 214)

This may seem new to economists but has been found out by physicists long ago: “The future is unpredictable.” (Feynman, 1992, p. 147)

So, what is really the root of all methodological evil? Orthodoxy is quite explicit about its principles.
“It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

Let us call this the PsySoc imperative because it firmly anchors economics in an idiosyncratic mixture of psychology/sociology/anthropology/gossip. Heterodoxy complies with this methodological imperative, albeit with the usual recourse to realism.
“To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational.” (See intro)

How long will it take economists to understand that economics is not about the behavior of agents but about the behavior of the economic system?

The critical methodological point is that no way leads from the understanding of the interaction of individuals to the understanding of the working of the economy as a whole. This has nothing at all to do with the deductive method. As a matter of fact, the breakup of the methodological stalemate consists in moving from subjective-behavioral axioms to objective-structural axioms (2014a).

The result of the PsySoc methodology has been that economists until this day cannot tell the difference between profit and income (2014b) or, as Keynes so aptly resumed the commonality of Orthodoxy and Heterodoxy: We simply do not know.

When will economists stop telling the world what is so obvious and annoying? 

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
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. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL

Objective principles of economics

Working paper at SSRN

Abstract  Economists have the habit of solving the wrong problem. They speculate circumstantially about the behavior of agents and do not come to grips with the behavior of the monetary economy. This is the consequence of the methodological imperative that all explanations must run in terms of the actions and reactions of individuals. The critical point is that no way leads from the understanding of the interaction of the individuals to the understanding of the working of the economy as a whole. The solution consists in moving from subjective-behavioral axioms to objective-structural axioms, i.e., from proto-scientific past to scientific future.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see here

March 19, 2015

Vacuonomics

Comment on ‘Is the Walrasian Auctioneer microfounded?’

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With a modicum of scientific intuition and after a deeper look into the matter everyone arrives with logical necessity at the following conclusion.

“At long last, it can be said that the history of general equilibrium theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin. ... General equilibrium theory is simply a research program that has run into the sands.” (Blaug, 2001, p. 160)

Clearly, general equilibrium and all its offshoots and variants are unacceptable. Why is the Walrasian approach applied nonetheless? Because economists are not only without scientific intuition they are also ignorant of scientific standards.

“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)

The third reason is the obvious lack of imagination, that is, of some hunch of a promising alternative approach.

“There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao and Israel, 1990, p. 362)

For lack of a promising alternative research program the representative economist simply clings to the familiar utility-demand-supply-equilibrium core —  always open and prepared, of course, for more realism or some fancy face lift.

To be sure, in his time Keynes was one big step ahead. He realized that something was wrong with the orthodox approach. With admirable consequence he took a different route and formulated the foundational syllogism of macroeconomics.

“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

Since theories have an architectonic structure it is clear that if there is a fault in the formal foundations the whole superstructure of the theory is vulnerable. Actually, the fault in Keynes's two-liner is in the premise income = value of output. This equality holds only in the limiting case of zero profit in both the consumption and investment good industry (2014).

Profit does not appear in Keynes's elementary formalism. That is, he in effect talks about a market economy without profit. Note well that Walras's original economy was also a zero profit economy. No such thing existed ever on this planet.

“Rather surprisingly, therefore, the nature of profits remains something of a mystery in contemporary economics; indeed, in the realm of ‘advanced’ theory —  namely the perfectly competitive general equilibrium models —  profits have disappeared altogether.” (Obrinsky, 1981, p. 491)

Neither New Classicals nor New Keynesians provide a consistent description of the market economy. The representative economist is intensely involved in discussions about nonentities like equilibrium, auctioneers, intertemporal optimization, rational expectation, real exchange and other features of his economic Disneyworld. Yet he has not the slightest idea about what profit really is.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

There can be no microfoundation of macroeconomics because microeconomics is itself unfounded. In technical terms: the behavioral axioms of microeconomics and macroeconomics are unacceptable.

“Cunningham in 1891 remarked that in the choice of premises ‘it is not always easy to tell when a professor of the dismal science is making a joke’ and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself.” (Viner, 1963, p. 12)

Time to leave the auctioneer and all the jokes and fools behind and to make economics a science.

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of Economic Perspectives, 15(1): 145–164.
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
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). 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).
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
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp. 1–22. URL


Post on MM has been shortened because of space restrictions.

March 14, 2015

Essentials of Constructive Heterodoxy: employment

Working paper at SSRN

Abstract  Orthodox economics is founded on behavioral assumptions. This has been the wrong starting point because no way leads from there to an understanding of how the economic system works. Critical Heterodoxy is one step ahead insofar as it does not accept the green cheese assumptionism of optimization and supply-demand-equilibrium, yet this is not sufficient to establish a superior paradigm. What we have at the moment is a plurality of debunked theories. This is not a tenable situation. Consequently, Constructive Heterodoxy is focused on the formally consistent reconstruction of central economic phenomena like market, money, profit, and - in this paper - employment.


