June 21, 2016

How to get rid of the silly Queen

Comment on Lars Syll on ‘Economics — spending time doing silly things’

Blog-Reference and Blog-Reference

Currently, economists are in the mode of thorough self-critique. Yes, we have done too much math, yes, our reduction of multi-dimensional homo sapiens to one-dimensional homo oeconomicus has been rather one-sided, yes, the Chicago free market philosophy has gone over the top, yes, there has been too much abstract model building and too little empirics and, yes, we have done all these silly things because “the profession” has told us so. Economics, it seems, has all these years not at all been about the economy but about signaling: “So DSGE might be an expensive way of proving that you’re willing to spend a lot of time and effort doing silly stuff that the profession tells you to do.” (See intro)

Why are the once proud heralds of the famous Queen of the so-called social sciences all of a sudden so conspicuously back-pedaling and ducking and discounting relevance? This question opens a wide field for speculation and second-guessing. But, clearly, to enter this playground of storytellers, gossipers, and wish-washers would be beyond silly. The very practical point is to take the opportunity and to get people who have disqualified themselves by doing silly things and talking nonsense finally out of science.

Economics is a failed science. Let us briefly spot the causal blunders. These are NOT located in the theoretical superstructure: “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)

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “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)

Methodologically, these premises are forever unacceptable but economists swallowed them hook, line and sinker from Jevons/Walras/Menger onward. The failure of methodological individualism and all other psycho/socio-approaches can be stated as an impossibility theorem: NO way leads from the explanation of human nature/behavior/action to the explanation of how the economic system works.

Keynes, as the other main protagonist, defined his set of foundational propositions in the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.”

This elementary syllogism is conceptually defective because Keynes never came to grips with profit. As a result, all I=S models and the Keynesian multiplier are false.

Conclusion: The one silliness of economists consists in the inability to spot the errors/mistakes in their respective axiom sets and to blindly build their respective theoretical edifices higher and higher upon unsuitable foundations. This holds also for Marxianism and Austrianism. The other silliness consists in the repetitive critique of well-known defects: “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)

And here is how to transcend the silliness of Orthodoxy and Heterodoxy: the forever unacceptable microfoundations have to be replaced by macrofoundations. This is achieved with this set of objective-structural foundational propositions. (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.

The investment good sector and more and more individual firms come in at a later stage. This increases complexity step by step. So, what we initially have with A1 to A3 is the pure consumption economy as the most elementary economic configuration. These premises are certain, true, primary, entirely free of green cheese behavioral assumptions, and therefore perfectly suited as the foundations of an “edifice that one wishes to expand and to build higher while preserving its stability.” (Hilbert 2005)

Human behavior, tastes, choices, or society have no durable underlying structure, but the monetary economy has and it is given in the most elementary case by A1 to A3. A system can be unambiguously defined.

Economics has to step down as Queen of the so-called social sciences in order to eventually become King of the system sciences. This paradigm shift, clearly, is beyond the means of the silly folks of traditional orthodox and heterodox economics.

Egmont Kakarot-Handtke

REPLY to Ken Zimmerman on Jun 24

You write: “As sociologist Edward Ross pointed out to the AEA in 1889, ignorance of custom, tradition and authority left economists ill-equipped to carry out their analysis of trade. It’s my view Ross hit the error of economists today on the head.”

The fundamental error of Ross and you is to assume that economics is about ‘how society works’. No! This is the subject matter of sociology. Economics is about ‘how the economy works.’ Society and economy are intertwined but must be separated analytically.

Since Adam Smith, economics claims to be a science. Methodologically, it started as a mixture of sociology and political science: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, ...” (Mill, 1874, V.39)

With respect to the subject matter there is no difference between Mill and Marx “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, ...” (Marx, 1906, M.9)

With Jevons/Walras/Menger the focus shifted to methodological individualism and economics became a mixture of dilettantish psychology, sociology, and political science. This approach has failed abysmally.

Economics is NOT a science of Human Nature or individual/social/political behavior but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”

As a consequence, the overdue Copernican turn in economics consists in the methodological switch from behavior-centered bottom-up, i.e. subjective microfoundations, to structure-centered top-down, i.e. objective macrofoundations of the world economy. All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/Darwinism/evolution theory, political science, social philosophy, etcetera) and are taken in from these by way of multidisciplinary cooperation IF NEEDED.

