July 31, 2015

Yes, it's proto-scientific garbage, so leave it behind for good

Comment on Lars Syll on ‘On the poverty of microfoundationalist fantasies’

Blog-Reference (alt.)

Heterodoxy is one crucial step ahead of Orthodoxy. As a matter of fact, today it is simply no longer possible to be an orthodox economist. So far, so good, but what comes next?

“As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

Above, Kevin Hoover summarizes: “Not only does the representative-agent model fail to provide an analysis of those interactions, but it seems likely that they will defy an analysis that insists on starting with the individual, and it is certain that no one knows at this point how to begin to provide an empirically relevant analysis on that basis.”

Orthodoxy starts off on the wrong foot, that is, with individual behavior. From Orthodoxy's failure follows for Heterodoxy as the negative heuristic: first of all abandon nonentities like utility, equilibrium, rational expectations, and the use of functions (supply, demand, and all the rest). As the positive heuristic follows: start with the economic system as a whole and then differentiate consistently into ever smaller sub-units.

Traditional Heterodoxy has cleared the ground for construction. Now the time of Constructive Heterodoxy has come.#1 The citadel has been conquered and found to be empty. It can safely be left behind.

“The point ... is to suggest ... that if one maintains the fundamentally individualistic approach to constructing economic models no amount of attention to the walls will prevent the citadel from being empty. Empty in the sense that one cannot expect it to house the elements of a scientific theory, one capable of producing empirically falsifiable propositions.” (Kirman, 1989, p. 126)

Egmont Kakarot-Handtke


#1 For the new start see cross-references New Curriculum.

References
Kirman, A. (1989). The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes. Economic Journal, Conference Papers, 99(395): 126–139. URL
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY, Melbourne: Cambridge University Press.

Related 'The axiomatic method is impeccable' and 'Full methodological illiteracy' and 'Note on Lars Syll on Axiomatization' and 'Austrian idiocy ― the case of Hayek'.

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Wikimedia AXEC121g

July 30, 2015

How to save the economy from storytelling economists

Comment on Simon Wren-Lewis on ‘The F story about the Great Inflation’

Blog-Reference

There are political economics and theoretical economics. In political economics, it suffices to tell a good story, in theoretical economics scientific standards are observed. Because economists since Adam Smith pursued these two hares with varying intensity consistency eventually got out of sight. More precisely, economists failed to develop a theory about how the market economy works that satisfies the criteria of material and formal consistency.

The Phillips Curve debate is a case in point. Originally, Phillips presented an astounding empirical relation between the rate of unemployment and the rate of change in the wage rate. After a little conceptual shell gaming, it was about unemployment and inflation. And after some additional wish-wash about expectations, the ending of the story was that there is no way to escape natural unemployment.

This conclusion lacks a sound theoretical foundation. To make a long argument short, the most elementary version of the correct Employment Law is given on Wikimedia AXEC62a:


From this equation follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment. An expenditure ratio ρE>1 indicates credit expansion, a ratio ρE<1 indicates credit contraction/debt repayment.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment. This implies that a higher average wage rate W leads to higher employment. This explains the original Phillips Curve but is contrary to conventional wisdom. It is, though, easy to prove that conventional wisdom is a mere Fallacy of Composition (2015).
(iv) A price increase lowers the factor cost ratio and is conducive to lower employment. This explains stagflation.
(v) The complete Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and the trade balance with the rest of the world. All variables are measurable, the structural Employment Law is testable.

Point (i) and (ii) are old Keynesian stuff. Let us focus here alone on the factor cost ratio as defined in (iii). This variable formally represents the price mechanism which, however, does not work as Orthodoxy imagines. As a matter of fact, overall employment increases if the average wage rate W increases relative to average price P and productivity R. This gives one the lever to improve the employment situation all over the world and to fend off deflation without rising debt and without artificial capacity growth.

According to pre-Keynesian Orthodoxy, the price mechanism as embodied in ρF should spontaneously establish full employment. More precisely, a falling average wage rate should restore full employment. The consistent structural Employment Law says that the opposite is true.

The overlooked irony of the original Phillips Curve is that it clearly shows a positive correlation between average wage rate and employment that should have cast doubt on the familiar supply-demand-equilibrium story.

The core of the employment problem is that the price mechanism does not work as orthodox economics says and this has nothing to do with wage or price stickiness but with the fact that theoretical economics never could really emancipate itself from political economics and thus arrive at a consistent theory of how the monetary economy works.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

Related 'The end of storytelling' and 'Storytelling and facts'.

July 29, 2015

Storytelling and facts

Comment on Blissex on ‘The F story about the Great Inflation’

Blog-Reference

You write: “His [Phillips's] original graph was essentially a hunch based on a very small dataset that in some cases there is a tradeoff between labour market pressure and accelerating inflation, ...” This is inaccurate.

(i) “The original Phillips Curve is about the relation of the rate of unemployment and the rate of change of the wage rate. Phillips studied more than a century's worth of data and established the stable inverse relation for the United Kingdom. Phillips's original curve was a remarkable empirical finding.” (2012, Sec. 6)
(ii) It is the bastard Phillips Curve of Samuelson/Solow which initiated the ensuing discussion and it is this dilettante construction that was later found wanting.

If the Phillips Curve debate proves one crucial fact beyond reasonable doubt it is that the representative economist is an utterly confused confuser. This goes down the line from Samuelson/Solow to Friedman, to Wren-Lewis, and finally to Blissex.


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL

Related 'The end of storytelling'. See also 'Mental messies and loose losers'. For details of the big picture see cross-references Incompetence

July 28, 2015

Stop guessing, start thinking

Comment on David Ruccio on ‘The guessing game’

Blog-Reference

The guessing about the effects of minimum wages makes it clear to everyone that economists lack the correct labor market theory or, even worse, the correct theory of the interaction of markets.

The acceptance of the supply-demand-equilibrium depiction by the majority of economics students can be taken as proof that you can sell whatever green cheese assumption you may dream up to substandard thinkers.

The first task of Heterodoxy is to discard NONENTITIES like utility or equilibrium and to fully replace the supply-demand-cross as the representation of a market (2015b).

The second task is to determine the systemic interaction between the product and the labor market and the key drivers of overall employment (2015a).

