March 31, 2016

Profit, marginalism, and other anomalies

Comment on Larry Summers on ‘Corporate profits are near record highs. That’s a problem’

Blog-Reference

You write: “The rate of profit under standard assumptions reflects the marginal productivity of capital.”

Only for economists who have not yet realized that marginalism is dead since more than 140 years. The correct profit equation for the closed investment economy reads Qm=Yd+I-Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving.

When the profit theory is false, then the rest of economic theory is false. The reason why the profit development appears “anomalous” to you is that you simply do not know what profit is.*

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

* See ‘How the intelligent non-economist can refute every economist hands down

For details of the big picture see cross-references Profit

Immediately following post 'How the American working class can bring overall profits down to zero without bloody revolution'.

Show first your economic axioms or get out of the discussion

Comment on Mart Malakoff on ‘On the Truth of Scientific Theories’

Blog-Reference

You say: “One can axiomatize sciences as suggested by Hilbert long ago, but it has essentially two sets of axioms — math ones, taken from math, and empirical ones taken from assigning symbols to observations.”

Axiom means foundational proposition and because Euclid explicitly based geometry on axioms many people think the term refers alone to mathematics. This is not quite correct.

Newton famously put his PHYSICAL axioms on the first pages of the Principia. In methodological analogy ECONOMIC axioms have to be laid down by economists. This defines the subject matter.

The actual situation is this: Orthodoxy clings to a thoroughly refuted axiom set and Heterodoxy so far has failed to formulate a new one. As Keynes famously put it: “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16)

Only retarded economists still maintain that axioms apply exclusively to mathematics.

There is but ONE way to build up a valid theory: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein, 1934, p. 165)

The methodological term for ‘basic concepts and laws which are not logically further reducible’ is axioms. As long as economic theory is not based on a formally and materially consistent set of axioms it is out of science and cannot be taken seriously.

Egmont Kakarot-Handtke


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.  London, Basingstoke: Macmillan.

Immediately preceding post 'There is no truth in political economics'

March 30, 2016

Your profit theory is false

Comment on Justin Fox on ‘When Workers Get More of the Income Pie’

Blog-Reference

You write: “For corporate profits to grow faster than GDP (and faster than national income) some other sectors have to lose out.”

It is one of the oldest errors in economics that wages and profits are antagonistic: “And thus we arrive at Mr. Ricardo’s principle, that profits depend upon wages; rising as wages fall, and falling as wages rise.” (Mill, 1874, IV.12)

This relationship holds for a single firm but not for the economy as a whole.* The correct profit equation for the closed investment economy reads Qm=Yd+I-Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving.

When the profit theory is false, then the rest of economic theory is false. The reason why the profit development appears “ominous” to you is that you simply do not know what profit is. That’s rather bad for an economist, isn’t it?

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On Profits, and Interest. Library of Economics and Liberty. URL

* For details see ‘As goes GM, so goes America — A rather ordinary fallacy of composition

Related 'The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?' and 'Essentials of Constructive Heterodoxy: Profit' and 'Profit for Marxists' and 'Debunking Squared'.

***
REPLY to Farcaster on Mar 31

It seems that you cannot read. The slice-of-a-pie metaphor is inappropriate for the description of the relationship between wages and profits since Ricardo. Your concept of profit is still on the flat-earth level.

For the derivation of the formally correct Profit Law see ‘How the intelligent non-economist can refute every economist hands down

There is no truth in political economics

Comment on Asad Zaman on ‘On the Truth of Scientific Theories’

Blog-Reference

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 push an agenda, the goal of theoretical economics is to 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. Political economists who are dimly aware that they have no true theory — among them many heterodox economists — tend to argue that there is no such thing as truth. What these people overlook is that scientific truth is well-defined as formal and material consistency (Klant, 1994, p. 31). Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing. “So the idea of truth (of an ‘absolute’ truth) ... is our main regulative idea.” (Popper, 1994, p. 161)

The regulative idea of truth has an implication for scientific debate which no blatherer can ever accept: if you do not have some idea of true theory you better shut up. “If economics cannot aspire to any substantive knowledge of economic relationships, it cannot speak with authority about questions of economic policy.” (Blaug, 1990, p. 111).

Without this aspiration and the commitment to scientific truth economics cannot rise above the actual level of mere opinion, storytelling, pluralism of false theories, and brain-dead political blather.

Egmont Kakarot-Handtke


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.

Immediately following post 'Show first your economic axioms or get out of the discussion'

The futility of testing economics blather

Comment on Scott Sumner on ‘Fiscal multiplier studies far worse than I thought’

Blog-Reference

Economics is what Feynman called a cargo cult science, that is, the outer form looks like science, but it is not science, and it does not work. Science is well-defined by material and formal consistency (Klant, 1994, p. 31). Somehow economists messed up both formal theory building and empirical testing.

The crucial point is that there is no use at all to discuss statistical problems when the theory to be tested is defective, to begin with. Roughly speaking, it is pointless to discuss what confidence level is appropriate for testing the hypothesis that seven angels can dance on a pinpoint.

The actual situation in economics is that Walrasianism, Keynesianism, Marxianism, and Austrianism are provably false (for IS-LM, in particular, see 2014). Therefore, you can test until you are blue in the face without the slightest chance of arriving at a meaningful result.

All this, in turn, means that economic policy advice or what economists tell about the market economy has no sound foundation whatsoever. “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)

It is pretty obvious that neither orthodox nor heterodox economists have developed the true economic theory. The ultimate cause is that economists are scientifically incompetent.*

Let us take Walrasianism as an example here: “The program is organized around the following hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

It is pretty obvious that HC3 and HC6 are nonentities like angels, unicorns, or the Easter Bunny. If the foundational propositions, a.k.a. axioms, are false the whole theoretical superstructure is false, and because of this, the whole of Neoclassics is false since more than 140 years.

It is known since the ancient Greeks: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)

Now, there is NO such thing as a ‘certain, true, and primary’ proposition about human behavior. Economics is NOT a so-called social science like psychology/sociology and NOT a natural science like physics but a system science. Because there is no such thing as a behavioral axiom, HC3 above as well as Praxeology is an abysmal methodological blunder.

