July 6, 2016

The economist as second-guesser, mind reader, and folk psychologist

Comment on Asad Zaman on ‘ET1% — Economic Theory of the top 1%’

Blog-Reference

You say: “As Feynman put clearly, no matter how clever you are, and no matter how fancy your theory is, if it does not match observations, it is wrong.”

We perfectly agree.* Science is strictly about material (empirical) and formal (logical) consistency (Klant, 1994, p. 31), everything else is storytelling.

You say also: “Even playing along with your confinement of economics to monetary theory, there is no way to understand money without understanding human behavior.”

Please note, when I use the term monetary economy then this is the SAME thing what Keynes called the monetary theory of production. The monetary economy is the real economy. The “real” economy in the sense of Sraffa, RBC or other money-is-a-veil approaches is NOT the real economy. The monetary economy constitutes itself through the interaction of real AND nominal variables. The monetary economy has nothing at all to do with what is known as Monetarism (2011).

You say: “For example consider the Brexit vote and the subsequent drastic drop in the value of the GBP. It is impossible to explain this phenomena without understanding human behavior.”

Seen from the business sector, the Brexit vote is an external shock. Imagine the business sector conducts a post-Brexit survey asking consumers ‘How much will your consumption expenditures decrease/increase YoY’ and asking firms ‘How much will your investment expenditures decrease/increase YoY’ and so on. Let us assume the survey yields reliable numbers. This is ALL the business sector or the economist needs to know. It is absolutely irrelevant to understand why people voted as they did (frustration, economic distress, fear, hope, xenophobia, stupidity, propaganda, etc). This is an issue for sociologists or other social scientists.

The social scientists will deliver an INTERPRETATION and here the problem is: “... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung.” (Morgenstern, 1941, p. 381)

For the understanding of how the monetary economy works these interpretations are IRRELEVANT. What is needed are the concrete rates of change of expenditures and other economic variables. And these do certainly NOT come from highly subjective interpretations. For a businessman who goes bankrupt after Brexit it is a matter of indifference whether this is due to racism, pessimism, stupidity of his countrymen/ government, or the wrath of God for former sins. The why-interpretation in NO way affects his real situation.

Of course, for the political discussion and agenda pushing and sitcom gossiping all this PsySoc stuff is important. But politics and economics should be kept strictly separated and politics should be left to the political scientists. The economist’s business is the economy and NOTHING else. For the economist the Brexit is simply a one-time random event and nothing is gained by mind reading the population after the fact. Explanations are for the birds.

You assert “... the same tactic would lead to hyperinflation in other economies. Again there is no way to understand/explain this phenomenon without paying attention to historical and structural details which would fall outside the ambit of any axiomatic system.”

You simply do not get what axiomatization is all about. A concrete event is a combination of space-time specific conditions and the interaction of universal laws (2014b). When a man is thrown out of the window this is a political or criminal act but independently of this the Law of Falling Bodies applies. The Law is part of the general theory of motion which in turn has been axiomatized by Newton. Clearly, the theory of motion does NOT explain why the man flew out of the window. But there are neighbors and bystanders and psychologists and journalists and paranoiacs who can readily “explain” it. These explanations are guesswork and mind reading and storytelling and scientifically worthless. All this stuff can be left to the police and the historian.

Nobody needs an economist to predict that the exchange rate will plummet when a country falls apart. This is common sense stuff and every forex trader or journalist will predict it. And that actions are guided by expectations is a triviality since the dawn of mankind. But second-guessing expectations is not science but folk psychology and vacuous speculation. Here Keynes’s dictum applies: ‘We simply do not know.’ However, people/economists like to waffle about expectations because everybody can contribute with his own silly guess to entertaining human communication.

You say: “To conclude, it is IMPOSSIBLE to study economics without having a theory of human behavior.” False. Theories of human behavior are the subject matter of psychology/sociology and economists who are confused about their subject matter. Most microeconomic studies, including your babysitter study, can and should better be left to sociologist.

I say: “To conclude, it is IMPOSSIBLE to study economics without having a theory of profit.” You have NO theory of profit and therefore you cannot explain how the economy works. Your theory of babysitting does NOT not help that much.

The Iron Law of economic methodology says: NO way leads from the understanding of human behavior to the understanding of how the monetary economy works (2014a). And this explains why the microfoundations approach has been doomed to failure from the very beginning.

You say: “Profit is also a subjective concept — as the bible says: For what shall it profit a man, if he shall gain the whole world, and lose his own soul?”

