May 11, 2016

Hayek or how economists miss their subject matter since more than 200 years

Comment on Robert Waldmann on ‘DeLong on Hayek, Smith, and Smith’

Blog-Reference and 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 the scientific standards of material and formal consistency are observed.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics since Adam Smith can be summarized as perpetual violation of 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.

The task of economics is to figure out how the economy works. The real antagonism in economics is not between liberalism/socialism/communism/fascism/etc, the fundamental antagonism is between political economics and theoretical economics, that is, between storytelling and science.

Political economists have not produced much, if anything, of scientific value. What we have is Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency. Economists are PROVABLE false with regard to the two most important features of the market economy: (a) the profit mechanism, and (b), the price mechanism.* Let this sink in: the profit theory is false since Adam Smith.** Instead of having clarified their foundational concepts profit and income economists have made fools of themselves with inept policy blather.

Political economists of all stripes are characterized by four common traits: (a) They are mainly occupied with sociology, psychology, anthropology, political science, history, ethics etcetera. That is, they miss the essentials of economics proper. (b) They use theoretical economics as a means/support for their agenda. By this, they abuse science unknowingly or knowingly. (c) As far as they have tried to underpin their respective agendas theoretically it can be rigorously demonstrated in each case that their approaches lack formal and material consistency. (d) They have no idea about how the economy works.

Hayek is nothing more and nothing less than a characteristic specimen in the series of failed economists from Adam Smith to Robert Waldmann.

Egmont Kakarot-Handtke

* See post ‘The market economy is inherently unstable and economists never grasped it
** See post ‘How the intelligent non-economist can refute every economist hands down

REPLIES on May 11

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The two criteria for determining whether a theory is true or false are logical and material consistency. The employment equation says that the market system is inherently unstable under the usual wage rate adaptation rule and the equation is testable. So you can try at any time to empirically refute it. Ultimately, only testing counts, your opinion is for the birds.

I intended to write something even you could perhaps understand but then I saw it had already been done:

Krugman: “Again, this is just personal, and if you don’t want to know, well, nobody says you have to read this. So yes, I’ve lost a lot of weight (which you can see comparing recent photos with a lot of the pictures around on the interwebs.) I’m not sure exactly how much I weighed when I started taking things in hand — I didn’t want to know — but I believe I’ve lost about 45 pounds, most of it in 2012-2013.”

anne: “Actually, not at all trivial or even personal. ... I really can and do run and walk and otherwise exercise everyday, and I just do not eat unfortunate types or amounts of food. Simply my choice, and evidently it works.”

Deep thoughts of great minds. At last, economics that everybody can understand.

Your silly argument has already been answered, see ‘The Humpty Dumpty methodology’  and ‘Humpty Dumpty is back again’.

When you are happy with Warren Mosler’s economics that’s OK. But for the refutation of MMT better see ‘Modern moronomic theory’.

COMMENT on RGC on May 11

In economics, everything and the exact opposite has already been said sometime, somewhere, by somebody. This exactly is the problem: there is an abundance of opinion and a dearth of knowledge — scientific knowledge, that is: “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 and because of this all economic policy advice has no sound scientific foundation. What economists ever derived of their various models and uttered about monetary/fiscal policy is not different from old Roman haruspicy, i.e. the reading of poultry entrails.

The ultimate reason is that the profit theory is false. This is rather bad for economics’ claim to be a science as one can easily imagine and it holds for example for Keynes (2011a),* Kalecki (2011b), Post-Keynesians (2011c), Krugman (2014).

To rely on these and other orthodox/heterodox economists’ prescriptions for the future of capitalism is as good as relying on a non-swimmer to save a drowning person.

Kakarot-Handtke, E. (2011a). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2011c). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
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
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

* See also post ‘Finalizing the Keynesian Revolution

REPLY to Longtooth on May 12

There are two things that hit the eye and are commonsensically true: the sun goes up and the economy is a human artifact. The point is that common sense has always been a bad guide in science. It can even be said that the very characteristic of science is to put common sense on its head.

“I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (Galileo)

It is trivially true that human behavior/action keeps the economy going, nevertheless this is the wrong starting point for economic analysis. The right methodological starting point is to look at the economy as a system. So, the crucial insight is that economics is NOT a social science but a system science. Economists cannot get their heads around this and this is why economics is a failed science.

There is no such thing as laws of human behavior but there are systemic laws that are as good as any physical law — first of all the Profit Law. Economists certainly should know it, because without the Profit Law you cannot understand how the actual economy works. And then, of course, all you are left with is the plurality of false theories, the inconclusive wish-wash and the brain-dead political blather of incompetent scientists.

For more details about the bane of economics see:
How to get out of the Econ 101 PsySoc woods
Economics is NOT a science of behavior
From PsySoc to SysHum
The happy end of the social science delusion

REPLY to Adamski on May 12

Thank you for the link to Warren Mosler. I have checked the PDF-version of SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY. The crucial mistake is on p. 64: ‘I like to say it this way: “Savings is the accounting record of investment.”’

This is false since Keynes*. The correct relationship reads: Qm =Yd+I-Sm Legend: Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditure.

MMT, too, got the profit theory wrong. And when you do not understand profit, you do not understand how the monetary economy works. This fate MMT shares with Walrasianism, Keynesianism, Marxianism, and Austrianism.

* See cross-references.

REPLY to Don Coffin on May 13

To see the classical idiocy of your argument you need simply transpose it as follows: ‘My conclusion, which I reached in about 1975, was that the flat-earth model works pretty well.  Most of the time, nay every time, the sun has gone up. Haven’t seem any reason in the intervening 40 years to change my mind.’

Before others feel the urge to make fools of themselves, all commonsensers are invited to take notice of what J. S. Mill has said to the low-IQ folks of his time. The key point is not so hard to understand and is still applicable: get out of economics. For further references see:
Economics, too, has been almost ruined by the bigots of common sense
Low-IQ economics: the beginner’s guide
Misled by ordinary intuition and common sense
Appearances and evidence

Science is about logical and empirical proof and not about belief or opinion or wishful thinking or agenda pushing. For the proof of the inherent instability of the market system see here.