After the vertical differentiation of the product and the labor market, the next task is the horizontal differentiation of arbitrary many product and labor markets (2014).

To recall, Keynes's main issue was employment theory and he was quite clear that orthodox employment theory was defective. However, Keynes succeeded only partly, his employment theory is not general either and misses a crucial feature (2012). The most elementary version of the correct Employment Law is given on Wikimedia AXEC62:
From this follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment. This implies that a higher average wage rate W leads to higher employment. This explains the original Phillips curve.
(iv) A price increase is conducive to lower employment. This explains stagflation.


Consisting exclusively of measurable variables, the structural Employment Law can be tested. So there is no need to continue the silly guessing game as the main occupation of substandard thinkers.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25. URL
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: The Market. SSRN Working Paper Series, 2547098: 1–10. URL

Oh no! How could this happen?

Comment on ‘IS-LM vs. Minsky’

Blog-Reference

“I=S is the epitome of economists’s scientific incompetence. If this were as plain as a meteorite hitting the earth the problem would have been fixed long ago; it is, though, just the contrary: subtle, unspectacular, counter-intuitive, subterranean, and rather involved.” #1

Of course, IS-LM from Hicks to Krugman is unacceptable because of multiple defects (2014). Keynesians, though, have to admit that it all started with this two-liner in the General Theory: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

For the ultimate explanation of how the IS-LM embarrassment could happen see Mental messies and loose losers.

Egmont Kakarot-Handtke


References
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
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

#1 RWER blog

July 27, 2015

What comes after debunking?

Comment on Lars Syll on ‘Why Real Business Cycle models can’t be taken seriously’

Blog-Reference and Blog-Reference

Orthodoxy is a failure and even laypersons understand intuitively that the behavior of the economy as a whole cannot be explained by the behavioral assumption of constrained optimization of individual agents. This has been a non-starter since Jevons-Walras-Menger and Heterodoxy have always said so. Yet, the question is not how this ‘pure nonsense’ ‘could be awarded The Sveriges Riksbank Prize in Economic Sciences’ but why traditional Heterodoxy could not produce something better than this ridiculous specimen of proto-science?

Orthodoxy is long dead but it has not been buried. Why is this scientific zombie (Quiggin, 2010) still around?

“The main reason for the considerable acceptance of the approach is that fundamental rule of scientific combat: it takes a theory to beat a theory. No amount of skepticism about the fertility of a theory can deter its use unless the skeptic can point to another route by which the scientific problem of regulation can be studied successfully.” (Stigler, 1983, p. 541)

So, this is the pork-barrel deal: Orthodoxy does not vanish because of proven scientific incompetence but only if Heterodoxy presents something better.

To do them a favor is the pleasant duty of Constructive Heterodoxy. Let us throw out the ‘real’ business cycle by advancing to the interaction of nominal and real variables which constitutes the business cycle of the economy we happen to live in (2012).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Intertwined Real and Monetary Stochastic Business Cycles. SSRN Working Paper Series, 2173528: 1–27. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL

July 26, 2015

The end of storytelling

Comment on Simon Wren-Lewis on ‘The F story about the Great Inflation’

Blog-Reference

“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)

Because economists have been aware at least since the 1930s that they lack the true theory they let a change of rules happen. The true/false criterion of science vanished and had been replaced by the first rule of communication: “A good principles of economics teacher is a good storyteller.” (Colander, 1995, p. 169)

This is how economics eventually became a sitcom or proto-scientific shitshow.

This blog makes no exception. Already the third sentence of the intro is incorrect. You write: “After Phillips discovered his curve, which relates inflation to unemployment, ...” It has to be emphasized that Phillips ‘had not made an explicit link between inflation and unemployment’ (Ormerod, 1994, p. 120).

The original curve was bastardized by Samuelson with the formula: rate of inflation = rate of wage growth minus the rate of productivity growth (Samuelson and Nordhaus, 1998, p. 590). This ‘important piece of inflation arithmetic’ was fallacious but this did not prevent the acceptance of the Samuelson/Solow ‘Phillips’ curve. Phillips is said to have remarked ‘if I had known what they would do with the graph I would never have drawn it.’ (Quiggin, 2010, p. 91).

The storytelling then continued with Friedman and the vacuous filibuster about expectations and the natural rate of unemployment.

The axiomatically correct Phillips curve is shown on Wikimedia AXEC36:
This testable structural curve asserts inter alia (2012, Sec. 7):
• An increase in the average wage rate leads to a lower unemployment rate. This is in accordance with the correlation of Phillips's original study, but clearly against conventional labor market wisdom (2015).
• A price increase is conducive to lower employment. This is in accordance with the stagflation of the 1970s.

The structural Phillips curve contains vastly more variables than the methodologically inferior bastard versions. All that has to be done is to stop storytelling and to check how data and formulas fit together. Time to make economics a science.

Egmont Kakarot-Handtke


References
Colander, D. (1995). The Stories We Tell: A Reconstruction of AS/AD Analysis. Journal of Economic Perspectives, 9(3): 169–188. URL
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. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Ormerod, P. (1994). The Death of Economics. London: Faber and Faber.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, MA, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

July 25, 2015

Stubbornly in the wrong research program

Comment on Fredrick Welfare on ‘The Keynes-Ramsey-Savage debate on probability’

Blog-Reference

You say: “The failure to update beliefs and predictions given contradictory evidence constitutes irrationality.”

Because you do not understand the relationship between theory and evidence, you — as both orthodox and heterodox economists — do not understand what science is all about.

“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 ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (Galileo, quoted in Popper, 1994, p. 84)

The key words are ‘sheer force of intellect.’ And this gives you the explanation of why economists are stuck in a pointless wish-wash about utility, equilibrium, expected utility, uncertainty, and the abuse of mathematics by formalizing nonentities. There is not much difference between the Ramsey-Keynes debate and the angels-on-a-pinpoint debate of yore.

Indeed, is there any difference in pseudo-logical hypotheticalness between “angels can fly because they have wings” and “... that people had to behave in this way because if they did not, people would devise schemes that made money at their expense”? And is it not astounding that economists buy these kinds of arguments? And what does this tell you about their ‘sheer force of intellect?’

Egmont Kakarot-Handtke


References
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.

