September 30, 2016

The general theory of scientific incompetence

Comment on Paul Krugman on ‘A General Theory Of Austerity?’

Blog-Reference

Paul Krugman explains the world by second guessing the motives of folks he does not agree with: “[The] bottom line is that austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state.” (See intro)

Krugman should know that ‘right-wing opportunism’ is not exactly a profound scientific argument: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter)

The very characteristic of the Austerity discussion is that the arguments of BOTH sides have no sound scientific foundation. In other words, they are provable false.

The title of Krugman’s post refers to Keynes’s General Theory. Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder since 1936.

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)

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.

Allais clearly identified Keynes’s major fault: “... mais son [Keynes’s] 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 stumbled upon the problems but could not solve them because of his logical insufficiency.

The correct relationship is given by Qre=I-S (Allais, 1993, p. 69) Legend: Qre: retained profit, S: saving, I investment expenditure.

So, Keynes got it wrong 80 years ago and Allais got it right 23 years ago and Krugman did not check anything and is deep in the woods until this day (2014). The same holds for Wren-Lewis.*

Because Keynesianism in all its variants is axiomatically false, the commonplace theory of employment is false by implication.** What is needed is NOT brain dead political blather but the scientifically true general theory of profit, employment and deficit spending. Don’t wait for Krugman, Wren-Lewis and the rest of logical insufficients to deliver it.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
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

* See post ‘I=S: Mark of the Incompetent
** See post ‘The choice between Friedmanian pest and Keynesian cholera

A basket of scientific deplorables

Comment on Paul Krugman on ‘VAT of Deplorables’

Blog-Reference

Paul Krugman argues: “This says that if he [Trump] somehow becomes president, and decides to take the job seriously, it won’t help — because his judgment in advisers, his notion of who constitutes an expert, is as bad as his judgment on the fly.”

What exactly is an economic expert?

“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)

Economists have no true theory. Economics is a failed science. What economists have to offer is political opinion without sound scientific foundation.

Paul Krugman still applies IS-LM* and this proves that his scientific judgment is “as bad as his judgment on the fly”.

Egmont Kakarot-Handtke

* See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

September 29, 2016

The real problem with the economics Nobel

Comment on Lars Syll on ‘The Nobel factor — the prize in economics that spearheaded the neoliberal revolution’

Blog-Reference and Blog-Reference on Oct 3 and Blog-Reference on Oct 10 and Blog-Reference on Jun 8, 2017, adapted to context

Lars Syll argues that the economics Nobel is politically biased: “... the prize was thought to take advantage of the connection with the true Nobel prizes and spearhead a market-oriented neoliberal reshaping of the world.” (See intro)

This is a minor problem, the real problem is in the title: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

The key word is science[s]. Why not simply “Bank of Sweden Prize in Economics”? The original title clearly communicates the claim that economics is a science. This claim is as old as Adam Smith/Karl Marx.

Science is well-defined by the criteria of formal and material consistency: “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)

Neither orthodox nor heterodox economics satisfies the criteria of formal and material consistency. It is a provable fact that neither Walrasianism, nor Keynesianism, nor Marxianism, nor Austrianism is materially/formally consistent.

Accordingly, economics is not a science but what Feynman famously called a cargo cult science.

The Bank of Sweden is legitimized to award prizes to whomever it wants and to push any political agenda it wants. The Bank, though, is NOT legitimized to declare economics as science well knowing that economics has not lived up to scientific standards since the founding fathers.

The scientific community has to see to it, firstly, that the word ‘sciences’ is eliminated from the “Bank of Sweden Prize in Economic Sciences”. The general public has to be informed that the 200-year-old claim and the actual state of economics do not match and that ALL economic policy guidance, i.e. independently of political orientation, lacks a sound scientific foundation. It follows, secondly, that economists have to be expelled from the scientific community. It follows, thirdly, that organizations like AEA, Royal Economic Society, Verein für Socialpolitik etcetera refrain from speaking in the name of science.

The real problem with the Bank of Sweden Prize is that it may give rise to a claim for damages in the case of severe depression/unemployment which is ultimately caused by provable false economic theory.

Egmont Kakarot-Handtke

Immediately following 'Great souls’ methodology'

Related 'Swedish muddle' and 'Swedish economists — what’s that?' and 'Economics: the simple logic of failure' and 'Scientists and science actors' and 'The economist as standup comedian' and 'Economists: the Trumps of science' and 'When fake scientists call out on fake politicians' and 'The economics Cargo Cult Prize' and 'Economics is NOT a science of behavior' and '10 steps to leave cargo cult economics behind for good'.
***
COMMENT and COMMENT on 'Oliver Hart, Laureate in Economic Sciences' on Dec 13

Economics is a failed science. Walrasianism, Keynesianism, Marxianism, Austrianism are contradictory and axiomatically false. See ‘The real problem with the economics Nobel’.

In order NOT to mislead the general public, the word 'sciences' has to be deleted from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Sticky prices or sticky brains?

Comment on David Glasner on ‘Price Stickiness Is a Symptom not a Cause’

Blog-Reference and Blog-Reference on Sep 30

The discussion between Nick Rowe and David Glasner suffers from the obvious fact that they have no common and well-articulated model of the economy at the back of their minds. The arguments are drawn either from the Walrasian general-equilibrium-theory pool or from the Keynesian monetary-theory-of-production pool. What makes the discussion surreal is that both Walrasianism and Keynesianism are known to be failed approaches.

The elementary Walrasian story of the market economy goes roughly as follows. There are different types of markets (basically product, labor, money, real assets, financial assets) which function according to what Leijonhufvud called the totem of economics, that is, supply-function-demand-function-equilibrium and interact such that under the ideal condition of full price flexibility in each market all markets clear. It has ALWAYS been admitted that in the real world conditions are not ideal. The claim is that this does not affect the benchmark function of the Walrasian model. The elementary story is backed up by general equilibrium theory which provides the formal proof of the existence of a market clearing price vector.

