December 31, 2016

A political stench is in the air

Comment on James Kwak on ‘A Change Is in the Air’

Blog-Reference and Blog-Reference and Blog-Reference on Jan 15 adapted to context

Most people/economists have no proper understanding of what economics is all about. Therefore it is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith to Keynes and beyond can be summarized as utter scientific failure. A closer look at the history of economic thought shows that theoretical economics had been hijacked from the very beginning by the agenda pushers of political economics. Smith and Ricardo fought for liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — are mutually contradictory and materially/formally inconsistent. Economics is a failed science.

Neither the orthodox defense of the market economy nor the heterodox critique can be taken seriously. Since the founding fathers, economists claim to do science but they have never risen above the level of opinion, belief, wish-wash, storytelling, soap box propaganda, and sitcom gossip.#1

Keynes is a case in point. His political critique of Laissez-faire was spot on. But Keynes himself was a political economist and an incompetent scientist. He did not even get the elementary conceptual foundations of economics right.#2

Political economists of all stripes are characterized by four common traits: (i) They are mainly occupied with sociology, psychology, political science, social philosophy, history, anthropology, Darwinism/evolution theory, etcetera. That is, they miss the essentials of economics proper, viz. the systemic properties of the monetary economy. (ii) They use theoretical economics to advance their agenda. By this, they abuse science unknowingly or knowingly. (iii) As far as they have tried to underpin their agendas theoretically it can be proved in each case that their approaches lack formal and material consistency. (iv) They have NO idea about how the actual economy works because they lack the correct profit theory since Adam Smith/Karl Marx.#3

It is not decisive what the political agenda is: ALL of political economics is what Feynman called cargo cult science or what we call today fake science.#4 Kwak’s attempt to reanimate the absolute scientific failure Keynes is just another smelly exercise in political economics.

Egmont Kakarot-Handtke

#1 See ‘Americans believe crazy things, yet they are outdone by economists
#2 See ‘How Keynes got macro wrong and Allais got it right
#3 See ‘The distribution theory is false because the profit theory is false
#4 See ‘FakeNews, FakeScience: economics in the information age

***
Related NOTE on Bob Jan 1

Most people/economists have no proper understanding of what economics is all about. Therefore it is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — are mutually contradictory and materially/formally inconsistent. Economic policy guidance never had sound scientific foundations.

What we have at the moment is the pluralism of provable false theories. Instead of teaching the true economic theory Steve Keen is “Teaching Economics the Pluralist Way”.

It is high time to take away from ALL orthodox and heterodox failures their fake scientific diplomas and to sue them for damages.

***
REPLY to Bob on Jan 1

I said that there is political economics (= agenda pushing) and theoretical economics (= science). Science is supposed to give us the true mental representation of reality.

You said: “In practice, there is no such thing as theoretical economics.” In other words, economics is not or cannot be a science.

Obviously, you are not familiar with the definition of economics: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16) Economists repeat this claim once a year very publicly with a prize which explicitly says: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Either you are not familiar with the definition of economics or with the definition of science.*

* See also ‘A political stench is in the air’ and ‘The real problem with the economics Nobel

Immediately following 'Will economics ever become a science?'

December 30, 2016

Let Keynes rest in peace

Comment on Koichi Hamada on ‘Keynes Reborn’

Blog-Reference and Blog-Reference

Walrasian, Keynesian, Marxian and Austrian economists are groping in the dark with regard to the two most important features of the market economy, that is, the profit mechanism and the price mechanism. To get out of failed economic theory requires nothing less than a full-blown paradigm shift.

In the following a sketch* of the correct employment theory is given. The most elementary version of the objective systemic employment equation is shown on Wikimedia. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation gets a bit longer and contains in addition profit distribution, public deficit spending, and foreign trade.

Items (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, works other than standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. This implication is readily testable against standard economics.

The systemic employment equation points the way to an effective employment policy. Right policy depends on true theory. Both neoclassical and Keynesian labor market theories are provable false.*

Egmont Kakarot-Handtke

* For details see ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

The futile synthesis of neoclassical rubbish and Keynesian garbage

Comment on Roger Farmer on ‘Keynes betrayed’

Blog-Reference and Blog-Reference on Jan 26, 2017

The Keynesian Revolution had already been dead in the cradle but economists have not realized it until this day. Since 80 years orthodox and heterodox economists are involved in the insoluble deep semantic riddle whether there is involuntary unemployment or not.

Farmer, in a new book, writes: “Macroeconomics has taken the wrong path. The error has nothing to do with classical versus New Keynesian approaches. It is a more fundamental error that pervades both.”

The fact of the matter is, though, that Farmer does not spot the fundamental error in macro that pervades all of economics. In order to see this, one has to go back to Keynes.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.*

What neither Orthodoxy nor Keynes ever understood was profit: “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 et al., 2010)

It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes profit and income is a laughing stock. This applies to Walrasians and Keynesians of all colors. The messed-up profit theory is the “more fundamental error” that pervades both microeconomics and macroeconomics.

In Samuelson’s synthesis the defective Walrasian microfoundations and the defective Keynesian macrofoundations were cobbled together. Samuelson’s textbook consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves did not logically fit together.

Science is committed to material and formal consistency. Samuelson’s textbook had ― with a probability close to 1 ― the lowermost scientific content of all textbooks ever written. The fact of the matter is: the micro axioms are inconsistent, the macro axioms are inconsistent, and the synthesis of the two sets is by consequence also inconsistent.

Macroeconomics is NOT in need of another brain-dead discussion about voluntary/ involuntary unemployment nor about what Keynes really meant nor about IS-LM nor about what went wrong 80 or 140 years ago nor about a new synthesis of old trash. Economics is in need of a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to  consistent macrofoundations.

Egmont Kakarot-Handtke

* See ‘How Keynes got macro wrong and Allais got it right

December 29, 2016

The distribution theory is false because the profit theory is false

Comment on Lars Syll on ‘New study shows marginal productivity theory has only a “negligible” link to reality’

Blog-Reference and Blog-Reference and Blog-Reference on Dec 31

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: the confused confusers of economics have NO idea what the pivot of their subject matter is. In still other words, this bunch of scientific deplorables does not know how the market economy works and is talking nonsense since Adam Smith.

It is pretty obvious that without the true profit theory there is no true distribution theory.#1 So everybody can know without bothering much about the insane behavioral assumptions of utility and profit maximization that the marginal theory of income distribution must be dead wrong.

The trouble with distribution theory started with Ricardo who got the distinction between wage, profit, and rent wrong.#2 Then Marx got the class theory of profit wrong.#3 Neoclassical marginal distribution theory, of course, is unsurpassable idiocy, but Keynesianism did not perform much better, and Heterodoxy has actually multiple profit theories that do not fit together.#4

Distribution theory has always been the deepest morass of economics. Do not expect that the brotherhood of orthodox and heterodox muddleheads will find a way out any time soon.