For cross-references see here

March 12, 2015

From proto-science to science

Comment on ‘What is science?’

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“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)

Neither orthodox nor heterodox economics satisfies the scientific criteria of material and formal consistency. Economists cannot explain how the economy works. The profit theory is false since Adam Smith, that is, economists do not understand the two most important phenomena in their universe: profit and income. Economics still stands where physics stood in the Middle-ages before the concepts of force and mass were properly defined and clearly understood.

Orthodox economics is founded on behavioral assumptions. This has been the wrong starting point because no way leads from there to an understanding of how the economic system works. Critical Heterodoxy is one step ahead insofar as it does not accept the green cheese assumptionism of optimization and supply-demand-equilibrium, yet this is not sufficient to establish a superior paradigm. What we have at the moment is a plurality of debunked theories. This is not a tenable situation. Consequently, Constructive Heterodoxy is focused on the formally consistent reconstruction of the central economic phenomena market, money, profit, employment, etcetera.

“Economics today is a discipline that must either die or undergo a paradigm shift ...” (Kaletsky, 2009, p. 156)

This is a critical juncture. From the fact that the behavioral axioms of Orthodoxy are forever beyond acceptability does not follow that axiomatization is inapplicable or dispensable. Formal consistency is as important as material consistency. It follows therefore that the axioms of Orthodoxy have to be replaced by the axioms of Heterodoxy (2014). That is in technical terms what a paradigm shift is all about.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kaletsky, A. (2009). Goodbye, Homo Economicus. real-world economics review, 50: 151–156. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

For the systematic clarifying of foundational concepts see also the references overview

March 10, 2015

Economists: stop dreaming and waffling and do your scientific homework

Comment on ‘America can be a full-employment economy once again’

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John Komlos writes:
“Isn’t it strange that full employment has to be a dream, even a quarter millennium after the beginning of our stupendous surge in wealth with the Industrial Revolution? But what is full employment? Well, it’s simple enough, isn’t it? An economy in which there are enough jobs to go around for everyone.”

In a well-functioning market economy all factors, including labor, are fully employed. This is what standard economic theory asserts. Obviously, this is regularly not the case and that means that the theory of employment is empirically refuted.

Being no real scientists economists simply ignore refutation. This is normal operating procedure since time immemorial and more than one methodologist has condemned it.

“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)

This is exactly what we observe: an endless writing and waffling about the natural rate of unemployment.

The empirically testable employment formula for the investment economy is given here.

Employment L depends in the main on investment expenditures I, the expenditure ratio rhoE, and on the price mechanism which is embodied in the factor cost ratio rhoF. If this ratio increases employment increases (all other variables held constant).

The price mechanism, i.e., the factor cost ratio which consists of wage rate, price, and productivity, should regulate itself, such that full employment results under the condition that I and rhoE (= aggregate demand) is given. The fact of the matter is that the price mechanism does not work as the representative economist thinks it works and this has nothing to do with market imperfections, or stickiness, or expectations, or uncertainty (for details see 2014a; 2014b; 2012).

Orthodox employment theory is false and has to be replaced.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014a). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2014b). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

March 9, 2015

Essentials of Constructive Heterodoxy: profit

Working paper at SSRN

Abstract  The goal of theoretical economics is to explain how the actual economy works. Since Adam Smith economists have consistently failed to clarify the nature and magnitude of overall profit. No economist, though, would deny that profit is an important phenomenon. Yet, obviously economists are still mired in utter confusion about the most fundamental concept of their discipline. Hence, in the strict sense, there is no valid economics. From all this follows for a methodologically ambitious Constructive Heterodoxy that the accustomed foundations of Orthodoxy have to be replaced. In technical terms this is what a paradigm shift is all about.

March 3, 2015

Complexity, scientific incompetence, and the art of asking the right questions

Comment on Peter Radford on ‘Economic Ignorance?’

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Peter Radford arrived a the following insight.
“Economies are devilishly complicated things. They are full of obstreperous and notoriously difficult subject matter. Notably people. And people, as we all know, do the darnedest things. They, for instance, change their minds and sometimes even contradict themselves — with a straight face too. This makes plotting and explaining their activity very hard.” (see intro)

Since Newton's and Adam Smith's days, when economists ask themselves why they have failed in both relative and absolute terms, one invariably hears the same complexity-uncertainty-hard-stuff refrain.