Therefore, methodologically correct economics starts with the SYSTEMIC behavior of the monetary economy. There are objective systemic laws, for instance, the Profit Law (2015). Systemic laws contain NO nonentities but only measurable variables and are readily testable.

There is no place for Walrasianism, Keynesianism, Marxianism, Austrianism and their retarded proponents in science.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

* See ‘Why economics is a failed science: the 25 best explanations/excuses

***
REPLY to Ray Lopez on Mar 31

It is not such a good idea to project one’s own incompetence onto others. The average wage rate is well defined and can be straightforwardly derived by aggregation of the differentiated wage structure.

See Fig. 3 in ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?’ and Fig. 1 in ‘Geometrical Exposition of Structural Axiomatic Economics (II): Qualitative and Temporal Aggregation

For the future: whenever you detect a logical flaw it is always in your short-attention-span goldfish brain.
***
REPLY to Tom Brown on Mar 31

As I said above: there is NO such thing as a behavioral axiom. This applies to the maximization axiom HC3 of Walrasianism, on which the whole of marginalism rests, and this applies to the action axiom of Praxeology (see Wikipedia).

In other words, the axiomatic foundations of both Walrasianism and Austrianism are methodologically defective. In still other words, both approaches are pseudo-scientific garbage.

For the correct formalization of intentional behavior see ‘Essentials of Constructive Heterodoxy: Behavior’ and ‘The Propensity Function as General Formalization of Economic Man/Woman’.

Major.Freedom advertises Praxeology as follows: “Praxeology actually is the solution to the mind body dichotomy problem, or as it is also known, the subject-object dichotomy, or the idealist-materialist dichotomy.”

Funny thing, the Austrians have solved the old mind-body chestnut but cannot until this very day tell the differences between profit and income. From all ridiculous economic blatherers, Austrians are the worst.
***
REPLY to Ray Lopez on Mar 31

Did it ever occur to you that there must be something fundamentally wrong with economics? To talk about blatant NONENTITIES like utility, equilibrium, rational expectations and so on is the ONLY way economists have found in more than 200 years to capture REALITY?

Here are some more nonentities: expected utility, rationality/bounded rationality/animal spirits, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, total income=value of output, I=S, real-number quantities/prices, ergodicity. Every theory/model that contains one of these nonentities goes directly into the waste basket.

On the other hand, economists do not know what profit is. In contradistinction to the nonentity utility, monetary profit is a very real and measurable magnitude. Everybody can touch it in the cash box or see it on the bank account with the accuracy of two decimal places. The fact of the matter is that economists have not figured out to this day what the overall profit of an economy is and what its determinants are. As the Palgrave Dictionary sums up: “A satisfactory theory of profits is still elusive.”

The very characteristic of scientific thinking is to deal with entities, preferably with measurable entities like profit, and NOT with blatant nonentities like utility/maximization/ equilibrium.

Because of this, it is not necessary to lose more than the combi-word nonentity-low-IQ-blather about the Cambridge Capital Controversy.

To recall: propositions that contain nonentities are not testable in principle. And this is why economic debates get lost in nirvana with a probability of 100 percent. The CCC is a case in point.

Make no mistake, economists are quite satisfied with inconclusive outcomes. Inconclusiveness is the very survival strategy of the scientifically incompetent.

***
COMMENT on Scott Sumner on Apr 1

With regard to multipliers, the fact of the matter is that already Keynes’s simple investment multiplier has been defective.

Keynes defined the formal foundations of the General Theory as follows: “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 never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

The three main points of the axiomatically correct approach are:
• All I=S models are false since Hicks (2011; 2014) (proof see post ‘Toward the true economic axioms’).
• The correct profit equation for the investment economy reads Qm=Yd+I-Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. Sm establishes the connection to the money/credit market.
• The correct employment equation/Phillips curve is given here. For details see the post ‘Have data, lack theory

It is no surprise at all that testing the fiscal multiplier, which in turn is based on IS-LM, yields no results. When the theory is wrong testing is pointless and econometric shop talk is a waste of time. Better test the structural axiomatic employment multiplier first.


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.  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

Immediately following post 'Austrian blather'

March 28, 2016

Stanley Fischer: Rewarding scientific incompetence

Comment on ‘Reflections on Macroeconomics Then and Now’

Blog-Reference

Stanley Fischer starts the meaty part of his talk with: “I will start by briefly sketching the structure of a basic macro model. The building blocks of this model are similar to those used in many macro models, including FRB/US, the Fed staff's large-scale model, and a variety of DSGE models used at the Fed and other central banks and by academic researchers.
The structure of the model starts with the standard textbook equation for aggregate demand for domestically produced goods, namely:
1. AD = C + I + G + NX;
2. Next is the wage-price block, which is based on a wage or price Phillips curve.” (See intro)

We can stop already here because this is definitively the false start. In order to see where things went wrong one has to return to the very beginnings of macro. Keynes defined the formal foundations of the General Theory as follows: “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 never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12). As a result, all I=S models including the Keynesian multiplier are false (2011; 2014). Neither the proponents nor the opponents of mainstream macro got this point until this day. Stanley Fischer is only one among the many.

When the foundational economic concept profit is inconsistently defined then the whole theoretical superstructure is a flawed construction without any scientific value whatsoever. No policy recommendation can be drawn from such a model. Because of this, the macro policy discussions from Keynes/Hicks/Samuelson/Friedman onward have been surrealistic. All participants lacked the correct profit theory and this continues to this day.

First of all, Keynes’s fundamental equations of macro have to be fully replaced.* This yields (i) the correct profit equation (2014, eq. (18)), and (ii), the correct employment equation/ Phillips curve (2012, eq. (33)).

Because the first two building blocks of Fischer’s ‘basic macro model’ are false the whole thing is worthless. During his long career, Fischer obviously did not get the point. He never understood the pivotal phenomenon of economics and, clearly, when one does not understand profit one cannot understand how the economy works.

Already J. S. Mill tried to excuse economics as ‘separate science’. Its distinctive features are (i) the foundational concepts profit/income are inconsistent since more than 200 years, (ii) the FRB/US, the Fed and other central banks, as well as academic researchers blindly apply false models, and (iii), evident scientific incompetence is not punished but rewarded.