July 24, 2015

We simply do not know — so let us move on

Comment on Lars Syll on ‘The Keynes-Ramsey-Savage debate on probability’

Blog-Reference

Science restricts itself to things that can be known. In marked contrast, non-scientists prefer to spend their lifetime on questions that cannot be answered. Let us face the fact, it is not primarily solutions that most people are really interested in, it is more the perpetual inconclusive talk about beliefs. Solutions only spoil the fun.

Economists are traditionally fond of talking about NONENTITIES like equilibrium, utility, or rational expectations. It seems that this bad habit has a debilitating effect also on mathematicians. Our actual question is not whether statistical mechanics is good enough for physics and there is absolutely no need to discuss the finer points of quantum mechanics. Why? Because quantum mechanics and locality and all the rest are irrelevant to economics. All that is relevant about uncertainty and unpredictability is known at least since J. S. Mill and has been stated unmistakably by other well-known people.

  • “The phenomena with which this science [of human nature] is conversant being the thoughts, feelings, and actions of human beings, it would have attained the ideal perfection of a science if it enabled us to foretell how an individual would think, feel, or act, throughout life, with the same certainty with which astronomy enables us to predict the places and the occultations of the heavenly bodies. It needs scarcely be stated that nothing approaching to this can be done.” (Mill, 2006, p. 846)
  • “The future is unpredictable.” (Feynman, 1992, p. 147)
  • “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire.” (Popper, 1960, p. 139)
  • “... it has even been argued that economic explanations involving rational choice are a species of ‘folk psychology’, explaining actions in terms of beliefs and desires, variables that cannot be measured independently of the actual choices we want to predict, so that they are no genuine predictions at all.” (Blaug, 1994, p. 113)

Keynes only used more words to restate the obvious: “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)

It is remarkable that the representative economist simply does not accept the obvious even when politely told by one of the greatest mathematicians: “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 Walras’ neoclassical heirs can either not see or not accept is that they are in the wrong research program: “The failure to find such a law [between desire, belief and action] or any approximation to it that actually improves our ability to predict consumer behaviour any better than Adam Smith could have resulted on the one hand in a reinterpretation of the aims of economic theory away from explaining individual human action, ...” (Rosenberg, 1994, p. 224)

And this is the spoilsport. “... 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)

Because economics is definitively ‘not a science of behavior’ (Hudík, 2011), the subject matter of economic theory has to be changed.
  • 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.
Why tell the world ad nauseam ‘We simply do not know’ when scientific knowledge about the actual monetary economy is possible?#1, #2

Egmont Kakarot-Handtke


References
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepentant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 109–136. London, New York: Routledge.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. 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: Liberty Fund.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, 128–170. Cambridge: Cambridge University Press.
Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pp. 216–235.
London, New York: Routledge.

#1 If it isn’t macro-axiomatized, it isn’t economics
#2 For details see cross-references New Curriculum

Related 'Opinion, conversation, interpretation, blather: the economist’s major immunizing stratagems' and 'Lars Syll, fake scientist'.

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Wikimedia AXEC121e

July 23, 2015

How to consistently start off on the wrong foot

Comment on Lars Syll on ‘The Keynes-Ramsey-Savage debate on probability’

Blog-Reference

Economists have the talent to mess up everything they touch. Curiously, everything that works fine in the real sciences does not seem to work in economics. The long-standing mathiness discussion corroborates this observation. More than one physicist has wondered about the ‘unreasonable effectiveness of mathematics in the natural sciences’ (Wigner) and this led Velupillai to wonder about the ‘unreasonable ineffectiveness of mathematics in economics.’ The same holds for probability theory and empirical testing.

In a sense, economists had the bad luck that when Adam Smith started to think about the economy mathematical tools had already proven their unreasonable effectiveness. So economists could not resist applying them as they found them. It can be said that neoclassical economics has literally been built around calculus (Mirowski, 1995). This was the first big mistake.

“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 whole mathiness discussion is a surface phenomenon that covers the underlying incompetence of economists to create their own mathematical tools. Therefore, a precise distinction has to be made. One can agree with Keynes that constrained optimization is pointless as a formal embodiment of human behavior, but one cannot agree with him that mathematics or formalization is entirely misplaced in economics. The same holds for probability theory.

The task of Heterodoxy is therefore to quit the bad habit of taking prefabricated tools from the math department and instead of developing their own tools. As a matter of fact, this has already been done. For the application of Popper's idea of propensity to human behavior in the economic realm see (2015).

With regard to Keynes and methodology, we should agree that his valuable contributions to economics lay elsewhere (2011). “I consider that Keynes had no real grasp of formal economic theorizing (and also disliked it), and that he consequently left many gaping holes in his theory. I none the less hold that his insights were several orders more profound and realistic than those of his recent critics.” (Hahn, 1982, pp. x-xi)

Egmont Kakarot-Handtke


References
Hahn, F. H. (1982). Money and Inflation. Oxford: Blackwell.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. 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

July 21, 2015

Cartoon science

Comment on Henry on ‘Ignoring elementary economics’

Blog-Reference

Your reference to Keynes misses the point.

(i) The neoclassical program is broadly defined by: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994, p. 1) Clearly, this implies the expectation that the explanation of human behavior eventually leads to the explanation of how the actual monetary economy works. This is the fundamental error.

(ii) Keynes remained within this psychological/sociological/behavioral paradigm. He only made some outright idiotic neoclassical behavioral assumptions more realistic. This is laudable but does not count as a Paradigm Shift.#1 It is more like adding an epicycle to the geocentric model.

(iii) Keynes kept economics firmly in the social sciences which are in fact cargo cult sciences “... 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)

(iv) It should be clear by now even to economists that second-guessing other agents and gossiping about motives and conceivable actions fall into the category of entertainment/ folk psychology/politics but is as far from science as can be.

(v) Keynes' approach suffers from severe logical defects and is provably false (2011). So Keynesianism is outside of science just like Neoclassics. Logical consistency is the minimum requirement and this cannot be decried as scientism.

(vi) The problem is that economists of all camps simply violate scientific standards, as Morgenstern observed long ago: “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)

(vii) Conventional economics is refuted and over the cliff just like Wile E. Coyote of the road-runner cartoon.