Well said! There is subjective reality and objective reality. Science, though, deals EXCLUSIVELY with the latter. The economist is supposed to figure out the Profit Law and he is neither supposed nor entitled nor qualified to preach about lost souls.

It is high time that Heterodox economists make up their minds whether they want to become a religious sect, political agenda pushers, or the future scientific mainstream.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

* For the Feynman quote and the YouTube link see ‘There is no like/dislike button in science’.

Immediately preceeding 'Refocusing economics'.
Related 'Enough! Economists, retire now!'

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REPLY to Michael Kowalik on Jun 7

You ask: “Profit of what? Are you asking for a definition of ‘value’?”

Monetary profit is objective. You can touch it in the cash box or see it on your bank account with an accuracy of two decimal places. Value is a subjective concept. So economics has to deal FIRST with measurable profit and LATER ON with value. Economists did it the other way round and this is like putting your boots on and then to try to get into your trousers. This has never worked and never will. It is simply a dilettantish methodological mistake. And this mistake is built into the neoclassical axiom set which is subjective-behavioral. This is the ultimate root cause of the scientific failure of economics.

In order to get economics out of folk psychology and folk sociology the Walrasian subjective-behavioral axioms have to be REPLACED by objective-structural axioms.*

Iron Rule of methodology: deal first with the objective aspects of reality and then with the subjective aspects. Economics cannot be built upon green cheese behavioral assumptions and nonentities like constrained optimization and equilibrium. ALL models that contain these two concepts are a priori false and this is more than 90 percent of the content of peer-reviewed economic journals.

You say “I maintain that human behavior, even if its structure is not fixed, must be somehow integrated into the formal system, otherwise it is unclear to me why the system should still be representative of anything real.”

Yes, of course. It is all a matter of methodological SEQUENCE: structure comes first, behavior comes second; objectivity comes first, subjectivity comes second. This is what the inescapable paradigm shift is all about. For the consistent formalization of human behavior see (2015).

Make no mistake, it is NOT either structure or behavior, it is structure first and behavior second. This is why economics has to be based upon objective-structural axioms.


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. URL

* For how this is done see the cross-references New Curriculum.

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REPLY to Michael Kowalik on Jul 8

You criticize the structural axioms: “Your model, as it stands now, is obviously too simplistic.”

You obviously cannot get your head around the starting problem.* Every analysis starts with premises/primitive propositions/axioms. For axioms the MINIMUM principle holds and this is known since antiquity as Occam’s razor. So, the first methodological task is to find the simplest set of foundational propositions. Simplest in this context means not further reducible. The first thing to notice is that the three structural axioms are not further reducible.

Among scientists simplicity is a significant quality attribute: “Others, the inexperienced students, make guesses that are very complicated, and it sort of looks as if it is all right, but I know it is not true because the truth always turns out to be simpler than you thought.” (Feynman, 1992)

von Mises ― your methodological lamppost ― took the the action axiom as the starting point. Unfortunately, he thereby fell for the same blunder that Neoclassicals fell into when they built upon subjective-behavioral axioms instead of objective-structural axioms.

Krugman is exemplary for his explicit commitment to his axiomatic starting point: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” With this wrong selection of axioms he readily debunks himself, just like von Mises. There is NO need to check the theoretical superstructure or the policy conclusions of Neoclassicals or Austrians because when the axioms are false all the rest is worthless.

Only objective-structural axioms lead to propositions which can be confronted with reality. As you should know, empirical test is the ULTIMATE arbiter in science. Or, as Asad Zaman put it: “... no matter how clever you are, and no matter how fancy your theory is, if it does not match observations, it is wrong.”

In brief, that you find the structural axiom set too simplistic is in turn too simplistic: it is the PROOF of logical and material consistency that counts in science and NOTHING else.**

As far as one can see, there is NO serious alternative to the objective-structural axiom set.

Egmont Kakarot-Handtke

* “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.” (J. S. Mill)
** For the proof that Austrian profit theory, too, is false see ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’.

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REPLY to Michael Kowalik on Jul 8

(i) The issue of this thread is that Asad Zaman not only asserts that Orthodoxy is axiomatically false ― to which all heterodox economists agree ― but that it is INTENTIONALLY false. This raises, first of all, the following question: Heterodoxy, too, is axiomatically false,* and now it would be interesting to learn whether this is also intentionally?

(ii) If it is intentionally this opens a big can of worms, e.g. can students sue their university for false teaching? or the textbook publishing houses? or the textbook writers? Is there something like an educational product liability? bear economists liability for misleading policy advice that causes enormous damages (e.g. unemployment)? have they to pay back Nobel Prize money? have they to be thrown out of academia? and so on. Intentionality is a serious accusation, and I wonder whether this is consensus among heterodox economists.