The proof of the Walrasian story is worthless because its premises are false. Fact is that (i) the different market types work on DIFFERENT principles (2011), (ii) all three analytical elements of “the” market, i.e. supply function, demand function, equilibrium, are nonentities, (iii) the underlying behavioral assumptions are false.

In sum, the Walrasian story of the market economy is axiomatically false. The axioms are given with this set: “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)

Axiomatically false means that the theory/model is BEYOND repair and has to be fully REPLACED. The replacement of the axiomatic foundations is what methodologists call a paradigm shift. Nothing less will do.

Nick Rowe has not realized this and reiterates the Walrasian story with a new spin which is as senseless as adding epicycles to the Geo-centric model.

David Glasner is already enlightened: “Most of all, they represent an uncritical transfer of partial-equilibrium microeconomic thinking to a problem that requires a system-wide macroeconomic approach. That approach should not ignore microeconomic reasoning, but it has to transcend both partial-equilibrium supply-demand analysis and the mathematics of intertemporal optimization.” This crucial insight is beyond sticky Nick and others of the Walrasian ilk.

To rise above Walrasian and Keynesian drivel requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations (2014).* New macrofoundations deliver the materially/formally consistent general theory of profit, employment, interest and money.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See also ‘From Orthodoxy to Heterodoxy to Sysdoxy’ and ‘How to restart economics

Immediately following 'A brief rectification employment theory'

September 27, 2016

The choice between Friedmanian pest and Keynesian cholera

Comment on Brad DeLong on ‘The Stakes of the Helicopter Money Debate: A Primer’

Blog-Reference

Brad DeLong summarizes: “The Great Moderation of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus of mainstream economists at least, that Keynes had been wrong and Friedman had been right. But in the aftermath of 2007, it became very clear that they — or, rather, we, ... — were very, tragically, dismally and grossly wrong.”

And then he continues: “Now we face a choice ...”

No, there never has been a choice between the Friedmanians and Keynesians because BOTH are wrong. Both are groping in the dark with regard to the two most important features of the market economy: the profit mechanism and the price mechanism. Because of this, the discussion about monetary and fiscal policy, or helicopter money for that matter, never had more scientific content than free ink-blot association.

“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)

Economists have no true theory. Economics is a failed science. What Friedmanians and Keynesians have to offer is political opinion without sound scientific foundation.

For the proof let us very briefly turn to the formally and empirically correct employment theory (2012; 2014). The basic version of the objective structural employment equation is shown on Wikimedia. From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment,
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.
The complete AND testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Items (i) and (ii) cover Keynes’s arguments about the role of aggregate demand, which have been commonsensically right but formally defective. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist hallucinates. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

So, in simple terms, full employment (in any definition) can be achieved by increasing aggregate demand or by INCREASING the average wage rate (or by a combination of the two).

The second alternative is preferable to Keynesian deficit spending* but it is the very opposite of what the broad consensus always told the world: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin, 1997, p. 11)

Both, the Friedmanian and Keynesian approaches have produced misleading policy advice. Unemployment is ultimately the result of theory failure. Before economists can hope to be taken seriously they have to do some scientific homework.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Tobin, J. (1997). An Overview of the General Theory. In G. C. Harcourt, and P. A. Riach (Eds.), The ’Second Edition’ of The General Theory, volume 2, pages 3–27. Oxon: Routledge.

* See post ‘Keynesianism as ultimate profit machine

***
REPLY to Ray LaPan-Love on Sep 28

You say: “I get the sense that you expect too much from the ‘dismal science’.”

I get the sense that you have some trouble with clear thinking. It is very well known and communicated each year in no uncertain terms that economics is a science: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Science is well-defined by the criteria of formal and material consistency: “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)

It is a provable fact that neither Walrasianism, nor Keynesianism, nor Marxianism, nor Austrianism is materially/formally consistent. All these approaches are axiomatically false, that is, beyond repair.*

If you think that it is ‘too much’ to demand from economics to live up to scientific standards then you have to see to it, firstly, that the word ‘sciences’ is eliminated from the “Bank of Sweden Prize in Economic Sciences”. The general public has to be informed that the 200-year-old claim and the actual state of economics do not match. It follows, secondly, that economists have to be expelled from the scientific community. It follows, thirdly, that organizations like the AEA refrain from speaking in the name of science.

Your argument misses the point. I expect nothing from the currently active and failed economists other than to drop the claim that they are doing science. This claim is ‘too much’.

* See post ‘All models are false because all economists are stupid

The trouble with Naked Keynesianism

Comment on Matias Vernengo on ‘The Trouble with Paul Romer’s Angriness’

Blog-Reference

In his recent paper ‘The Trouble With Macroeconomics’ Paul Romer put DSGE and its main proponents ― Lucas, Sargent, Prescott ― to rest. From the fact that microfounded macro is an officially buried research program, though, does not follow that Keynesian macro can now be taken seriously.

Keynes, too, based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 80 years.

For details see ‘How Keynes got macro wrong and Allais got it right
and ‘All models are false because all economists are stupid

Egmont Kakarot-Handtke

September 26, 2016

How Keynes got macro wrong and Allais got it right

Comment on Lars Syll on ‘Good advice to aspiring economists’

Blog-Reference and Blog-Reference on Sep 28 and Blog-Reference on Nov 28

Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his 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)

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).

Allais clearly identified Keynes major fault: “... mais son [Keynes’s] 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 because of his logical insufficiency.

The correct relationship is given by Qre=I−S (Allais, 1993, p. 69) Legend: Qre: retained profit, S: saving, I investment expenditure.