Egmont Kakarot-Handtke

#1 See ‘Essentials of Constructive Heterodoxy: Profit
#2 See ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#3 See ‘Profit for Marxists
#4 See ‘Heterodoxy, too, is scientific junk

Americans believe crazy things, yet they are outdone by economists

Comment on Catherine Rampell on ‘Americans — especially but not exclusively Trump voters — believe crazy, wrong things’#1

Blog-Reference

Americans are NOT special. Since more than 5000 years people believe things JUST BECAUSE they are absurd — in accordance with Tertullian’s famous dictum “credo quia absurdum”.#2

As a matter of principle, almost everybody has the right to his own opinion no matter how stupid, crazy, wrong, or absurd; the only exception are scientists. The ancient Greeks started science with the distinction between doxa (= opinion) and episteme (= knowledge). Scientific knowledge is well-defined by material and formal consistency. Knowledge is established by proof, belief or opinion count for nothing.

Opinion is the currency in the political sphere, knowledge is the currency in the scientific sphere. It is extremely important to keep both spheres separate. Since the founding fathers, though, economists have not emancipated themselves from politics. They claim to do science but they have never risen above the level of opinion, belief, wish-wash, storytelling, soap box propaganda, and sitcom gossip.

The orthodox majority still believes in these Walrasian hard core absurdities: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states.” (Weintraub)

To be clear: HC2, HC4, HC5 are NONENTITIES like angels, Spiderman, or the Easter Bunny.

The heterodox minority still believes in these ill-defined Keynesian relationships: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.”

Until this day, Walrasians, Keynesians, Marxians, Austrians hold to their provable false beliefs and claim to do science. This is absurdity on stilts but it is swallowed hook, line and sinker by every new generation of economics students. Compared to the representative economist the average political sucker is a genius.

Egmont Kakarot-Handtke

#1 The Washington Post
#2 Wikipedia

December 28, 2016

Why Hayek was not a scientist

Comment on David Glasner on ‘Why Hayek Was not a Conservative’

Blog-Reference and Blog-Reference

Most people/economists have no proper understanding of what economics is all about. Therefore it is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith to Hayek and beyond can be summarized as utter scientific failure. A closer look at what is naively called economics as if it were a homogeneous entity shows that theoretical economics has been captured by the agenda pushers of political economics. Smith and Ricardo fought for liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

It is a widespread misunderstanding to think that people who talk about the economy understand how the economy works. Hayek’s ‘Road to Serfdom’ is a political pamphlet and it is not backed by the true economic theory simply because Hayekian economics is scientifically worthless storytelling.

Hayek claimed that a system of competitive markets is efficient and stable and a superior means to aggregate knowledge while preserving decentralization. Like general equilibrium theory he never delivered a valid proof of this claim. Hayek’s defense of the market system has NO sound scientific foundation. The provable fact of the matter is that the market system is inherently unstable.*

Hayek, of course, had the right to write political pamphlets, to defend capitalism, to support Thatcher, to found the political club Mont Pelerin and to dabble in sociology and political philosophy. One thing, though, should be perfectly clear: the moment an economist starts with politics he leaves economics, understood as a science, for good.

Political economists of all stripes are characterized by four common traits: (i) They are mainly occupied with sociology, psychology, anthropology, political science, history, law/institutions, Darwinism/evolution theory, social philosophy, etcetera. That is, they miss the essentials of economics proper. (ii) They use theoretical economics as a means/support for their agenda. By this, they abuse science unknowingly or knowingly. (iii) As far as they have tried to underpin their agenda theoretically it can be proved in each case that their approaches lack formal and material consistency. (iv) They have NO idea about how the actual economy works because they lack the correct profit theory since Adam Smith/Karl Marx.

It is not decisive what the political agenda is: ALL of political economics is cargo cult science (Feynman’s term). Political economics has produced nothing of real scientific value. This includes the storyteller and agenda pusher Hayek.

Egmont Kakarot-Handtke

* See ‘Could we, please, all focus on the key question of economics?

Related 'Economists and politics: Will you kindly shut up!' and 'Economics ― a Pygmy wrestling show' and 'Economics is not post-truth but pre-truth' and cross-references Incompetence

Economics: Two ages of scientific incompetence

Comment on Bradford DeLong on ‘The Age of Incompetence’

Blog-Reference and Blog-Reference

Bradford DeLong comments on the incompetence of US presidents from Ronald Reagan to Donald Trump. DeLong is an economist and economics is supposed to be a science and ― this got lost entirely in the Age of Incompetence ― genuine scientists keep out of politics because they know that politics and science do not mix, never have, and never will.

Economists habitually ignore the separation of politics and science. They claim to do science since Adam Smith/Karl Marx, what they in fact have done is what Feynman famously called cargo cult science or, more specifically, political economics.

Political economics is agenda pushing and has produced NOTHING of scientific value in the last 200+ years. Economics is a failed science. The four major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — are mutually contradictory and materially/ formally inconsistent. Until this day, there is NO scientifically valid economics.

Political economists are incompetent scientists and have made economics a fake science.* DeLong is a prominent representative of this aberration. He is out of science, his contributions to economics are rubbish, and his comments on politics are sitcom stuff.

Incompetent economists are as much a menace to their fellow citizens as incompetent presidents.

Egmont Kakarot-Handtke

* For details see cross-references Incompetence

Related  'Economists and politics: Will you kindly shut up!' and 'Economists: the Trumps of science' and 'Why Hayek was not a scientist' and 'Economics ― a Pygmy wrestling show' and 'Econ 101 is dead ― and now?' and 'Economists still don’t get Econ 101 right' and 'Enough! Economists, retire now!' and 'Krugman is not an economist'

Economists and their silly excuses

Comment on Lars Syll on ‘The search for heavy balls in economics’

Blog-Reference and Blog-Reference on Feb 3, 2017

Economics is a failed science. Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory and  provable false, i.e. materially and formally inconsistent.#1

Economists cannot explain how the economy works but they can explain why economics does not work. Here is the comprehensive list of excuses: “Economics is a strange sort of discipline. The booby traps I mentioned often make it sound as it is all just a matter of opinion. That is not so. Economics is not a Science with a capital S. It lacks the experimental method as a way of testing hypotheses. . . . There are always differences of opinion at the cutting edge of a science, . . . . But they last longer in economics . . . and there are reasons for that. As already mentioned, rival theories cannot be put to an experimental test. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once. The inferences that can be made from history are always uncertain, always disputable, . . . You can’t even count on a long and undisturbed run of history, because the ‘laws’ of behavior change and evolve. Excuses, excuses. But the point is not to provide excuses.” (Solow)

With this silly excuses economists unwittingly kick themselves out of science because science consists of two essential elements: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

If empirical consistency cannot be established in economics then it is a priori out of science and in the same category with religion, philosophy, storytelling and sitcom gossip. This, though, contradicts the claim of economics which is upheld since Adam Smith and Karl Marx and encapsulated in the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

An economists who claims that economics is a science that unfortunately lacks the experimental method simply does not understand what science is all about.

