August 27, 2016

Debt and other unsolved economic problems

Comment on Lars Syll on ‘The real debt problem’


Economics virtually started with the debt problem: “Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by ‘political economy’ a ‘branch of the science of the statesman or legislator’, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt trough the conquest of her colonial Empire.” (Halévy, 1960, pp. 104-105)

After more than 200 years economists still have not solved the debt problem. What Lars Syll’s intro clearly shows is utter confusion which, indeed, is the natural state of economists (2013).

The ultimate methodological reason of the failure to get out of inconclusive wish-wash and to reach logically/empirically consistent conclusions is rather obvious:
― Barro, for example, argues within the Walrasian paradigm.#1
― Lerner, for example, argues within the Keynesian paradigm.#2

Because both sides start from different premises/axioms they forever talk past each other. It is methodologically IMPOSSIBLE that the two paths of arguments ever met. What is worse, both the Walrasian and the Keynesian set of premises/axioms is provable false. The methodological insanity is aggravated by the fact that both sides incessantly flip-flop between theoretical and political arguments. This means that the debate is programmed to get lost with absolute certainty in some surreal parallel universe.

What has to be done instead is to put the formal foundations straight: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

Because there cannot be a synthesis of Walrasian microfoundations and Keynesian macrofoundations and because both axiom sets are provable false the solution consists in a paradigm shift, that is, in the reconstruction of economics from entirely new formal foundations.#3 For an exhibit of the current and future state of economics see Wikimedia.

Policy guidance must be based on a materially/formally consistent theory or it is worthless or even harmful: “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)

Neither the Walrasian nor the Keynesian theory of debt is true. The real problem of economics are incompetent economists.

Egmont Kakarot-Handtke

Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
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
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

#1 The Walrasian paradigm is formally defined by these hard core 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)
#2 The Keynesian paradigm is formally defined by these axioms: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (GT, p. 63)
#3 See ‘From Orthodoxy to Heterodoxy to Sysdoxy

Related 'Keynesianism as ultimate profit machine' and cross-references Debt