It is pretty obvious from this equation that I and S are NEVER equal, neither ex-ante nor ex-post. The argument that I=S is merely an accounting identity proves only that, as a general rule, economists are too stupid to understand the elementary mathematics of accounting (2012). Allais understood it.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
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.
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

Related 'Wikipedia and the promotion of economists’ idiotism' and 'Macro for dummies' and 'Rectification of MMT macro accounting' and 'A tale of three accountants' and 'Review of the economics troops' and 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists' and cross-references Refutation of I=S and cross-references Accounting

From gossip to the correct employment theory

Comment on ProGrowthLiberal on ‘The New Men Without Jobs Conservative Excuse’

Blog-Reference

Economists love to psychologize about their fellow citizens. A long-standing topos is that the unemployed are drunkards, sluggards, criminals, social parasites, or smart optimizer who simply prefer leisure over work.

It is pretty obvious that NO way leads from this brain dead folk psychological gossip to the explanation of employment/unemployment for the economy as a whole. Nonetheless, economists are quite sure how to cure unemployment: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997, p. 11)

In more than 200 years, employment theory has not risen above this substandard intellectual level. Time for a sketch of the formally and empirically correct employment theory (2012; 2014). The basic version of the objective structural Employment Law is shown on Wikimedia.

From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE 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 of the factor cost ratio rhoF=W/PR leads to higher employment.

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

Items (i) and (ii) cover Keynes’s arguments about the role of aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provable false. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist hallucinates. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (expenditure ratio, investment expenditures etc.) or by INCREASING the average wage rate or by a combination of the two.

Both, the Walrasian and Keynesian approaches have produced misleading policy advice. Unemployment is ultimately the result of theory failure, that is, of the utter scientific incompetence of economists who are mainly occupied with gossiping about whether the new men without jobs are floated by wives, girlfriends, relatives or by Uncle Sam. It is only a question of time before these new men get the idea to tar and feather the ‘throng of superfluous economists’ (Joan Robinson).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Tobin, J. (1997). An Overview of the General Theory. In G. C. Harcourt, and P. A. Riach (Eds.), The ’Second Edition’ of The General Theory, volume 2, pages 3–27. Oxon: Routledge.

All models are false because all economists are stupid

Comment on David Glasner on ‘Paul Romer on Modern Macroeconomics, Or, the “All Models Are False” Dodge’

Blog-Reference

Theoretical economics is science and science is digital=binary=true/false and NOTHING in between. Political economics is the very opposite of science and it resides in the bottomless morass between true/false where “... nothing is clear and everything is possible.” (Keynes, 1973, p. 292). One will invariably find that political economists adhere to the freak methodology of anything goes/nothing matters.#1

What David Glasner does not seem to realize in his laudable refutation of the silly ‘All models are wrong’ excuse is that with regard to simplification and abstraction and the deductive method ALL has been said by the founding fathers:

“Any order of phenomena, however complicated, may be studied scientifically provided the rule of proceeding from the simple to the complex is always observed.” (Walras, 2010, p. 211)

“The conclusions of geometry are not strictly true of such lines, angles, and figures, as human hands can construct. But no one, therefore, contends that the conclusions of geometry are of no utility, or that it would be better to shut up Euclid’s Elements, and content ourselves with ‘practice’ and ‘experience’.” (Mill, 1874, V.48)

“The ground of confidence in any concrete deductive science is not the à priori reasoning itself, but the accordance between its results and those of observation à posteriori.” (Mill, 2006, p. 896)

In his recent paper, ‘The Trouble With Macroeconomics’#2 Paul Romer puts DSGE and its main proponents ― Lucas, Sargent, Prescott ― to rest. In the final section ‘The Trouble Ahead For All of Economics’ he appeals to emotions: “It is sad to recognize that economists who made such important scientific contributions in the early stages of their careers followed a trajectory that took them away from science.”

While it is true that DSGE and its proponents are out of science it is NOT correct to give the impression that an accident happened at some point on the way which led from science to non-science. The fact of the matter is that DSGE has ALWAYS been out of science because economics has ALWAYS been out of science. The leaders of the DSGE/RBC program have done exactly what they were supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

This definition of the subject matter translates into the following set of hard core propositions/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)

The critical axioms are HC2 and HC5. Krugman put it nicely: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

It is obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of orthodox economics is methodologically forever unacceptable. The axiom set consists of blatant nonentities but each student generation has swallowed it without turning an eyelid. Lucas, Sargent, Prescott certainly did. This is scientifically disqualifying.

In order to be applicable HC2, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. Taken together, all axioms and auxiliary assumptions crystallize to SS-DD-equilibrium or what Leijonhufvud famously called the Totem of Micro/Macro.

Needless to stress that ALL THREE elements of the standard tool (SS-function, DD-function, equilibrium) are nonentities. The fact that neither SS/DD functions nor equilibrium exist leads with inescapable consequence to the identification problem in Econometrics (see Romer Sec. 4). Romer takes this insurmountable technical difficulty as a methodological silver bullet in order to finish off DSGE/RBC. It should be noted, though, that the identification problem has its roots in the Walrasian axiom set HC1/HC5 which is the accepted common ground of orthodox economics.

To throw DSGE/RBC unceremoniously out of science is only the first step because textbook supply-demand-equilibrium, which is built upon the same maximization-and-equilibrium axioms, is rubbish since Jevons/Walras/Menger.

This is the current state of economics: Walrasian microfoundations are false since 140 years and Keynesian macrofoundations are false since 80 years. As a consequence, roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks is false.

To rise above the proto-scientific level requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations (2015). In methodological terms, rethinking macroeconomics requires the replacement of false axioms by true axioms and the dishonorable discharge of the Walrasian, Keynesian, Marxian, Austrian crowd from science.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
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). 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.
Walras, L. (2010). Elements of Pure Economics. London, New York, NY: Routledge.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

#1 See also post ‘Eclecticism, anything goes, and the pluralism of false theories
#2 Paper of Sep 14, 2016


Related 'Economics between mathiness, dyscalculia and idiocy' and 'Schizonomics' and 'Modern macro moronism' and 'The methodological blunders of fake scientists' and 'If it isn’t macro-axiomatized, it isn’t economics' and 'Economics is a science? You must be joking!' and 'New economic thinking, or, let’s put lipstick on the dead pig' and 'Economists and the destructive power of stupidity' and 'Failed economics: The losers’ long list of lame excuses' and 'Economists: scientists or political clowns?'