Accordingly, the current state of economics is that of a fake science or what Feynman famously called cargo cult science. This intolerable state is due to the scientific incompetence of economists and NOT to the alleged fact that there are not testable economics laws. These laws, though, refer to the economy as a system and NOT to human behavior. A theory that is built upon axioms like constrained optimization, rational expectations, equilibrium and other NONENTITIES is NOT testable just like the hypothesis that seven angels can dance on a pinpoint is NOT testable.

The failure of economics has been programmed with the false definition of the subject matter: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

In order to get out of the cul-de-sac economics has to be redefined by switching from behavioral axioms to systemic axioms, that is, from microfoundations to macrofoundations: “Economics is the science which studies how the monetary economy works.” and NOT “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” The study of human behavior is the subject matter of psychology, sociology, history, biology/evolution, political science, anthropology, etcetera.

The paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to true systemic macrofoundation yields testable propositions which have the same status as physical laws.#2

Economics is not a proto-science because it lacks “the experimental method as a way of testing hypotheses” but because economists are too stupid to formulate logically consistent and testable propositions. This incompetence persists since more than 200 years and it holds for Walrasians, Keynesians, Marxians, Austrians in equal measure.

There should not be the slightest doubt that these four approaches will never make it into the history of scientific thought except perhaps as a cautionary example for the idiocy of fake scientists and the persistence of evident intellectual junk.

Egmont Kakarot-Handtke

#1 For details see: ‘Economists and politics: Will you kindly shut up!
#2 For details see ‘The one stone that kills orthodox and heterodox employment theory

Related 'Failed economics: The losers’ long list of lame excuses'

December 27, 2016

The futile attempt to recycle Sraffa

Comment on Ajit Sinha on ‘Sraffa’s Revolution in Economic Theory’

Blog-Reference and Blog-Reference-Link and Blog-Reference on Jan 10

Sraffa realized that there is something fundamentally wrong with neoclassical marginalism. Up to this point he was right, of course. But, like all other heterodox economists, he failed to produce a valid replacement. Because Sraffa, too, produced merely proto-scientific rubbish it is misleading to characterize his approach as a “revolution in economic theory”. Economic theory is false since Adam Smith and Sraffa is part of the overall scientific failure.

The lethal blunder of economics is the theory of profits. As the Palgrave Dictionary puts it: “A satisfactory theory of profits is still elusive.” (Desai, 2008). Economists have NO idea of the pivotal concept of their subject matter and because of this ALL orthodox and heterodox approaches are fundamentally flawed#1.

Sraffa starts with an “extremely simple society” which produces wheat and iron#2, p.3. In other words, he starts with a real model just like Ricardo#3, and this is the fundamental methodological error/mistake/blunder. Real models cannot capture profit and this fact is obscured by Sraffa’s false assertion that surplus (a real magnitude) is the same as profit#2, p.6.

Methodologically, Keynes was a bit more sophisticated than Sraffa because he clearly recognized that economic theory has to start with the “monetary theory of production”. The economy constitutes itself through the interaction of real AND nominal variables. From this follows that ALL real models are a priori false.

Sraffa defines the rate of profit without prior definition of profit#2, p.6. To clearly see the conceptual blunder, Sraffa’s elementary real economy has to be replaced by the elementary consumption economy.

In the elementary consumption economy#4 three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.

In case (i) wage income is assumed to be Ym=100 monetary units (e.g. trillion dollar/euro/yuan) and consumption expenditures are assumed to be C=100 monetary units. Then, the monetary saving of the household sector Sm≡Yw-C is zero and the monetary profit of the business sector Qm≡C-Yw, too, is zero.

In case (ii) wage income is assumed to be Ym=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=-10. The whole output is sold, i.e. O=X, and the market clearing price P is now lower than in case (i).

In case (iii) wage income is assumed to be Ym=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=-10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market clearing price P is now higher than in case (i).

It always holds Qm+Sm=0 or Qm=-Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the PROFIT LAW for the economy as a WHOLE.

It holds in particular:
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit maximizing behavior. These subjective factors are IRRELEVANT. Profit for the economy as a whole is OBJECTIVELY determined.
• Profit/loss of the business sector is, in the simplest case, determined by the increase/ decrease of household sector’s debt.
• Wage income is the factor remuneration of labor input. Profit is NOT a factor income.
• There is no relation at all between profit, capital, marginal or average productivity.
• Profit has NO real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart. As a logical consequence, profit cannot appear in a real model.

Sraffa’s definition of the profit rate is utter methodological dilettantism. As a consequence, his entire analytical superstructure falls apart. The proper place of Sraffa’s book has always been the waste basket. It is a pointless exercise to recycle it as an alternative to the neoclassical approach. To fully replace Neoclassics requires the shift form false microfoundations to true macrofoundations. This, obviously, is absolutely beyond the horizon of incompetent scientists like Sinha.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith
#2 Sraffa, Production of Commodities by Means of Commodities
#3 See ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#4 The correct macrofoundations are given with three systemic equations: A1 Yw=WL wage income Yw is equal to wage rate W times working hours L. A2 O=RL output O is equal to productivity R times working hours L. A3 C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

***
NOTE on Barkley Rosser on Jan 8

Heterodoxy is as dead as Orthodoxy. For details see ‘The futile attempt to recycle Sraffa

December 25, 2016

The one stone that kills orthodox and heterodox employment theory

Comment on Asad Zaman on ‘Keynesian Unemployment’

Blog-Reference

The Post Keynesian critique of Orthodoxy as articulated by Zaman, Syll, Davidson, Fullbrook and many others on the RWER blog continues the tradition of heterodox blahblah economics that cannot get beyond the repetitive enumeration of Orthodoxy’s most obvious blunders. The incompetence of Heterodoxy guarantees the indefinite prolongation of Orthodoxy’s zombie state.

Heterodoxy claims since 80 years that Keynesian employment theory is superior. This is NOT the case. The simple fact of the matter is that Keynesian macro is as unacceptable as microfounded macro.

Here is the exact point where macroeconomics has gone wrong: Keynes defined the formal core of the General Theory as follows “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This elementary two-liner is defective because Keynes never came to grips with profit. The initiator of the Keynesian Revolution had NO idea of the pivotal concepts of economics, viz. profit and income, and After-Keynesians never detected or rectified his foundational blunder. An economist who cannot tell the difference between profit and income is a laughing stock. This applies to orthodox economists as well as to Zaman, Syll, Davidson, Fullbrook and the rest of dim bulbs.

