September 23, 2015

Heterodoxy, too, is scientific junk

Comment on Lars Syll on ‘What went wrong with economics?’

Blog-Reference and Blog-Reference

Science is defined by material and formal consistency. If a theory/model fails on one criterion it is scientifically worthless. With regard to formal consistency, there is no way around “... he who contradicts himself proves nothing” (Klant, 1988, p. 113). But formal consistency alone also proves nothing.

The actual state of economics is this: Orthodoxy has failed on both counts. Therefore, all hopes rest on Heterodoxy. The crucial question is, does Heterodoxy satisfy the indispensable methodological criteria? Let us have a look at profit theory.

The profit theories of Keynes, Kalecki, Minsky, Keen are different (Marx, Mises/Hayek, and others could be added). They cannot all be correct at the same time. As there is only one Law of the Lever, there can be only one objective Profit Law for the economy as a whole. This is not the case.

(i) Keynes: “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, pp. 12-13, 16)

(ii) “Kalecki derived this relationship in an extremely concise, elegant and intuitive way. He starts by making simplifications which he later progressively eliminates. These assumptions are:
• Divide the whole economy into two groups: workers, who earn only wages and capitalists,    who earn only profits.
• Workers do not save.
• The economy is closed (there is no international trade) and there is no public sector.

With these assumptions Kalecki derives the following accounting identity:

 \textstyle  P+W=C_W+C_P+I  \,\

where P is the volume of gross profits (profits plus depreciation), W is the volume of total wages, Cp is capitalists consumption, Cw is workers consumption and I is the gross investment that has been made in the economy. Since we have supposed workers who do not save (that is, to say in the preceding equation), we can simplify the two terms and arrive at:

 \textstyle P=C_P+I

This is the famous profits equation, which says that profits are equal to the sum of investment and capitalist’s consumption.” (Wikipedia: Kalecki, 2015)

(iii) Minsky: “The simple equation 'profit equals investment' is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (2008, p. 161)

(iv) Keen: “Total income = Wages plus Profits” (2011, pp. 366, 146) and “... national income resolves itself into wages and profits” (2010, p. 12).

It is quite obvious that heterodox economists, like their orthodox counterparts, have no idea of what profit is (2014). Hence, they fail to capture the essence of the market economy. Because of this, economists have nothing to offer in the way of a scientifically founded advice.

“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)

The true theory satisfies the criteria of material/formal consistency. All that Orthodoxy and Heterodoxy have currently to offer are contradicting opinions; neither came ever to grips with science, with profit and with the working of the economy we happen to live in.

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
Kalecki, M. (2015). The Profit Equation. Wikipedia. URL
Keen, S. (2010). Solving the Paradox of Monetary Profits. Economics E-Journal, 4(2010-31). URL
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
Klant, J. J. (1988). The Natural Order. In N. de Marchi (Ed.), The Popperian Legacy in Economics, pages 87–117. Cambridge: Cambridge University Press.
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, NY, Chicago, IL, San Francisco, CA: McGraw Hill, 2nd edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT 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

Preceding post 'Economics is an abysmal failure of reason'.

Related 'PsySoc — the scourge of economics' and 'Economics: ‘a tale told by an idiot, full of sound and fury’?'

For details of the bigger picture see cross-references Profit in particular 'Keynesianism as ultimate profit machine' and cross-references Heterodoxy.