True or false: income=wages+profits? False

Comment Lars Syll on ‘Stiglitz and the demise of marginal productivity theory’

Blog-Reference

The trouble with distribution theory started with Ricardo who got the distinction between wage, profit and rent wrong (2011). Then Marx got the class theory of profit wrong (2014a). Neoclassical marginal distribution theory, of course, is unsurpassable idiotism, but Keynesianism did not perform much better, and Heterodoxy has actually multiple profit theories that do not fit together.*

Yes, distribution theory has always been the deepest morass of economics. For the correct approach see (2014b).

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2011). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. 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

* See ‘Heterodoxy, too, is scientific junk

September 25, 2016

Kick out the king and don’t forget the jesters

Comment on Marc Lavoie on ‘Rethinking Macroeconomic Theory Before the Next Crisis’

Blog-Reference

“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)

Economists have no true theory. Economics is a failed science. Lacking the true theory means that economists do not understand how the actual monetary economy works and from this follows that they are, as a matter of principle, in NO position to give policy guidance. To derive policy advice from defective models is not different from poultry entrails reading.

Both, neoclassical and Keynesian policy proposals have NO sound theoretical foundations. Economists always argue horizontally and compare different proposals instead of vertically looking downward to their premises. The fact of the matter is that Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false and because of this ALL their policy guidance is worthless.

Lavoie takes the 2008 crisis and its aftermath in order to prove that Orthodoxy got it often wrong and Heterodoxy got it often right. The problem is this: in economics, almost everything and the exact opposite has already been said sometime, somewhere, by somebody. So it is easy to show ex post with selected examples where the own party was right and the other party was wrong.

This is not how science works. Science is about the material and formal consistency of a theory which crucially depends on the foundational propositions/premises/assumptions/ axioms. This is known since antiquity: “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.” (Aristotle). The scientific failure of economics consists in the fact that Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false, that is, built upon green cheese assumptions.

Orthodox economics is built upon this set of foundational propositions/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)

Methodologically, this axiom set is forever unacceptable but economists swallowed it hook, line and sinker from Jevons/Walras/Menger onward to DSGE/RBC and its New Keynesian variants. The microfoundations approach is not a degenerated research program but has already been dead in the cradle.

Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)

Keynes’s original blunder kicked off a chain reaction of errors/mistakes. As a result, all I=S/IS-LM models are worthless. Most importantly, Keynes’s profit conundrum remained unsolved. Until this day neither Walrasians, nor Keynesians, nor Marxians, nor Austrians got profit right. As the Palgrave puts it: “A satisfactory theory of profits is still elusive” (Desai). Because economists have NO IDEA of the PIVOTAL concept of their subject matter they cannot explain how the actual economy works which means that their policy guidance has NO sound scientific foundation (2015).

This is the current state of economics: Walrasian microfoundations are false since 140 years and the Keynesian macrofoundations are false since 80 years. To expect good advice for the future of macro from economists who were active participants in the joint disaster of Orthodoxy and Heterodoxy is beyond ridiculous.

Marc Lavoie concludes his comprehensive synopsis of orthodox errors/mistakes/falsehoods: “Providing new clothes to the Naked Emperor of mainstream economics won’t do; the Emperor needs to be dethroned.” Indeed, but don’t forget to kick out the heterodox jesters, too.

To rise above the proto-scientific level requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations.* In methodological terms, rethinking macroeconomics requires the replacement of false axioms by true axioms and the dishonorable discharge of the Walrasian, Keynesian, Marxian, Austrian crowd from science. As Romer recently put it: there is trouble ahead for ALL of economics.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT 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
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See post ‘From Orthodoxy to Heterodoxy to Sysdoxy

***
COMMENT on Vic Volpe on Sep 30

You are missing the point. This thread is neither about economic history nor the USA but about economic theory. Economics ― understood as science ― is about an abstract entity called the monetary economy or the market economy and about how this entity works. More specifically economics is about the laws or invariants of the economic system. Like in physics, where there is no American, French or Chinese Law of the Lever, there are no American, French or Chinese economic laws.

The task of economics ― understood as science ― is to figure out the systemic laws of the monetary economy and NOTHING else.

However, there has always been political economics and theoretical economics. The founding fathers were straightforward people and called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became one of the most embarrassing failures in the history of scientific thought.

The main topic of your post is how to make America economically great again. This is a legitimate political issue but has to be clearly separated from the core question of economics ― understood as science ― which is: How does the monetary economy work?

Science is well-defined by the criteria of formal and material consistency. It is a provable fact that neither Walrasianism, nor Keynesianism, nor Marxianism, nor Austrianism is materially/formally consistent. So, all we actually have is scientifically worthless political economics.

You say: “Let’s put a little more emphasis on productivity and growth and a little less on economic stability. If you want a metaphor, why not shoot for the Moon, like we did in the ‘60s?”

Clearly, if you want to go to the moon you have to figure out the laws of physics first. Likewise, if you want to make America economically great you have to figure out the laws of economics first. After more than 200 years, the representative economist does not even know the Law of Profit* and this includes Walrasians and Keynesians and Marc Lavoie and you.

* See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?

***
COMMENT on Vic Volpe on Oct 3

You say: “Economics is not a science. I know of no better evidenciary proof of this than the above discussion of the various contradictory theories none of which depict reality.”

This is true* but the problem is that what you are doing is NOT science either but storytelling. The very task of science is to move from mere opinion and wish-wash to scientific knowledge.

“There are always many different opinions and conventions concerning any one problem or subject-matter ... This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other ...” (Popper, 1994)

What is indeed needed is, as Marc Lavoie put it in the title ‘Rethinking Macroeconomic Theory Before the Next Crisis’. What is NOT needed is just another conventional opinion about how the American economy performed in the 1960s.

