October 23, 2016

Economics between science and magic

Comment on Anonymous on Noah Smith on ‘Do economists have physics envy?  Pt2’

Blog-Reference and Blog-Reference on Oct 26

You say: “Yes, magic is orders of magnitude more abundant in physics than in economics. But Economists make more money...uhmm, ...”.

The emotionally powerful common core of magic, physics, alchemy, biology, and economics is the idea of the creatio ex nihilo, the creation out of nothing, the making of gold out of dreck, life out of dead matter, the perpetual motion machine, the free lunch, something for nothing.

So, you are plainly wrong. In fact, magic and magical thinking is more abundant in economics than anywhere else. Actually, economists are occupied with nothing else. And, let us face it, it seems that economists have made the gold-maker’s dream come true. They have uncovered the magic formula and it spells market economy.

The classical economists advertised themselves as gold-makers: “... in the introduction to Book IV we read that Political Economy ‘proposes to enrich both the people and the sovereign,’ and it is this definition which expresses both what Smith wanted above everything and what interested his readers more than anything else.” (Schumpeter, 1994, p. 186)

Marx was a real spoilsport. He, too, was occupied with the magic formula M-C-M+, that is, how it is possible to make more money (= M+) out of money (= M). His answer is known as surplus theory or in simple pejorative terms exploitation. C in his formula stands for capital/capitalism.

Nowadays, the focus has moved from the sphere of production to the monetary sphere and more and more people get crazy about the fact that the FED can create money out of nothing and that bankers can charge interest for this feat.

Ordinary people have discovered that home-sweet-home, too, creates wealth over time seemingly out of nothing and can therefore be turned into an ATM.

The magical phenomenon of the market economy is profit. And the true magician knows how to make it. However, there is a nagging problem. Physicists have shown that because of the law of energy conservation something like value creation, i.e. something out of nothing, is impossible in principle. Only energy transformation is possible. Physical reality is a zero sum game (with entropy ignored).

This idea occurred also to economists: “... since it is impossible to have an economy where everyone is making profits. Aggregate profit for an entire (closed) economy must be zero, hence if any firm is making profits, some other firm must be making losses.” (Boland, 1992, p. 80)

On the other hand, one can point to the indisputable fact that the market economy is NOT a zero sum game. In the last 200 years overall profit in the market economies has been greater than zero. Something is very strange and magical here: profit seems to prove that something can come out of nothing. This, though, is against the iron rule of all of economics: “There is no such thing as a free lunch.”

What is even more strange: economics claims to be a science but cannot explain profit, or as Mirowski put it: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

According to scientific criteria economics is a failure. Neither Walrasians, nor Keynesians, nor Marxians, nor Austrians have figured out what profit is or can tell the difference between profit and income.* Economics is a proto-science and still stands where physics stood in the Middle-ages before the elementary concepts of force, mass, energy were properly defined and clearly understood.

Compared to physicists, economists have achieved virtually nothing of scientific value in the last 200 years. How, then, does it come that they make more money than physicists, as Noah Smith gleefully points out in order to debunk the old cliche of physics envy?

Quite simple, economists are magicians and have found the formula of how to transmute scientific dreck into gold.

Egmont Kakarot-Handtke

* See ‘The Profit Theory is False Since Adam Smith

Immediately preceding 'Economics between physics and psychiatry'

Related 'Gold-making, wine from water, M-C-M+, perpetuum mobile, free lunch, beating the stock market, and the perennial human dream'