The unfinished Keynes (III)

Comment on Paul Davidson on ‘The Keynes Solution’

Blog-Reference

It is trivial but worth repeating: political economics and theoretical economics are different things and have to be strictly kept apart. The core problem of economics as a science is, of course, that by its very nature it is closely entangled with politics. The biggest threat to theoretical economics is that it gets hijacked by those with a political agenda. It does not matter whether this agenda is good or bad in predefined moral terms. Science is committed to its own criteria or it ceases to be science.

But are we not all inescapably involved in the struggle between good and bad/evil? Politics, religion, and philosophy say so. But even if this were true, it cannot serve as a justification to hijack science or to let it be hijacked. What has to be recognized is that science is about true/false and not good/bad or like/dislike. This distinction is part of the demarcation problem, which is the fundamental problem of methodology (Popper, 1980, p. 34).

Keynes had a political agenda, and this was his first priority. Let us agree for the moment that his attempt to alleviate unemployment was good and right without any qualification. Hence we all can accept Keynes' agenda ― except for one point: Keynes used theoretical economics for political purposes. This is unacceptable.

“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

Having taken politics out of the way, the next question is about the scientific content of the General Theory. Here we can ― in very general terms ― side with Allais: “... mais son [Keynes'] insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70) In other words, Keynes saw the problems but could not solve them due to a lack of logical consequences.

• “For, if anything, Keynes was the most intuitive of men.” (Moggridge, 1976, p. 33)
• “It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent.” (Valentino, 1988, p. 239)
• “But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)

With his comment on Hayek “... a remorseless logician can end up in Bedlam. (Moggridge, 1976, p. 36) he won the everlasting sympathies of all who have their own troubles with logic.

In more specific terms we can definitively declare that the formal foundations of Keynesianism are logically defective since the General Theory. Keynes’ fundamental equations of macroeconomics, i.e. Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment, is indefensible. That is why Keynesianism is a failure (2011; 2014b).

The deeper reason is that Keynes ― just like his predecessors and fellows ― did not come to grips with profit.

“His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, pp. 12-13, 16), see also (2014a; 2015)

It is no contradiction to acknowledge that Keynes was one of the good guys of political economics and not to accept the General Theory as a valid contribution to theoretical economics. Yet good intentions are not a scientific criterion, only material and formal consistency count. So what is left?

Keynes’ economic policy ideas were not exactly innovative. “Public works to relieve the unemployed is an idea as old as the Bible; ...” (Blaug, 1998, p. 662)

Keynes' lasting scientific contribution relates to methodology. He spoke it out loud so that every fellow economist could hear it: Throw over the classical axioms and put theoretical economics on new foundations. What else could Keynesian Revolution mean than a Paradigm Shift? Keynes pointed the way but could not follow it himself.#1

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014a). 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. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
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
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, 238–249. Cambridge, New York, etc.: Cambridge University Press.

#1 Finalizing the Keynesian Revolution

Economics: The chief demerit is inconsistency

Comment on Lars Syll on ‘How evidence is treated in modern macroeconomics’

Blog-Reference and Blog-Reference on Aug 4

Scientists know it but economists do not: “The chief demerit is inconsistency, including inconsistency with the results of experiments that a competing theory can explain.” (Popper, 1994, p. 160)

Scientists know it but economists do not: “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)

So, science is about formal AND material consistency ― BOTH simultaneously, NOT either/or. The outstanding characteristic of economists is that they still think there is something to choose from: “Is it better to start deductively from axioms or inductively from facts? When the time comes to choose between internal consistency and consistency with observations, which side should we take? (Blinder, 1987, p. 135)

BOTH SIDES, blind Blinder! There is NO trade-off in science, neither between formal and material consistency nor between rigor and relevance nor between theory and practice. As Kant famously put it: “There is nothing so practical as a good theory.”

Needless to emphasize that the DSGE folks never got the pivotal point of methodology: “The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.” (Wren-Lewis, see intro)

Never had methodological idiocy been expressed so clearly. Mind you, a theory that does not fit the data is falsified and has to be abandoned. Economists, though, do not abandon their proto-scientific garbage but desperately cling to it. This is the Original Sin: “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, p. 369)

The fact of the matter is that economics is a failed science. This is well-known among scientists but economists simply have no idea how to get out of the cul-de-sac: “And so ― faithful to the theory’s conceptual cornerstones and hoping against all hope that the unthinkable may still be achieved (i.e., a satisfactory theory of the price mechanism) ― the tormented upholders of the validity of the paradigmatic core of economic equilibrium theory appear singularly reluctant to face the problem of comparing expectations and results and assessing the consistency of the theory.” (Ingrao et al., 1990, p. 346)

One tends to think that Heterodoxy is methodologically superior to Orthodoxy but this is not the case. Keynes, too, played material consistency against formal consistency: “... the brave army of heretics ..., who, following their intuitions, have preferred to see the truth obscurely and imperfectly rather than to maintain error, reached indeed with clearness and consistency and by easy logic but on hypotheses inappropriate to the facts.” (Keynes, 1973, p. 371)

Brave Post Keynesians echoed the master’s methodological kitsch with their silly motto: “... it is better to be roughly right than precisely wrong!” (Davidson, 1984, p. 574)

Roughly right is NOT a scientific criterion. Science is bivalent true/false with nothing in between. Roughly right = roughly wrong. Non-scientists, of course, are at home in the swamp of wish-wash and inconclusiveness between true and false where anything goes and “nothing is clear and everything is possible.” (Keynes, 1973, p. 292)

It is a methodological tragicomedy that Keynes spotted the all-decisive point correctly: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (Keynes, 1973, p. xxi)

Krugman clearly spoke out what the premises are: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Like Keynes, Keen got the decisive point: “... real progress involves radically revising or even abandoning that starting point.” (Keen, 2011, p. 35)

Twisting and doctoring and tampering with assumptions, equations, and/or data is NOT compatible with scientific standards. A Paradigm Shift is inevitable, which means in concrete and unmistakable terms: abandoning microfoundations.#1 And this is what Keynes attempted: he replaced microfoundations with macrofoundations.#2

Keynes, too, got it provably wrong, yet neither Keynesians nor Post Keynesians nor New Keynesians nor the Anti-Keynesians ever spotted the logical inconsistency in Keynes’ macrofoundations. Not very profound thinkers these Walrasian, Keynesian, Marxian, and Austrian folks. There is NO hope that these dilettantish orthodox or heterodox economists will ever understand what the unity of formal AND material consistency means (2013).#3 After all, they did not get it in the last 200+ years. There is only one option left: to expel economics as we know it from the sciences.