* See posts ‘All models are false because all economists are stupid’ and ‘The real problem with the economics Nobel

Solow and the ludicrousness of economics

Comment on Lars Syll on ‘Solow on post-real Chicago economics’

Blog-Reference

From the fact that DSGE/RBC is a failed research program does not follow that the available alternatives can be taken more seriously.

Solow’s critique of Orthodoxy is spot on: “Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous ― that is, by laughing at it ― so as not to fall into the trap of taking it seriously and passing on to matters of technique.” (See intro)

But Solow, too, has been moving into the wrong direction for the last three decades. He promoted the utterly silly and post-real concept of a production function, which is part and parcel of failed Orthodoxy’s fundamental framework, see ‘Putting the production function back on its feet’.

The ludicrousness of economics begins already with supply-demand-equilibrium and Solow has always been member of this broad church of scientific retards.

Egmont Kakarot-Handtke

September 24, 2016

Out of science

Comment on David Ruccio on ‘Phlogiston, the identification problem, and the state of macroeconomics’

Blog-Reference

In his recent paper ‘The Trouble With Macroeconomics’* Paul Romer puts DSGE and its main proponents (Lucas, Sargent, Prescott) to rest. In the final section ‘The Trouble Ahead For All of Economics’ he appeals to emotions: “It is sad to recognize that economists who made such important scientific contributions in the early stages of their careers followed a trajectory that took them away from science. It is painful to say this so when they are people I know and like and when so many other people that I know and like idolize these leaders.”

While it is true that DSGE and its proponents are out of science it is NOT correct to give the impression that an accident happened at some point on the way which led from science to non-science. The fact of the matter is that DSGE has always been out of science because economics has always been out of science. The leaders of the DSGE/RBC program have done exactly what they were supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

This definition of the subject matter translates into the following set of hard core propositions/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)

The critical axioms are HC2 and HC5. Krugman put it nicely: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

It is obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of orthodox economics is methodologically forever unacceptable. The axiom set consists of blatant nonentities but each student generation has swallowed it without turning an eyelid. Lucas, Sargent, Prescott certainly did. This is scientifically disqualifying.

In order to be applicable HC3, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function.*** Taken together, all axioms and auxiliary assumptions crystallize to SS-DD-equilibrium or what Leijonhufvud famously called the Totem of Micro/Macro.

Needless to stress that ALL THREE elements of the standard tool (SS-function, DD-function, equilibrium) are nonentities. The usual concept of a function is NOT applicable in economics. It was the heterodox economist Georgescu-Roegen who raised some methodological doubts long ago: “But why should economic laws ... be expressed by analytical functions?” (1966, p. 123)

The fact that neither SS/DD functions nor equilibrium exist leads with inescapable consequence to the identification problem in Econometrics (see Romer Sec. 4).** Romer takes this insurmountable technical difficulty as methodological silver bullet in order to finish off DSGE/RBC. It should be noted, though, that the identification problem has its roots in the Walrasian axiom set HC1/HC5 which is the accepted common ground of orthodox economics.

The real and ultimate scientific error/mistake of Lucas, Sargent, Prescott et al. consists in accepting the very definition of economics. The failure of DSGE therefore calls (i) for a paradigm shift, i.e. a new definition of the subject matter, and (ii), the replacement of the silly supply-demand-equilibrium totem of economics (2013; 2014).

To throw DSGE/RBC now unceremoniously out of science is only the first step because textbook supply-demand-equilibrium, which is built upon the same maximization-and-equilibrium axioms, is rubbish since Jevons/Walras/Menger. By sticking to the post-real microfoundations HC1/HC5 economists are since 140 years out of science. Romer is right: there is trouble ahead for ALL of economics.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Georgescu-Roegen, N. (1966). Analytical Economics, chapter General Conclusions for the Economist, pages 92–129. Cambridge, MA: Harvard University Press.
Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
Kakarot-Handtke, E. (2014). The Law of Supply and Demand: Here it is Finally. SSRN Working Paper Series, 2481840: 1–17. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* Paper of Sep 14, 2016
** See also Wikipedia
*** See post ‘Putting the production function back on its feet

Preceding 'The identification problem and the dumping of the old guard'

Unemployment ― the toughest challenge for economics students

Comment on Maria Alejandra Madi on ‘How unemployment has been considered by mainstream macroeconomic models?’

Blog-Reference

Maria Alejandra Madi tells the history of employment theory since the 1950s and recounts the various recommendations given by economists. This is counterproductive. For a heterodox student, it goes without saying that orthodox economics is dead. Hence, there is NO need to reiterate false theories, the only topic of interest is the TRUE employment theory. The students of physics nowadays do not waste much time with the study of the Geo-centric model or other obsolete theories. Students want to learn the true theory.

With regard to employment theory it is important to note the following:
  • IS-LM is refuted and as dead as a doornail (2014),
  • the (bastard) Phillips curve is refuted and as dead as a doornail (2012),
  • the correct employment theory is already part of the curriculum of Constructive Heterodoxy (2015).*
In the following, a sketch of the formally and empirically correct employment theory is given. A rather elementary version of the objective structural employment equation is shown on Wikimedia.

From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE 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 of the factor cost ratio rhoF=W/PR leads to higher employment.

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

Items (i) and (ii) cover Keynes’s arguments about the role of aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provable false. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist falsely assumes. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (expenditure ratio, investment expenditures etc.) or by INCREASING the average wage rate or by a combination of the two.

Both, the Walrasian and Keynesian approaches have produced misleading policy advice. Unemployment is ultimately the result of theory failure, that is, of the utter scientific incompetence of economists ― more precisely of orthodox AND heterodox economists.