To get out of failed Keynesianism requires nothing less than a full-blown paradigm shift to entirely new macrofoundations. In the following a sketch of the consistent macroeconomic employment theory is given.*

The elementary version of the objective systemic employment equation for the investment economy (no government, no foreign trade) is shown on Wikimedia. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation gets a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does not work as standard economics assumes. As a matter of fact, overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This implication is readily testable against standard economics.

The systemic employment equation is the one stone that kills the orthodox employment theory, the Keynesian employment theory, the Keynesian multiplier, all IS-LM models, the stickiness argument, and the (Bastard-) Phillips curve including the natural rate hypothesis. This is bad news for the brotherhood of orthodox and heterodox blatherers.

Egmont Kakarot-Handtke

* All details are to be found in the working papers

Related 'Econ 101 is dead ― and now?' and 'Rethinking the multiplier' and 'How to end the futile economics zombie ping-pong' and 'Unemployment is high because economics is false: period, full stop, end of story'

December 23, 2016

Economics: The pathetic story of two failures

Comment on Lars Syll on ‘Keynes betrayed’

Blog-Reference and Blog-Reference on Dec 28

The Keynesian Revolution had already been dead in the cradle but economists have not realized it until this day. Since 80 years, orthodox and heterodox economists are involved in the insoluble deep semantic riddle whether there is involuntary unemployment or not.

Farmer, in a new book, writes: “Macroeconomics has taken the wrong path. The error has nothing to do with classical versus New Keynesian approaches. It is a more fundamental error that pervades both.” The fact of the matter is, though, that Farmer does not spot the fundamental error in macro that pervades all of economics. In order to see this, one has to go back to Keynes.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.#1

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations down through intermediate levels (sectors, branches, firms, households) to the individual. What has to be recognized is the methodological insight that NO way leads from the understanding of microeconomic behavior to the understanding of how the monetary economy works. And this explains why the microfoundations approach had been doomed to failure already 140 years ago.

What neither Orthodoxy nor Keynes ever understood was profit: “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 et al., 2010)

It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes profit and income is a laughing stock. This applies to Walrasians and Keynesians of all colors. The messed-up profit theory is the “more fundamental error” that pervades both microeconomics and macroeconomics.

Macroeconomics is NOT in need of another brain-dead discussion about voluntary/ involuntary unemployment, nor about what Keynes really meant, nor about IS-LM, nor about what went wrong 80 or 140 years ago. Economics is in need of a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to  new macrofoundations. This, of course, is entirely beyond the horizon of the representative orthodox and heterodox economist in his involuntary goofiness.

Egmont Kakarot-Handtke

#1 See ‘The unfinished Keynes’ and ‘How Keynes got macro wrong and Allais got it right
#2 See ‘Macro for dummies’ and ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down

Related 'The father of modern economics and his imbecile kids' and 'Economists: the Trumps of science' and 'Economists still don’t get Econ 101 right'

***

NOTE on Lars Syll on 'Economists — nothing but a bunch of idiots savants'

Heterodoxy, too, is scientific junk. For details see cross-references Heterodoxy and cross-references Incompetence

December 20, 2016

The IS-LM macro imbeciles

Comment on Lars Syll on ‘The non-existence of Paul Krugman’s Keynes/Hicks macroeconomic theory’

Blog-Reference and Blog-Reference and Blog-Reference on Dec 21

Economists think they can solve any problem by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool totem of the micro/totem of the macro. What economists do not understand is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions.#1 The totem of micro/macro is a NONENTITY. And this means that the history of IS-LM from Keynes to Hicks to Davidson to Krugman and beyond is a perfect example of economists’ absolutely vacuous model bricolage.#2

Keynesianism in general, and IS-LM in particular, has always been methodologically unacceptable and its proper place since 80 years is the waste basket.#3

What economists’ in their innate scientific incompetence fail to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE interrelationships as its HARD CORE. This is an imperative methodological necessity.

The false Walrasian microfoundations and the false Keynesian macrofoundations have to be replaced by the true hard core macrofoundations. This is achieved as follows.
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The graphical representation of this absolute formal minimum is given on Wikimedia. This chart replaces the hare-brained totem of SS-function―DD-function―equilibrium. A detailed description of the elementary macro relationships has been given elsewhere.#4

The systemic macro axiom set A1/A3 is the one stone that kills, for a start, the Keynesian multiplier, ALL IS-LM models from Hicks onward, the stickiness argument, and the (Bastard-) Phillips curve including the natural rate hypothesis.#5

This, though, is forever beyond the horizon of the representative economist who flunked the intelligence test already by accepting the totems of micro and macro.

Egmont Kakarot-Handtke

#1 See ‘Ground Control to David Glasner
#2 See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 See ‘Keynesianism is broke: Get over it!
#4 See ‘Getting out of IS-LM = Getting out of despair
#5 See ‘The final smackdown of blahblah-Keynesianism

For more details see also cross-references Refutation of I=S

Keynesianism is broke: Get over it!

Comment on LordKeynes on ‘A Lecture by Robert Skidelsky on Keynes’s General Theory’

Blog-Reference and Blog-Reference and Blog-Reference on Dec 22 and Blog-Reference

Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 80 years.#1

Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is defective because Keynes never came to grips with profit: “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 et al., 2010)

It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes profit and income is a laughing stock. This holds for Keynes and to an even higher degree for After-Keynesians who have not spotted the foundational blunder in the past 80 years. Skidelsky is a case in point.

Keynesianism is provable false and therefore indefensible. Economic policy guidance of Keynesians has no sound scientific foundation and grave unintended consequences.#4

Egmont Kakarot-Handtke

#1 For details see cross-references Keynesianism
#2 See ‘The final smackdown of blahblah-Keynesianism
#3 See ‘Macroeconomics ― dead since Keynes
#4 See ‘Rethinking deficit spending

Related 'Keynes’s message for contemporaries' and 'The Cambridge crap curriculum' and 'Marshall and the Cambridge school of plain economic gibberish'

December 19, 2016

Economists and politics: Will you kindly shut up!

Comment on Mark Thoma on ‘What Economics Can Tell Us about Trump’s Policy Proposals’

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[The comment section on TheFiscalTimes is access-restricted by Disqus see Blog-Reference]

Brad DeLong wrote elsewhere: “Back in 2007 we thought we understood the macroeconomic world, at least in its broad outlines and essentials. It has become very clear to us since 2007 that that is not the case.”#1

Mark Thoma echoes: “Faith in macroeconomic models plummeted after the Great Recession, and for good reason. The models failed to foresee the economic problems that were coming, the severity of the recession was misjudged, and the models provided little guidance on how policymakers should respond to the economic crisis. Macroeconomists have since overcome many of these problems.”#2

Not at all! What economists still fail to notice is that they themselves are the biggest problem of economics.