Egmont Kakarot-Handtke


References
Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic Review, 77(2): 130–136. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
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: Edward Elgar.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality, chapter Models, Instruments, and Truth, 154–184. London, New York: Routledge.

#1 Orthodoxy is built upon this set of hardcore propositions, a.k.a. premises, a.k.a. starting point, 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)
#2 Keynesianism is built upon this set of foundational propositions: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, 63)
#3 For more details and references see The problem with macro in two words.

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Wikimedia AXEC121i

Economic policy guidance out of the scientific kindergarten

Comment on Lars Syll on ‘Austerity policies — nothing but kindergarten economics’

Blog-Reference and Blog-Reference

Lars Syll quotes Kalecki asking this question: “The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them?”

And he quotes also the answer: “But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.”

This is a fine example of Political Economics. A political explanation consists of speculative mind reading and the triumphant exposure of the ‘true’ motive of the other fellow, which turns out to be crass self-interest in the best case or something far worse in all others. Schumpeter characterized the intellectual kindergarten of Political Economics as follows: “It is only our inability to divorce research from politics, or our suspicion, all too often justified, that the other fellow cannot analyze with single-minded devotion to truth, which makes problems and party issues out of decisions that do not excite anyone in more fortunate fields of research.” (1994, p. 566)

Needless to emphasize that from the intellectual kindergarten of Political Economics not much, if anything, of scientific value ever emerged. Economics is a failed science. Walrasianism, Keynesianism, Marxianism, and Austrianism are provably false. Science, or Theoretical Economics in contradistinction to Political Economics, is the “single-minded devotion to truth” which in turn is well-defined as material and formal consistency. Theoretical Economics refrains from speculative mind reading, motive imputation, and storytelling.

The very characteristic of the agenda pushers of Political Economics is that they are either ignorant of scientific standards or simply trample them underfoot. “As some one has said, it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another.” (Fisher, 1911, PF. 6)

The real problem of the austerity discussion is this. Neoclassical employment theory is provably false. Keynes’s employment theory is a great step in the right direction but only half-true because Keynes never came to grips with profit (2012). The same holds for Kalecki (2011).

So, neither orthodox nor Keynesian nor Kaleckian policy proposals with regard to employment/austerity/sound finance have a valid scientific foundation. In Political Economics there is a TOTAL DISCONNECT between an economic policy proposal and the underlying theory. Economic theory is worthless and only puts some pseudo-scientific lipstick on the political pig.

The Political Economics of traditional Heterodoxy is not better than that of Orthodoxy. ALL Political Economics is scientific garbage.

Egmont Kakarot-Handtke


References
Fisher, I. (1911). The Purchasing Power of Money. Its Determination and Relation to Credit, Interest, and Crises. Library of Economics and Liberty. URL
Kakarot-Handtke, E. (2011). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

Substandard reasoners

Comment on Lars Syll on ‘Why economists can’t reason’

Blog-Reference and Blog-Reference on Jul 22

The simple fact is that about one percent of a population can reason. The rest merely recycles stories of different degrees of absurdity according to Tertullian’s motto ‘Credo quia absurdum est’.#1 Unfortunately, economics has been done since Adam Smith by the ninety-nine-percenters. This happened because “... we can never make sure that the right man will be attracted to scientific research.” (Popper, 1960, p. 157)

The failure of economics proves that it has been particularly attractive for substandard reasoners.

Science is special because it is the systematic attempt to establish truth which in turn is well-defined by material AND formal consistency. Scientific truth is double-checked, everything else is storytelling.

About the logical part, Scriven says: “Reasoning is the process whereby we get from old truths to new truths, from the known to the unknown, from the accepted to the debatable … If the reasoning starts on firm ground, and if it is itself sound, then it will lead to a conclusion which we must accept, though previously, perhaps, we had not thought we should.” (See intro)

The key term is “firm ground” or, as Aristotle put it: “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.”#2

Scientific methodology is old stuff for more than 2300 years but economists never could get their heads around it.

What does the “firm ground” of economics look like? 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, p. 147)

With this “firm ground” sound logical thinking with iron necessity arrives eventually in a parallel universe. Clearly, with manifest NONENTITIES in the premises, the inevitable outcome is a bubbling angels-on-a-pinpoint discourse. The real question is why so many economists could ever accept HC1 to HC5. Obviously, the motto ‘Credo quia absurdum est’ applies as ever and has only to be translated into modern English as ‘You can sell any crap to an economist’.#3

The curious thing is that there is no difference between orthodox and heterodox economists in this respect. What is, in fact, different between them is the color of their methodological tinfoil hats. Orthodoxy says HC1 to HC5 is firm ground, and Heterodoxy subscribes to anything-goes or optionally to nothing-goes.

Scientists have always known one crucial thing about firm ground: “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 and pieces together in an orderly fashion.” (Schmiechen, 2009, p. 11)

In order to pull themselves out of the swamp, economists have to replace the microfoundations HC1 to HC5 with macrofoundations. There is no hope at all that the old swampies can do the trick.

Egmont Kakarot-Handtke


References
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
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

#1 Wikipedia Credo quia absurdum
#2 Wikipedia Posterior Analytics
#3 Mental messies and loose losers

Making the economy the focus of the economists’ dialogue

Comment on Robert Locke on ‘Making firm governance part of the economists’ dialogue’

Blog-Reference

One way to explain the actual state of the world is the historico-genetic (K. Mannheim) approach. And this is how Robert Locke explains the differences between firm governance in different countries (US, Germany, Japan). I have no problem with this account except that it is not economics.

Let us make a thought experiment and imagine we have a country with direct democracy. So, the question who rules is already solved. Now comes the very practical question of how to organize the economy. Clearly, it is in the POLITICAL sphere where this question has to be addressed and decided. In the given framework of direct democracy one can expect that the majority decides that the firms should organize themselves. So, the dominant legal form of the firm would probably be something like a cooperative.

The crucial point is that the question who rules the firm is ultimately a political question and not an economic question. The two spheres should be strictly kept apart. Of course, everybody knows that in real life they are intimately entangled. Real life is muddle and confusion and compromise. The history of economic thought shows that economists have never properly separated the political and the economic sphere, neither in theory nor in practice.

Economics started as Political Economy. Political Economy is agenda pushing and economists from Smith, Ricardo, Marx, Keynes, Hayek, Friedman to the present were agenda pushers first and scientists second. As a matter of fact, they were lousy scientists because they never figured out how the actual monetary economy works. How do we know this? We know this for sure because the profit theory is provable false and without the correct profit theory the economist cannot rise above the level of proto-scientific storytelling.