By again and again recycling theories that have already been refuted, the pedagogy blog is treading water, keeps students away from the cutting edge of research, and ultimately hampers an effective employment policy.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). 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. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

* See cross-references New curriculum

September 23, 2016

False hopes

Comment on Lars Syll on ‘Wren-Lewis trivializing Romer’s critique’

Blog-Reference

From the fact that DSGE/RBC is a failed research program does not follow that Keynesianism is a progressive alternative. Axel Leijonhufvud’s critique of neo-Walrasian Orthodoxy is spot on but he, too, is moving since three decades into the wrong direction, see ‘The economic Sisyphus: Forever kicking the can down the wrong road

Egmont Kakarot-Handtke

Related 'No future for axiomatically false economics'

September 22, 2016

The identification problem and the dumping of the old guard

Comment on David Ruccio on ‘Phlogiston, the identification problem, and the state of macroeconomics’

Blog-Reference and Blog-Reference on Sep 23 adapted to context

There is political economics and theoretical economics. The founding fathers were straightforward people and called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became one of the most embarrassing failures in the history of scientific thought.

Now, Paul Romer argues: “A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.” (See intro)

The key word is scientific truth. Why is scientific truth suddenly the uppermost value? Actually, it is not! Since the founding fathers, theoretical economics is dominated by political economics. What Romer is communicating with his critique of DSGE/RBC/ mathiness is nothing less than a change of policy which means that theoretical economics has now speedily adapt to a new agenda. To wrap the new task for the economics community in a critique of the identification problem, which is a old as Econometrica (1933), proves a strong sense of humor.

There is a policy change in the offing which requires a redecoration of the scientific fig leaf. The severe critique of the old authority (Lucas, Sargent, Prescot et al.) makes it clear that there is a new authority and that the old loyalities are obsolete.

With regard to the scientific status of economics (= material and formal consistency) the situation is UNCHANGED since half an eternity. Methodologically, the maximization-and-equilibrium approach has always been axiomatically unacceptable but economists swallowed it hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The microfoundations approach is not a degenerated research program but has already been dead in the cradle.*

This is the current state of economics: Walrasian microfoundations are false since 140 years and the Keynesian macrofoundations are false since 80 years.** As a consequence, all models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and together this is roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks.

Because they either do not fully realize that their research program has already been dead in the cradle or because they have not the slightest idea about what a progressive alternative could look like, the present generation of orthodox and heterodox economists has not made and cannot make a significant contribution to the discussion about how the actual economy works.*** These folks are not part of the solution they ARE the defunct research programs.****

Egmont Kakarot-Handtke

* See post ‘No future for axiomatically false economics
** See post ‘Marshall and the Cambridge school of plain economic gibberish
*** See post ‘The trouble with economics prizes
**** For the paradigm shift see cross-references

Following 'Out of science'

Dead men tweeting

Comment on Brad DeLong on ‘DSGE as a Degenerating Research Program in Lakatosian Terms’

Blog-Reference

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

Methodologically, the maximization-and-equilibrium approach is axiomatically unacceptable but economists swallowed it hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The microfoundations approach is not degenerating but has already been dead in the cradle.*

This is the current state of economics: Walrasian microfoundations are false since 140 years and the Keynesian macrofoundations are false since 80 years.** As a consequence, all models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and together this is roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks.

Brad DeLong and friends are active participants in one of the most embarrassing failures in the history of scientific thought.

Because they either do not fully realize that their research program has already been dead in the cradle or because they have not the slightest idea about what a progressive alternative could look like, the present generation of economists has not made and cannot make a significant contribution to the discussion about how the actual economy works.

These folks are not part of the solution they ARE the defunct research program.***

Egmont Kakarot-Handtke

* See post ‘No future for axiomatically false economics
** See post ‘Marshall and the Cambridge school of plain economic gibberish
*** See post ‘The trouble with economics prizes

September 20, 2016

Scientists and science actors

Comment on Lars Syll on ‘Chicago drivel — a sure way to get a ‘Nobel prize’ in economics’

Blog-Reference and Blog-Reference

Personal experience makes only a tiny part of what every human knows about the world/ universe and other humans, the greater part stems from myth/religion/philosophy/ science. Myth/religion/philosophy is storytelling and does not satisfy the scientific criteria of logical and empirical consistency. Storytelling is easy, to establish consistency is hard. From the history of the last 5000 years we know that stories sell well, the absurder the better. The average person prefers belief/opinion (= doxa) to knowledge (= episteme) and thinks more about natural/supernatural persons/personifications and less about the universe and its sub-systems. Because of this, nearly 100 percent of human communication consists of gossip.

A case in point is economics. What Thomas Sargent tells his students boils down to: (i) humans respond to incentives, (ii) one cannot always get what one wants, (iii) in equilibrium economic agents are satisfied, (iv) sometimes people/governments keep their promises, sometimes not, (v) people try to get more out of the social pot than they put in, (vi) it is difficult/impossible to know other peoples’ motives/preferences and to forecast their actions. (See intro)

This is folk psychology and folk sociology — PsySoc for short. The economist Sargent tells his students how humans work but not how the economy works. The main reason is that Sargent and his fellow economists at Chicago, Berkeley, Harvard and elsewhere do not know how the economy works.

This would not be a big issue, after all, people talk most of the time about nonentities and things they know nothing about. To believe in standard economics is in no way different from the belief in the myths of ancient goat herders. The real trouble with economics begins here: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

The key word is science[s]. Why not simply “Bank of Sweden Prize in Economics”? The original title clearly communicates the claim that economics is a science. This claim is as old as Adam Smith/Karl Marx. But economists never lived up to the claim.

Science is well-defined by the criteria of formal and material consistency: “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)

Neither orthodox nor heterodox economics satisfies the criteria of formal and material consistency. Worse, economists violate scientific standards since the founding fathers. There is no exception: Walrasian, Keynesian, Marxian, or Austrian economics is provable inconsistent.

There is political economics and theoretical economics. The founding fathers were straightforward people and called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became one of the most embarrassing failures in the history of scientific thought.

