August 16, 2015

Sales talk vs. Science

Comment on Brad DeLong on ‘“We Always Thanked Robert Lucas for Giving Us a... Monopoly” Over Valuable Macroeconomics’

Blog-Reference and Blog-Reference

First of all, it is of utmost importance to distinguish between political and theoretical economics. The main differences are:
— 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 economics is scientifically worthless. Most of economics since more than 200 years has been political economics.

“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 produced gigabytes of opinion but failed to develop the true theory. What has been developed instead falls roughly into three categories: Walrasian, Keynesian, Other. What these approaches have in common is that the representative WKO-economist cannot tell the difference between profit and income. Because of this, WKO-economists never captured the essence of the market economy. This is what unites them. This common lethal defect, though, gets regularly out of sight when relative merits/demerits are discussed.

It takes not much ingenuity to see that Lucas et al. is junk. But to argue “Consider Macro Advisers. Macro Advisers makes a very good living today selling its simulation models.” and implying with this recommendation that the MA-approach is methodologically superior is a non sequitur.

In fact, without going deeper into details, we can can safely conclude that the MA-model, too, is junk, albeit somewhat different from the New Classical ilk. We can conclude this with certainty from this description: “The heart of this new synthesis — a dynamic general equilibrium system with nominal rigidities — is precisely what one finds in the early Keynesian models. Hicks proposed the IS-LM model, for example, in an attempt at putting the ideas of Keynes into a general equilibrium setting.” (See intro)

Now, we know
— all equilibrium models are false because equilibrium is a nonentity (2015),
— all IS-LM models are false because of a mis-specification of overall profit (2014).*

Profit did not appear in Keynes's elementary formalism because he never came to grips with this pivotal economic phenomenon. Neither did the Post Keynesians until this day (2011). What makes all WKO-models worthless is the lack of understanding of what profit is.

The criterion of science has always been true/false. Whether New Keynesian models sell better than New Classical models is irrelevant. To recall, Kepler had figured out the laws of planetary motion. What he was paid for handsomely, though, was not this unique scientific achievement but the horoscopes he produced for the imperial court of the Holy Roman Empire. Clients never had a sound judgment in scientific matters. This is why political economics and disqualified scientists are still among us.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

* See ‘Mental messies and loose losers