Their scientific incompetence, though, could not stop economists from giving economic policy advice and telling people how to organize the economy and how to organize firms. The history of who pushed which agenda with what arguments is nicely summarized in Robert Locke’s intro.

As a matter of principle, though, political questions have to be answered in the political sphere and are the subject matter of political science and sociology. The economist has a voice in the political sphere like every other voter. But he is not allowed to bring his political preferences into economics and to make it the guiding principle of his scientific work. Science neither serves the one-percenters nor the ninety-nine-percenters. Science is strictly committed to true/false and NOTHING else. The primary task of the economist as scientist is to figure out how the monetary economy works. It is not his task to dabble in politics. J. S. Mill was very clear about this.

“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (2006, p. 950)

It is the mixture of politics and science that is the root cause of the manifest scientific failure of economics. Political economics has not produced much, if anything, of scientific value in more than 200 years. What is first of all needed is a strict separation of politics and science. This means that economists have to leave all question about who rules whom to political science/sociology for analysis and to the legitimate sovereign for decision.

Heterodoxy has criticized Friedman that his theory of the firm is politically biased. Asad Zaman would call it a 1%er economic theory. Now, to put a 99%er theory of the firm against Friedman is a natural reaction but to correct one political bias with the opposite political bias is still politics. It is definitively not science. Science asks: is the mental construct called economic theory true or false, and NOT does it fit the agenda of the one-percenters or the ninety-nine-percenters.

Science tells us that the conflicting theories of the firm are based on a false premise. Since Ricardo and Marx, both orthodox and heterodox economist believe that there is a fundamental antagonism between the firm’s owners (= capitalists) and the employees/workers. Accordingly, firms should be regarded as battlefields of class war.

The idea that antagonism between classes is built into the economic system, though, rests on an optical illusion. And this optical illusion ultimately derives from the theory of the firm. It is obviously true that an individual firm can increase profit by lowering the wage rate. But this is NOT true for the (world-) economy as a whole. To generalize what is true for an isolated part of a system is known as Fallacy of Composition.

In the most elementary case, the interdependencies of the economic system have the unintended effect that if firm A makes a profit by lowering the wage rate, firm B (= the rest of the economy) makes a loss under the initial macroeconomic condition that total consumption expenditure is equal to total wage income (2014; 2015). And, by the same token, the real wage of the workers of firm A decreases and that of the workers of firm B increases. So, what happens is that a redistribution of profit between firms and a redistribution of output between households takes place. In political terms, this means that there are no classes with a common interest. Put differently, what appears as exploitation of the workers of firm A is only part of the complete picture of a REDISTRIBUTION of profits WITHIN the business sector and a REDISTRIBUTION of output WITHIN the household sector. In political terms: the exploitation of workers in firm A benefits the workers in firm B. And the profit increase of firm A’s capitalists comes from firm B’s capitalists. Taken all capitalists together their profit does not change. Taken all workers together their real share of output does not change.

Economists are supposed to be experts on the economy. So it is quite natural to think that they know how the profit mechanism works; after all, this is the pivotal phenomenon of their subject matter. Yet, this is definitely not the case. So economists have nothing to contribute to the discussion about how the economy or about how firms should be organized. This holds for Walrasians, Keynesians, Marxians, and Austrians.

The theory of the firm presupposes the correct macroeconomic theory. Heterodox economists are supposed to develop this objectively true theory and to replace false and scientifically worthless orthodox economics by true heterodox economics. This is a scientific task and has nothing in common with incompetent political agenda pushing.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

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REPLY to robert locke on Jul 21

You ask: “Whoever said economics is a science?”

Economics is even multiple sciences and it is in the news every year: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

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REPLY  to robert locke on Jul 21

You say: “... everybody knows that this prize is not a Nobel Prize.” That is not the point. The key word is NOT Nobel but science(s). And this claim has ALWAYS been a constitutive element of the definition of economics.

“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, in so far as those phenomena are not modified by the pursuit of any other object.” (Mill, 1874, V.39)

“That Political Economy is a science which teaches, or professes to teach, in what manner a nation may be made rich. This notion of what constitutes the science, is in some degree countenanced by the title and arrangement which Adam Smith gave to his invaluable work. A systematic treatise on Political Economy, he chose to call an Inquiry into the Nature and Causes of the Wealth of Nations; and the topics are introduced in an order suitable to that view of the purpose of his book.” (J. S. Mill, 1874, V.7)

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16)

Needless to add that the psycho-social-behavioral definition of economics has been false from the very beginning because economics is a systems science.

Like all so-called social scientists, you are far, far behind the curve.

References
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
Robbins, L. (1935). An Essay on the Nature and Significance of Economic Science. London, Bombay, etc.: Macmillan, 2nd edition.

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REPLY to robert locke on Jul 22

You say: “I could cite many critics of economics that say it is not a science, ...” and then you quote von Neumann.

I agree with the quote, but not with your conclusion. Note what conclusion von Neumann drew from his diagnosis: “... von Neumann developed the conviction over time that economics stood badly in need of revision and reconceptualization; what changed over the course of his writings was the intended shape and contours of this revision.” (Mirowski, 2002, p. 97)

von Neumann urged what is called a paradigm shift. He saw clearly that the fundamental concepts of economics were hopelessly muddled and inadequate: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)

But note also that von Neumann accepted the claim that economics is a science. What he diagnosed was that economics was still at the proto-scientific level: “Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (quoted in Ingrao et al. 1990, p. 197)

So, von Neumann and I are on the same page: (i) economics is incoherent gibberish because its fundamental concepts (= axiomatic foundations) are defective (2013), (ii) economics does not live up to its claim to be a science (2011), (iii) economics is in need of a paradigm shift (2014).

From this follows, firstly, that the word ‘sciences’ has to be eliminated from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The general public has to be informed that the 200 year old claim and the actual state of economics still do not match. It follows, secondly, that incompetent scientists have to be thrown out of economics regardless of their affiliation to either Walrasianism, Keynesianism, Marxianism, Austrianism or any other failed approach. It follows, thirdly, that it is the very task of Heterodoxy to carry out the paradigm shift and to make economics a science.

What economics needs least is the skepticism of historians, the realism of engineers, the toolism of physicists, the Verstehen of psychologists, the anything-goes of methodologists, the nothing-goes of intellectual sclerotics, the machinations of agenda pushers, and the quick-and-dirty fixes of commonsensers and practical men. From all this economics had more than enough in the last 200 years.


References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.