The fact of the matter is that economists still have not spotted the fundamental error in macro. In order to see this, one has to go back to Keynes.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations.#3 This is why Keynesianism, too, is a failure.

What neither Orthodoxy nor Keynes ever understood was profit: “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 et al., 2010)

It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes profit and income is a laughing stock. This applies to Walrasians, Keynesians, Marxians, Austrians. The profit theory is false since Adam Smith or, as the Palgrave Dictionary puts it, “A satisfactory theory of profits is still elusive.” (Desai, 2008). Economists have NO idea of the pivotal concept of their subject matter and because of this ALL models are false.

The provable falsity of both micro- and macroeconomics should be enough reason to keep a low profile in the political arena.

But economists suffer under severe self-delusion: “One of the things we tell students who are just beginning to learn about economics is that it will teach them a way of thinking that applies very generally, a way of thinking that will be valuable in almost all areas of life, including making business decisions, evaluating government policy, and making choices in one’s personal life.”

What Thoma overlooks is that the opportunity cost principle and the marginal principle are (i) vacuous in economics, and (ii), not applicable in the political realm in the first place. Here, the legitimate sovereign makes the decision according to agreed upon procedures. The legitimate sovereign is ‘We, the people’ directly or a legitimate delegate. And that’s it for the economist. He has simply to take notice of the consolidated valuations of benefits and costs of ‘We, the people’ that are implicit in any political decision.

The economist as scientist has NO mandate to interfere with political decisions. This is known since John Stuart Mill: “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.”

There are three reasons for economists to keep a low profile in the political arena: (i) they have NO political mandate (except that of a voter like anybody else), and (ii), they have nothing of scientific value to contribute. Economics is a failed science, and current macro is worse than rubbish.#4 Last, but not least, they risk that the general public realizes that what they thought are experts are in fact a bunch of blatherers and agenda pushers.#5

Egmont Kakarot-Handtke

#1 See ‘Has Academic Thinking About Countercyclical Fiscal Policy Changed?
#2 See ‘When It Comes to Trumponomics, Economists Are on High Alert
#3 See ‘How Keynes got macro wrong and Allais got it right
#4 See ‘Macro for dummies
#5 See ‘There is NO such thing as an economic expert

Related 'Why don’t economists simply shut up for a while?' and 'Economists: the Trumps of science' and 'All models are false because all economists are stupid' and 'The final smackdown of blahblah-Keynesianism' and 'Scientific suicide in the revolving door' and 'Profit and the collective failure of economists'

December 18, 2016

The final smackdown of blahblah-Keynesianism

Comment on Brad DeLong on ‘(Early) Monday DeLong Smackdown Watch: Has Macroeconomics Gone Right?’

Blog-Reference

There is a lot of blahblah-Keynesianism that cannot easily be nailed down. But there is also a precious little piece of formalized Keynesianism that can be refuted. The straightforward refutation implodes the vast superstructure of blahblah-Keynesianism.

This is the exact point where macroeconomics has gone wrong: Keynes defined the formal core of the General Theory as follows “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

From this two-liner follows a series of Keynesian gadgets, prominently among them the multiplier and various IS-LM models.

The lethal fact of the matter is that the two-liner is defective because Keynes never came to grips with profit: “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 et al., 2010)

Keynes had NO idea of the pivotal concepts of economics, viz. profit and income, and After-Keynesians never detected or rectified his foundational blunder.

To get out of failed Keynesianism requires nothing less than a full-blown paradigm shift to entirely new macrofoundations. In the following a sketch of the consistent macroeconomic employment theory is given.*

The elementary version of the objective systemic employment equation for the investment economy (no government, no foreign trade) is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation gets a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does not work as standard economics assumes. As a matter of fact, overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This implication is readily testable against standard economics.

The systemic employment equation is the one stone that kills the Keynesian multiplier, all IS-LM models, the stickiness argument, and the (Bastard-) Phillips curve including the natural rate hypothesis.

Egmont Kakarot-Handtke

* For details see working papers  here  here  here  here  here

Related 'Macroeconomics ― dead since Keynes' and 'Macro for dummies'

December 17, 2016

Macroeconomics ― dead since Keynes

Comment on Diane Coyle on ‘Rescuing macroeconomics?’

Blog-Reference and Blog-Reference on Dec 18 and Blog-Reference on Dec 18

Macroeconomics cannot be rescued ― and certainly not by Roger Farmer’s silly belief function ― because it is already defunct since 80 years. Farmer writes: “Macroeconomics has taken the wrong path. The error has nothing to do with classical versus New Keynesian approaches. It is a more fundamental error that pervades both.” This is probably the most enlightened sentence in Farmer’s new book.

The fact of the matter is, though, that Farmer does not spot the fundamental error in macro that pervades all of economics. In order to see this, one has to go back to Keynes.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.#1

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations down through intermediate levels (sectors, branches, firms, households) to the individual. What has to be recognized is the methodological insight that NO way leads from the understanding of microeconomic behavior to the understanding of how the monetary economy works. And this explains why the microfoundations approach has been doomed to failure from the very beginning.

What neither Orthodoxy nor Keynes ever understood was profit: “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 et al., 2010)

It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes profit and income is a laughing stock. This applies to Walrasians and Keynesians of all colors. The profit theory is the “more fundamental error” that pervades both microeconomics and macroeconomics.

Rescuing macroeconomics in the correct understanding means a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to new macrofoundations. This, of course, is entirely beyond the horizon of Roger Farmer.

Egmont Kakarot-Handtke

#1 See ‘The unfinished Keynes’ and ‘How Keynes got macro wrong and Allais got it right
#2 See ‘Macro for dummies’ and ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down

Economics ― a Pygmy wrestling show

Comment on Lars Syll on ‘Microfoundationalist fantasies’

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Lars Syll summarizes the critique of representative-agent models: “Kevin Hoover has been writing on microfoundations for now more than 25 years, and is beyond any doubts the one economist/econometrician/methodologist who has thought most on the issue.” (See intro)

This argument is intended to give additional weight to the critique of the Lucasian microfoundational program. The followers of this program are encouraged “to do some reflection and at least try to come up with a sound methodological justification for their position.”

How weird is this? Hoover criticizes the representative-agent approach since 25 years! Did it never occur to him that this is a pointless exercise and that the main task of a scientist is NOT to endlessly elaborate on a false theory but to speedily come up with the true theory. Physics did not make progress because of the critique of every single of the 20+ epicycles but by throwing the whole geo-centric thing out of the window and replacing it by Helio-centrism. With this effective action, the object of criticism simply vanished into thin air. Criticism is either promptly followed by a paradigm shift or it is a distraction that leads even deeper into the swamp of disinformation.