(iii) Therefore, in the given context, the structural axiom set is not at all an issue. If you think your axioms are better simply stick to them. I have no intention to convince you of anything. For me it suffices to REFUTE you.

(iv) If you think you have found a mistake/error in my papers, please add the reference. I cannot answer to assertions like “you do not adequately account for new bank-credit” except that this is the worst nonsense imaginable. I have written two papers about the Quantity Theory and there you can study the relationship between money and credit and credit creation in extenso. In fact, ALL my papers deal EXCLUSIVELY with pure credit money. Your assertion is patently false and everybody can easily check it.** Money and credit follow DIRECTLY from the structural axiom set! And this is as it MUST be! ALL economic phenomena must ultimately follow from the axioms.

This, exactly, is the beauty of axiomatization. “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)

Austrians in general and you in particular never got this point.

* See ‘The scientific self-elimination of Heterodoxy’ or ‘Heterodoxy, too, is scientific junk’.
** See working papers on SSRN

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REPLY to Michael Kowalik on Jul 9

The section from where you have taken the quote is titled “From function to institution” (2015, Sec. 11). Accordingly, the section STARTS with a FUNCTIONAL analysis which describes how the ideal banking system operates and then continues IMMEDIATELY after your quote:

“This said, it is clear that in the concrete case the institutional design of the central bank is of utmost importance. Not many countries have been perfect in the art of institution building. The Federal Reserve System in particular has met with a lot of critique lately. Only part of it is justified. The functional analysis provides some ideas for institution building. It should be clear that successful institution building presupposes the correct theory of money. What we have analyzed above is the ideal type of the monetary economy and the central bank. This helps to identify the institutional weak spots of concrete banking systems.”

In brief: you need to know what it takes that an aircraft flies (laws of aerodynamics, thermodynamics, material science, etc) in order to build one and in order to explain in the concrete case why it crashed (bad design, functional failure, human failure, etc). The functional analysis delivers the OBJECTIVE benchmark of a well-functioning economy (2013). Against this background the mathematical proof can be given that the actual monetary economy MUST break down EVEN if it functions perfectly (2014). This proof refutes the central assertions of General Equilibrium Theory.

Independently of this, the fact of the matter is:
(i) You do not know what profit is, so you have no idea how the monetary economy works. This you have in common with Orthodoxy. Both, heterodox and orthodox profit theory is PROVABLE false.
(ii) As a collateral damage, your theory of money is provable false. This you have in common with Orthodoxy.
(iii) Either you do not understand what you read or you do not know how to quote correctly.

The version of Heterodoxy you represent is scientifically NOT better than Orthodoxy but worse. And Orthodoxy is already bad enough.

The common denominator of current Orthodoxy and Heterodoxy is that it is political economics and NOT scientific economics. And political economics has produced NOTHING of scientific value since Adam Smith and Karl Marx. The failure of economics is due to the scientific incompetence of BOTH orthodox and heterodox economists.

The question of whether economists are naturally incompetent or intentionally is a moot one. ALL incompetent scientists have to be thrown out of science/academia, no matter what their political color is. Science is ABOVE politics and the ULTIMATE arbiter of science is the theory-guided observation/test.*

References
Kakarot-Handtke, E. (2013). The Ideal Economy: A Prototype. SSRN Working Paper Series, 2355860: 1–27. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL

* See charts here and here.

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REPLY to Michael Kowalik on Jul 11

The actual situation and the alternative futures of Heterodoxy are summarized in this Wikimedia-chart.

(i) Most heterodox economists are at E (traditional Heterodoxy) and have the choice between E-C, E-F, and E-I.
(ii) I am at B (constructive Heterodoxy) and propose to move to C.
(iii) Some heterodox economists are at H (nihilistic Heterodoxy) and they go to nowhere.

As everybody can glean from my posts* I argue against E-F (the pluralism of false/ inconclusive theories) and E-I (the weaponizing/capturing/politicizing of economics in the name of either the one-percenters or the ninety-nine-percenters).

I see you on E-I, that is, the Zaman way.

Science is ABOVE politics and the ULTIMATE arbiter of science is the theory-guided observation/test. Methodological discussions are pointless in economics because the scientific criteria are given and immutable (= material and formal consistency). So, there is either sticking to the rules or leaving science (Sexit**), but no such thing as playing tennis with the methodological net down.

Neither the one-percenters nor the ninety-nine-percenters have anything to say in science. Political economics in ANY form or color is inadmissible without exception. The separation of politics and science has often been ignored/violated in the past, mostly by the one-percenters. Heterodoxy has to make sure that this does NOT happen in the future.

