December 5, 2016

The false foundations of economics

Comment on Peter Dorman on ‘The Identity-Equals-Causation Fallacy, Yet Again’

Blog-Reference

“We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114)

“In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (Georgescu-Roegen, 1970, p. 9)

Economics is a failed science and the ultimate reason is that economists did not get the conceptual foundations of their subject matter right. More specifically, both Walrasian microfoundations and Keynesian macrofoundations are false. As a consequence, not only Mankiw’s textbook is proto-scientific rubbish but ALL textbooks from Samuelson’s classic onward.

The preceding discussion between Dorman, ProGrowthLiberal, Unknown, Nick Rowe, George H. Blackford, rayward, Don Coffin, Bill, gives a vivid impression of utter confusion about the elementary concepts of economics.

The distinction between equality/identity/equilibrium has already been discussed at great length in the 1930s. It is not well understood until this day as Peter Dorman’s post demonstrates. For the definitive clarification see (2011, Sec. 11-18).

There is no use at all to discuss Mankiw’s textbook or his balance of payments theory in particular because Mankiw et al. apply false microfoundations and false macrofoundations. As Keynes already realized: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

This is the current state of economics in Hume’s words: “... when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.”

What has to be done? “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)

After more than 200 years economists cannot tell the difference between the foundational concepts profit and income. This is comparable to medieval physics before the concepts of energy, mass, force, etcetera were clearly defined and properly understood.

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Kakarot-Handtke, E. (2011). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.

Immediately preceding 'Economists still don’t get Econ 101 right'

***

COMMENT on ProGrowthLiberal and Spencer England on Dec 6

Each falling apple is an unique historical event. There are arbitrary many causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. That is so OBVIOUS that no physicist ever lost many words about the historicity of falling apples.

Accordingly, when the apple fell on Newton’s head he did NOT run to his neighbor in order to tell him the story but he wrote down the COMMON principle that underlies the motion of ALL falling bodies including the moon and the stars, i.e. the Law of Gravity.

This, in a nutshell, is the difference between storytelling and science. Science is NOT interested in singular historical events as such but in the underlying invariances (Nozick) or ‘eternal laws’.

What is at issue here is the theory of foreign trade and the interrelation of balances and their representation in national accounting and the fact that economists in general and textbook writers in particular do not understand the elementary mathematics of accounting.

So, your newspaper wisdom about Reagan’s tax policy is absolutely out of place.

***
ADDENDUM on Dec 16

Recycling trash talk
Comment on ProGrowthLiberal on ‘The Current Account Deficit: Low National Savings Redux’

You say “I have been reading something Lawrence Summers wrote over 12 years ago. A lot of interesting comments but let me pick out one key segment: ‘Tautologously, a current account deficit is the difference between national savings and national investments;’ ...”

From this discussion between Summers, Krugman, DeLong you draw a policy conclusion: “We should instead think in terms of how to get investment demand ... higher.”

This conclusion is absolutely unfounded and you should know it. On the preceding thread the proof has been given that the “tautologous” interrelation of balances, i.e. NX ≡ (S-I) + (T-G), is PROVABLE false.#1

By warming up the old discussion you make four points rather clear:
(i) That Summers, Krugman, DeLong were talking trash already 12 years ago.
(ii) That they did not realize then that their “tautologous” relation has been false since the 1930s.
(iii) That you mindlessly parrot trash from economists who are known to be scientifically incompetent.
(iv) That you do not understand the consequences of a formal refutation.

You violate scientific standards by mindlessly repeating provable false arguments. Take notice: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941)

#1 See ‘The Identity-Equals-Causation Fallacy, Yet Again