May 26, 2015

The intelligent layperson's guide through vacuonomics

Comment on ‘Consistency and validity is not enough!’


“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)

Economists have no true theory.

It is important to distinguish between political and theoretical economics. Quite similar on the surface, these are entirely different endeavors. The goal of political economics is to push an agenda; the goal of theoretical economics is to explain how the actual economy works. In political economics anything goes; in theoretical economics scientific standards are observed.

Political economists cannot explain how the actual economy works. There is much opinion and storytelling but little knowledge. Theoretical economics, on the other hand, is virtually non-existent. The two criteria theoretical economics must satisfy are material and formal consistency.

The reason why economics is a failed science is that it has followed the wrong guideline (in the old days this was not so unusual: physicists stubbornly followed the planets-must-move-in-circles guideline for a couple of centuries).

“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)

Starting on the wrong foot, this program cannot do other than to apply a barrage of green-cheese assumptions like utility, optimization, perfect foreknowledge, production function, supply/demand function, perfect competition, capital, equilibrium, etcetera. Clearly, these conceptions are nonentities. The scientific content of all models that contain nonentities is nil — it is vacuousness wrapped in rhetoric or mathematics. Storytelling is more Keynesian, formalization is more Walrasian. There is nothing to choose between the two.

That much is evident by now: no way leads from the explication of individual behavior to an explanation of how the actual monetary economy works. Apart from manifest evidence, there are compelling methodological reasons for the repudiation of the accustomed paradigm. This means that a paradigm shift is overdue.

One problem, though, is this. In the discussion of real world issues like unemployment, debt, or bubbles it is not transparent that the respective arguments are either derived from a false underlying theory or simply ad hoc. A mass of practical details covers theoretical emptiness. The realisticness of historical/personal accounts covers the surrealism of foundational beliefs. Because of commonsensical examples and appeals political economics appears not so alien as it in fact is. In the last instance, however, it is decisive that the layperson rates an economic argument according to the subjective code like/dislike or credible/incredible and not to the objective code true/false. So the latter criterion regularly gets lost in the discussion.

What is constantly overlooked is that since Walras most models describe explicitly or implicitly a zero profit economy. Or, when profit does make an appearance it is definitively not clear what it really is (2015). The great embarrassment of economics is: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10) This vaporizes the economist's key competence.

There is no need to be conversant with the details of various economic approaches, because from the fact alone that the representative economist cannot correctly specify the difference between profit and income every layperson can safely conclude that economics as a discipline has nothing to contribute to the understanding of actual market economies.

Economists who cling to the accustomed paradigm cannot be taken more seriously than any smart journalist, no matter what the issue or the actual discussion is. The scientific content of a peer-reviewed article, an op-ed, an economist's blog, a layperson's opinion, or a sitcom is the same, that is, nil.

Egmont Kakarot-Handtke

Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
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. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.