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'.

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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

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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.

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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

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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.

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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.

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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’.

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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.

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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'