As an urgent first step, economics has to be excluded from the sciences, and both orthodox and heterodox economists have to be thrown out of the scientific community.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. 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 ‘Finalizing the Keynesian Revolution’ and ‘Toward the true economic axioms

March 26, 2016

Economics: neither craft nor science

Comment on ‘Economics is more a craft than a science — The Washington Post’

Blog-Reference

Science was already well established when Adam Smith declared that economics, too, is a science. Economics defends this claim until this day (viz. Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel) but has never delivered anything fitting the description of science.

Economics is a failed science and the ultimate cause is the proven scientific incompetence of economists. Since Adam Smith economists have not grasped what science is all about — despite the fact that it is unambiguously defined (Klant, 1994, p. 31).

According to scientific criteria Walrasianism, Keynesianism, Marxianism, and Austrianism is logically inconsistent or empirically inconsistent or both.

Always when economics is in open crisis five reactions are to be observed: (i) self-delusional denial, (ii) back pedaling and relativization, e.g. ‘economics is not a Science with a capital S’ (Solow)*, (iii) admission of the most noticeable flaws with the reassurance that ‘our best brains’ are already working on them, (iv) clueless actionism and innovation showbiz (v) hand-waving in the media.

This is what is known since J. S. Mill: “Science is a collection of truths; art, a body of rules, or directions for conduct. The language of science is, This is, or, This is not; This does, or does not, happen. The language of art is, Do this; Avoid that. Science takes cognizance of a phenomenon, and endeavours to discover its law; art proposes to itself an end, and looks out for means to effect it.” (1874, V.8)

Now, it is pretty obvious that when economics has no scientific truths, then art, craft, or economic policy advice has no sound foundation whatsoever. “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Economists do not have the true theory, their economic policy proposals are plucked out of thin air. Economics does not belong to science but to circus maximus.

Egmont Kakarot-Handtke


References
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

* See ‘Why economics is a failed science: the 25 best explanations/excuses

March 25, 2016

The three fundamental economic laws

Comment on Lars Syll on ‘The non-existence of economic laws’

Blog-Reference and Blog-Reference

You say: “In mainstream economics there’s — still — a lot of talk about ‘economic laws.’ The crux of these laws — and regularities — that allegedly do exist in economics, is that they only hold ceteris paribus.” (See intro)

It is obvious that neither Orthodoxy nor Heterodoxy has found anything that deserves the title of an economic law. This, though, is due to sheer incompetence and not to the non-existence of laws.

Orthodoxy is wedded to methodological individualism. This is the original blunder because there is NO such thing as a BEHAVIORAL law. Because of this, economics never rose above silly behavioral speculation about utility maximization or rational expectations.

“Now, at any rate, we have an explanation for why the assumptions of economic theory about individual action have not been improved, corrected, sharpened, specified, or conditioned in ways that would improve the predictive power of the theory. None of these things have been done by economists because they cannot be done. The intentional nature of the fundamental explanatory variables of economic theory prohibits such improvement.” (Rosenberg, 1992, p. 149). In short, economists bark since more than 140 years up the wrong tree.

The point most economists cannot get their head around is that there are NO behavioral laws but that there are SYSTEMIC laws. The three fundamental laws of the monetary economy are:

The First Economic Law
The Profit Law
The Law of Supply and Demand

For the consistent derivation see the working paper ‘Objective Principles of Economics’ or ‘Economics for Economists’.

Systemic laws are composed of measurable variables and therefore are straightforwardly testable. All those who claim that there are no economic laws are invited to refute the systemic laws.

Egmont Kakarot-Handtke


References
Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago, IL: University of Chicago Press.

March 24, 2016

Economics between truth and blather

Comment on Lars Syll on ‘Science and truth’

Blog-Reference

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Economists who are well aware that they unfortunately have missed the true theory, like Robert Aumann and other representatives of Orthodoxy, have not much alternatives — short of simply admitting failure — than to argue that there is no such thing as truth. These people then become histrionic and pose Pilate’s famous question ‘What is truth’.

What these pseudo-philosophers overlook is that scientific truth is well-defined as formal and material consistency (Klant, 1994, p. 31). “So the idea of truth (of an ‘absolute’ truth) ... is our main regulative idea.” (Popper, 1994, p. 161)

Genuine scientists have no problem with the concept of scientific truth but it has always been a big issue in the so-called social sciences, which Feynman famously characterized as cargo cult sciences.

It is pretty obvious that neither orthodox nor heterodox economists have developed the true economic theory. Economics is still at the proto-scientific stage: “Within the whole of his [the economist’s] science, or what he insists on calling science, no generally recognised result is to be found, as is also the case for theology and for roughly the same reasons; there is no single doctrine taken to be a scientific truth without the diametrically opposed view being similarly upheld by authors of high repute.” (Wicksell, in Deane, 1983, p. 8)

One possible reaction to this embarrassment is to give up the idea of objective truth in economics. This attitude is rather popular among heterodox economists — and it is self-defeating. “If economics cannot aspire to any substantive knowledge of economic relationships, it cannot speak with authority about questions of economic policy.” (Blaug, 1990, p. 111). Without this aspiration economics degenerates to mere opinion, pluralism of false theories, and in the last consequence to brain-dead political blather.

The idea of truth has an implication for scientific debate which no blatherer can ever accept: if you do not have the true theory you better shut up. Blatherers therefore resort to questioning what no genuine scientist ever questions because it defines his mission.

For economists the mission is clear since J. S. Mill: “Science is a collection of truths; art, a body of rules, or directions for conduct. The language of science is, This is, or, This is not; This does, or does not, happen. The language of art is, Do this; Avoid that. Science takes cognizance of a phenomenon, and endeavours to discover its law; art proposes to itself an end, and looks out for means to effect it.” (1874, V.8)

Egmont Kakarot-Handtke


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.
Deane, P. (1983). The Scope and Method of Economic Science. Economic Journal, 93(369): 1–12. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

March 23, 2016

Macro of and for the scientifically blind and deaf

Comment on Simon Wren-Lewis on ‘MMT and mainstream macro’

Blog-Reference

The summary argument against MMT from the standpoint of old/post-Keynesian/ mainstream macro is ‘the old is correct and well understood, while the new is substantially wrong.’ (Palley)

The old may be subjectively well understood but it is objectively false nonetheless since Keynes. In order to see where things went wrong one has to return to the very beginnings of macro: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

Keynes defined the formal foundations of the General Theory as follows: “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 never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12). As a result, all I=S models including the Keynesian multiplier are false (2011; 2014b; 2014a; 2012). Neither the proponents nor the opponents of mainstream macro got this point until this day. Wren-Lewis is only one among the many (for details see this post).