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REPLY to robert locke on Jul 23

With regard to von Neumann, there are two things to be kept apart: diagnosis and therapy. His diagnosis was correct. The project of the proper formalization of economics, though, had one fatal drawback: von Neumann left the underlying theory untouched: “But this [establishing the analytic mother-structure] required one very crucial maneuver that was nowhere stated explicitly: namely, that the model of Walrasian general equilibrium was the root structure from which all further work in economics would eventuate.” (Weintraub, 2002)

This is the REAL mathiness problem. Formalization does not help if the conceptual root structure, a.k.a. axiom set, is defective.

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REPLY to Skiadas Stefanos on Jul 23

To say “the sun goes up” is a simple and immediately convincing statement. To explain this optical illusion with the Helio-centric theory is a bit complicated and abstract. Because of this, common sense beats science in a normal discussion hands down. Science is always counter-intuitive.

Likewise, the commonsensical theory of exploitation is simple and convincing and it is as old as Ricardo. What IN FACT happens is cross-over exploitation and this is a bit more involved than the seemingly obvious wage-profit antagonism that comes to mind immediately. Cross-over exploitation explodes the sociological/political concept of class.

The commonsensical profit and distribution theory is false. First of all, because the concepts profit, distributed profit, and income have been permanently confused. The conceptual confusion of economists with regard to the foundational concepts of their subject matter is unique in the history of scientific thought and it disqualifies economists from Adam Smith onward.#1

In my post I have dealt with the most elementary case. For the complete distribution theory see the working papers (2015; 2014b; 2014a; 2012). In a counter-intuitive and common sense defying soundbite: total monetary profit does not affect the workers’ share of total output.

References
Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN Working Paper Series, 2012793: 1–13. URL
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL

#1 How the intelligent non-economist can refute every economist hands down.

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REPLY to robert locke on Jul 26

You ask me: “... how can you have a systems science that leaves morality out of the system?”

The Is/Ought difference is reasonably clear since Hume but, beginning with Adam Smith, it has been mostly ignored by economists. It is important to realize that Smith wrote The Theory of Moral Sentiments before The Wealth of Nations.

Science voluntarily restricts itself to the Is and leaves the Ought to philosophers/priests/ mythologists/politicians/storytellers. Why? Because Is-questions have a general objective answer (= true/false) while Ought-questions are in the last instance arbitrarily/politically/ historically decided within a space/time-restricted society. Good/bad were very different things in Athens and Sparta.

The voluntary self-restriction of science is not something to be criticized as deficiency and juxtaposed against the richness of philosophical/mythical/religious/historical storytelling. The tight focusing on questions that have an answer which satisfies the conditions of formal/material consistency is the very prerequisite of the growth of knowledge.

You say: “Any economic system that thrives must be rooted in some moral order. Conservative thinkers, great religious teachers, and philosophic thinkers recognize this when they talk about sustaining economic communities.” Yes, the great teachers have taught awesome things to their stupid pupils. On closer inspection, the greatness of the teachings consists of enormously inflated social trivialities (do not kill, steal, lie), vacuous talk about an almost infinite multitude of nonentities (= Pantheon), emotionally charged and neuroticizing dietary/behavioral rules, ridiculous claims of a truth monopoly, threat in the form of prophecy, and of the explanation of the principle of positive/negative feedback, that is, of self-caused reward/punishment in this and the other world.

Yes, indeed, every society has a moral order. This order, though, is NOT the subject matter of economics. The moral order is the subject matter of sociology and other so-called social sciences.

The trouble with the founding fathers is that they started off at the wrong foot. The subject matter of Political Economy has been society and not the economy. As enlightened moralist, Adam Smith began to replace the religion-based regulation of society by the principle of enlightened self-interest (which is NOT the same thing as greed or egoism) and mutually beneficial exchange. With Smith, the moral carrot/stick morphed into profit/loss.

The drawback of Smith’s approach is obvious by hindsight: he was so occupied with moral sentiment that he never figured out how the economy works. And neither did his successors until this day. Economics is a failed science, but NOT because it has nothing to say about the moral social order, just the contrary, economists messed up economics BECAUSE OF permanent pointless waffling about good/bad human nature/behavior/action.

Science keeps out of the Ought-issues and focuses on the Is-issues. Its very strength lies in focusing on tiny and seemingly insignificant segments of reality (lever, pendulum, falling apples, etcetera) and in leaving the infinite x-dimensional whole to the thinkers/ storytellers/agenda pushers of philosophy/religion/politics. What these folks have produced so far is provable false. Science does not explain everything, but non-science explains nothing.

Economics has to explain how the monetary economy works. The economist as scientist has NOTHING to say/blog about the moral order of society. This holds for Orthodoxy AND Heterodoxy. Economists have to fix economics. It is deeply immoral to maintain, defend, and disseminate theories that are known to be false (2014; 2011).

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 Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL

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REPLY to Ken Zimmerman on Jul 27

Economist are privileged because one of their founding fathers was a noteworthy methodologist. Therefore, every economist knows that science is about Is and NOT about Ought: “Science is a collection of truths; art, a body of rules, or directions for conduct. The language of science is, This is, or, This is not; This does, or does not, happen. The language of art is, Do this; Avoid that. Science takes cognizance of a phenomenon, and endeavours to discover its law; art proposes to itself an end, and looks out for means to effect it.” (Mill, 1874, V.8)

Science is NOT about the biographies of scientists or how they arrived at the solution of a problem. Only the solution itself matters. The story of Archimedes jumping out of the bathtub and running naked through the streets shouting Eureka is stuff for the retarded audience of the History Channel. The same holds for your story about how scientists work and what goes on in their heads and how they make decisions. That is more or less entertaining mind-reading of a hobby psychologist who has never produced a single proposition that satisfies scientific criteria.

The problem of economics is this: “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)

Every moron has an opinion. But, as a matter of plain historical fact, economists do not have the true theory of how the monetary economy works (2013). Neither have you. So neither your nor Robert Locke’s nor anybody else’s psycho-sociological storytelling can be made part of the economists’ dialogue. Economics is a systems science and what is welcome are testable propositions about how the economy works. Psychologists, historians, sociologists, and all other cargo cult scientists are requested to dump their rubbish elsewhere.


References
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. 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
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

Feeble minds, shaky assumptions, and the inevitable failure of economics

Comment on Edward Fullbrook on ‘Shaky Assumptions’

Blog-Reference

Every perceived event is a hard to unravel clew of unique space/time specifics, eternal laws/invariants, and free target-oriented human action. The flow of events is a clew of regularities, novelties, and apparent randomness. In order to think about a smaller or bigger section of reality, it is imperative to simplify/abstract/idealize the perceived flow of events. This is known to every economist since J. S. Mill.

“Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)

What we call ‘the economy’ is an abstract mental construct. Nobody can see or touch or experience ‘the economy’. From the history of science, though, it is known that simplification/abstraction/idealization can go badly wrong. This happened in economics as almost everybody has realized by now. To better see want went wrong, here is the famous prototype of how ‘abstract speculation’ is done and how it finally approaches the complexity of reality with the highest possible degree of perfection. The prototype comes from physics but the step-by-step process can be customized for other disciplines. Mindless one-to-one copying of the procedure is, of course, not such a good idea.

“The Principia begins with an idealized world, a simple mental construct, a ‘system’ of a single mathematical particle and a centrally directed force in a mathematical space. Under these idealized conditions, Newton freely develops the mathematical consequences of the laws of motion that are the axioms of the Principia. At a later stage, after contrasting this ideal world with the world of physics, he will add further conditions to his intellectual construct ― for example, by introducing a second body that will interact with the first one and then exploring further mathematical consequences. ... In this way he can approach by stages nearer and nearer to the condition of the world of experiment and observation, introducing bodies of different shapes and composition and finally bodies moving in variant types of resistant mediums rather than in free space.” (Cohen, 1994, p. 77)

Orthodox economics, too, starts with an idealized world. There is NOTHING WRONG with that in general but ALL is wrong in particular because: “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)

The problem with this axiom set is NOT that it defines an idealized world but that it defines a world that does not and cannot possibly exist. HC3 or HC5 do not define limiting cases of reality like friction-free motion but introduce NONENTITIES, that is, entities like angels, unicorns, Spiderman, or the Easter Bunny. In addition, there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is a quite primitive methodological blunder.

Clearly, when only one of the foundational propositions fails the whole formal basis breaks apart and with it the whole theoretical superstructure. In general terms, the fatal fault of Orthodoxy is that it is based upon behavioral assumptions that can, as a matter of principle, not be other than shaky. In other words, Orthodoxy does not satisfy Aristotle’s definition of science: “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.” There is no such thing as a ‘certain, true, and primary’ behavioral premise. The fatal mistake/error is to define economics as a behavioral science.

Because of this, there is no other way out of the calamity than to reconstruct economics entirely WITHOUT the concepts of constrained optimization, rational expectations, equilibrium and other nonentities. In methodology this is called a paradigm shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)

Obviously, there is until this very day ‘no indication of what it might mean’ to do economics without nonentities. Traditionally, heterodox economists have always been very clear that the neoclassical axioms are unacceptable but they have not come forward with a concrete proposal on how to replace them.

Just like Orthodoxy, traditional Heterodoxy could not solve the starting problem, which consists in defining the elementary monetary economy in simple/abstract/idealized and consistent terms. Many heterodox economists do not even understand the starting problem. J. S. Mill put it thus:

“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.” (2006, p. 746)

Krugman has clearly told the world “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Traditional Heterodoxy has always been very outspoken that these premises are “unrealistic” or “shaky” but never told the world what the ‘certain, true, and primary’ premises of economics are. And this is how Heterodoxy has become part of the problem and in fact, one of the many obstacles for economics to become what it claims already since Adam Smith to be: a science. Both, orthodox and heterodox economics, is nothing more than storytelling and a more or less plausible myth.

Egmont Kakarot-Handtke


References
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of  Science. Cambridge, London: MIT Press.
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
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. URL
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.

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REPLY to Ken Zimmerman on Jul 20

You say “I put it to you that there are no certain, true, and primary premises of economics, ...”

This is incorrect. The true economic axiom set is shown on Wikimedia AXEC137b.

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REPLY to Ken Zimmerman on Jul 21

(i) You made the assertion “... there are no certain, true, and primary premises of economics, ...” without giving proof or citing a proof.

(ii) In direct refutation of your purely rhetorical assertion, I gave you the certain, true, and primary structural axiom set as a replacement for the false Walrasian microfoundations and the false Keynesian macrofoundations.

(iii) You now have two options either (a) to prove your unfounded assertion (i) ex-post, or (b), to empirically disprove one of the many theorems that follow from the certain, true, and primary macrofoundations (ii) yourself or to follow the standard procedure and let econometricians do the test.#1

The ball is in your field. I am looking forward to the results of empirical testing.


#1 I submit the rather complex structural Phillips curve eq. (33) in Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster (augmented with foreign trade and government) as an IDEAL object for testing.

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REPLY to Ken Zimmerman on Jul 23

Science is special because it is the systematic attempt to establish truth which in turn is well-defined by material AND formal consistency. Scientific truth is double-checked, everything else is blather, storytelling, gossip, rhetoric, propaganda, sitcom, etcetera.

The very characteristic of a scientific proposition/theory is that it is open to logical and empirical proof/disproof. In general terms, the sole task of the scientist is to produce logically and materially consistent propositions about a segment of reality: “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein, quoted in Brown, 2011, p. 244)

You say: “The question that any social science must answer is ‘why is there durability?’”

I say:
(i) Economics is NOT a social science but a systems science. Your specification of the subject matter is false, to begin with.
(ii) Economics has to answer the question of how the monetary economy works.
(iii) Iron Law of methodology: No way leads from the understanding of human behavior to the understanding of how the economic system works.
(iv) Orthodox economics is built upon subjective-behavioral axioms. Because of (iii) this is the false starting point. In addition: From green-cheese behavioral assumptions, e.g. utility maximization, no testable proposition ever follows. Second-guessing human behavior has always been and will always be a pointless exercise.#1
(v) Economics has to be built upon objective-structural axioms.
(vi) From objective-structural axioms follow testable propositions about the relationships of measurable economic variables. The two most important of these relationships are the Profit Law and the Employment Law. There can be no doubt that it is of utmost importance for an economist to know the Profit Law. The actual situation is that the representative economist cannot even tell what profit is. This includes all Nobel Prize winners.
(vii) All questions about human nature/behavior/action have to be left to psychology, sociology, anthropology, political science, etcetera. Knowledge about human behavior is imported into economics from these disciplines IF NEEDED. Economics is NOT a science of behavior (2011).
(viii) In order to become a science, economics has to move from shaky subjective-behavioral microfoundations to solid objective-structural macrofoundations (2014) and to refrain entirely from political agenda pushing.

Conclusion: Your clueless PsySoc philosophizing is irrelevant for economics.

#1 “The disciplines that we currently call ‘social sciences’ may accumulate gossip or spot correlations, but Rosenberg believes they will never succeed in formulating laws and theories with the force and fruitfulness of those in the natural sciences.” (Hausman, 1992, p. 326). In other words, the term ‘social sciences’ is a misleading pretension. Feynman aptly called them cargo cult sciences.