How can anyone waste 25 years by occupying himself with constructs that are so obviously false that scientifically trained non-economists can see it when they open an economic textbook? “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse.” (McCauley, 2006)

To see the utter scientific dilettantism, it suffices to spell out the foundational propositions of standard economics: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985)

These premises of orthodox economics are not merely ‘unrealistic’ but downright silly,#1 yet Heterodoxy has not managed to replace them in the last 140+ years. Heterodoxy instead bloviates about eschatological justification and ontology and methodology.

Obviously, Heterodoxy is as clueless as Orthodoxy: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1991)

What it means is this: Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory and axiomatically false. There is no use at all of one approach criticizing the other. Because all four approaches are provable false they ALL have to go out of the window and to be replaced by a superior approach. To do the paradigm shift is the mission of a scientifically competent Heterodoxy.

This, obviously, has not yet happened. Until this day, there has not been a competent Heterodoxy. So we are left with the perpetuum mobile of four crap recycling approaches.

Neither approach can admit to have produced nothing of scientific value for generations and to be falsified according to the well-defined criteria of material and formal consistency. Instead, pluralism is proclaimed. Pluralism is the peaceful coexistence of false theories. The methodological prime directive of pluralism is anything goes. And when truth, defined as material/formal consistency, is abolished as guiding principle then there is no falsification. And when there is no serious falsification proto-scientific rubbish prevails.

Economics is not part of science but has become a subcontractor of the entertainment industry. Heterodoxy is the black-hatted guy in the Circus Maximus which is set up to keep the audience amused by presenting intellectual Pygmies fidgeting with funny gadgets called models and making some political sound and fury.

To get out of Circus Maximus requires a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations#2 to entirely new macrofoundations. This ― and doing away with both Orthodoxy and traditional Heterodoxy ― is the mission of constructive Heterodoxy.

Egmont Kakarot-Handtke

#1 See ‘Ground Control to David Glasner
#2 See ‘How Keynes got macro wrong and Allais got it right

December 16, 2016

Economics, methodology, and the Molehill Impossibility

Comment on Bernard Guerrien on ‘A New “General Theory”? A review of Capitalism by Anwar Shaikh’ #1

Blog-Reference

All intelligent economists are heterodox. As James Kwak put it on another occasion: “Economism is a logical fallacy ... Intelligent economists know this. Those who don’t realize it are unintelligent. So take your pick between liar and moron.” The unassailable fact of the matter is that Orthodoxy is no longer defensible.

The problem is that simply to be heterodox is NOT enough. From rejecting Orthodoxy one eventually has to move on to fully replace it. The great majority of heterodox economists wants ― as the French students put it ― “to escape from imaginary worlds” but for some reason they fail as their heterodox ancestors did. The current state of economics is that not only Orthodoxy is a scientific failure but traditional Heterodoxy, too.#2

Orthodoxy and traditional Heterodoxy have one thing in common: they do not understand the scientific method. A case in point is the new book Capitalism by Anwar Shaikh who claims to provide a new General Theory.

Guerrien summarizes: “Shaikh belongs to the ‘classical tradition’ that starts ‘from the bottom up, from the actual world that we observe around us, and then build abstractions from there’.” (#1, p. 156)

Now, bottom-up is exactly how Orthodoxy proceeds under the label of microfoundations: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994)

Already Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.#3

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations down through intermediate levels (sectors, branches, firms, households) to the individual. Why? Let us rename the microfoundations approach as Molehill Impossibility: “Although molehills are undeniably part of the universe NO amount of molehill research ever leads to the understanding of how the universe works.” Applied to economics: “NO amount of microeconomic research ever leads to the understanding of how the (world-) economy works.” Alternatively: “NO way leads from the understanding of human behavior to the understanding of how the monetary economy works.” And this explains why the microfoundations approach has been doomed to failure from the very beginning.

The touchstone for the assessment of any new approach is: does it solve the profit puzzle? What neither Orthodoxy nor Keynes ever understood was profit: “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 et al., 2010)

It is pretty obvious that an economists who cannot tell the difference between profit and income is a laughing stock. Shaikh introduces profit as follows: “The distinction made between what happens at an abstract level and at a more concrete level leads to the two important notions of a normal profit rate and of a regulating profit rate.” But Shaikh neither defines overall profit nor explains how it comes that normal profit is greater than zero.

“Shaikh does not claim to start from scratch: he identifies himself with the classical tradition throughout Capitalism even if what is meant by classical is not specified.” (#1, p. 159) Because he does not start from scratch, Shaikh takes the whole conceptual blunder from the classicals on board. One of the worst blunders of the classicals, including Marx, was that they did not understand profit.

The indispensable paradigm shift consists in replacing the false microfoundations of Orthodoxy and Shaikhian Heterodoxy and the false Keynesian macrofoundations by entirely new macrofoundations.#4 This is the way that leads to a valid General Theory. There is NO need for Heterodoxy to re-invent the scientific method but there is an urgent need to apply it properly.#5

Egmont Kakarot-Handtke

#1 RWER, issue no. 77
#2 For details see cross-references Heterodoxy
#3 See ‘The unfinished Keynes
#4 See ‘Macro for dummies
#5 See ‘Heterodoxy and the re-invention of science

December 15, 2016

Economics is not post-truth but pre-truth

Comment on Noah Smith on ‘Academic signaling and the post-truth world’

Blog-Reference

Noah Smith observes “For one thing, rising distrust of science long predates the current political climate; ...”. This is true, the ‘distrust of science’ is literally built into the core of politics because science is the very antithesis of politics. The guiding principle of science is the distinction between true and false. Scientific truth is well-defined as material and formal consistency. Science has NOTHING to do with trust or credibility or belief but with proof, transparency, explicitness, and acceptance of falsification. All this is antithetical to politics.

The very signature of politics is to give a shit about scientific standards: “As some one has said, it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another.” (Fisher, 1911)

To say that we live in a post-truth world is utterly misleading. The fact of the matter is that politics has hijacked science and gradually adapted it to its own modus operandi. Much of what parades as science nowadays is what Feynman famously called cargo cult science, that is, the outer form looks like science, but it is not science, and it does not work.#1

To say that we live in a post-truth world is to insinuate that politics has been successful in its age-old attempt to corrupt science.

This is true as far as economics is concerned.#2 Economists claim to do science since Adam Smith/Karl Marx. What they in fact have done is cargo cult science or, more specifically, political economics. Political economics is agenda pushing and fundamentally different from theoretical economics.

The proper definition of theoretical economics is: the science that tries to figure out how the actual economy works. Scientific knowledge takes the form of a theory which satisfies the criteria of material and formal consistency. A theory is the humanly best mental representation of reality.

Economics is a failed science. The four major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — are mutually contradictory and axiomatically false. Political economics has not produced much, if anything, of scientific value in the last 200+ years.