It should be clear that when the foundational economic concept profit is inconsistently defined then the whole theoretical superstructure is a flawed construction without any scientific value whatsoever. No policy recommendation can be drawn from such a model. This applies to both old mainstream macro and new MMT macro. Therefore any policy discussion between the two camps is vacuous.

The three main points of the axiomatically correct approach are:
• All I=S models are false since Hicks (for the proof see post ‘Toward the true economic axioms’).*
• The correct profit equation for the investment economy reads Qm=Yd+I-Sm (2014b, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. Sm establishes the connection to the money/credit market.
• The correct employment equation/Phillips curve is given here. For details see the post ‘Have data, lack theory

Conclusion: The old macro is incorrect but nonetheless accepted by a majority, while the new MMT macro is incorrect but accepted by a minority. Neither approach can be taken seriously because the proponents do not know what macro profit is, but the stuff is good enough for another senseless economic policy debate.

Egmont Kakarot-Handtke


References
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. 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

* For details of the big picture see cross-references I=S

***

COMMENT on Simon Wren-Lewis on Mar 28

You ask “Can you suggest a better way of examining intergenerational issues than an OLG model?”
Yes. For the correct approach see the working paper ‘Settling the Theory of Saving

***

COMMENT on axdouglas on Mar 29

Before you wreck your brain about how the state can positively/negatively affect employment you first need the correct employment theory for the economy without state. The fact of the matter is that the neoclassical and the Keynesian employment theories are provable false. Because you do not have the correct employment theory to start with your whole argument is flawed.

To cut the meticulous formal derivation short (2015; 2014; 2012), the most elementary version of the correct employment equation for the economy as a whole is given here.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the letter rho stands for ratio). An expenditure ratio rhoE>1 indicates credit expansion, a ratio rhoE<1 indicates credit contraction/debt repayment of the household sector.
(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 is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) is familiar since Keynes. What is missing in the Keynesian employment multiplier, though, is the ratio rhoF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

This is the very OPPOSITE of what standard economics claims. The explanation of unemployment is ultimately given by the fact that the price mechanism does NOT work as standard economics hallucinates, i.e. wages down, employment up. The correct employment equation tells you how the market interaction produces unemployment and how full employment can be achieved WITHOUT the state’s variation of taxes/government spending.


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

March 22, 2016

How to get out of the morass of ignorance

Comment on Noah Smith on ‘New paradigms in economic theory? Not so fast.’

Blog-Reference and Blog-Reference on Mar 24

The natural cognitive state vis-à-vis reality — and by implication vis-à-vis the economy — is this: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits an pieces together in an orderly fashion.” (Schmiechen, 2009, p. 11)

How to get out of the swamp is known since more than 2000 years as the scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)

Orthodoxy has followed this method and laid down its hard-core propositions: “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, p. 147)

Orthodoxy is a failed approach because this axiom set contains nonentities, i.e. HC2, HC4, HC5 cannot by any stretch of the imagination taken to be true. Clearly, when the premises are not ‘certain, true, and primary’ the whole theoretical superstructure falls apart. Exactly this happened with maximization-and-equilibrium economics.

In this situation an ‘empirical revolution’ is pointless. Propositions that contain nonentities like utility, equilibrium, or Easter Bunny are not testable to begin with.

What instead has to be done is to replace the orthodox set of foundational propositions with a new set. J. S. Mill identified the very first question of methodology: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

The current state of economics is that Heterodoxy, too, has failed at the opus magnum. It is not sufficient to throw in any number of unrelated concepts like evolution, complexity, networks, nonlinearity, incomplete optimization, incomplete forward-lookingness, externalities, behavioral heuristics, social preferences, cooperative games. This only proves the utter confusion about the subject matter.

Economics is about the properties of the monetary economy. Because of this, economic analysis has to start with the objective system component of reality. The necessary paradigm shift requires the replacement of the false orthodox axiom set by an entirely new one.

The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by these three objective structural 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.

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The paradigm shift consists of the move from HC1/HC6 to A1/A3. Everything else is frog quacking in the morass of ignorance.

Egmont Kakarot-Handtke


References
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

Immediately preceding post 'Vain hopes in the ruins of economics'.

Related 'Toward the true economic axioms' and 'Why economics is a failed science: the 25 best explanations/excuses'.

***

REPLY to Barkley Rosser on Mar 23

(i) As you should know from Econ 101, accounting identities consist exclusively of nominal magnitudes. The three structural axioms consists of nominal AND real variables. Therefore, they are NO accounting identities, stupid.

(ii) The three structural axioms constitute the formal backbone of economics. Models that do not consistently fit into this elementary mathematical framework, e.g. real models or Keynesian models, are out of economics for good.

(iii) The three structural axioms define the elementary consumption economy which every economist should thoroughly understand.* Because, who does not understand the most elementary case has no chance at all to understand anything.

(iv) Your problem is that you are not even aware that you never understood what profit is. For your overdue enlightenment see the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai). What do you call an economist who cannot tell what profit is? Clearly, incompetent would be an euphemism.

(v) From a deeper analysis of the pure consumption economy follows the most elementary version of the Profit Law.** Every economist — even you — has now a chance to understand the basics of economics.

(vi) From the differentiated structural axiom set follows the employment equation, see eq. (33) of the working paper ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’. Either you empirically refute this equation or simply get out of the way. To recall, science is about formal and material proof. Blather does not count for much.

* See ‘Toward the true economic axioms
** See ‘How the intelligent non-economist can refute every economist hands down

***

REPLY to Barkley Rosser on Mar 24

You say: “Your supposed axioms are ... true by definition.” Yes, this is exactly what I assert. So we have common ground. Not only this, we are in perfect accordance with what Aristotle defined as scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”

Having established a rock solid starting point we now can advance: “The object of reasoning is to find out, from the consideration of what we already know, something else which we do not know.” (Peirce)

From the axioms we have agreed upon to be true follows that Walrasianism and Keynesianism is provable false.

