August 5, 2016

Economists’ full-scale retreat

Comment on Lars Syll on ‘How true is Friedman’s permanent income hypothesis?’

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

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 incompetent 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 (Desai, 2008) and without the correct profit theory the economist is lost in the wood and only babbles incoherent nonsense. This happened to Friedman. He was a lifetime political economists and ALL political economics from Smith and Marx onward is scientifically worthless.

That the permanent income hypothesis is utter scientific dilettantism ― or what Feynman famously called cargo cult science ― could and should have been obvious from the beginning around 1960. The real question is why it took economists more than 50 years to realize that: “Unfortunately, there’s just one small problem ― it’s almost certainly wrong.”* Unfortunately, there is a second small problem: “PIH is so dominant that almost all modern macroeconomic theories are based on it. They enshrine the idea with a formula called a ‘consumption Euler equation,’ which has appeared in the vast majority of academic macro models during the past few decades.”* In other words, economics of the past 50 years has been pure scientific garbage.

The fact that economists are in the process of abandoning one core piece of modern macroeconomic theory after another is a sign for worse things to come. As long as the economy has a reasonably good run, economists are mainly occupied with praising themselves and their relentless championship of markets. Now they distance themselves even from “the great Milton Friedman”*, renounce mathiness, and readily degrade themselves from upper case Science to lower case science. The greater economic problems become, the smaller economists make themselves.

But economists have never admitted failure without offering betterment for the future: “Kocherlakota thinks macroeconomists should set aside their big, complex formal models of the economy, since these elaborate constructions are built on a foundation that probably doesn’t describe reality all that well. He recommends that economists go back to the drawing board, and look around for new, more accurate kernels of insight with which to build the theories of tomorrow.”*

Yes, indeed, Kocherlakota is spot on. The Walrasian microfoundations are unacceptable since more than 140 years and the Keynesian macrofoundations are false since more than 80 years. Kocherlakota should have even gone one step further and to explicitly recommend the correct macrofoundations “with which to build the theories of tomorrow”. See for a start:
Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist
Economics for Economists

Egmont Kakarot-Handtke

Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL

* See ‘Economists Give Up on Milton Friedman’s Biggest Idea’ on BloombergView