Heterodoxy should do better. The alternative is that it is thrown out of science just like Walrasianism and Keynesianism.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.

#1 Mental messies and loose losers

Related 'The case for pure economics'.

July 18, 2015

Knowledge vs Belief

Comment on Asad Zaman on ‘The marginalisation of morality’

Blog-Reference

This blog [RWER] distinguishes itself from all the rest by its title Real-World Economics Review Blog. The keyword is economics. Now, everybody understands that (i) the economy is but one aspect of the real world, and (ii), that economics is the science that tries to find out how the economy works. Hence economics is restricted with respect to its subject matter and committed to the scientific method.

Since its beginnings, economics has overstepped its narrow limits. The simple reason is that authors and teachers and ideologues and politicians have consistently tried to instrumentalize economics for other purposes. This gave us political economics in the widest sense whereby the term political embraces all belief systems including, of course, religions (Nelson, 2006).

To the extent that theoretical economics has been hijacked by political economics, it has to regain its full independence. That part of economics that has been political from Smith, to Marx, to Hayek, to Keynes, and on to the actual orthodox and heterodox activists has to be clearly separated from science and eventually thrown out.

Theoretical economics is about the world economy. It is not about the Greece or European or US economy. And it is certainly not at all about the problems of the American educational system. It is the task of American citizens to organize the education of their children. And no economist has any legitimacy of telling anybody how this could or should be done.

Most belief systems are expansionary and rely on the time-tested experience that the best way to propagate belief is to hijack the educational system, including, of course, the universities.

Now, science is about knowledge and this is the exact opposite of belief. Science restricts itself to things that can be known, and belief systems second-guess things that cannot be known. Science has its own moral standard that is not derived from any belief system. What is most important, though, is that humanity has learned in the course of history that morality is a fundamental human trait that comes before religion or politics. Non-religious people have moral standards that are on average higher than those of religious people who have, again on average, unthinkingly adapted to their rather specific cultural environments.

We may agree with Assad Zaman that morality is at a low ebb in the USA and the world at large. We do certainly not agree that this is due to a lack of religious education.

As economists, we have a problem that has nothing at all to do with morals and belief systems. It is a fact that the scientific level of economics is at a low ebb in the USA and the world at large. As a result, we have no economic theory that satisfies the scientific standards of material and formal consistency. And here moral comes in again. By propagating refuted or irrefutable theories or belief systems the representative economist violates scientific ethics.

To do some sociology about the deplorable state of American universities is not real-world economics. It is the proper task of Heterodox economics to emancipate economics from all belief systems and to make it a real science that after 200+ years of groping in the dark eventually finds out how the actual economy works.#1

Egmont Kakarot-Handtke


References
Nelson, R. H. (2006). Economics as Religion: From Samuelson to Chicago and Beyond. Pennsylvania: Pennsylvania State University Press.

#1 For a start see the belief-free New Curriculum.

July 15, 2015

The case for pure economics

Comment on Yanis Varoufakis on ‘On the Euro Summit’s Statement on Greece: First thoughts’

Blog-Reference see also Blog-Reference

What is the proper job of the economist qua scientist? “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (J. S. Mill, 2006, p. 950)

The economist qua scientist brings knowledge to the table, not his personal opinion. It is the legitimate political institution that determines the political ends. This is the OUGHT-part, science is concerned exclusively with the IS-part of reality. The is/ought difference is reasonably clear since Hume but has been deliberately ignored by every talented public speaker since then. However, for science this difference is fundamental.

“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)

The economist who comments on political goals leaves the realm of science. This, of course, is no problem at all under one condition. All he has to do is to put off his scientific hat and put on his political hat and then go the other way. This, of course, holds in normal times with legitimate political bodies in place. What has to be done if political bodies are on the way to losing their legitimacy is quite another matter.

Why must politics and science be strictly separated? Simply because it is less probable that the scientific ethics of objectivity/impartiality/knowledge flows to politics and more probable that subjectivity/partiality/opinion flow to science. Gresham’s Law about bad money driving out good applied to sociology says: politics debase science but science does not improve politics. Therefore there is an overall net loss from close interaction. Partiality and impartiality simply cannot coexist in one and the same person.

That part of economics that has been political from Smith, to Marx, to Hayek, to Keynes, and on to the actual orthodox and heterodox activists has to be clearly separated from science and eventually thrown out. To the extent that theoretical economics has been hijacked by political economics, it has to regain its full independence.

As far as politics is of importance for theoretical economics it has to be taken in from political science. Theoretical economics has to answer only one question: how does the monetary economy work? This presupposes that the economy is understood — broadly speaking — as a system with objective features. Of no primary interest is psychological or sociological second-guessing of human behavior. As far as behavioral issues are of importance for economics they have to be taken in from psychology or sociology.

It is not the task of the economist to dabble in psychology, sociology, political sciences, geopolitics, history, anthropology, law, ethics, philosophy, etcetera. Interdisciplinarity, for one, means that economics relies on the results of other sciences and in turn offers reliable knowledge about the working of the monetary economy. The same applies to all other practical cooperation.

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)

Here is the crux. There is no such thing as a true economic theory. What economists have produced so far is not much more than educated common sense and an abundance of incoherent models that apply nonentities like equilibrium or utility or rational expectations or supply/demand functions or I=S, etcetera, etcetera. Whoever exchanges scientific ideas with an economist gets lemons.

The deep root of the failure of both Orthodoxy and traditional Heterodoxy is a complete lack of understanding of what profit is.#1 The profit theory is false since Adam Smith. This, in turn, means that economists have failed to capture the essence of the market system. Neither the Marxian attack nor the Liberal defense of the market economy ever had a sound theoretical foundation (2015). Economists have nothing to offer of scientific value.

In sum: the poor results of political economics are not only an embarrassment for economics but — as severe collateral damage — have negative external effects on the true sciences. It cannot be expected of the public to immediately recognize the difference between cargo cult science#2 and the real thing. This provides an ecological niche for illusion and deceit that undermines the integrity of science.

Here is the wake-up call from a genuine scientist. “So we really ought to look into theories that don't work, and science that isn't science.” (Feynman, 1974, p. 11)

Both, Orthodoxy and traditional Heterodoxy are lost for science. Their proponents are still employable for some econ-talk and entertainment in the media. Yet, young students indeed have the choice between becoming real innovative scientists or just some redundant quacking frogs in the swamp of political economics.