This, in a nutshell, is the straightforward application of the axiomatic-deductive method to economics. The method is known since more than 2000 years and you can look it up in Wikipedia: “Euclid’s method consists in assuming a small set of intuitively appealing axioms, and deducing many other propositions (theorems) from these.”

One very important theorem is the Profit Law which says in its most elementary form (i) Qm=-Sm (Qm monetary profit, Sm monetary saving). This is the beauty of the scientific method to ‘find out, from the consideration of what we already know, something else which we do not know.’ What theorem (i) tells you is that all I=S models are false and by implication that both Walrasianism and Keynesianism are as dead as a doornail. I am pretty sure that you did not know this until now.

You say about the axioms A1 to A3 “They lead to nowhere at all other than to help in a ‘measurement without theory’ sort of empirical investigation, which you claim is ‘pointless.’ But your axioms are good for nothing more, and not even all that useful for even that.”

It cannot be said that my axioms ‘lead to nowhere.’ At minimum they have led to the incontrovertible conclusion that you have been hanging around for too long in the scientific Neanderthal.

***

REPLY to Tom Brown on Mar 25

You say: “Your concept of science sounds more like mathematics.” This is perhaps because you have a wrong idea of what science is all about. Science was already well established when Adam Smith declared that economics, too, is a science. Economics defends this claim until this day but has never delivered anything fitting the description of science.

So, it is not “my” concept or “your” concept. Science is well-defined and economists either stick to the rules or they will be thrown out of science. According to the criteria of formal and material consistency (Klant, 1994, p. 31), economics is indisputably a failed science. In methodological terms this means that the old paradigm is dead and a new paradigm is urgently needed. Because a paradigm is defined by its foundational propositions, a.k.a axioms, a paradigm shift means practically to fully replace the old axiom set, i.e. HC1 to HC6 above, by a new one. This has nothing to do with mathematics as such. Newton put his PHYSICAL axioms on the first pages of the Principia.* In methodological analogy ECONOMIC axioms have to be laid down by economists. This defines the subject matter.

The actual situation is this: Orthodoxy clings to a thoroughly refuted axiom set and Heterodoxy so far has failed to formulate a new one. As Keynes famously put it: “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

As a matter of fact, Keynes’s paradigm shift (= overthrow of axioms) failed. This means in the strict sense that economics has no scientifically valid axiomatic foundations at all. Walrasian and Keynesian economics is what Feynman famously called cargo cult science. In other words, economics is de facto OUT of science.

Economists violate well-defined scientific standards on a daily basis. To recall: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

In the proto-science of economics it is indeed possible to teach falsified theories like supply-demand-equilibrium generation after generation ‘as if nothing had happened’.

Therefore, in economics the task is NOT to replace something like true but qualified ‘Newtonian’ axioms with something like true but general ‘Einsteinian’ axioms but to replace the neoclassical axioms which are KNOWN to be FALSE.

There is not “my” or “your” concept of science or different concepts in mathematics, physics, the so-called social sciences, or economics. There is only ONE way to build up a valid theory: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein, 1934, p. 165)

The methodological term for ‘basic concepts and laws which are not logically further reducible’ is axioms. As long as economic theory is not based on a consistent set of axioms it is out of science. This is the case since Adam Smith. There is no use to wish-wash around this embarrassing fact.


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

***

REPLY to Tom Brown on Mar 26

(i) You say: “Having a consistent set of axioms is not a guarantee that you’re doing science.” Yes, indeed, because science requires formal AND material consistency. THIS is the guarantee: “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)

The fact of the matter is that orthodox economics lacks BOTH formal AND material consistency. This in turn is the guarantee that economics is NOT a science. In order to refute a theory it SUFFICES to prove EITHER logical or material inconsistency.

Walrasian and Keynesian economics is logically defective and the proof has been carried out by using the axiomatic-deductive method. No scientist will ever accept Walrasian or Keynesian economics.

(ii) Walrasian and Keynesian economics is refuted. Economists either do not know it, do not understand it, or ignore it. Either way, they are violating the well-defined standards of science. This is inexcusable.

(iii) It is a silly game to challenge a scientist by asking him to predict the future. He will simply tell you “The future is unpredictable.” (Feynman)* Predicting the future is the business of imbeciles.

(iv) Because of this, economics from Jevons/Walras/Menger onward to DSGE is NOT dismissed because it has not predicted crises. Neoclassics is unacceptable because it is logically and empirically inconsistent.

(v) From the structural axioms follows the elementary version of the Profit Law.** You, or a competent economist for that matter, are invited to test it against the DSGE profit law. This test, though, is an entirely separate issue and should not distract from the fact that neoclassical economics is axiomatically false since more than 140 years.

(vi) That the Fed uses DSGE does not speak for DSGE but against the Fed.

Egmont Kakarot-Handtke

* For details see the posts ‘Scientists do not predict’ or ‘Prediction does not work? Try retrodiction first
** See ‘The three fundamental economic laws’.

ADDENDUM

The formula for the simulation of the elementary structural axiomatic consumption economy is given here. You are certainly in the position to produce the source code yourself.

***

REPLY to Tom Brown on Mar 28

We have two SEPARATE issues (i) orthodox economics is false and thoroughly refuted according to well-defined scientific criteria, and (ii), given that Orthodoxy is dead, what does the new paradigm look like?

The problem with Noah Smith and you is that you have not yet realized (i). Because of this you are hopelessly locked in at the proto-scientific stage. With regard to Orthodoxy or so-called mainstream economics this is the situation: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)

Therefore, for every economist there is but ONE worthwhile task: to contribute to the NEW paradigm. All the rest is pointless behind-the-curve blather.

Instead of doing your scientific homework you argue with regard to (ii): “Even a zeroth order model will do (up or down). Is your theory useful? I’d like to see the evidence that it is. Make them conditional if you like: tell me what things cannot happen and what's more likely to happen. Tell us the kinds of states we’ll likely find the economy in, and those that are excluded by your theory (past, present and future).”

Obviously you cannot read. With regard to the issues of scientific prediction and testable economic laws I have referred you above to the pertinent posts which are in turn backed up by working papers. You have not realized this either.

Economics could make much faster progress toward science if failed mainstream economists could simply get out of the way — NOW.

***

REPLY to Tom Brown on Mar 30

Science is not about preaching but proof. You are provable false and are defending the indefensible.

