May 4, 2016

The overdue public clarification of economics’ actual scientific state

Comment on Barkley Rosser on ‘The Legacy of Joan Robinson’

Blog-Reference

In what has been called Keynesian Revolution, Keynes attempted the paradigm shift from the accustomed microfoundations to macrofoundations. This attempt failed. The deeper reasons have to be clarified by the historians of economic thought. For the moment the formal proof suffices.

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

For the graphical representation of this ABSOLUTE formal MINIMUM see Wikimedia.

A1 to A3 asserts: 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 (i) budget balancing, i.e. C=Yw, and (ii), market clearing, i.e. X=O.

Under the conditions (i)|(ii) the price is derived in each period as P=W/R, i.e. the market clearing price is in the most elementary case equal to unit wage costs which vary over successive periods. This is the elementary form of the Law of Supply and Demand which fully REPLACES supply-demand-equilirium.

In the next period, the households save, i.e. (i) is lifted. The result is shown here.

Consumption expenditures C fall below Yw and with it the market clearing price P. There are NO unsold quantities and NO change of inventory. The product market is cleared due to (ii) and there is no such thing as an inventory investment, i.e. I=0. Monetary saving of the household sector is given by Sm=Yw-C.

The business sector makes a monetary loss which is  equal to the household sector’s saving, i.e. Qm=-Sm (Robinson, 1956, pp. 401-2). 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-Ym and the definition of household sector saving. The sector balances always add up to zero, i.e. Qm+Sm=0.

So the OVERALL profit of the pure consumption economy has NOTHING at all to do with productivity or uncertainty or wages or exploitation or monopoly power or the smartness of CEOs or any other of the familiar interpretations. The familiar profit theories are false, which is the consequence of gross methodological mistakes, i.e. microfoundations and fallacy of composition.

The correct profit equation for the investment economy reads: Qm=Yd+I-Sm. Legend: Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditures. Saving has never been and will never be equal to investment, neither ex ante nor ex post.

Conclusions: (a) All I=S/IS-LM models from Keynes to Krugman are provable false (2014). (b) All microfounded profit theories are provable false. (c) Neither orthodox nor heterodox economists have gotten (a)|(b).

(2) The two main charges
(I) Scientific standards are well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
(II) Science is about IS and NOT about OUGHT. Therefore, the strict separation of science and politics has to be observed.

Currently, economics neither complies to (I) nor to (II). This applies to the four main schools Walrasianism, Keynesianism, Marxianism, and Austrianism.

(3) Immediate consequences
Economists sometimes claim that economics is a science and sometimes admit that it is only a discipline (Hicks), or a science with lowercase S (Solow), or a separate and inexact science (J. S. Mill). This is confusing: currently economics is de facto a proto-science.

Science governs itself by the implementation of a specific ethic and rules of conduct and built-in checks and the comittment to well-defined truth. This implies that its actual state is clearly communicated to the general public.

Therefore, as an all-important first step the word ‘sciences’ has to be deleted until further notice from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

A proto-science that has not yet managed to consistently define its foundational concepts cannot legitimately present itself as 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
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Robinson, J. (1956). The Accumulation of Capital. London: Macmillan.

Immediately preceding post 'Joan Robinson and the ‘throng of superfluous economists’'

***
REPLY to Barkley Rosser on May 4

You quote me with: “There are NO unsold quantities and NO change in inventories.” Note that the proof starts with two conditions: (i) budget balancing, and (ii), market clearing. Then (i) is lifted which produces the complementary phenomena of saving/dissaving and loss/profit. Condition (ii) is kept in place. As you could easily imagine it has been already dealt with elsewhere (2011).

Lest it get lost, the lifting of condition (i) is SUFFICIENT for the proof that standard profit theory and I=S/IS-LM are false.

It is not really big news for anybody that inventory changes happen. As a matter of fact, they appear explicitly in the correct market model, which fully replaces supply-demand-equilibrium (2013). It is perhaps news for you that this hapless construct is one of biggest embarrassments in the history of what Feynman famously called cargo cult sciences (see Wikipedia).

As far as the empirical content of supply-demand-equilibrium is concerned this is common knowledge: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse.” (McCauley, 2006, p. 17)

Every economist who accepts or defends supply-demand-equilibrium exposes himself as scientifically incompetent to a degree that is intolerable.

I propose, firstly, that you read some of my working papers or posts* before you make a fool of yourself by running headless through wide open doors. You will find that ALL of your kindergarten objections have been dealt with already.

I propose, secondly, that you take the structural-axiomatic employment equation/Phillips curve (2012) and test it against the momentarily accepted peer-reviewed standard version.

I propose, thirdly, that depending on the outcome of testing of propositions that have been consistently derived from the structural axiom set** one of us has to leave economics for good.

It is widely known that this is the way how matters are settled in science. Time for all proto-scientific blatherers to catch up.


References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL

* See SSRN and Blog
** See Wikimedia

Immediately following post 'A science without scientists'.

Related 'How to leave pulp economics behind'.