To recall: (i) human progress has neither been brought about by politicians nor by businessmen nor by economists but solely by scientists and (ii), because of their scientific failure over the last 200+ years economists have consistently stood in the way of establishing overall economic welfare.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1974). Cargo Cult Science. Engineering and Science, 37(7): 10–13. URL
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. 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, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

#1 Mental messies and loose losers
#2 Wikipedia Cargo cult science

Related 'The end of political economics' For details of the big picture see the blog label Science and cross-references Political Economics/Stupidity/Corruption.

July 14, 2015

Sexit

Comment on/Kommentar zu ‘Griechenland-Krise: Deutsche Ökonomen schlagen gegen Krugman zurück’

Blog-Reference (condensed to 1.000 characters)

Ist das Ziel eines vereinten Europa als politisches Datum vorausgesetzt, dann lautet die rein ökonomische Fragestellung: wie kann dieses Europa als Ganzes — einschließlich Griechenland — wirtschaftlich erfolgreich sein?

Die intuitive Ökonomik sagt, dass Vollbeschäftigung und Produktivität die Schlüsselvariablen sind. Wie kann das realisiert werden? Nur auf Basis einer umfassenden makroökonomischen Theorie. Und hier beginnt das Problem: Ökonomen haben diese Theorie nicht, weder Krugman noch die deutschen Ökonomen.

Weder die Walrasianische noch die Keynesianische Beschäftigungstheorie ist wissenschatlich akzeptabel.#1 Der Kern des Problems ist, dass der Preismechanismus nicht so funktioniert wie es die Ökonomik imaginiert, und das hat nichts mit Lohn- oder Preisstarrheit zu tun. In letzter Konsequenz leidet Griechenland und Europa insgesamt am Theorieversagen der Ökonomen.

“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)

Da sie die ‘true theory’ nach 200+ Jahren immer noch nicht entwickelt haben, braucht die Welt einen Sexit (scientific exit), d.h. einen freiwilligen Exit dilettierender Ökonomen aus der Wissenschaft, die bekanntlich keine nationalen Unterschiede kennt. Was hier allein zählt ist wahr/falsch.

#1 Für die ausführliche Begründung siehe Mental messies and loose losers.

Siehe auch How to save Greece and Europe at the same time.

July 13, 2015

How to save Greece and Europe at the same time

Comment on ‘Employment in selected Eurozone countries. No austerity or neoliberal miracles’

Blog-Reference see also Blog-Reference

Political economics is, as most economics blogs show, just this: political gossip about what this guy said and that guy did, with all guys neatly sorted into good and bad. The well-known modus operandi of the media is personalization and horrification (Schauble creeps through Eurozone; Tsipras is mentally waterboarded, etc). All this is Circus Maximus — senseless, yet entertaining.

Meanwhile, the solution to the economic problem got completely out of sight. What, in the broadest possible perspective, is the basic economic problem? Given the political goal of a united Europe, the economic problem is how to make it prosperous — all of it, including Greece, of course.

How can this be achieved? Common sense tells us that full employment and productivity are the key variables. The next question then is how to put this intuition into practice? This can be done only on the basis of a comprehensive macroeconomic theory. Here the problems start because economists have no such theory.*

To recall, Keynes's main issue was employment theory and he was quite clear that the orthodox approach was defective. However, Keynes succeeded only partly, his employment theory is not general either and misses a crucial point (2015a; 2012). The most elementary version of the correct Employment Law is given on Wikimedia AXEC62:
From this follows:
(i) An increase in the expenditure ratio ρE leads to higher employment. An expenditure ratio ρE>1 indicates credit expansion, a ratio ρE<1 indicates credit contraction/debt repayment.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite. That's old Keynesian stuff.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment. This implies that a higher average wage rate W leads to higher employment. This is, of course, contrary to conventional economic wisdom. It is, though, easy to prove that conventional wisdom is a mere Fallacy of Composition (2015b). The factor cost ratio formally represents the price mechanism.
(iv) The complete Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and the trade balance with the rest of the world.

As a matter of principle, the structural Employment Law can be tested against the graph in the intro above. Put the other way round, the equation fully explains the graph.

Let us focus here alone on the factor cost ratio ρF as defined in (iii). This variable embodies the price mechanism which, however, does not work as Orthodoxy imagines it works. As a matter of fact, overall employment increases if the average wage rate W increases relative to average price P and productivity R. This gives us the lever to improve the employment situation in all of Europe — including, of course, Greece — without ever-increasing deficits.

How could it work in practice? The average wage rate increases if the wage rates in those firms that perform well increases relative to those at or below average. With a given expenditure ratio ρE this increases overall demand and leads to a redistribution of profits among the business sector. Total profit remains unchanged, what we have is a profit ratio equalization among firms. This takes structural stress out of the economic system.

What can be done in addition is to increase profit distribution in a specific way, boost investment, and something like a Grexit writ large, that is, a depreciation of the Euro against the Dollar.

The core of the problem is that the price mechanism does not work as orthodox economics says and this has nothing to do with wage or price stickiness. Ultimately, Greece and Europe with it suffer from a scientifically unacceptable economic theory.

What the world really needs is a Sexit (scientific exit), that is, a voluntary exit of scientifically incompetent economists.

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. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* For the reason why see RWER Blog or here

July 11, 2015

Profit theory and distribution formulas

Comment on Jonathan Nitzan on ‘Some important limitations of income inequality data’

Blog-Reference

Blair Fix says in his post on the Capital-as-Power Blog: “For a long time now I've been bothered by the lack of a clear connection between capitalist income and inequality. ... I'm not sure why it took me so long to realize this, but last week I realized that corporate profits are not really a type of personal income.”

Exactly so. The familiar approaches are defective. In contradistinction, the superior structural-axiomatic approach starts with the equation total income is wage income plus distributed profit (2015, eq. (1)).* This gives one the theoretically well-founded distribution formulas (2015, eq. (55) ff.). For the correct Profit Theory see (2014).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). 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). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* See Terms of use

Extremely long roots

Comment Lars Syll on ‘Schäuble goes Matrix’

Blog-Reference

You quote Mark Blyth’s article ‘A Pain in the Athens. Why Greece Isn't to Blame for the Crisis’ approvingly. Blyth explains: “The roots of the crisis lie far away from Greece; they lie in the architecture of European banking.”

This is accurate only insofar as the European banking system has adopted the negative institutional features of the US banking system.

Remember that the investment banks literally invented sub-prime lending. Not one competent mortgage banker, neither in Germany nor in France, would have taken up this type of business.#1 Investment banking has nothing to do with classical European banking which consists essentially of lend-and-hold, long-term customer relationship, and risk-absorbing equity.

Investment banking depends basically on extreme leveraging, minimizing risk-bearing equity, maximizing quarterly return on equity, shifting credit risk to non-banks via securitization, and shifting the risks from derivatives betting ultimately to the public via too-big-to-fail. It is not so long ago when first Deutsche Bank and then the rest of the rather conservative German banking industry turned to investment banking.

This casino banking failed in 2008 in the US and now in Greece.

A very good piece of advice for the Greek people would be to look at the German cooperative banking group. In effect, people can own their local bank, the lender-creditor relationship is face-to-face, risks are strictly limited, and if it actually happens that one bank fails it is bailed out by a fond, that is, by all cooperative banks together. Seen as an institution, this self-organizing group of diverse firms provides all banking/insurance services at zero risks for society at large. No tax-payer ever paid a cent for a failed cooperative bank. This is exactly the opposite of too-big-to-fail which is the de facto life insurance of the free-riding US banking system.

This system, not the German three-column institutional setup, has been exported around the world under the flag of deregulation.

In 2008 the US banking system had been rescued by the Fed. Only if the toxic assets were valued to market today, one could see whether the big American banks are actually bankrupt or not. Note that the suspension of the mark-to-market accounting principle FAS157 was one of the first rescue actions in March 2009.

The Greek crisis is ultimately due to a switchover from originally safe and sound European banking institutions to US-style Ponzi-banking. The self-destructive feature of this system is extreme leveraging, as Minsky already pointed out.

It is true, indeed, that it was not alone Greece which had the whole thing messed up, but Blyth’s analysis remains on the surface. Yes, the roots of the crisis lie far away from Greece — approximately the width of the Atlantic.

Egmont Kakarot-Handtke


#1 See also on the RWER blog It's about institution-building, stupid.

July 10, 2015

Mental messies and loose losers

Reply to comments on E.K-H's ‘Keenonomics, aggregate demand/change of debt, and some misleading critique’

Blog-Reference

I=S is the epitome of economists' scientific incompetence. If this were as plain as a meteorite hitting the earth the problem would have been fixed long ago; it is, though, just the contrary: subtle, unspectacular, counter-intuitive, subterranean, and rather involved.

Already von Neumann spotted the peculiar methodological defect of economics: “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)

This, however, has never been a point of great concern for the representative economist. In particular, for the Cambridge School of Loose Verbal Reasoning sharpness, precision, uniqueness, rigor, bivalent logic, etcetera always amounted rather to a violation of the human right to mental messiness. This stance has habitually been defended with a false but suggestive alternative: “Marshall followed the maxim: Better to be ambiguous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

Then, Keynes occupied the realm of vagueness, ambivalence, indeterminism, fogginess, wish-wash, casual conversation, inconclusiveness, complexity, twilight, uncertainty — the realm where nothing is clear and everything is possible — as the ecological niche of Keynesianism: “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

This problem avoidance strategy was soon summed up in a catchy pseudo-choice: “For Keynes, as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’" (Davidson, 1984, p. 574)

With this cavalier mentality, Keynesians, and eventually the majority of other schools, have occupied the habitat between true and false where the scientific procedure of ‘conjecture and refutation’ runs into the bottomless swamp: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158)

So, economics is no longer about the true economic theory, all one has to do is avoid a crystal-clear refutation. This can be achieved by persevering fuzzy filibustering and by maintaining that crystal-clear refutation is impossible in the first place. If, against all defensive complacency, a refutation plainly succeeds, ignorance and business-as-usual help. This has become standard operating procedure in economics, as already Morgenstern complained: “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.” (1941, pp. 369-370)

With these two stratagems, economists entrenched themselves in the swamp of anything-goes and subsequently turned to defend their scientific no-man's-land in the main with rhetorical soap bubbles. All this is — as economists always readily admit — second-best, however, “... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

What made this deadlock possible is a tacit quid-pro-quo agreement among different camps on the legitimacy of Humpty Dumpty methodology: "When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master — that's all." (Carroll, Through the Looking-Glass)

This quasi-feudal Freedom-of-Definition Privilege constitutes the different schools and has been sanctioned by the likes of Schumpeter. “For, on principle, we may call things what we please.” (1994, p. 598)

Of course, freedom of definition is a methodological illusion. It applies but to the FIRST definition. Subsequently, one has to make sure that every additional definition is consistent with the preceding ones. Overall consistency cannot be achieved in the economist's cavalier fashion: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009, p. 344)

Institutionalized economics never seriously aimed at, and therefore never arrived at, a coherent language, not to speak of an axiomatic framework of foundational concepts. Thus, debates/conversations between schools resemble nothing so much as ‘Babylonian incoherent babble’ (cf. Dow, 2005, p. 385). Without a common frame of reference, perpetual cross-talk is guaranteed. Economics fits the format of a sitcom.

The lack of a minimal common ground explains the secular stagnation of economics: “We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114)

What, then, is the — minimal, objective, consistent, testable — common conceptual ground of all of the economics?

Total period income in an elementary production-consumption economy with only one giant firm is given by the sum of wage income and distributed profit, i.e. (1) Y=Yw+Yd. Total consumption expenditures are equal to the product of price and quantity sold, i.e. (2) C=PX. That's all for a start.

The monetary profit of the business sector as a whole is then defined as the difference between consumption expenditures and wage costs, i.e. Qm≡C−Yw. Monetary saving of the household sector is then defined as the difference between total income and consumption expenditure Sm≡Y−C. Hence, Sm≡−Qm if, for a start, Yd=0. In simple words: saving Sm is equal to loss −Qm, or, dissaving −Sm is equal to profit Qm. From this follows immediately that all I=S or IS-LM models from Keynes, to Hicks, to Krugman, and all the busy blogging rest are false — irrevocably in all eternity.