Thank you for the link to TheMoneyIllusion. See my comment there ‘The futility of testing economics blather’.

***
ICYMI Tom Brown on Apr 7

In case you have not followed the short excursion to Austrianism on TheMoneyIllusion-blog here is the resume which applies generally:

Science was there before economics was there. Economists either conform to scientific standards or they are out of science: they are in NO position to redefine scientific criteria.

Because economics — as represented by the four failed sects Walrasians, Keynesians, Marxians, Austrians — has never risen above the level of a proto-science it has become popular among economists to question the standards, to lower them or, as Blaug aptly put it, ‘to play tennis with the net down’. When this is pointed out, economists make the salto backward: ‘Economics is not a Science with a capital S’ (Solow).

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)

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

Economics fails on both counts: the axiomatic foundations are provable false and testing is regularly inconclusive. So, economics has happily established itself in the swamp between true and false where ‘nothing is clear and everything is possible’ (Keynes).

The swamp between the hard rocks of true and false is the natural habitat of blathering frogs, of which there are four species, which are clearly identifiable by their respective axiom sets. The funniest species are the Austrians which are in the possession of an irrefutable magic axiom but never managed to produce a testable proposition. So, there is NO WAY to get an Austrian frog ever out of the swamp. And of this they are very proud.

No problem with this, of course. What has to be made crystal clear is that Austrians have never produced anything of scientific value. For the proof re-read Major.Freedom’s posts. With this stuff the poor souls in scientific hell are tortured.

Time to become constructive now: let’s proceed with the paradigm shift.

***
NOTE on Apr 19

See ‘Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn


Sequel 'The futility of testing economics blather' * 'Austrian blather' *  'The zombie wars are over'

March 21, 2016

Vain hopes in the ruins of economics

Comment on Noah Smith on ‘New paradigms in economic theory? Not so fast.’

Blog-Reference and Blog-Reference

Economics is a failed science and the ultimate cause is the proven multi-generation scientific incompetence of economists. Since Adam Smith economists have not grasped what science is all about — despite the fact that it is unambiguously 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, p. 31)

It is always BOTH, logical AND empirical consistency and NOT either/or. This is the critical hazard: instead of keeping the balance on the high methodological tightrope the incompetent researcher tumbles down either on the side of vacuous deductivism or on the side of blind empiricism. What the history of economic thought clearly shows is a pointless flip-flop between fact-free model bricolage and theory-free application of statistical tools or, worse, commonsensical stylized-facts storytelling.

So it comes as no surprise that, after the proven failure of maximization-and-equilibrium economics, it is again the turn of ‘empirical revolution’ (See intro). Needless to emphasize that this is just another instant of scientific incompetence because methodologically the theoretical revolution must precede any empirical revolution: “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.” (Blaug, 1998, p. 703)

Walrasianism, Keynesianism, Marxianism, and Austrianism is logically inconsistent or empirically inconsistent or both (2015).

Always when economics is in open crisis four reactions are to be observed: (i) self-delusional denial, (ii) back pedaling and relativization, e.g. ‘economics is not a Science with a capital S’ (Solow), (iii) admission of the most noticeable flaws with the reassurance that our best brains are already working on them, (iv) clueless actionism and innovation showbiz.

The two main pseudo-innovations consist of borrowing from either evolution theory or from the latest vintages of physics (complexity, networks, chaos, non-linearity, thermodynamics, disequilibrium, information, emergence, etc.). The actual confused state of these misdirected approaches may be gleaned from The Journal of Evolutionary Economics and from the EconoPhysics blog.

Mindless copying/borrowing is the characteristic of what Feynman famously characterized as cargo cult science. Neither evolution theory nor EconoPhysics is the way forward. Economics has to redefine itself in a genuine paradigm shift. In very general terms, the methodological revolution consists in the switch from behavior-centered bottom-up, i.e. subjective microfoundation, to structure-centered top-down, i.e. objective macrofoundation (2014).

First of all, the orthodox set of axioms (Weintraub, 1985, p. 109) has to be fully replaced.* Nothing short of a theoretical revolution, a.k.a. paradigm shift, will do. Needless to stress that the superior paradigm has to be logically AND empirically consistent. After more than 200 years of failure and Noah Smith’s latest methodological wind egg economics needs the true theory — fast.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New
York, NY, etc.: Cambridge University Press.

* For details see the post ‘From Orthodoxy, to Heterodoxy, to Sysdoxy’ and cross-references Paradigm shift

Related 'Toward the true economic axioms' and 'Low-IQ economics: the beginner’s guide'.

***

REPLY  to Tom Brown on Mar 21

Specifically, I propose to test the structural-axiomatic employment equation/Phillips curve (33) of the working paper ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’ because of its overriding importance for improving the actual employment situation.

Immediately following post 'How to get out of the morass of ignorance'.

March 19, 2016

Helicopter money — a free lunch for the one-percenters

Comment on Erwan Mahé on ‘The arrival of helicopter money’

Blog-Reference

Heterodoxy, understood as political economics, is in favor of all measures that benefit ‘the people’ and against all measures that benefit ‘the one-percenters’. Quite naturally, Heterodoxy is in favor of citizen helicopter money.

Unfortunately, most heterodox economists have not done their scientific homework and, by consequence, have merely a superficial idea of how the monetary economy works. This is what they have in common with most orthodox economists (2014; 2015). Because of this, the discussion about helicopter money lacks a sound theoretical foundation. More specifically, the profit theory of both Orthodoxy and Heterodoxy is provable false.*

This lack of understanding produces an unintended perverse effect because what seems at first sight to benefit ‘the people’ benefits ultimately ‘the one-percenters’. In the simplest case the additional nominal demand increases either the price at constant employment or employment at constant price or something in between, yet in ALL cases the profit of the business sector as a whole increases exactly by the amount of helicoptered money. In other words, if fully spent the money thrown from the helicopter reappears one-to-one as profit. This effect is not directly visible because total profit is distributed among many firms depending on what goods the households buy.

To this day, neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect can tell the difference between income and profit. As the Palgrave Dictionary sums up “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

This has three consequences: (i) ALL opinion-input to the discussion about helicopter money lacks a sound scientific foundation, (ii) unenlightened good intentions backfire, i.e. in the course of time helicopter money leads to an extremely unequal distribution of financial wealth, (iii) heterodox economists become politically the useful idiots of the one-percenters.

