June 24, 2017

The role of labor and business in a well-organized society

Comment on Sandwichman on ‘Hoxie on “Fixed Group Demand Theory” (the “lump of labor”)’

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)

Fact is that economists do NOT have the true theory. This holds in particular for employment theory, and the lump of labor theory is a case in point. The lethal methodological blunder of employment theory consists in the Fallacy of Composition, i.e. the illegitimate transfer of truths that hold for one firm/market onto the economy as a whole. What the representative micro-brained economist never understood is that what is true for the molehill is not true for the universe.

Methodological conclusion: the traditional microfoundations approach is as false as one can get and has to be fully replaced by the macrofoundations approach.

The correct macro employment equation#1 is reproduced on Wikimedia.#2 From this objective-structural-systemic relationship follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek 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 structural-systemic employment equation is a bit longer and contains in addition the public sector and the foreign trade sector.

Item (i) and (ii) cover the familiar arguments about how effective demand affects employment. Item (iii) embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

From this follows the proper macroeconomic role of the institution union. To be clear, with the institution union is not meant the different historical variants as they have developed in different countries but an abstract entity that represents all workers/employees. At the other side of the table sits the abstract entity business which represents all firms of the business sector. These two macro-entities are now given the task to establish full employment by setting the average wage rate W and the average price P.

In the present situation (with rhoE and I given), a theoretically enlightened and politically empowered perfectly symmetric macro-institution would set the parameters as follows: price increase zero and wage increase greater than productivity increase. This increases employment for a while. Afterwards: price increase zero and wage increase equal to productivity increase. This stabilizes the economy at full employment.

With the historically given institutional setting one gets this chain of events: insufficient wage increase - employment L down/price P down - asymmetric weakening of the labor side - insufficient wage increase - employment down/price down - and so on. Correct macrofounded economic theory tells us that an economy with crappy institutions gets eventually caught in a spiral of deflation and falling employment. And that is exactly what can be observed.

Obviously, it is mentally retarded economists who ― after 200+ years still stuck with the lump of labor theory ― bear the intellectual responsibility for the economic mess.

Egmont Kakarot-Handtke

#1 For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia’  and ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 Wikimedia

June 22, 2017

Have we reached the bottom of gossip economics?

Comment on Barkley Rosser on ‘Saudi Succession Shuffle’

Blog-Reference

Always when you think you have seen the worst crap of economics you are in for a surprise because Barkley Rosser posts on EconoSpeak.

To put things in perspective one has to realize that Barkley Rosser is the very incarnation of the representative economist. That is:
  • Since Econ 101 he has not understood what profit is.
  • He has never understood that Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory, axiomatically false, and materially/ formally inconsistent.
  • He has never understood that the pluralism of false theories makes economics a fake science.
  • He has never understood that economics is NOT about Human Nature/behavior/ reproduction but about the behavior of the economy.
  • He has never understood that he most of the time violates scientific standards.
  • Instead of bringing himself scientifically up to speed he clarifies Elvis’ genealogy: “Elvis Presley almost certainly had African ancestry, even if as the son of a culturally white family born in the heart of the racist Deep South in Tupelo, Mississippi, he never made any mention of this likely fact overtly to my knowledge.”
  • Instead of studying the cutting edge of economics he gossips about the celebrities of the Saudi family: “Abdulaziz, who died in 1953 after uniting Saudi Arabia and having 43 sons and over 100 wives, although never more than 4 at a time. Certain wives were more important than others and produced more important sons, with basically only three in play here regarding possible future succession to the Saudi throne. And “Muhammed bin Salman is a millennial, and this is the moment of the millennials taking charge there, even if it is a ‘sloppy’ and ‘unwise’ and highly aggressive one that is doing so.”
Somehow, Barkley Rosser has come down to a dog breeder’s variant of political economics. And, having lost all perspective, he has no objections when the admin of EconoSpeak deletes posts that straightforwardly debunk his poor economics.

Not much positive can be said about the representative economist: he is a failed scientist and to call him sloppy and unwise would be a bit flattering.

Egmont Kakarot-Handtke

* See preceding threads
Needed: The Worst of the Worst of economics blogs
Banana economics
First Lecture in New Economic Thinking

Rethinking the Phillips curve

Comment on Nick Bunker on ‘Is the Fed being misguided by the Phillips curve?’

