September 8, 2016

Putting the production function back on its feet

Comment on Steve Keen on ‘Incorporating energy into production functions’

Blog-Reference

Orthodox economics messed up the theory of production but Heterodoxy never developed a viable replacement despite the fact that with Georgescu-Roegen’s approach it had already been on the right track (1970; 1971). Georgescu-Roegen was quite clear about “... the completely faulty form by which standard economics represents a production process” (1979, p. 318) but he failed to see that it was not enough to rectify the theory of production. What had to be replaced then and still has to be done is to scrap standard economics as a WHOLE. Partial improvements are as pointless as adding just another epicycle to the Geo-centric model. Nothing less than a paradigm shift will do.

The whole theoretical superstructure of Orthodoxy is based upon this set of hard core propositions a.k.a. 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, p. 109)

HC3 introduces marginalism which is the all-pervasive principle of Orthodoxy. Needless to emphasize that marginalism is ridiculous pseudo-scientific rubbish.

In order to be applicable, marginalism requires some auxiliary assumptions. One of them is the concept of a well-behaved production function. This concept implicitly excludes increasing returns (2011a). As every economists knows from Adam Smith’s pin factory, though, the beauty and triumph of capitalism consists exactly of increasing returns due to the division of labor and the mechanization of a growing number of sub-processes.

Thus, the green cheese behavioral assumption HC3 ultimately determines the analytical representation of the physically objective production process: “Indeed, here we find the neoclassical economist dictating the laws of physics to the physicist!” (Mirowski, 1995, p. 328). It is impossible to surpass the scientific incompetence of economists.

Steve Keen is perfectly right: “Arguably therefore, the production functions used in economic theory — whether spouted by mainstream Neoclassical or non-orthodox Post Keynesians — deserve to ‘collapse in deepest humiliation.’" In very practical terms this means that NO economic journal can accept papers that contain a Cobb-Douglas or any other well-behaved production function without violating scientific standards.

All these half measures, though, do not cut much ice. The very task of constructive Heterodoxy is to FULLY replace Orthodoxy as defined by HC1/HC6 and by implication the obsolete production function. For the correct approach and the correct sequential production function see (2011b, Sec. 4).

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge, MA: Cambridge University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic
Issues, 13(2): 317–328. URL
Kakarot-Handtke, E. (2011a). Increasing Returns and Stability. SSRN Working Paper Series, 1921267: 1–19. URL
Kakarot-Handtke, E. (2011b). Matter Matters: Productivity, Resources, and Prices. SSRN Working Paper Series, 1946874: 1–21. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.