The actual state of economics is that of a proto-science, that is, the representative economist lives in a pre-truth world. This is why the word sciences has to be deleted from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The claim that economics is ‘sciences’ cannot be upheld. It is provable false.

Theoretical economics (= science) could never emancipate itself from political economics (= agenda pushing). Political economics is fake science. And all agenda pushers from Smith, Ricardo, Marx to Keynes, Hayek, Friedman and onward to Krugman and Varoufakis are fake scientists. The general public's distrust in political economics is fully justified.

The most urgent task in economics is to implement the separation of politics and science and to throw all political economists out of the scientific community.#3 This is the only way to de-incentivize incompetent scientists to “crank out crap”.

Egmont Kakarot-Handtke

#1 For details and references see Wikipedia
#2 See ‘Economists: the Trumps of science
#3 See also cross-references Political economics and cross-references Incompetence

Related 'Economics and corruption' and 'Political economics: a deadhead sitcom' and 'Lousy scientists' and 'Politics, storytelling, and science'

December 13, 2016

Ground Control to David Glasner

Comment on David Glasner on ‘A Primer on Equilibrium’

Blog-Reference and Blog-Reference

Economics is the science that tries to figure out how the actual economy works. Scientific knowledge takes the form of a theory which satisfies the criteria of material and formal consistency. A theory is the humanly best mental representation of reality.

David Glasner and his interlocutors, though, do not talk about the economy but indulge in meta-communication. The whole discussion circles around the question of the content and meaning of different features and versions of the general equilibrium model. In their communicative parallel universe they are mainly occupied with the difference between rational expectations, perfect foresight, perfect knowledge, complete knowledge and so on.

Economic equilibrium does NOT exist. And it has been PROVEN that it does not exist. So ALL equilibrium theory ― partial and general ― is axiomatically false because this concept is built right into the premises of standard economics.#1 This is methodologically inadmissible. Axiomatically false means that the theory has to be shredded and fully replaced, there is no twisting and tweaking of behavioral assumptions that can save it.

This is NOT news: “At long last, it can be said that the history of general  theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin (Ingrao et al., 1991). It has been a dead alley because the most rigorous solution of the existence problem by Arrow and Debreu turns general  theory into a mathematical puzzle applied to a virtual economy that can be imagined but could not possibly exist, while the extremely relevant ‘stability problem’ has never been solved either rigorously or sloppily. General  theory is simply a research program that has run into the sands.” (Blaug, 2001)

Equilibrium is a NONENTITY, that is, it has NOTHING to do with the real world which is the subject matter of economics understood as science.

From this follows that the whole equilibrium paradigm has to be replaced. This, too, is NOT news: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1991)

Instead, David Glasner discusses the relationship of equilibrium and rational expectations. To see the absolute senselessness of this economics sitcom, equalize the nonentity equilibrium with angels-dancing-on-a-pinpoint and the nonentity rational expectations with navel-of-Adam, then David and Nick and Henry are clarifying the question of how many angels can dance on Adam’s navel ― without ever realizing that they are making fools of themselves.

Needless to emphasize that the participants are also confused about other foundational concepts like pure competition and profit and their relationship: “Pure competition simply means that transactors are price-takers. Perfect competition adds the condition that (economic as opposed to accounting) profit is zero.” The zero-profit economy is another nonentity which follows from the methodological fact that economists do not understand until this day the difference between income, profit and distributed profit. So, the concept of zero-profit-perfect-competition, too, is a nonentity.

Standard economics is proto-scientific rubbish. The concept of equilibrium has already been dead in the cradle 140 years ago. Since Jevons, Walras, Menger all talk about equilibrium is vacuous.

Ground Control to David Glasner. Your circuit’s dead, there’s something wrong. Can you hear me, David Glasner?

Egmont Kakarot-Handtke

#1 See ‘The prime primer on equilibrium

December 12, 2016

Heterodoxy and the re-invention of science

Comment on Asad Zaman on ‘Historical context for Keynes’

Blog-Reference

The scientific method is well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994)

Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

NOBODY is obliged to do science. In fact, 99 percent of humanity live and die without the slightest idea of what science is all about. Everybody can use a knife or a shovel or a paddle without ever having heard of the Law of the Lever.

Science goes well beyond practical use and an intuitive understanding, and tries to capture the invariant features of reality with utmost precision.#1 Archimedes wrote down the Law of the Lever more than 2000 year ago and it had not to be changed since. Science is above the ever changing mess of history.

Certainty, precision and reliability is essential for cumulative progress because nothing can be built on swampy ground. This is why science insists on the proof of material and formal consistency.

As Hilbert put it: “If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ... The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge — a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability.”

While the sciences built their edifices higher and higher in the past 200+ years, economists still bum around in their flat swamp huts which are organized in four intellectual slums called Walrasianism, Keynesianism, Marxianism, Austrianism.

This is NOT such a great problem because everybody can choose (at least in principle) to intellectually settle down where they want. The problem starts as soon as somebody claims to do science but does not satisfy the criteria of material and formal consistency. This happened with economics. Economists claim to do science since Adam Smith/Karl Marx. What they in fact have done is cargo cult science or, more specifically, political economics. Political economics is agenda pushing and fundamentally different from theoretical economics (= science). The very signature of political economics is to give a shit about scientific standards: “As some one has said, it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another.” (Fisher, 1911)

Needless to emphasize that political economics has NOT produced anything of scientific value in the last 200+ years. This holds for Orthodoxy AND Heterodoxy. Asad Zaman maintains that the failure of economics is “due to the adoption of axiomatic-deductive methodology by economists.” Nothing could be farther from the truth. Political economists have ― without exception ― either misapplied the axiomatic-deductive method or not applied it at all. It is a provable fact that both Walrasian microfoundations and Keynesian macrofoundations are false.#2

Because of this, the indispensable paradigm shift consists in replacing the false axioms of Orthodoxy and Heterodoxy by entirely new axioms and to get out of the swamp of political economics as fast as possible.

There is NO need to re-invent the scientific method, but there is an urgent need to re-invent economics. Asad Zaman and the rest of the deplorables of traditional Heterodoxy have to get their heads around the fact that economics is NOT about psychology, sociology, history or politics but about how the economic system works.#3

Egmont Kakarot-Handtke

#1 See Nozick ‘Invariances; The Structure of the Objective World’
#2 See ‘Economics: The chief demerit is inconsistency
#3 For details see cross-references Heterodoxy

Related 'Methodology 101, economic filibuster, and the mother of all excuses' and 'Econ 101 is dead ― and now?' and 'The prime primer on equilibrium'

Macro for dummies

Comment on heteconomist on ‘Short & Simple ― Total Spending Equals Total Income’

Blog-Reference

The heteconomist Peter Cooper says: “Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.” (See intro)

Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock bottom truth of all of economics. Too bad that this statement is materially/logically false.