Economics is not a science, but what Feynman famously called a cargo cult science. Accordingly, economists are not scientists but science actors. The difference is this: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

Not only the Chicago version but economics in all its orthodox and heterodox variants is unacceptable proto-scientific stuff. The first thing to do is to rename the most prestigious economics prize into “Bank of Sweden Oscar for the best science actor/actress.”

Egmont Kakarot-Handtke


References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL

Related 'Feeble minds, shaky assumptions, and the inevitable failure of economics' and 'How to get out of the Econ 101 PsySoc woods' and 'Economics is NOT a science of behavior' and 'From PsySoc to SysHum' and 'The happy end of the social science delusion' and 'The Science-of-Man fallacy' and 'PsySoc — the scourge of economics' and 'A farewell to PsySoc economics'

***
REPLY to Peter on Sep 21

Your argument adds nothing to the discussion but distracts from the main point. The question is: Is the theory/model true or false. The character of the author, his CV, and what his motives might be is ultimately irrelevant. Science is about proof and not about personality or credibility.

“Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter)*

Chicago economics is provable false. The same holds for Cambridge economics. It is irrelevant whether Cambridge is regarded politically more leftist and Chicago more rightist. The point is that both Chicago and Cambridge produce scientific rubbish.

* See also the first 60 seconds of ‘Feynman on Scientific Method’ on YouTube

No future for axiomatically false economics

Comment on Narayana Kocherlakota on ‘How to Build a Better Macroeconomics’

Blog-Reference and Blog-Reference on Sep 22 adapted to context

There is political economics and theoretical economics. The founding fathers were straightforward people and called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). This is how economics became one of the most embarrassing failures in the history of scientific thought.

Standard economics is built upon this hard core set of foundational propositions/axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states.” (Weintraub, 1985)

Methodologically, this axiom set is forever unacceptable but economists swallowed it hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The failure of methodological individualism is indisputable. The ultimate reason can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works. In other words, the microfoundations approach has already been dead in the cradle.

Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010)

Keynes’s original blunder kicked off a chain reaction of errors/mistakes. As a result, all I=S/IS-LM models are worthless. Most importantly, Keynes’s profit conundrum remained unsolved. Until this day neither Walrasians, nor Keynesians, nor Marxians, nor Austrians got profit right. As the Palgrave puts it: “A satisfactory theory of profits is still elusive” (Desai). Because economist have NO IDEA of the pivotal concept of their subject matter they cannot explain how the actual economy works which means that their policy guidance has NO sound scientific foundation.

This is the current state of economics: Walrasian microfoundations are false since 140 years and the Keynesian macrofoundations are false since 80 years. As a consequence, all models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and together this is roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks. Robert Lucas has been a major participant in this scientific disaster. To expect good advice for the future of macro from an economist who has proven his scientific incompetence over the last three decades is beyond ridiculous.

To get out of failed economics requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations. In methodological terms: to build a better macroeconomics requires the replacement of the false axioms of Lucas et al. by true axioms and the dishonorable discharge of the DSGE crowd from science.

Egmont Kakarot-Handtke

***
REPLY to reason on Sep 21

You say: “I understand the potential importance of profit as a driver of investment (i.e. it is important from the point of view of motivation and micro-foundations), but I don’t see the relevance to macro flow analysis.”

This is because you are way behind the curve and still cling to the fundamental error that economics is a behavioral science (Hudík, 2011).* Profit, though, does not appear because agents need an incentive. Profit for the economy as a whole appears, or fails to appear, independently of what the agents subjectively wish or think or imagine or expect or need because of the objective, systemic, macroeconomic Profit Law (2014).

Systemic laws have the same methodological status as physical laws.

In the Middle Ages, physicists did not understand the pivotal phenomenon of their subject matter, viz. energy, and could not tell the difference between potential and kinetic energy.

At present, the representative economist is still at the proto-scientific level, that is, he does not understand the pivotal phenomenon of his subject matter and cannot tell what the difference between profit and income is.

You say “Profit is just another part of income” and this proves your utter scientific incompetence.

References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
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

* See also ‘Economics is NOT a social science

September 19, 2016

Critique is good, refutation is better, paradigm shift is best

Comment on Lars Syll on ‘Why critique in economics is so important’

Blog-Reference and Blog-Reference on Sep 22

It is long known that DSGE is a failed approach and nobody needs the critique of Romer et al. which amounts to not much more than the smarter rats abandoning the sinking ship. What is needed is a constructive idea about how to switch from the degenerated neoclassical research program to a progressive paradigm. As Blaug put it: “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.” (1998, p. 703)

The only reason why DSGE is still around despite the fact that even its dullest proponents have realized by now that it is indefensible rubbish is that Heterodoxy has failed to develop a suitable alternative: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

Heterodoxy’s failure is due to the fact that it stands methodologically still in the Cambridge tradition of loose verbal reasoning: “For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’” (Davidson, 1984, p. 574).* This contrasts with the motto of science “it is better to be precisely right than roughly wrong!”

There is nothing to choose between failed Orthodoxy and failed Heterodoxy. Both are logically and empirically refuted. Effective critique does NOT consist in Romer’s folk-psychological crap about heroic critique and killing poor Bob, it consists in throwing false theories out of the window and incompetent scientists out of science.

As Feynman knew: “The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.”

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.

* See post ‘Marshall and the Cambridge school of plain economic gibberish

Related 'The end of traditional Heterodoxy in the Malmö coal pit'

September 18, 2016

From subjective weighing of motives to objective systemic properties

Comment on merijntknibbe on ‘Insider critiques of neoclassical macro models’

Blog-Reference

It is long known that DSGE is a failed approach and nobody needs the insider critique of Romer et al. which amounts to not much more than the smarter rats abandoning the sinking ship. What is needed is a constructive idea about how to switch from the degenerated neoclassical research program to a progressive paradigm.