Generally speaking, it holds for the production-consumption economy that Qre≡−Sm, i.e. retained profit Qre is equal to dissaving −S. And for the investment economy holds Qre≡I−Sm, i.e. retained profit is equal to the difference between investment and saving (for details see 2014). No accounting trick and no ex-ante/ ex-post filibuster and no expected/unexpected stock changes and no equilibrium verbiage and no natural rate of interest will ever make the household sector's saving equal to the business sector's investment expenditures. Never ever! No way! Forget it!

Saving-equals-investment is the epitome of conceptual and logical incompetence of economists of all schools. In science, there is no ecological niche between true/false and no pluralism of false theories. Humpty Dumpty’s methodological no-man’s-land is an uninhabitable swamp for every thinking human being.

The root cause of the IS error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income and profit but of wage income and distributed profit (2013). The profit theory is false since Adam Smith. This, in turn, means that economists have failed to capture the essence of the market system. Neither attack nor defense of the market economy ever had a sound theoretical foundation (2015). Political economics has been a complete waste of time.

Economics of the last 200 years is the most embarrassing failure in the history of modern science.

Egmont Kakarot-Handtke


References
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Dow, S. C. (2005). Axioms and Babylonian Thought: A Reply. Journal of Post Keynesian Economics, 27(3): 385–391. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand BoD, 2nd edition. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

Related 'Economists: Jacks of all trades ― except economics' and 'Economics ― a doctor worse than the disease' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist' and 'Knowledge is attainable ― even in economics'. For details of the big picture see cross-references Failed/Fake Scientists and cross-references Not a Science of Behavior and cross-references Profit (i.e. the foundational concept of economics).


For more about the Humpty Dumpty Fallacy see AXECquery.
For more about inconclusiveness see AXECquery.


***

Wikimedia AXEC172

July 9, 2015

The economics of here and now

Comment on ‘An inconvenient historical truth’

Blog-Reference

I agree, graccibros, let us return to the economics of here and now. With regard to the correct macroeconomic formula that describes the actual Greek situation, see my post: Poisoned, hanged, and shot. Comment on ‘Austerity policies — prescribing rat poison for ailing economies.’*

The Greek situation, however, is only exemplary for a really profound question, that is, the relationship between growth of debt, profit, and employment. Put simply: can the market system (global, not Greece, not Germany, not US, not China, etc) survive without steadily growing public/private debt?

The answer is that a local debt reduction leads to local recession (2013), this is the case of Greece, and a global debt repayment brings the whole system down (2014).

This is, with regard to the future, the really inconvenient historical truth.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism.SSRN Working Paper Series, 2375578: 1–21. URL

*See on the RWER blog or here

July 8, 2015

Separation of politics and economics

Comment on Blissex on ‘Euro — the antithesis of democracy’

Blog-Reference

“To be sure, economics may perform a valuable social role without adding any significant understanding to knowledge of the economy — a “good myth,” economically speaking, can work not only in primitive tribal cultures but also in modern societies. ... Indeed, ... the religious function may have been the most important role throughout the history of modern economics since the Enlightenment.” (Nelson, 2006, pp. 300-301)

We had the separation of church and state, what is needed next is the separation of politics and economics.

The task of the economist is to figure out how the actual Economy works, just like the physicist figures out how Nature works. What the economist has first of all to do is to take an objective observer standpoint — as far as possible. This is not compatible with taking a political side.

I am, of course, not against taking a political side. What I emphasize is that it is humanly impossible to do politics and science simultaneously. Because of this, institutional separation is necessary.

I have no trouble acknowledging that, for example, Hayek has the right to write political pamphlets, defend Capitalism, support Thatcher, and found a political club as he did with the Mont Pèlerin Society (MPS). What I say is, the moment he or any other economist starts with politics, the same moment he leaves economics understood as a science for good. It is the mixture that is toxic. Independently of this, Hayek is simply unacceptable as an economist. His economics is proto-scientific garbage.

You cite many cases of economists involved simultaneously in academia/business/politics that simply are not compatible with scientific ethics. Now, I cannot check them and, most importantly, I do not want to occupy myself with corrupt people in science, politics, business, and elsewhere. Something went wrong with these institutions, that much is clear at the moment. A lot of corruption fighters are needed, that much is also clear. Finally, a lot of institution-builders are needed, obviously. But the rest is hanging in the air at the moment.

This is why I urge heterodox economists not to become redundant quacking frogs in the swamp of political economics but instead to focus on economics as a science. To refute political economists according to well-defined scientific rules is the first step. As Feynman put it: "So we really ought to look into theories that don't work, and science that isn't science." (1974, p. 11)#1

Orthodox economics is scientifically substandard. Heterodoxy is not any better. There is much opportunity to develop something better.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1974). Cargo Cult Science. Engineering and Science, 37(7): 10–13. URL
Nelson, R. H. (2006). Economics as Religion: From Samuelson to Chicago and Beyond. Pennsylvania: Pennsylvania State University Press.

#1 The Farce That Is Economics: Richard Feynman On The Social Sciences


For more about the separation of politics and science see AXECquery.

July 7, 2015

How to get out of psychology/sociology/wish-wash

Comment on Bruce Edmond on ‘Economic Value is NOT Price’

Blog-Reference

At the end of the day, value theory has to explain the exchange value expressed as the price relation P1/P2, P1/P3, and so on. This is what can be observed and measured with the precision of two decimal places.

Somehow, the agent must translate preferences, utility, expectations, targets, physical needs, budget restrictions, cultural norms, and what not into a subjective valuation price which is comparable with the market price and this helps him to decide whether to buy/sell or not. This process of translation is opaque. We can only speculate about it or turn to introspection. All this psychologism is a waste of time for the economist. Nothing useful follows from this exercise.

Prices and exchange relations are an objective result of all interactions of the whole economy including production.

The first important distinction for value theory is between primary and secondary markets (2011a). Already at this juncture neoclassical theory and all subjective value theories run into the wrong direction.

For the most elementary economic configuration exchange value is given by P1/P2=R2/R1, that is, the price relation is the inverse of the productivity relation. This is an objective and testable proposition. It can be generalized to the price structure, i.e. relative prices, are determined by the productivity structure. To recall, this holds for the most elementary economic configuration (2014; 2011b).