References
Brown, K. (2011). Reflections on Relativity. Raleigh: Lulu.com.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
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

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REPLY to Ken Zimmerman on Jul 26

I am on one page with Capra.
(i) I say that economics is a systems science, he titles one of his books: “The Systems View of Life: A Unifying Vision.”
(ii) He says: “What makes the scientific enterprise feasible is the realization that, although science can never provide complete and definitive explanations, limited and approximate scientific knowledge is possible.” I hasten to add that non-science cannot, as a matter of principle, provide any explanations at all.
(iii) Capra enumerates the main deficiencies of orthodox economics (1983, ch. 7). I prove that economics is a failed science.
(iv) Methodologically: “All of physics has to follow uniquely from the requirement that its components be consistent with one another and with themselves.” (1983, p. 92) This brings us directly to the shaky axiomatic foundations of economics.#1

Where things go awry is: Capra (a) does not understand how the economic system (= monetary economy works), (b) has no idea what profit is and how the profit mechanism works, (c) has not gotten the crucial point of a paradigm shift: “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, p. 703)

Capra argues from the highest peaks of theoretical physics down to actual theoretical economics. The insights of quantum physics or relativity theory, though, are completely irrelevant for economics because economics is still at the proto-scientific level and has not even arrived at something like Archimedes’s Law of the Lever. It is lagging more than 2000 years behind: “Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (von Neumann, quoted in Ingrao et al. 1990, p. 197)

For economists, Descartes is NOT outdated. These confused blatherers and silly agenda pushers have still a long way to go until they arrive at Descartes’s level of rigorous thinking. Economists have no Cartesian clarté about their foundational concepts of profit and income.

To tell people who cannot even define the systemic relations of an elementary consumption economy (2012; 2014) that they need to apply the tools of complexity theory is beyond absurd.

Orthodoxy is false. But Orthodoxy bashing is not enough. It even becomes a bit comical when it is done by unqualified heterodox folks who recommend ‘Science and Spirituality’ but have never produced a testable economic proposition and insist: “I don’t have to prove anything.” (Zimmerman Jul 22)

Note, the first rule of science says: If it cannot be proved it cannot be accepted to the corpus of scientific knowledge. It is just another repugnant instance of storytelling, cargo cult science, or economics.


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Capra, F. (1983). The Turning Point. Bantam.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2012). Geometrical Exposition of Structural Axiomatic Economics (I): Fundamentals. SSRN Working Paper Series, 2060073: 1–22. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL

#1 For my take on formal and material consistency go to the AXEC blog and enter ‘consistency’ into the search field

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REPLY to Ken Zimmerman on Jul 28

In the philosophers’ section#1 of this economics blog, you communicated your most profound insight: “Like all of life, including human communities ‘freedom to’ is complex and its evolution uncertain.”

True, even trivially true. But you are not only a philosopher on a par with Socrates (I know that I know nothing) but also an expert on scientific methodology and kindly enlighten me and the world: “But you miss the really basic point before this one. That the components of physics have to be consistent with observations (with experience, experimental and otherwise). A logically, even mathematically self-consistent framework is useless and misleading if it is not consistent with observations.”

True, except for: “But you miss the really basic point before this one.” It seems, your attention span is even shorter than that of a fruit fly.

In the immediately preceding post of Jul 22 I wrote: “Science is special because it is the systematic attempt to establish truth which in turn is well-defined by material AND formal consistency.” Note that AND is in capital letters. So, as a matter of provable fact#2, I missed nothing.

I even realized that you are the most prolific blatherer near and far and that means something given the abundance of white-noise producers on economics blogs in general. And this in turn only proves that BOTH Orthodoxy AND Heterodoxy are way below the scientific level. Nothing has changed since von Neumann wrote this: “You know, Oskar, if those books are unearthed sometime a few hundred years hence, people will not believe they were written in our time. ... Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (quoted in Ingrao et al. 1990, p. 197) In fact, economics is not even at the level of Archimedian mechanics and Cartesian logic.

Orthodox economics is based on shaky assumptions, a.k.a. Walrasian axioms. To accept these axioms is incontrovertible proof of scientific incompetence. This holds for Orthodoxy for more than 150 years. So, Heterodox Economists of the World!, what are the certain, true, and primary axioms of economics? To say that reality is complex and its evolution is uncertain and that science is hard does not count as an answer.#3


References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.

#1 Escape from Freedom
#2 See this exhibit which neatly summarizes the scientific process.
#3 For the comprehensive list of excuses see Economic recommendations out of the swamp between true and false.

Economics: deadlocked between politics and science

Comment on Asad Zaman on ‘Economic Theory as Ideology’

Blog-Reference

Asad Zaman quotes Joseph Stiglitz’s remark “... that modern economics represents the triumph of ideology over science”. This is only half of the calamity because modern economics represents also the triumph of scientific incompetence.

First of all, one has to distinguish between theoretical and political economics. The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. From the viewpoint of science, political economics as a whole is a no-go, no matter what the agenda is. The main problem of economics is that the vast majority of economists are agenda pushers of one sort or another. This has always been an impediment to scientific advance.

Currently, the situation is as depicted in this chart.

Square D: Economics started as Political Economy. The better-known representatives of the two main factions were Smith/Ricardo with a bias for the one-percenters and Marx with a bias for the ninety-nine-percenters.

From the very beginning, economists claimed to do science but the agenda pushers were dominant and captured theoretical economics as a scientific poster-child. Nevertheless, there was also a strong undercurrent away from politics toward genuine science. Because of scientific incompetence, however, neither Orthodoxy nor Heterodoxy could rise above the proto-scientific level and both landed in square C with no sharp demarcation line between science and politics.

The methodological characteristic of square C is that the axiomatic foundations, that is, Walrasian microfoundations and Keynesian macrofoundations, are defective.#1 Now, the Iron Law of Methodology says: When the premises/axioms/foundational propositions are false the WHOLE theory/model/superstructure is false. Because of this, ALL economic policy advice lacks sound scientific foundations and is squarely hanging in midair. Economists simply do not know how the market economy works.

So here we are: “Nothing is more difficult than to turn an entire discipline around, asking in effect to jettison its own history over the last 200 years.” (Blaug, 1990, p. 205)

What economics needs is a move from square C to A, i.e. a replacement of defective Walrasian microfoundations and Keynesian macrofoundations by true macrofoundations. In other words, nothing less than a Paradigm Shift will do.#2

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith onward can be summarized as an utter scientific failure. Economics never could itself fully emancipate from politics: Keynes was an agenda pusher, so were Hayek and Friedman, and so are Krugman and Varoufakis. As a consequence, what we actually have is Walrasianism, Keynesianism, Marxianism, Austrianism, and ALL FOUR are axiomatically false and politically biased.

Egmont Kakarot-Handtke


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield: Edward Elgar.

