March 30, 2016

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

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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.
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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.
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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.

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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'