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
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* For more details see cross-references Profit

Related 'Deficit spending, helicopter money, and profit' and 'Crisis, cranks, and scientists' and 'Profit and the collective failure of economists' and 'Keynesianism as ultimate profit machine'.

March 18, 2016

Hayek was not an economist

Comment on Maria Alejandra Madi on ‘Economic discourse and the market’

Blog-Reference

You say “In the last decades, the emergence and diffusion of the neoliberal agenda reflected the intellectual victory of Hayek’s ideas about the supremacy of the competitive economic order and the rejection of interventionism to promote economic growth and social justice.” (See intro)

This is a misunderstanding that is grounded in the provable fact that most people/ economists have no proper understanding of economics.* 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 push an agenda, the goal of theoretical economics is to 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 since Adam Smith can be summarized as perpetual violation of well-defined scientific standards.

Theoretical economics has been hijacked 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 are economists and 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 until this day.

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

When Krugman supports the Democrats, Wren-Lewis and Keen support Corbyn, when Varoufakis fights for democratizing the Eurozone, has this anything to do with scientific research? What have they and Hayek in common? Neither has a scientifically valid theory about how the actual economy works. So, all their arguments and opinions are hanging in midair.

One task of Heterodoxy is to refute false theories. The more important task, though, is to develop the true theory of how markets work (2015). Hayekian economics never satisfied the criteria of material and formal consistency. It is worthless political economics. Let Heterodoxy throw Hayek out of economics and over the disciplinary fence to political science to where he rightfully belongs.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL

* See post ‘How the intelligent non-economist can refute every economist hands down

Related 'Economics and the weapons of mass distraction' and  'Low-IQ economics: the beginner’s guide' and 'Krugman and the scientific implosion of economics' and 'Political economics: a playground for scientific deadbeats' and  'Every thinking economist is heterodox by default, but how do we proceed from here?' and 'Are economists natural born scientific failures?'.

March 17, 2016

The Fed should first of all get economics right

Comment on MoneyWatch on ‘The Fed Should Allow Wages to Rise’

Blog-Reference

Standard labor market theory is provably false. To cut the meticulous formal derivation short (2015; 2014; 2012), the most elementary version of the correct employment equation for the economy as a whole is given here.

From this equation follows the employment multiplier. It says roughly*: if the Fed wants an inflation rate of, say, 2 percent and the actual productivity growth is, say, 1.5 percent then the AVERAGE wage rate must rise with 3.5 percent. And there is no use to wait until this miraculously happens, but the Fed has to actively promote a wage increase in those sectors/firms with an above-average profit rate. These sectors then pull the economy out of recession/deflation. This works best when applied worldwide.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* For details see ‘It’s the price mechanism, stupid!

Related 'Deficit spending, helicopter money, and profit' and  'Austerity and the utter scientific ignorance of economists' and 'Have data, lack theory' and 'Going beyond sitcom economics' and 'The labor market and the consistent failure of 101-economics'.

“As goes GM, so goes America” — A rather ordinary fallacy of composition

Comment on David Ruccio on ‘"For years I thought what was good for our country was good for General Motors, and vice versa"’

Blog-Reference

Let us call it the Marshallian Vice. The vice consists in taking a firm or a sub-sector of the economy, to analyze the basic relationships under the condition of ceteris paribus, and then to generalize the result for the economy as a whole. As a rule, the generalization is false, despite the fact that the conclusions of partial analysis are for all practical purposes correct. Because of this, Walrasian total analysis is — in principle — the methodologically correct way. Marshallian partial analysis is — in principle — misleading and scientifically worthless.

To see this let us make a simple example. Imagine two firms, GM and the rest of America. In the initial period the respective prices are equal to unit wage costs, i.e. GM Pg=Wg/Rg and rest of America Pr=Wr/Rr. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, so there is neither saving nor dissaving (for details see 2014).

Now GM slashes the wage rate from Wg to W'g. Total employment is kept constant. Thus, total wage income falls. Because total consumption expenditures are equal to total wage income, nominal demand for both firms falls. Because total employment remains unchanged, the output of both firm remains unchanged. Under the condition of market clearing the respective prices adapt accordingly — both fall.

GM now makes a profit because the difference between the new price P'g and the lower unit wage costs W'g/Rg is now positive: “And thus we arrive at Mr. Ricardo’s principle, that profits depend upon wages; rising as wages fall, and falling as wages rise.” (Mill, 1874, IV.12)

GM provides the clear-cut empirical proof that the profit theory of all economic half-wits from Ricardo via Marx to Marshall and beyond is true — except for the conclusion ‘As goes GM, so goes America’.

The second firm (= the rest of America) now makes a loss because the new price P'r is lower than the unchanged unit wage costs Wr/Rr. The loss of the second firm is exactly equal to the profit of GM. Overall profit of the American economy is exactly zero, just as it was in the initial period. Because of this redistribution of profit the generalization ‘As goes GM, so goes America’ is patently false. The nuisance with economic half-wits is not that they are downright false but that they are at best half true. This is the fatal methodological flaw of all partial analysis. The proper subject matter of economics is the world economy as a whole and NOT the profit maximizing firm or the utility maximizing agent.

In the value-laden language of political economics the complete picture is as follows. With the wage cut W'g < Wg GM increases its profit and exploits the rest of the American business sector which now makes a loss of equal magnitude. Because output remains unchanged the real situation of the household sector as a whole remains unchanged in real terms. However, the employees of the second firm absorb now a greater part of the total output because of lower prices and an unchanged wage rate. They exploit the employees of GM which can buy less now because of their lower wage rate. So, what we have as a result is a cross-over exploitation WITHIN the business and the household sector. The big picture is entirely different from what simpleminded partial analysis suggests.

What the big picture shows is that the fundamental concepts of profit, exploitation, and class — which are common to Ricardo, Marx, the president of GM, the union leaders, the Econ 101 students, and all the other half-wits of political economics — are simply false.

When the profit theory is false, then the rest of economic theory is false, including the theory of international trade. And when economic theory is false, then economic policy is wrong-headed, and then the economy eventually goes down the drain.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On Profits, and Interest. Library of Economics and Liberty. URL

For details of the big picture see cross-references Profit.