#1 How Keynes messed macro up
#2 For details of the big picture see cross-references Paradigm Shift.

Stock prices, profit, and other self-fulfilling idiocies

Comment on David Glasner on ‘Stock Prices, the Economy and Self-Fulfilling Prophecies’

Blog-Reference and Blog-Reference and Blog-Reference adapted to context

You quote Paul Krugman saying:#1 “The truth . . . is that there are three big points of slippage between stock prices and the success of the economy in general. First, stock prices reflect profits, not overall incomes. “

And, elaborating on this point: “This may seem, however, to present a paradox. If the private sector doesn’t see itself as having a lot of good investment opportunities, how can profits be so high? The answer, I’d suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power — brand position, the advantages of an established network, or good old-fashioned monopoly.”

Obviously, economists do not really understand what profit is and where it ultimately comes from. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10). Or, as Mirowski put it “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” (1986, p. 234)

So, in effect, Krugman, Glasner, and the blogging rest try to explain stock market valuation as a reflection of profit expectations without having any idea of what profit is. What the general public cannot see is that this abysmal scientific blunder is all-pervasive and that the representative economist does not understand the pivotal phenomenon of his subject matter.

For this reason alone, the whole discussion about stock market valuation and efficient markets is vacuous. The root cause of why the profit theory is false lies in the Fallacy of Composition, that is, economists take propositions that are true for a single firm and generalize them for the economy as a whole (2013).

The correct profit theory follows from the analysis of the pure production-consumption economy which is the most elementary case (2011). From this analysis follows:

― The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.

― Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior. Overall monetary profit is NOT explainable by subjective factors but is OBJECTIVELY given by the Profit Law which can be tested in principle by summing up what is in the cash boxes or on the bank accounts.

― In order for profit to come into existence for the first time in the pure production-consumption economy the household sector must run a deficit for at least one period. This presupposes the existence of a credit-creating entity.

― Profit is, in the simplest case, determined by the increase and decrease of household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole.

― Wage income is the factor remuneration of labor input. Profit is NOT a factor income. Since capital is nonexistent in the pure production-consumption economy profit is not functionally attributable to capital.

― There is NO relation at all between profit, capital, marginal or average productivity.

― Profit has no real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart. In a real exchange economy, profit does not exist.

― The existence and magnitude of overall profit do not depend on the ownership of the firms that comprise the business sector. The Profit Law holds for capitalist and communist economies alike.

― The value of output is, in the general case, different from the sum of factor incomes. This is the defining property of the monetary economy.

― Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.

― There is NO antagonism between total wages and total profits, and the distribution of consumption goods output has nothing at all to do with profit.

― Innovation and efficiency are IRRELEVANT to the profit of the business sector as a WHOLE. It is a logical mistake to trivially generalize what can be observed in an individual firm. The same holds for monopoly power. These factors affect the DISTRIBUTION of profit among firms but NOT the overall volume.

All this follows from the elementary case of the pure production-consumption economy. The Profit Law for the investment economy reads Qm≡Yd+I−Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. The Profit Law gets a bit more complex when foreign trade and government are included.

In the last decades, overall (= world) profit has been driven by the growth in Asia (= high I), by dissaving, i.e. the growth of private debt mainly in the USA, by the growth of public debt worldwide, and by substantial profit distribution mainly in the USA. Overall profit has been distributed between the countries via export surpluses/deficits.

Roughly speaking, as accumulation (= I) slows down in China/Asia and the developing regions overall world profit goes down, then overall profit distribution goes down, then again profit goes down, then investment goes down again, and so on. Rising unemployment and falling wages ACCELERATE the downward spiral (2015). The market economy is NOT self-adjusting.

Does this matter for stock valuation? Not much, as long as the central banks stand ready to stabilize the stock markets. This is what the market participants have observed in the past and expect for the future, independent of the performance of the real economy. This is where the disconnect between overall profit and overall stock market valuation comes from.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Mirowski, P. (1986). Mathematical Formalism and Economic Explanation. In P. Mirowski (Ed.), The Reconstruction of Economic Theory, 179–240. Boston, Dordrecht, Lancaster: Kluwer-Nijhoff.

#1 Bull Market Blues

History and future of the monetary economy

Comment on Michael Hudson on ‘A Travesty of Financial History ― which bank lobbyists will applaud’

Blog-Reference

Not only humans but animals, too, know how to use levers of all forms and sizes since time immemorial. And it is certainly possible to write a history of the use of levers from the Stone Age to the Egyptians and beyond. However, this history of the practical use of levers will never arrive a the Law of the Lever as put down by Archimedes.#1 Obviously, there are different views of the lever: the practical, the historico-genetic, and the scientific.

The historian can write a history of levers without knowing the Law of the Lever, that is, without a deeper understanding of the essence/principle/nature of the lever which is abstract and independent of concrete historical time/space but holds for every concrete application of the lever whether the user knows this or not.

The same holds for economic phenomena like money and debt. We have the history of money and the theory of money. The point is that both are related but methodologically entirely different. So, we have to differentiate between the historico-genetic and the axiomatic-deductive method. The drawback of the former is that it remains on the commonsensical surface and easily gets lost in scattered historical details that have no relevance for the here and now, the drawback of the latter is that reality easily gets totally out of sight, that is, the abstraction is eventually entirely disconnected from the real counterpart.

The common danger for both approaches, though, is to get hijacked by politics: “Some years ago, a German Assyriologist told me why so many members of that discipline choose to publish in German or French instead of in English. The reason is that so many Americans (and also Englishmen) take documentation out of context to force into “crazy” theories.” (See intro) This is a good example of what political economics has been all about since Adam Smith and Karl Marx. Political economics and theoretical economics are entirely different things. Political economics is scientifically worthless.

It seems that Goetzmann tried to use the history of money and debt to push an agenda and it is absolutely necessary to point out his distortions and omissions. This is the positivum of Hudson’s† contribution.

The negativum of the Goetzmann-Hudson historical discourse is that it is (i) theoretically unfounded, and (ii), not relevant for the understanding of the working of the actual monetary economy.

First of all, the theory of money/debt cannot stand alone but must be embedded in what Keynes called the monetary theory of production, which in turn must be based on macrofoundations.

In the following, a sketch of the formally and empirically correct theory is given. The most elementary version of the objective structural Employment Law (2012) is shown on Wikimedia AXEC62a:

From this equation follows:
(i) An increase in the expenditure ratio ρ_E leads to higher employment (the letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, a ratio ρ_E less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete and testable Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’ arguments about aggregate demand. Item (i) establishes the connection between employment and the growth of household sector debt. It holds that growing debt is good for employment and shrinking debt is bad for employment.