The foundational error/mistake/blunder consists in the methodological fact that the two most important magnitudes of economics — profit and income — are ill-defined.#1 In order to see this one has to go back to the MOST ELEMENTARY configuration, that is, the pure consumption economy which consists only of the household and the business sector.#2

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

In case (i) the monetary saving of the household sector Sm≡Yw-C is zero and the monetary profit of the business sector Qm≡C-Yw, too, is zero. The product market is cleared, i.e. X=O.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm+Sm=0 or Qm=-Sm, in other words, at the heart of the monetary circuit is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. It follows directly from the profit definition Qm≡C-Yw and the definition of household sector saving Sm≡Yw-C.

Loss or profit is NOT income. Only distributed profit is income. The profit theory is false since Adam Smith.#3

Egmont Kakarot-Handtke

#1 For details see ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’ and ‘Keynes’s Missing Axioms’ Sec. 14-18
#2 The elementary consumption economy is given by three systemic axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
#3 See ‘Essentials of Constructive Heterodoxy: Profit’ and cross-references Profit

Related 'The problem with macro in two words'

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REPLY to Schofield on Dec 13

Obviously, you cannot read. The point at issue is ‘Total Spending Equals Total Income’ and NOT the tautology ‘Total Contracting = Total Contracting.

Money is a related issue but an analytically different matter. See ‘Essentials of Constructive Heterodoxy: Money, Credit, Interest'

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NOTE of peterc on 14 December 2016 at 3:11 AM:

Hi Egmont. I’d prefer you didn’t clog up the blog with essentially the same comments you have posted at many other sites along with the numerous links to your blog and dozens of SSRN papers, most of which are basically just the same paper repeated with a different title and cosmetic alterations. (Yes, I have had a look over them in the past.)

If you do insist on posting comments here, kindly refrain from attacking other commenters (“Obviously, you cannot read”) or insulting readers (“Macro for dummies”) and state your point in a polite manner.

Unlike your contributions, the comments of Schofield and numerous others have added — and continue to add — a great deal of value to the blog. I consider your contributions basically to be graffiti, especially when they appear in response to introductory posts. They create noise, at best, and confusion at worst for newcomers to economics.

Please consider going away and not coming back unless and until you are prepared to engage in discussion in a constructive fashion.

For now, I am keeping your comments on moderation. I will exercise my right not to publish them, when I see fit, without explanation or apology.

Peter

The magic circuit and how economists got it wrong

Comment on Peter Cooper on ‘The Monetary Circuit & Compatibility of Marx, Kalecki and Keynesian Macro’

Blog-Reference and Blog-Reference

The heteconomist Peter Cooper says: “There appears to be a considerable degree of compatibility between Marx and various Kalecki- and Keynes-influenced approaches to macroeconomics.” (See intro)

The compatibility consists in the fact that all these approaches are provable false. In other words, until this day neither orthodox nor heterodox economists have manged to give a formally consistent description of the monetary circuit. The blatant incompetence of economists is the ultimate reason of why economics is a failed science.

The current state of economics is that the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory and axiomatically false.

For the short refutation of Kalecki, Keynes, Minsky and Keen see ‘Heterodoxy, too, is scientific junk’#1 The complete formal proofs are given in separate papers.#2

Debunking is necessary but insufficient. As Blaug put it: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” What is needed is to move on from falsified approaches to the materially and formally correct theory. In methodology this is called a paradigm shift.#3 The opus magnum consists in replacing false Walrasian microfoundations and false Keynesian/Marxian macrofoundations by entirely new macrofoundations.#4 Nothing less will do.

The true theory does not emerge from a mixing of failed approaches. The true theory satisfies the well-defined criteria of material and formal consistency. What the heteconomist Peter Cooper offers is as inconsistent as one can get.

Both, Orthodoxy and Heterodoxy never came to grips with science, with the pivotal concept of profit, and with the working of the monetary circuit we happen to live in.

Egmont Kakarot-Handtke

#1 Link to post
#2 See ‘Profit for Marxists’ and ‘Debunking Squared
#3 See ‘The Emergence of Profit and Interest in the Monetary Circuit
#4 See ‘From Orthodoxy to Heterodoxy to Sysdoxy

Related 'Why economists know nothing' and 'Rethinking MMT' and 'The false foundations of economics' and 'Wikipedia and the promotion of economists’ idiotism' and 'From false micro to true macro: the new economic paradigm' and 'The final implosion of MMT' and 'Economists still don’t get Econ 101 right'

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COMMENT on peterc on Dec 20

You write “Hi Magpie. Kalecki is starting from accounting identities. In particular, in the simplest model:
Income = Wages + Gross Profit
Income = Consumption + Gross
Investment Proceeds = Prime Cost + Wages + Gross Profit.”

Note that the first equation, i.e. Income = Wages + Gross Profit, is already false. For the proof see (2011; 2012; 2014)

References
Kakarot-Handtke, E. (2011). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
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

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REPLY to peterc on Dec 22 and additional Blog-Reference

You compare Marx, Kalecki, and Keynes. The first thing a logically talented person notes is that the three authors use different definitions of profit and income. Now, a logically talented person knows (i) only one approach can be true, or (ii), all three are false. This is known since more than 2000 years: “There are always many different opinions and conventions concerning any one problem or subject-matter .... This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion ... on the other.” (Popper, 1994)

The intellectual Lumpenproletariat has no problem with scrambling an arbitrary number of contradictions in their confused brains but for a scientist this is unacceptable: “[economists] pursue the consistency of the theories they make, for he who contradicts himself proves nothing.” (Klant, 1988)

Because the definitions of income and profit of Marx, Kalecki, Keynes are inconsistent these three authors prove NOTHING. You can find the proof of inconsistency elsewhere.#1 From this proof follows that the widely used definition Income = Wages + Profits is false. And since Kalecki starts with this definition he, too, is false and his whole analytical superstructure falls apart. It is as simple as that.

You say: “You can start from your own definitions, but this doesn’t really have a bearing on Kalecki, who did not share the same starting position.”

It is a widespread self-delusion among the intellectual Lumpenproletariat that everybody is entitled to make his own definitions. This is NOT the case.#2 It should be pretty obvious that all physicists apply the SAME definitions of energy, work, velocity, potential/kinetic energy etcetera and that these fundamental concepts are CONSISTENTLY defined. And this explains why physics is a success while economics never rose above the level of incoherent blather.#3

What is known since 2000+ years ― except to economists ― is: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009)

So what has to be done instead of comparing the rubbish of Marx, Kalecki, Keynes is to move from their false macrofoundations to entirely new and CONSISTENT macrofoundations.

#1 For example in ‘Debunking Squared
#2 See ‘Humpty Dumpty is back again
#3 See ‘Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist