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’


“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 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 (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

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