* See blog.
** See ‘Enough! Economists, retire now!’.

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REPLY to robert locke on Jul 12

You say: “German business economists discussed the question of Wirtschaftlichkeit and profits in the early 1920s, and the discussion about profit hinged on definition about the purpose of the firm.”

True, but business economists, being business economists, have the horizon of a kneeling ant. And what they do is to deliver an INTERPRETATION of a minuscule cutout of economic reality.

What is needed INSTEAD is the monetary profit for the (world-) economy as a whole. This is a measurable variable whereas what the socio-cultural economist regularly delivers is woolly PsySoc babble. Best of all, these interpretations are contradictory and when generalized for the economy as a whole the fallacy of composition kicks in and this renders the whole exercise worthless. Profit for the economy as a whole does NOT AT ALL depend on PsySoc factors or what people think about it or what the purpose of the firm is. Monetary profit is given by the objective and immutable PROFIT LAW with the accuracy of two decimals.

You ask me: “Where have you been for the past 90 or so years?”

Most of the time in the real world where I have collected profit definitions from Adam Smith onward* and, guess what, it did not even take me one year to realize that they are ALL contradictory and ALL false.**

Isn’t it curious that economists never felt the urge to clear up the mess and to meticulously define the pivotal concept of their subject matter? Obviously, in the past 90 or so years they did not wake up from their PsySoc delirium.

* See ‘Profit: One way to get it right, many ways to get it wrong’.
** See ‘Profit and the collective failure of economists’ and also  ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’.

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REPLY to robert locke on Jul 12

As an economist I am interested in how the monetary economy works.

I am NOT interested in how the German or the US educational system works. As far as economics is concerned neither system has produced noteworthy scientific output but only a lot of more or less useful sociological micro-studies that are confined to a tiny section of geographical space and historical time. This admitted, one has to realize that after more than 200 years economists do still not know how ‘the monetary economy’, i.e. an abstract entity with unspecified space-time coordinates, works. Walrasianism, Keynesianism, Marxianism, Austrianism are provable false.

I am NOT interested in the economist as person/character but in his/her research output. When I read a paper I want to learn something about the economy and not be bothered with personal idiosyncrasies. I am focused on whether the paper is logically/empirically correct and not on whether the author is a good or bad guy and what his nationality, gender, reputation, religious/political/sexual orientation is and who his collegues and friends are. I do NOT study CVs, I study economics.

Of course, I agree with Asad Zaman that a meta-analysis of how the community of economists organises itself and interacts and communicates with society/business/state and how it allocates financial/non-financial incentives/disincentives is very important. There has been done excellent work by Mirowski in this field (1995; 2002; 2009), BUT meta-economics deals with economists and NOT with the economy. Meta-economics or the study of the history of economic thought are worthy subjects in themselves but vastly different from economics proper.

In brief, I have no qualms with what Asad Zaman says about the one-percenters or the importance of meta-economics, except that it leads AWAY from the point at issue, that is, the materially and formally correct theory of how the monetary economy works.

The actual situation and the alternative futures of economics are summarized in this Wikimedia-chart.
(i) Neoclassical economics is dead but not buried (squares D and G).
(ii) Most heterodox economists are on square E (traditional Heterodoxy) and have the choice between E-C, E-F, and E-I.
(ii) I am on square B (constructive Heterodoxy).
(iii) Some heterodox economists are on square H (nihilistic Heterodoxy) and they are going to nowhere.

The two wrong ways for the heterodox student of economics are E-F (toward the pluralism of false/inconclusive theories and incoherent stand-alone micro-truths) and E-I (toward the weaponizing/capturing/politicizing of economics).

I think, E-F roughly characterizes your way and E-I roughly characterizes Asad Zaman’s way.

For the young students of economics two things are certain (i) Orthodoxy and traditional Heterodoxy have failed, and (ii), because they will not be spoon fed with the true economic theory by their teachers they will have to figure it out for themselves. Mind you, whoever accepts utility maximization, supply-demand-equilibrium, microfoundations, I=S, well-behaved production functions, rational expectations and all the provable false rest of Econ 101 is out of science from now to eternity, no matter what is written on his diploma.


References
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Mirowski, P., and Plehwe, D. (2009). The Road From Mont Pelerin. The Making of the Neoliberal Thought Collective. Cambridge, MA, London: Harvard University Press.
Mirowski, P., and Sent, E.-M. (2002). Science Bought and Sold, chapter Introduction, pages 1–66. Chicago, IL, London: University of Chicago Press.