Economics is NOT a science of behavior (Hudík, 2011).* Economics is not a so-called social science like psychology/sociology and not a natural science like physics but a system science.

By the way, it seems to have escaped your attention that Luhmann has defined sociology as a system science (1995) and this, indeed, is the common methodological platform of sociology and economics (2014). With Edward Ross of 1889 you are way behind the curve.

Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Luhmann, N. (1995). Social Systems. Stanford, CA: Stanford University Press.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
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

* See also cross-references

REPLY to Ken Zimmerman on Jun 27

For somebody with a small horizon the earth is for all practical purposes flat and all empirical evidence is so convincing that it is almost impossible to transcend this commonsensical world view and ever get out of the tiny box. All the more so because science is as a rule counter-intuitive and requires the emancipation from small scale idiosyncratic personal experience.

Because of this, nothing seems more commonsensical than your assertion: “All that happens, I repeat, ALL is created via interactions (relationships) among a number of actors.” As a matter of fact this view ― let us call it the Science-of-Man fallacy ― is as old as the hills. It goes back to Hume.

“And as the science of man is the only solid foundation for the other sciences, so the only solid foundation we can give to this science itself must be laid on experience and observation.” (2012, Introduction)

It reappears with the Austrian sect.

“Mises’ contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do.” (Foreword, von Mises, 2007, p. v)

And it is the tenet of Orthodoxy.

“It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994, p. 1)

The common denominator of all Science-of-Man approaches is that they are scientific failures. Not much profound insight about how the economy works has come from them. Until this day the representative economist cannot even tell the difference between income and profit.

Consistent with the low performance of flat-earthers in general you have not put forward one single testable proposition about an important economic relationship. This is rather odd for a person who claims to apply the right methodology. In science, claims and opinions do not count for much, only proof counts.

Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
von Mises, L. (2007). Human Action. A Treatise on Economics, volume I. Indianapolis, IN: Liberty Fund. (1949).

REPLY to Ken Zimmerman on Jun 28

(i) You say: “The entire structure of western (but not all sciences) rests on the assumption that’s possible to go from an observation to conclusions about that observation.”

False. This holds only for the proto-scientific stage. For details see this chart.

The scientific stage starts with a well-articulated theory which is based on axioms. Axioms in turn are NOT DIRECTLY based on naive observation/experience but are a sophisticated logical construct: “If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way?” (Einstein, 1934, p. 167)

As we know from history, scientists have found the correct way. You definitively do not understand the specific characteristics of science and mess it up with observationism: “The Baconian dogma I have in mind asserts the supreme merits of observation and the viciousness of theorizing speculation. I shall call this dogma, briefly, by the name ‘observationism’.” (Popper, 1994, p. 84)

(ii) You say: “Putting forth testable propositions about economic interactions is not my job. I’m not an economist. Rather, it’s your job as an economist. As an historian I don’t test propositions, I examine the stories of how humans live together.”

True. Historians are storytellers and second-guessers but NO scientists. Because of this, they have NOTHING useful to say about methodology. Psychologists, too, have not much to say because economics is NOT about human psychology/behavior but about the behavior of the economic system. Economics is NOT a so-called social science but a system science. For more about the cargo cult science psychology see Feynman on Wikipedia or YouTube.

(iii) You say: “Finally, following this dictum if you can find some other variables to measure and test except relational ones let me know. That would change everything. A brand new universe would emerge.”

Yes, indeed. Here you have the First Economic Law which defines the measurable and testable economic relations for the elementary consumption economy which in turn are entirely FREE of green cheese psychological/behavioral assumptions.* If you think this equation is false you can try to empirically refute it. This is how science works.

Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111. London, New York, NY: Routledge.

REPLY to Ken Zimmerman on Jun 29

Science is well-defined by material AND formal consistency and scientists judge and are judged according to these criteria. Genuine scientists have NO problem with these methodological essentials but the so-called social scientists have. Their persistent attempts to redefine science are understandable but pointless: either one plays according to the rules of science or one is OUT. Your view “that science is the study of the relationships among all the things, forces, thoughts, etc. that make the world and are made by it” is simply irrelevant.