Merijntknibbe asks: “Do I have something to add? Yes. Of the authors above, Romer is clearest ... about the fact that a scientific paradigm does not only need theory but also needs a matching system of measurement, ...” (See intro)

Yes, indeed, this was already obvious to the ancient Greeks: “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)

To establish material consistency requires observation and measurement. The central economic measuring device is national accounting. From this follows that economic theory must, as a necessary condition, (i) contain as a subset those variables that appear in national accounting, and (ii), the definitions of the variables must be identical in theory and in accounting. This is currently not the case (2012) and this goes a long way to explain why economics has never risen above the proto-scientific level.

The first thing to notice is that standard economics is built upon a set of axioms that do not contain measurable variables at all.* This was already clear to Jevons: “Many will object, no doubt, that the notions which we treat in this science are incapable of any measurement. We cannot weigh, nor gauge, nor test the feelings of the mind; there is no unit of labour, or suffering, or enjoyment.” (1911, pp. 7, 10, 12)

Standard economics deals since more than 140 years with scientific nonentities: “There is no such measurable quantity as ‘value’ or ‘utility’ (with all due respect to Jevons, Walras, and others) and there is no evaluation of ‘the greatest happiness for the greatest number’ or more flatly, ― there is no such thing.” (Evans, quoted in Weintraub, 2002, p. 60)

Accordingly, mathiness can be defined as the formalization of nonentities which is an entirely illegitimate/senseless application of mathematics.**

From all this follows that economics must be based upon premises/axioms that contain only variables that are capable of measurement by national accounting or other measuring devices.

Because of this, the Walrasian axioms* have to be FULLY replaced. What is required is a paradigm shift and this in turn requires the switch from behavior-centered bottom-up, i.e. subjective microfoundations*, to structure-centered top-down, i.e. objective macrofoundations.

The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is defined by these three objective structural axioms:
A1. Yw=WL wage income Yw is equal to wage rate W times working hours L,
A2. O=RL output O is equal to productivity R times working hours L,
A3. C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The investment good sector comes in at a later stage. So, what we have with A1 to A3 is the pure consumption economy as the most elementary economic configuration. These premises are certain, true, and primary, and therefore satisfy perfectly all methodological requirements. Note (i) that unacceptable nonentities like utility, maximization, or equilibrium are absent, and (ii), that Yw and C relate to national accounting while W, L, O, R, P, X have to be measured by other devices.

Human behavior, tastes, choices, or society have no durable underlying structure, but the monetary economy has and it is given in the most elementary case by A1 to A3. Economics is not a behavioral or social science but a system science. A system can be unambiguously defined and measured. All else is proto-scientific rubbish.

Egmont Kakarot-Handtke


References
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. 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
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, NC, London: Duke University Press.

* Standard economics is defined by these six hard core propositions/axioms:
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)
** See Barzilai ‘On the Mathematical Foundations of Economic Theory

***
REPLY to Ken Zimmerman

“People who say it cannot be done should not interrupt those who are doing it.” G. B. Shaw

You can constructively contribute to the success of Heterodoxy simply by stopping to reiterate notorious methodological nonsense. Science is about logical/empirical proof/refutation. Empirical proof/refutation presupposes measurement. A central measuring device in economics is national accounting and it works with the accuracy of two decimal places.

In economics, the problem is NOT that measurement is hard or impossible. In fact, it is much easier and cheaper than to build a measuring device like CERN. The problem is that economists of ALL colors are quite happy in the morass between true and false where “nothing is clear and everything is possible” (Keynes). Walrasian, Keynesian, Marxian, and Austrian proto-scientists are pleased with the inconclusiveness of their debates and the pluralism of false theories. What they fear more than hell fire is a clear-cut empirical test and a definitive refutation of their inconsistent modls. Both, orthodox and heterodox economists know very well that they cannot survive serious testing: “... suppose they did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics.” (Hands, 2001)

In fact, there IS NO economics, only cargo cult economics and inconclusive blather.

The trouble with economics prizes

Comment on Simon Wren-Lewis on ‘Economics, DSGE and Reality: a personal story’

Blog-Reference

The trouble with economics prizes begins here: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

The key word is science[s]. Why not simply “Bank of Sweden Prize in Economics”? The original title clearly communicates the claim that economics is a science. This claim is as old as Adam Smith/Karl Marx. But economists never lived up to the claim.

Science is well-defined by the criteria of formal and material consistency: “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)

Neither orthodox nor heterodox economics satisfies the criteria of formal and material consistency. Worse, economists violate scientific standards since the founding fathers. There is no exception: Walrasian, Keynesian, Marxian, or Austrian economics is provable inconsistent.

There is political economics and theoretical economics. The founding fathers were straightforward people and called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economics never really got out of political economics. In other words, theoretical economics (= science) ultimately could not fully emancipate itself from political economics (= agenda pushing). How economics became one of the most embarrassing failures in the history of scientific thought requires a more detailed account.

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states.” (Weintraub 1985)

Methodologically, these premises are forever unacceptable but economists swallowed them hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The failure of methodological individualism is indisputable. The ultimate reason can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works.

Because of this, the microfoundations approach has already been dead in the cradle. Methodologically, this leaves only one option. As Joan Robinson put it: “Scrap the lot and start again.”

Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010)

Keynes’s original blunder kicked off a chain reaction of errors/mistakes. As a result, all I=S/IS-LM models are worthless. Most importantly, Keynes’s profit conundrum remained unsolved. Until this day neither Walrasians, nor Keynesians, nor Marxians, nor Austrians got profit right. As the Palgrave puts it: “A satisfactory theory of profits is still elusive” (Desai). Because economist have no idea of the pivotal concept of their subject matter they cannot explain how the actual economy works. No doubt, economists bear the intellectual responsibility for the social devastations of the Great Depression and other economic crises since then. Economic policy guidance never had a sound scientific foundation. Why are economists awarded prizes and not simply thrown out of science because of manifest incompetence?

Egmont Kakarot-Handtke