September 1, 2015

No culpa, only stultitia

Comment on Peter Radford on ‘Mea Culpa: Storytelling Part Two’

Blog-Reference

You say: “I also recognize that it is not possible to have just one idea or set of ideas as an explanation of human economic activity.”

As a matter of fact, the psycho-social-behavioral approach is methodologically doomed from the very beginning. “By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can't be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

The fundamental methodological blunder is located in the commonsensical intuition that economics is first and foremost about human behavior.

Neither orthodox nor heterodox economists can get their head around the fact that economics is about the behavior of the economic system. What the behaviorals are talking about belongs entirely to the realm of sociology, psychology, anthropology, political science, history, etcetera. It is not economics at all.

The subject matter of economics has to be redefined. No way leads from the understanding of human behavior to the understanding of how the actual economy works.

Science is about logical and material consistency. Now, it can be rigorously demonstrated that economics lacks logical consistency and from this follows straightforwardly that it is out of science.

It is sufficient to take Keynes as concrete example and then to generalize. As a centerpiece of his General Theory he formulated the foundational syllogism of macroeconomics. “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This elementary two-liner is conceptually and logically defective because Keynes did not come to grips with profit (Tómasson and Bezemer, 2010, pp. 12-13, 16).

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. Hence, Keynes dealt with a zero profit economy without being aware of it (2011). Curiously, Walras's original model has also been a zero profit economy. Clearly, both approaches are not very ‘realistic’. Yet, both orthodox and heterodox economists lived comfortably with this plain idiocy for over a century.*

It holds in general: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10). It is pretty obvious that economists know nothing about how the actual monetary economy works when they cannot tell what profit is. A logically and materially consistent profit theory is the first scientific hurdle economics has to take. It did not, and this is a proven fact.

The problem of economics is not that this or that model is insufficient or unrealistic or oversimplified or whatever euphemism is used. The fact is that economics as a whole is a failure. And the ultimate methodological reason is that it is built upon false premises.

All theories/models that take one or more of the following concepts into the premises are worthless: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities.

From an economist who accepts one of these nonentities nothing of scientific value is to be expected. And this is why economics is caught in the proto-scientific cul-de-sac. Economists have wasted more than 200 years with second-guessing their fellow men’s behavior and telling stories that have less real-world content than a cartoon. Given this abysmal performance, neither Orthodoxy nor Heterodoxy as they stand now, nor the pluralism of defective theories, has a future.

You rejoice “Economics is wonderful” not realizing that economists in their manifest incompetence have become a plague to their fellow citizens.

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
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Kakarot-Handtke, E. (2011). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. 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.
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

* See also ‘Mental messies and loose losers