Household sector debt has nothing to do with the financing of investment expenditures I. Household sector financing and business sector financing have to be strictly kept apart (2011).

The factor cost ratio ρ_F as defined in (iii) embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

For the relationship between real wage, productivity, profit, and real shares see (2015, Sec. 10)

The correct Profit Law reads Q_m≡Y_d+I−S_m (2014b, p. 8, eq. (18)).#2 Legend: Q_m monetary profit, Y_d distributed profit, S_m monetary saving, I investment expenditure.

The Profit Law gets a bit longer when import/export and government are included.

The Employment Law and the Profit Law have some variables in common. And this has an important consequence. Roughly speaking, what happens in the monetary economy is this: the profit of the business sector as a WHOLE does NOT depend on productivity or low wages or the greed of capitalists or the smartness of managers but on the growth of the household sector’s debt. Therefore, as long as this debt grows employment and profit are fine. Needless to add that this implies the existence of a banking sector with the capacity of credit/money creation. Things become worrisome, though, as soon as credit expansion stops and nasty as soon as the household sector as a whole pays the debt back. In this case, profit turns into loss and the business sector breaks down (2014a). Note well, this happens without any debt crisis or market failure, or wrongdoing of the banking sector. It suffices that the households eventually pay back their debt as they are supposed to do. This is because the growing/shrinking household sector debt immediately translates into profit/loss of the business sector. Economists cannot see this because the standard price and profit theory is false.

What the macrofounded theory of employment, money/debt, and profit tell us is: The breakdown of the monetary economy is not a bug but a feature. It should be obvious, that one can never find this out by studying the debt policy of Hammurabi.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014a). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

#1 Wikipedia
#3 See Wikimedia AXEC09 or Wikimedia AXEC08 or Wikimedia AXEC42.

Related 'No future for Socialism and Capitalism' and 'The real trouble with Capitalism: stupid/corrupt economists' and 'Links on “Capitalism. Time for a reset.”' and 'MMTers make Capitalism work'

† See also Michael Hudson The Collapse of Antiquity

There is no thrift paradox, or, How economists fell over their own feet

Comment on Richard Koo on ‘Paradox of thrift was the norm before the industrial revolution’

Blog-Reference

Richard Koo’s paper about macroeconomic development#1 is descriptively accurate and historically rich in detail. It is far above the low level of familiar orthodox and heterodox economics. What is lacking, though, is a sound theoretical foundation. This cannot be otherwise because economics as a whole lacks sound foundations. More precisely, both current microfoundations and macrofoundations are false.

Koo puts it thus: “Macroeconomics is still a very young science compared to such disciplines as physics and chemistry. It started when Keynes began talking about the concept of aggregate demand in the 1930s, only 85 years ago. As a very young science, it has achieved only limited coverage of the broad range of economic phenomena and remains prone to fads and influences.”

Reality is actually far worse. Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized Keynes’ foundational blunder in 80 years (2014).

Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

This two-liner is defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)

Let this sink in, Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of macroeconomics is false, in particular, ALL I=S/IS-LM models (2011; 2013).

Koo starts his analysis as follows: “One person’s expenditure is another person’s income. It is this unalterable linkage between the expenditures and incomes of millions of thinking households and businesses that makes the study of the economy both interesting and unique.”

Note that Koo’s first sentence is identical to Keynes’. For every economist, this proposition is pure common sense ― a mere accounting identity. As a matter of fact, it is provably false and this explodes the whole of macroeconomics. Economists do not grasp the elementary mathematics of accounting (2012) and this goes a long way to explain why economics has never risen above the proto-scientific level.

To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed microfoundations and Keynes’ flawed macrofoundations to entirely new macrofoundations.#2

Ultimately, the paradox of thrift has its roots in the confusion about the saving of the household sector, retained profit (falsely termed ‘saving’ of the business sector), profit, and distributed profit. The axiomatically correct macroeconomic Profit Law reads Q_m= Y_d+I−S_m (2014, p. 8, eq. (18)). Legend Q_m monetary profit, Y_d distributed profit, S_m monetary saving, I investment expenditure. The interaction of I and S_m underlies Koo’s description of economic expansion and balance sheet recession. What is entirely missing in Koo’s description is the interaction of Q_m and Y_d.

The profit equation gets a bit longer when import/export and government are included.

Roughly speaking, there are TWO self-reinforcing feedback loops:
(i) Household sector saving S_m up ― profit Q_m down ― investment I down because of reduced self-financing out of retained profit ― profit Q_m down ― and so on (with wages, prices, and employment down)
(ii) Household sector saving S_m down or dissaving up ― profit Q_m up ― investment I up because of increased self-financing out of retained profit ― profit Q_m up ― and so on (with wages, prices, and employment up)

The confusion is, again in rough terms, this: (a) saving of the ‘workers’ is bad because it drags down the economy, (b) ‘saving’ out of profit (= retained profit) is good because it is normally put to use for business expansion = investment. In this case, bankers/financiers/ lenders are not needed at all or less so. There are fewer restrictions to expansion from the monetary side.

What the Classicals had in mind when they lauded ‘saving’ and ‘frugality’ was in fact retained profit and reinvestment in contradistinction to profit distribution and spending on consumption. What Keynes had in mind was the saving of the household sector. The cross-talk about saving and investment goes on until this day: “The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions.” (Fisher, quoted in Mirowski, 1995, p. 86)

What economic history will someday find out is that the kick-off event of the Industrial Revolution has been a happy combination of DISSAVING of the household sector and credit creation of the emerging banking sector on an ever-increasing scale and self-financing out of profits which freed businesses from lenders and the economy as a whole from the clampdown of a fixed quantity of money. Credit creation that translates directly into an increase in the wage bill (with wage increase = productivity increase) helps to enable perfectly inflation-free growth. Money out of nothing is a GOOD thing IF DONE PROPERLY.

Bottom line: saving S_m and investment I develop INDEPENDENTLY. There is NO such thing as an interest mechanism that equalizes I and S. It is neither true that saving ‘causes’ investment as the Classicals claimed nor that investment determines saving via the multiplier as Keynes claimed. The perpetual difference between investment I and saving S_m is the main determinant of profit Qm. BOTH, the Classicals and Keynes got the profit theory wrong. Nothing worse can happen to an economist.#3

Koo’s approach is a clear improvement with regard to the credit mechanism but shares the fundamental conceptual error which is embodied in this simple proposition: Income = value of output.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. 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.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
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

#1 real-world economics review issue #75
#2 For more details see The other half plus the hitherto missing true foundations of macroeconomics
#3 See also I=S: Mark of the Incompetent.

For details of the big picture see cross-references Refutation of I=S