March 16, 2016

Lucas: Confession of a scientific write-off

Comment on Lars Syll on ‘Robert Lucas the storyteller’

Blog-Reference

“We are storytellers, operating much of the time in worlds of make believe. We do not find that the realm of imagination and ideas is an alternative to, or retreat from, practical reality. On the contrary, it is the only way we have found to think seriously about reality.” (Lucas 1988, see intro)

Something is wrong in this argument.

Imagine, you tell a group of medieval philosophers that their prolonged inconclusive talk about how many angels can dance on a pinpoint is senseless/weird/stupid/fallacious and get the answer “this the only way we have found to think seriously about reality.”

Think twice, to talk about blatant NONENTITIES like utility, equilibrium, rational expectations and so on is the ONLY way you have found to think about REALITY? Clearly, you have found nothing at all.

And it is not exactly storytelling what is going on since Jevons/Walras/Menger, it is pseudo-scientific blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982, p. 698)

What everybody understands is that Lucas cannot possibly say ‘I am a scientifically incompetent blatherer’. So let us take “storytelling” or “loose verbal reasoning” for it.

This is the actual situation: economics is a failed science and the ultimate cause is the scientific incompetence of both orthodox and heterodox economists.* Walrasianism, Keynesianism, Marxianism, and Austrianism contradict another. Logic tells us that only one can be true or, more probable, that all are false. The latter is actually the case. The common defect of the familiar approaches is that neither ever came to grips with profit (Desai, 2008, p. 10).

And, lo and behold, monetary profit is — in contradistinction to the paradigmatic nonentity utility — a very real and measurable magnitude. Everybody can touch it in the cash box or see it on the bank account with the accuracy of two decimal places. The fact of the matter is that economists have not figured out to this day what the overall profit of an economy is and what its determinants are (2014).

The very characteristic of scientific thinking is to deal with entities, preferably with measurable entities like profit, and NOT with blatant nonentities like utility/maximization/ equilibrium. The foundational error/mistake of economics has been to miss the subject matter altogether.

From the fact that the representative economist does not understand the pivotal economic concept profit follows that economic policy discussions have no scientifically valid foundation whatsoever. Arguments are hanging in midair because of scientific incompetence on all sides. The economist’s contribution to the solution of economic problems is at the same level as any witch doctor’s or agenda pusher’s proposal. This is what storytelling implies.

Storytelling is disqualifying for a scientist. The only way out of the cul-de-sac economics has trapped itself in is to avoid nonentities like the plague and to deal exclusively with entities. For a start, here is a short list of the most obvious nonentities: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, rational expectation, total income = value of output, I=S, real-number quantities/prices, ergodicity. Every theory/model that contains one of these nonentities goes directly into the waste basket. Only what then remains is acceptable for real scientific discussion and peer review.

Lucas and other storytellers, who have swallowed nonentities hook, line and sinker since Econ 101, are beyond help. They are out of science for good.

Egmont Kakarot-Handtke


References
Dennis, K. (1982). Economic Theory and the Problem of Translation (I). Journal of Economic Issues, 16(3): 691–712. URL
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
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

* See ‘Why economics is a failed science: the 25 best explanations/excuses

March 15, 2016

Toward the true economic axioms

Comment on Paul Davidson on ‘The gross substitution axiom’

Blog-Reference and Blog-Reference on Mar 17

Paul Davidson describes the methodology of Orthodoxy as follows: “Building their economic models, modern mainstream neoclassical economists ground their models on a set of core assumptions (CA) — describing the agents as ‘rational’ actors — and a set of auxiliary assumptions (AA).” (See intro)

Keynes saw that the set of core assumptions, a.k.a. axioms, was unacceptable and consequently started his paradigm shift: “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16)

Keynes based his approach on this set of OBJECTIVE axioms: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This set is free of the green cheese assumptions of maximization-and-equilibrium. This obviously goes in the right direction but Keynes’s axioms are also defective. As a result, Keynes got the relationship between the product market and the money market wrong. Both markets are coupled via saving/dissaving (2015a; 2015b).

In order to see this, Keynes’s foundational propositions have to be replaced. The most elementary economic configuration is the pure consumption economy which is given by three objective structural axioms:
(i) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(ii) O=RL output O is equal to productivity R times working hours L,
(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

For the graphical representation see here.

At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e. C=Yw and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that W is the AVERAGE wage rate if the individual wage rates are different among the employees, which is normally the case. Under the INITIAL conditions of budget balancing and market clearing holds P=W/R.

If the wage rate W is lowered, the market clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price rises. If productivity increases the price falls. In any case, labor gets the whole product, the real wage is invariably equal to the productivity, and profit for the business sector as a whole is zero. All changes in the system are reflected by the market clearing price. The elementary consumption economy is reproducible for an indefinite number of periods at any level of employment.

In the next period, the households save. The condition of budget balancing is lifted. The condition of market clearing remains in place. The result is shown here.

Consumption expenditure C falls below Yw and with it the market clearing price P. With perfect price flexibility there are NO unsold quantities and NO change of inventory. The product market is cleared and there is no such thing as an inventory investment. So we have household sector saving but no business sector investment, that is, monetary saving, which is given by Sm=Yw-C, is NOT equal to investment I=0 as in Keynes’s formal foundations. I=S is always false.*

The crucial result is that the business sector makes a monetary loss which is exactly equal to the household sector’s saving, i.e. Qm=-Sm. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving. This is the most elementary form of the Profit Law. It follows directly from the profit definition Qm=C-Yw. It always holds Qm+Sm=0.

Now, monetary saving increases the stock of money of the household sector. Yet, the complementary monetary loss decreases the stock of money of the business sector. This effect is obviously missing in the gross substitution axiom. Neither Orthodoxy nor Keynes came to grips with profit and by consequence with the interaction of the product and the money market. Substitution is inapplicable because saving and profit is complementary.

Conclusion: The orthodox set of subjective-behavioral axioms is false. The Keynesian set of objective axioms is false. Ergo, BOTH versions of the so-called gross substitution axiom are false. Alone the objective-structural set of axioms is true.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

* For details see cross-references,

Related 'Finalizing the Keynesian Revolution' and 'From Orthodoxy, to Heterodoxy, to Sysdoxy' and 'How to restart economics'.