“There is a property common to almost all the moral sciences, and by which they are distinguished from many of the physical; this is, that it is seldom in our power to make experiments in them. ... We therefore study nature under circumstances of great disadvantage in these sciences; being confined to the limited number of experiments which take place (if we may so speak) of their own accord, without any preparation or management of ours; in circumstances, moreover, of great complexity, and never perfectly known to us; and with the far greater part of the processes concealed from our observation.” (Mill, 1874, V.51)

Or: “Years ago I heard Mr. Cobden say at a League Meeting that ‘Political Economy was the highest study of the human mind, for that the physical sciences required by no means so hard an effort.’” (Bagehot, 1885, PE. 13)

Or: “The motives and conditions are so numerous and complicated, that the resulting actions have the appearance of caprice, and are beyond the analytic powers of science.” (Jevons, 1911, p. 15)

Or: “Knight accuses the positivists of overlooking the complexity and uncertainty of testing in all sciences and argues at length that positivist views of science are particularly inappropriate to economics, which, like all sciences of human action, must concern itself with reasons, motives, values and errors, not just causes and regularities.” (Hausman, 1989, p. 118)

Or: “Economics is a strange sort of discipline. ... too many things are always happening at once. The inferences that can be made from history are always uncertain, always disputable, . . . You can’t even count on a long and undisturbed run of history, because the ‘laws’ of behavior change and evolve. Excuses, excuses. But the point is not to provide excuses.” (Solow, 1998, pp. x-xi)

We know from the history of science that Ptolemy's theory of planetary motion was very complex — in the end he dealt with more than 20 epicycles — and that the complexity vanished completely by changing the vantage point. Could it be that complexity is not in the subject matter but in the observer's mind? Could it be that economists observe and argue, like Ptolemy, from the wrong vantage point?

“Others, the inexperienced students, make guesses that are very complicated, and it sort of looks as if it is all right, but I know it is not true because the truth always turns out to be simpler than you thought.” (Feynman, 1992, p. 171)

Could complexity simply be an indicator of dilettantism or confusion?

Imagine for a moment an aircraft flying from, say, New York to Paris. Now we can ask why? One way to answer the question is to speculate about the motives and reasons of the passengers, the pilot, the crew, the flight controllers, and the greedy managers and stockholders of the airline. The other way to look at the flight is to think about the laws of aerodynamics, thermodynamics and so forth.

We could know in advance that there is no such thing as ‘laws’ of human behavior that could explain flying, not to speak of a particular flight. Real scientists have always been well aware of this.

“The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions.” (Brown, 2011, p. 211)

Hume and Adam Smith, though, missed this crucial methodological point and subscribed to the primacy of what was called the Science of Man.

“It is evident, that all the sciences have a relation, greater or less, to human nature: and that however wide any of them may seem to run from it, they still return back by one passage or another. Even. Mathematics, Natural Philosophy, and Natural Religion, are in some measure dependent on the science of MAN; since the lie under the cognizance of men, and are judged of by their powers and faculties.” (Hume, 2012, Introduction), original upper-case

By anchoring economics firmly in the social sciences Hume and Smith set the discipline on the wrong track and programed failure.

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

Ergo: economics is not a science of behavior (Hudík, 2011); economists have to change their vantage point; economics has to be redefined. Note well that all this has nothing to do with the manifest misapplication of mathematics in standard economics.

Old definition, subjective-behavioral: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
New definition, objective-structural: “Economics is the science which studies how the monetary economy works.”

In non-technical terms this is what a paradigm shift, a.k.a. new economic thinking, is all about.

Egmont Kakarot-Handtke


References
Bagehot, W. (1885). The Postulates of English Political Economy. Library of Economics and Liberty. URL
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1989). Economic Methodology in a Nutshell. Journal of Economic Perspectives, 3(2): 115–127. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. 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
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Solow, R. M. (1998). Foreword, volume William Breit and Roger L. Ranson: The Academic Scribblers. Princeton, NJ: Princeton University Press, 3rd edition.

March 1, 2015

Yes, Orthodoxy is incoherent but, unfortunately, Heterodoxy also

Comment on ‘A perverse intellectual hierarchy’

Blog-Reference

“Thomas Kuhn said that paradigm shift only occurs when a new and better paradigm emerges — At present there is a wide variety of proposed alternatives to conventional economics, but no consensus on any particular approach. Without creating some focal points of consensus, we cannot create the desired transformation.” (see intro)

This, of course, is absolutely correct and the curious thing is that it is long known among economists.

“The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

What the history of economic thought tells us is that Heterodoxy never had a clue how to perform the required paradigm shift. The heterodox approaches are themselves incoherent. Because of this, Heterodoxy pleads for pluralism. This means, it has given up the idea that there is something like a true economic theory. As soon as all are content with the pluralism of false theories there is no longer any need for a paradigm shift. Decorative innovation consists of a bit more commonsensical realism here and the application of a fancy new tool there.

It is a fact that economists cannot explain how the economy works. In technical terms, the fatal methodological defect of Orthodoxy is that it is based on behavioral axioms. Yet, no specific behavioral assumption whatever can serve as a starting point for economic analysis. From this follows for Constructive Heterodoxy that the subjective axiomatic foundations have to be replaced. This is what a paradigm shift is all about. Based on a set of objective axioms all economic conceptions have to be reconstructed from scratch.

The reconstruction of the foundations of economic theory is already on course:
Essentials of Constructive Heterodoxy: the market
Essentials of Constructive Heterodoxy: Say's Law
Essentials of Constructive Heterodoxy: aggregate demand
Essentials of Constructive Heterodoxy: money, credit, interest

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.