The beauty of this solution is that there is absolutely no need to speculate further about what goes on in the agents' brains. It has long been known that this leads to nowhere.

“It is possibly very encouraging for the economist to hear that compared with the natural scientist the psychological method saves him “ages of laborious research” but it is curious and a pity that this huge start has not enabled him to formulate any considerable body of reliable prognoses such as the natural sciences have managed to achieve.” (Hutchison, 1960, p. 132)

The structural-axiomatic approach yields a testable proposition. So, let us get out of wish-wash and proceed to testing.

Egmont Kakarot-Handtke


References
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). The Pure Logic of Value, Profit, Interest. SSRN Working Paper Series, 1838203: 1–27. URL
Kakarot-Handtke, E. (2014). The Logic of Value and the Value of Logic. SSRN Working Paper Series, 2399550: 1–20. URL

In science, NO is the answer

Comment on Paul Schächterle on ‘In Greece, NO is the answer’

Blog-Reference

OK then, here is my final comment.

You say: “The collection of knowledge about particular facts *is* part of science. On what basis could you otherwise come up with theory?”

Yes, this is an essential part of science and I never characterized science as a fact-free armchair phantasy. I agree with you that utility theory is a fact-free armchair phantasy, and general equilibrium theory too, DSGE, and so on. That is why Orthodoxy is not a science.

But a scientific fact is not what you get by simply looking out of the window or into the newspaper. The physicists never saw a quant but arrived at this ultimate reality by a long, long chain of theoretical reasoning. So you need a theory to get hold of reality. You cannot ‘see’ the economy without a theory.

This is what J. S. Mill told economists. “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)

And this is what Popper said. “Indeed, there is no such thing as an uninterpreted observation, an observation which is not theory-impregnated.” (Popper, 1994, p. 58)

And this is what Marx already knew: "That in their appearance things often represent themselves in inverted form is pretty well known in every science except political economy.” (Marx, 1906, VI.XIX.7)

So, what we can agree upon about Orthodoxy and Heterodoxy and political economics is this: “If one takes seriously what Popper says about falsifiability and the critical attitude, then the methodological practice of economics is not only mistaken, it is stupid and intellectually reprehensible.” (Hausman, 1992, p. 275)

Is this acceptable to an economist with a scientific conscience? NO is the answer!

Egmont Kakarot-Handtke

References
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. 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
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.

Regarding politics see also here and here

Heterodoxy's big fat Greek error

Comment on Paul Schächterle on ‘In Greece, NO is the answer’

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You say: “I am by no means against theorising as a part of an economic science.”

Theorizing is not a nice add-on, it is the very task of science. What we expect from physics is the correct theory of how Nature works, from the universe down to the smallest particle. Along the same line, we expect from economics the correct theory of how the economy works. Theory is not some exotic and inconsequential speculation, it is the incorporation of knowledge — the best thing we can achieve as humans.

The situation in economics is this: what has been produced in the last 200+ years has objectively not much scientific value. Take Newton and Smith as the baseline, then physics has arrived in the meantime at quantum theory while economics has not even produced something like the law of the lever.

Could economists have been too much occupied with playing political games and writing pamphlets instead of doing serious scientific work?

The crucial point is this: “Whatever knowledge we possess is either knowledge of particular facts or scientific knowledge.” (Russel, 1961, p. 620)

What you can learn in business schools and most universities is knowledge of particular facts, eg. how the Federal Reserve System or the gold standard works. This is all good and fine and useful but it is not science.

Heterodoxy criticizes Orthodoxy, and rightfully so. But here care has to be taken. Is it on political grounds or on scientific grounds?

My point is that both Orthodoxy and Heterodoxy are mired in political agenda-pushing. What they have both produced so far is good political ammunition = bad proto-scientific garbage.

In my view, Heterodoxy is not another political movement, nor a charity for the Greeks that suffer much from financial deficits but most from deficiencies in institution-building which cannot be repaired by throwing money at it. In my view, Heterodoxy's task is to get economics out of the political swamp and to make it a science.

You say “I mean, we should try, but we should not see it as an easy task.”

No, it's not easy — to become another quacking frog in the swamp is much easier.

Egmont Kakarot-Handtke


References
Russel, B. (1961). The Basic Writings of Bertrand Russel, chapter Limitations of Scientific Method, 620–627. London: Routledge.

July 6, 2015

Beware of the 9th circle

Comment on Paul Schächterle on ‘In Greece, NO is the answer’

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(i) I agree about the “unfortunate way that neoclassical economists actually do make politics by giving advice towards a very specific and highly disputed set of policies, but hide their political attitudes and beliefs behind a veil of pseudo-science.”

If there is a scientific analogon to Dante's Inferno all political economists will eventually meet again in the 9th circle.

(ii) The Greek referendum was a political manifestation and has to be accepted as such. It compares directly to political manifestations of the other European democracies which are uncomprehending.

(iii) When I speak of economic laws I clearly do not mean man-made laws but objective and testable structural laws. I agree, of course, that in economics any silly behavioral assertion is illegitimately advertised as a law.

(iv) You say “those well-defined scientific criteria *is* a somewhat political question.” That criteria are to some extent negotiable is, in fact, the representative economist's greatest self-delusion. The scientific criteria are material and logical consistency. And there is absolutely no way around this. There is true/false and nothing in-between. Economists know that neither Walrasianism nor Keynesianism nor the rest satisfies these criteria.

“... suppose they [the economists] did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics.” (Hands, 2001, p. 404)

Because of this, economists have moved from science's true/false to Hollywood's good guy/bad guy. Actually, that's more fun for all.

(v) The task of Heterodoxy is to refute Orthodoxy according to well-defined scientific rules and not to complain about political bias. It is too easy to return this compliment and thus all ends with the pluralism of false theories and the uneasy coexistence of confused confusers.

Economics has to get out of politics before it drowns with it in idiocy. Better one iota of knowledge than a heap of opinion.

Egmont Kakarot-Handtke


References
Hands, D.W. (2001). Reflection without Rules. Economic Methodology and Contemporary
Science Theory. Cambridge, New York, etc: Cambridge University Press.