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)

Fact is that economists do NOT have the true theory. This holds in particular for profit and employment theory which are provable false. The Phillips curve, for example, is misspecified since Samuelson.#1 So, yes, the Fed is constantly being misguided by provable false economic theory.

The correct employment equation is reproduced on Wikimedia.#2 From this objective-structural-systemic Phillips curve follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek 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 structural-systemic Phillips curve is a bit longer and contains in addition the public sector and the foreign trade sector.

Item (i) and (ii) cover the familiar arguments about how effective demand affects employment. Item (iii) embodies the price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

There is NOT much use in speculating if and when the wage rate rises if unemployment falls. There is NO law-like relationship between these variables. By consequence, wage rate and price have to be taken as parameters. The structural-systemic employment equation tells us how to exactly set the parameters in order to achieve the employment objective.

In the present situation, a theoretically enlightened and politically empowered FED (or some other competent institution) would set the parameters as follows: price increase zero and wage increase greater than productivity increase. This increases employment for a while. Afterwards: price increase zero and wage increase equal to productivity increase. This stabilizes the economy at full employment. Trying to steer price, wage rate and employment via the interest rate is a futile exercise that has NO sound theoretical foundation. To recall: economics is a failed science since 200+ years.

Egmont Kakarot-Handtke

#1 For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia’ and ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 Wikimedia


Related 'Attention: there are THREE types of inflation' and 'Naive arithmetic' and 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather' and 'Reading the correct Phillips curve correctly' and 'Nine views are nine too much' and 'The end of storytelling' and 'NAIRU and economists’ lethal swampiness' and 'NAIRU ― letting one more nonentity go'

June 21, 2017

Attention: there are THREE types of inflation

Comment on Simon Wren-Lewis on ‘UK monetary policy: you cannot be serious?’

Blog-Reference and Blog-Reference on Jun 22

Simon Wren-Lewis clarifies: “When I recently wrote about increasing the inflation target, I knew I would get at least one comment saying wouldn’t this reduce real wages even further. As I always do, I explained that raising the inflation target should raise the rate of increase of all nominal quantities by the same amount, which is what economists mean by inflation. But it seems the same basic point has to be made to these three members of the MPC too: inflation is not just the rate of change of the consumer price index.”

What economists mean by inflation is false and this is relevant for the relationship between inflation and employment.

From the correct employment equation* follows that employment L depends (i) on aggregate demand, which is here given with the expenditure ratio rhoE and investment expenditures I, and (ii), on the price mechanism, which is formally embodied in the macro-ratio rhoF=W/PR with W = average wage rate, P = average price, and R = average productivity.

Let rhoE and I be fixed and the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are THREE logical cases:
(i) The rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are.
(ii) The rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES.
(iii) The rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES.

So, it is DIFFERENCES in the rates of change of wage rate and price and NOT the absolute magnitude of change that affect employment. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment sticks indefinitely where it actually is.

Perfectly synchronous inflation/deflation is, according to Simon Wren-Lewis, “what economists mean by inflation”. Synchronous=employment neutral inflation, though, is a LIMITING case that occurs with a probability CLOSE TO ZERO.

In general terms, the neutrality condition reads w=p+r+pr. Therefore, it is a matter of indifference whether the wage rate falls or rises or whether wages are sticky or not. ALL depends on relative changes. Employment increases if w is greater than p+r+pr and decreases in the opposite case.

So, what is needed in the present situation is an asynchronous inflation, more specifically, w greater than r and p=0. This increases also the multiplier effect of expansive fiscal policy. The wage increase has to take the lead.

Egmont Kakarot-Handtke

* The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is given on Wikimedia. For details see ‘Keynes saw the problems but did not solve them


Immediately preceding 'Economic bungee jumping without cord'

Morons on math

Comment on Lars Syll on ‘Simpson’s paradox’

Blog-Reference

A theory is the humanly best mental representation of reality. A theory is fundamentally different from a commonsensical description of reality.

A theory must satisfy two criteria in order to be accepted to the corpus of scientific knowledge: material and formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

For the refutation of a theory it suffices to demonstrate that it is either logically or empirically inconsistent. We know by now that economics is both. The current state is this: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. With the pluralism of provable false theories economics sits squarely at the proto-scientific level.

Economics is a failed science and this proves first of all that BOTH orthodox and heterodox economists are incompetent scientists. They do not even understand what science is all about. Feynman called these people cargo cult scientists.

Cargo cult scientists are easy to spot because they talk often about methodology, i.e. how to do science properly, and what they say is glaring nonsense. Paul Romer is a case in point: “Math cannot establish the truth value of a fact. Never has. Never will.”

No, because scientific truth is defined by material AND formal consistency, and math is supposed to guarantee formal consistency. And this is what it has done so admirably throughout history ― except in economics. This, though, is not the fault of math but of economists.

Scientists know that math works but they are not sure why: “At this point an enigma presents itself which in all ages has agitated inquiring minds. How can it be that mathematics, being after all a product of human thought which is independent of experience, is so admirably appropriate to the objects of reality?” (Einstein, 1921), see also (Wigner, 1979), (Velupillai, 2005)

“I find it quite amazing that it is possible to predict what will happen by mathematics, which is simply following rules which really have nothing to do with what is going on in the original thing. (Feynman, 1992)

“The method of reasoning by chains of syllogisms is nothing but a transformation mechanism, applicable just as well to one set of premises as to another; it could not serve therefore to characterize these premises. In other words, it is the external form which the mathematician gives to his thought, the vehicle which makes it accessible to others, in short, the language suited to mathematics; this is all, no further significance should be attached to it.” (Bourbaki, 2005)

Genuine scientists know how to use math to their advantage, economists=cargo cult scientists don’t. In very general terms it can be said that economists fail because of the Fallacy of Insufficient Abstraction. What economist have not yet understood is that the subject matter of economics is not Human Nature/behavior/action but the behavior of the economy. Economics is NOT a social science but a system science.

The economy, i.e. the subject matter of economics, is an abstraction that has to be clearly defined by a set of premises, a.k.a. foundational propositions, a.k.a. axioms. Without clear premises all conclusions are for the waste basket, the whole argument is scientifically worthless, and economic policy guidance has no sound scientific foundation.

When the premises are not correctly defined mathematics cannot work its magic and as a collateral damage econometrics become a senseless exercise. When utility maximization is put into the premises no testable proposition ever results. Economists do not understand this elementary methodological fact since 140+ years.

It is not so that mathematics or standard statistical methods are inapplicable in economics. The failure of economics is uniquely and exclusively caused by the scientific incompetence of economists. The ultimate reason why economics never rose above the proto-scientific level is that it is built upon false premises. As Aristotle put it: “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.”

In the last 200+ years neither orthodox nor heterodox economists have produced scientific knowledge of their thing. They do not even understand the elementary mathematics of accounting.*

Egmont Kakarot-Handtke

* See for example ‘The final implosion of MMT’ and ‘How Keynes got macro wrong and Allais got it right


For details of the bigger picture see cross-references Math/Mathiness

June 20, 2017

The long genealogical tree of economic storytelling

Comment on Dániel Oláh on ‘The Amazing Arab Scholar Who Beat Adam Smith by Half a Millennium’

Blog-Reference

Dániel Oláh reports: “The biggest merit of Khaldun lies in his revolutionary methodological thinking. … Based on this it’s easy to understand that Ibn Khaldun presented very similar ideas as Adam Smith, but hundreds of years before the Western philosopher. But Khaldun said even more about the economy. He analyzed markets which arise based on the division of labor and examined market forces in a simple didactic way which is very similar to the attitude of Alfred Marshall. The invention of supply and demand analysis wasn’t invented in the 19th century …”

The fault of this argument lies in the fact that economics is, to begin with, NOT a social science.#1 Worse, to define economics as a social science has been the foundational blunder 200+ years ago. Worst, not to realize this until this day is the very proof of utter scientific incompetence of the representative economist.

Adam Smith was NOT a scientist but a storyteller: “… he had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along. (Schumpeter)

Schumpeter had to argue against the plain fact that the supply and demand story is not much better than the commonsensical story of how the sun travels from east to west over the firmament: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”

Neither Smith nor Marshall ever rose above the level of proto-scientific storytelling.#2 The same holds true for Ibn Khaldun. To put this in perspective is not to deny that Ibn Khaldun marked a progress in comparison to his precursors who limited themselves “to transmit knowledge without modifying, editing or adding any remarks to the tradition.”

Ibn Khaldun deserves credit as a forerunner of Adam Smith. But Smith was more a political blatherer than a scientist. So Ibn Khaldun is not the forerunner of economics as a science. The current state of economics is this: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. With the pluralism of provable false theories economics sits squarely at the proto-scientific level.#3

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics since Adam Smith can be summarized as perpetual violation of scientific standards. Theoretical economics had been hijacked from the very beginning by the agenda pushers of political economics. Smith and Ricardo fought for liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Keen.

Political economics has produced NOTHING of scientific value since Adam Smith. This is not the fault of Ibn Khaldun, of course, but of scientifically incompetent economists who have not realized until this day that economics is NOT a social science but a system science.#4 What is required since Ibn Khaldun is to double down on revolutionary methodological thinking.

Egmont Kakarot-Handtke

#1 For details see ‘Economics is NOT a social science
#2 For details see ‘Marshall and the Cambridge school of plain economic gibberish
#3 See ‘Economics: 200+ years of scientific incompetence and fraud
#4 See ‘First Lecture in New Economic Thinking

June 16, 2017

Economic bungee jumping without cord

Comment on Simon Wren-Lewis on ‘Raising the inflation target’

Blog-Reference and Blog-Reference on Jun 17

You say: “The argument for a higher inflation target is straightforward, once you understand two things. First the most effective and reliable monetary policy instrument is to influence the real interest rate in the economy, which is the nominal interest rate less expected inflation. Second nominal short term interest rates have a floor near zero (the Zero Lower Bound, or ZLB).”

The argument for a higher inflation target is NOT straightforward, once you understand two things. First interest theory is axiomatically false.#1 Because of this monetary policy never had sound scientific foundations. Second the same holds for fiscal policy.#2

Let us assume for a moment that, for whatever reasons, neither monetary nor fiscal policy is applicable. So, given investment expenditures of the business sector and the expenditure ratio of the household sector, the only alternative left is to directly influence the macroeconomic price mechanism.#3

The argument AGAINST higher inflation is that it REDUCES employment. Given the overall situation, the ONLY sensible policy is to increase the average wage rate, such that the rate of change of the wage rate is greater than the rate of change of productivity, because this increases employment. This is a SYSTEMIC necessity and has NOTHING to do with social policy. Employment is co-determined by the relationship between average wage rate, price and productivity. This relationship should automatically produce full employment but does not.

Standard employment theory is false.#4 The proposal to get the economy going by increasing price inflation is the direct result of the complete lack of understanding how the market economy works.

Egmont Kakarot-Handtke

#1 See ‘The Emergence of Profit and Interest in the Monetary Circuit
#2 See ‘Austerity and the utter scientific ignorance of economists
#3 For more details see ‘Think deeper
#4 For details of the bigger picture see cross-references Employment

***
REPLY to Simon Wren-Lewis on Jun 19

You say: “For every borrower there is a saver.”

In this generality this is trivially true, nonetheless it is grossly misleading. To see this, let us take the pure consumption economy as the most elementary case as starting point (no investment, not government, no foreign trade). Wage income is denoted as Yw, consumption expenditures as C.#1

The sector balances (Sm≡Yw-C, Qm≡C-Yw) always add up to zero, i.e. Qm+Sm=0 or Qm=-Sm, that is, the business sector makes a monetary profit Qm which is equal to the household sector’s dissaving -Sm or a loss -Qm which is equal to monetary saving Sm. So, if the household sector dissaves it uno actu happens that the household sector becomes the borrower vis a vis the banking sector (including the central bank) and the business sector becomes the lender to the banking sector. When we cut the banking sector short the business sector becomes the ultimate lender to the household sector.

From this immediately follows that saving and investment is NEVER equal, neither ex ante nor ex post, and ALL Keynesian and Post Keynesian and New Keynesian and IS-LM models are provable false.#2

The same relationship holds when the private households are substituted by public households. Therefore, the period deficit of the public sector reappears one-to-one as profit of the business sector. When we cut the banking sector short the business sector becomes the ultimate lender to the public sector.

Needless to say that the business sector prefers the public sector as ultimate borrower. This explains the safe asset shortage if the monetary profits stem from private deficit spending.

The deficit spending of the private and public households together determine the overall profit of the business sector. This means that Keynesian deficit spending is the ultimate profit machine if the household sector’s budget is balanced. Increased private and public deficit spending in turn explains the falling labor share.#3

Whether public deficit spending helps employment depends on whether the average price increases or not. In any case, though, public deficit spending helps profit one-to-one. So, whoever wants the maximum employment effect from deficit spending has to see to it that the price increase is zero.#4

Now, you are in favor of expansive fiscal policy and propose to increase the inflation target. This is as counterproductive as can be. The combination of increasing public deficit spending and a rising price increases profit and leaves employment unaffected.

From the standpoint of the 1-percenters your policy mix is perfect. From the standpoint of the 99-percenters it is another instance of expert madness. The correct policy in the given situation is to put traditional=failed monetary and fiscal policy aside and to increase the average wage rate at ZERO price inflation.

#1 For details see ‘First Lecture in New Economic Thinking
#2 For details see ‘Profit and the collective failure of economists
#3 See ‘Profit and distribution: a primer
#4 See ‘Unemployment is high because economics is false: period, full stop, end of story


Immediately following 'Attention: there are THREE types of inflation'

June 15, 2017

How Heterodoxy got lost in the methodological woods

Comment on Lars Syll on ‘What kind of realist am I?’

Blog-Reference

Lars Syll advertises his realist methodology: “Perhaps the most important contribution a researcher can make is reveal what this reality that is the object of science actually looks like.”

Translated into economics this means in concrete terms that the most important contribution an economist can make is to reveal how the actual economy works. This contribution takes the form of the true theory with truth well-defined as material and formal consistency.

Sometimes it is necessary to reflect about methodology, but only as a stepping stone on the way to the true economic theory. The economist who thinks he is in the possession of a superior methodology is supposed ― NOT to run around and give good methodological advice but ― to directly apply it and show the results. As J. S. Mill put it: “Doubtless, the most effectual mode of showing how the sciences of Ethics and Politics [and Economics] may be constructed, would be to construct them.”

Lars Syll rightly criticizes the methodology of Orthodoxy, which comes under the umbrella heading of methodological individualism, always implying that his realist methodology is superior, yet he has never produced a solid piece of economic theory. He has not even realized that Keynesianism, his prototype of a superior approach, is logically defective.#1

The repetitive blunder of Heterodoxy consists in getting stuck with methodology: “As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell)

Heterodoxy in general and Lars Syll in particular talk much about how ‘the science of economics may be constructed’ but never get started.

The crucial step on the way to the true theory is to move from the naive description of reality to abstraction: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (Mill)

Needless to emphasize that abstraction can go badly wrong. Starting with the realistic description ‘the earth stands still and the sun goes up’ Ptolemy constructed the Geo-centric theory. With this, Ptolemy committed the Fallacy of Insufficient Abstraction. The later paradigm shift from Geo-centrism to Helio-centrism delivered the best known example for successful abstraction: “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [Helio-centric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (Galileo)

The realists never got the point: “Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis. Don’t theorize, he said, but open your eyes and observe without prejudice, and you cannot doubt that the Sun moves and that the Earth is at rest.” This is how realists became the laughing stock of science and the whole filibuster about realism/unrealism became pointless.

There are TWO pitfalls in the process of abstraction, (i) that the unkown ‘essential’ aspects of reality are unintentionally abstracted away, i.e. that reality gets lost, and (ii), that the ‘inessential’ aspects of reality are not abstracted away, i.e. that the analysis remains on the commonsensical surface. Accordingly, we have (i) the Fallacy of Lethal Abstraction, and (ii), the Fallacy of Insufficient Abstraction. Orthodox economics suffers from (i), heterodox economics from (ii). And this is why economics is a failed science and why economists never came to grips with reality.

Lars Syll’s realist methodology is good for criticism but worthless for the axiomatic reconstruction of economics and therefore prevents the necessary paradigm shift, i.e. genuine scientific progress.

The common blunder of Orthodoxy and Heterodoxy consists of defining economics as social science. While it is quite obvious that human behavior plays an important role in how the economy develops, this is NOT the subject matter of economics but of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory etcetera. Economics has to focus on the systemic aspect of the economy. That means, economics is NOT a social science but a system science. Put differently, the focus of the theory of flight is NOT on why crew and passengers are on a plane, what their ulterior motives are, how they behave, and whether they are happy or not. The focus is on what makes the plane fly, i.e. the laws of aerodynamics, thermodynamics and so on. The theory of flight abstracts from the concrete human beings and leaves all Human Nature issues to social scientists, that is, to people who will NEVER get a plane off the ground.

Lars Syll argues: “The overarching flaw with methodological individualism and rational choice theory is basically that they reduce social explanations to purportedly individual characteristics. But many of the characteristics and actions of the individual originate in and are made possible only through society and its relations.”

This is a true example of the Fallacy of Insufficient Abstraction. The overarching blunder of BOTH orthodox and heterodox economists is that they dabble in psychology and sociology, which is NOT their proper business, and have until this day NOT figured out how the price- and profit mechanism works. Walrasianism, Keynesianism, Marxianism, Austrianism is proto-scientific rubbish and the realist Lars Syll stands clueless right in the middle of it.#2

Egmont Kakarot-Handtke

#1 See ‘How Keynes got macro wrong and Allais got it right
#2 See ‘Economics: 200+ years of scientific incompetence and fraud


For details of the bigger picture see cross-references Heterodoxy

June 14, 2017

Economics: 200+ years of scientific incompetence and fraud

Comment on Noah Smith on ‘Is economics a science?’

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)

The fact of the matter is that economists do NOT have the true theory. More precisely, economists do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.#1 With the pluralism of provable false theories economics sits squarely at the proto-scientific level.

The representative economist either does not realize it or cannot officially admit it. In this dire situation, the Pavlovian reaction is always and everywhere to muddy the waters and to retreat deeper into the swamp. Noah Smith is no exception, he rhetorically asks: “What the heck is a ‘science’?” and answers “No one knows.”

This is patently false. Science is, since the ancient Greeks made the distinction between opinion (= doxa) and knowledge (= episteme), well-defined by material and formal 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)

First question to Noah Smith: if no one knows what science is how does it come that we have a prize with the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.#2 And how does it come that economics is since Adam Smith/Karl Marx explicitly defined as science? And what does every economist learn in Econ 101?: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

Fact is that economics claims to be a science but is what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing is the true theory. Economics is a failed science because none of the four main approaches satisfies the criteria of material and formal consistency. When this is pointed out economists immediately retract and fire their barrage of brain-dead excuses.#3 Noah Smith applies the same old defense maneuvers. Needless to emphasize that every single of these excuses has been refuted long ago.

Economists have found a way to deal with the problem of manifest failure: they simply ignore and violate scientific standards. Or, as Blaug put it, they are playing tennis with the net down. Morgenstern reminded his fellow economists back in 1941: “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.”

This is why Walrasianism is still around although it has already been dead in the cradle 140+ years ago. Standard economics has been based on provable false axioms but economists proudly cling to them until this day: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman) Note in passing that maximization and equilibrium are NONENTITIES like angels or the Easter Bunny. Time for Krugman and the rest to end stubborn self-delusion: all equilibrium models are a priori false and this starts with textbook supply-demand-equilibrium.#4

Economics is a failed science because economists (i) are scientifically incompetent, and (ii), violate scientific standards/ethics on a daily basis. Since Adam Smith economic policy guidance never had sound scientific foundations. Both, orthodox and heterodox economists sell proto-scientific rubbish in the bluff package of science.

In order to become a science, economics needs a paradigm shift.#5 Nothing less will do.

Egmont Kakarot-Handtke

#1 See ‘First Lecture in New Economic Thinking
#2 See ‘The real problem with the economics Nobel
#3 See ‘Failed economics: The losers’ long list of lame excuses
#4 See also ‘The father of modern economics and his imbecile kids
#5 See also ‘The identification problem and the dumping of the old guard


For details of the bigger picture see cross-references Incompetence

***
REPLY to Jake Thompson on Jun 18

You argue: “It’s certainly, by a long shot, the most scientific of the social sciences.”

Your lethal methodological blunders are:
(i) The underlying binary code of science is true/false with NOTHING in between. Because of this, economics is either a science or not. The statement, economics is more scientific than X, is entirely devoid of meaning. (Just like the statement, Jake Thompson is by a long shot more innocent than Lee Harvey Oswald. Guilty/not guilty is also binary with NOTHING in between.)
(ii) Scientific truth is well-defined by material and formal consistency. It is not an easy task to establish scientific truth but from these practical difficulties cannot be concluded that it does not exist or that anything goes.
(iii) The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

Conclusion: Economics is NOT a science.

In order to rise above the proto-scientific level, economics needs a paradigm shift.#1 What failed economists first of all have to understand is that economics is NOT a social science but a system science. To define economics as a social science has been the foundational blunder 200+ years ago. Being scientifically incompetent, though, economists will not understand this. It’s Catch 22 and the representative economist is trapped in the scientific coal-pit.#2

#1 For details see ‘Redefining economics’ and cross-references Paradigm shift
#2 “... but 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.” (Hume) Obviously, you lack even this tiny quantity of judgement.

***
REPLY to Anonymous on Jun 20

You argue: “Some parts of Econ are a science (game theory and I’d argue basic macro in simple markets) while the rest is more of an art (everything else).”

You are trying to evade a clear-cut conclusion and your argument is way beside the point.
(i) Economics is either a science or not. That parts of it are acceptable is irrelevant. Every false theory has acceptable parts. Even the flat earth theory has some content that is true. False theories are always partially and commonsensically true. This is exactly why they can survive.
(ii) Game theory is NOT economics because economics does not deal with human behavior but with the behavior of the economic system. Economics is a system science and all Human Nature/behavior issues belong to psychology, sociology, anthropology and so on. To define economics as a social science has been the foundational blunder 200+ years ago.
(iii) Basic macro is provable false.*
(iv) To call economics an art is simply an euphemism.

The conclusion is inescapable: Economics is NOT a science.

* For details see ‘Textbooks and the mental cloning of dumb economists’ and ‘Why Post Keynesianism Is Not Yet a Science

June 13, 2017

Simpleminded losers

Comment on Paul Krugman on ‘Macroeconomics: The Simple and the Fancy’

Blog-Reference and Direct-Link and 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)

The fact of the matter is that economists do NOT have the true theory. More precisely, economists do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.

In science, the primary question is NOT about the simple or the fancy but about the true and the false, with truth well-defined as material and formal consistency. The point is that BOTH the simple and the fancy models are provable false. This includes Paul Krugman’s IS-LM version.#1

Economics is a failed science and Paul Krugman is a failed scientist.#2 Since Adam Smith economic policy guidance never had sound scientific foundations. It is as simple as that.

Egmont Kakarot-Handtke

#1 See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#2 For details see references ‘Just another wreck


Related 'Just another wreck'

June 11, 2017

Needed: The Worst of the Worst of economics blogs

Comment on Barkley Rosser on ‘EconoSpeak In The Top 100 Economics Blogs’

Blog-Reference

Every good thing/institution is eventually messed up or abused. This is the social version of the Second Law of Thermodynamics which says that the total entropy of an isolated system can only increase over time. This holds for the internet in general and for economics blogs in particular: total stupidity increases over time if not actively reversed.

Since economics is a science, the basic idea of the econoblogosphere is to contribute to the dissemination and growth of knowledge. Accordingly, the econoblogosphere becomes dysfunctional if it increases opinion (= doxa) instead of knowledge (= episteme).#1 The econoblogosphere reaches the entropic maximum when it consists entirely of obsolete/ falsified models/theories, political propaganda, sitcom gossip, and disinformation.

Crap thrives in the Circus Maximus and the whole issue is not new in economics: “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)

Marginalism has already been dead in the cradle 140+ years ago but it returns as Marginal Revolution at the top of Prateek Agarwal’s Top 100 list. Some people still have not realized that Marginalism has been refuted on all methodological counts long ago and is scientifically indefensible.

In order to prevent the institutional degeneration of the econoblogosphere some attention management is necessary. It consists in a positive list of blogs that foster the growth of scientific knowledge and a negative list of blogs that inhibit science.

While we have any number of journalistic Top 10/100 lists that rely on the naive metric of clicks or prestige or popularity or optical/communicative attractiveness a Top Ten list of qualitatively deficient and manipulative blogs is lacking. Occasionally, one hears the complaint that posts have been blocked or removed.

It is unknown to what extent scientific standards are violated in the econoblogosphere.#2 The scientific community is based on the principle of self-governance, so the obvious question to ask is whether the economic societies could establish something like a systematic ex-post peer review including an Evidence Center for the collection and verification of complaints about agenda pushing/censorship/suppression/manipulation/ fraud.

It should be obvious that the national economic societies cannot tolerate members that violate what has been called Feynman Integrity on their internet blogs.#3

What economics needs is not only an objective list of innovative blogs that push the necessary paradigm shift but also the Top Ten of disinformation, political propaganda, and violation of scientific standards. Prateek Agarwal’s list ― whether intentionally or unintentionally does not matter ― stabilizes and reinforces established stupidity, scientific incompetence, and the political corruption of both orthodox and heterodox economics.

Economics is a failed science and Prateek Agarwal’s list provides a comprehensive overview of the proto-scientific mess.

Egmont Kakarot-Handtke

#1 See also ‘Economics between cargo cult, farce, and fraud
Media-fake-farce-fraud-storytelling-macro
Economics and truth
Economics: The pluralism of false theories is over
Economists: Incompetent? Stupid? Corrupt?
#2 The censorship on EconoSpeak is a case in point.
#3 See also ‘Feynman Integrity, fake science and the econoblogosphere

***
REPLY to Barkley Rosser on Jun 11

You say: “… let me note that your big point about making a distinction between retained and distributed profits has absolutely nothing to do with any of the standard axioms of Walrasian neoclassical economics, or of the axioms or assumptions made by any of the other schools of economic thought, nothing.”

That is (i) correct and (ii) shows that you do not understand what a paradigm shift is all about. This is what Wikipedia has to say: “A paradigm shift, …, is a fundamental change in the basic concepts and experimental practices of a scientific discipline. Kuhn contrasted these shifts, which characterize a scientific revolution, to the activity of normal science, which he described as scientific work done within a prevailing framework (or paradigm).”#1

The key words are “fundamental change in the basic concepts …” which means more specifically the REPLACEMENT of false concepts by true concepts.#2 For this simple reason, the structural-systemic axioms have “absolutely nothing to do with any of the standard axioms of Walrasian neoclassical economics, or of the axioms or assumptions made by any of the other schools of economic thought, nothing.” Indeed, true and false are binary and have NOTHING in common, never had, never will.

You are consistently on the false side of the true/false divide.

#1 For details of the bigger picture see cross-references Paradigm shift
#2 See ‘First Lecture in New Economic Thinking

***
REPLY to Barkley Rosser on Jun 12

Economics is NOT a science, and economists are NO scientists. The objective of science is the true theory with truth well-defined as material and formal consistency. In economics the situation is this: there is political economics and theoretical economics and theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false. The four main approaches are scientifically indefensible.

This is not a big problem for the representative economist because he is ― to begin with ― NOT in the science business but in the politics business. The irreconcilable difference between scientific and political thinking has been made clear by Peirce: “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)

The representative economist is NOT a scientist but a political agenda pusher. The four main approaches are NOT science but what Feynman called cargo cult science or what we have come to call fake.

Now fake is one thing but corruption is another thing. That you are talking utter nonsense on this blog is one thing but that you and your sidekick Sandwichman are blocking/framing/ removing posts on EconoSpeak is another thing.

Taken in isolation, EconoSpeak is merely a nuisance. But EconoSpeak is not an unfortunate aberration but symptomatic for the whole of economics as it presents itself in the econoblogosphere.

I have not yet posted on all blogs that are on Prateek Agarwal’s Top 100 list but I have posted on a representative sample of orthodox and heterodox blogs. What I have practically experienced is that EconoSpeak is not the proverbial rotten apple in the barrel but that the whole barrel is spoiled.#1

My actual list of the Rotten Dozen, i.e. the tip of the iceberg, is based on a raw estimation of suppressed/removed posts over a longer time span and reads: 1 Real-World Economics Review blog, 2 Economist’s View, 3 Lars P. Syll blog, 4 EconoSpeak, 5 Uneasy Money, 6 Billy blog, 7 Information Transfer Economics, 8 bradford-delong.com: Grasping Reality with Both Hands, 9 Roger Farmer’s Economic Window, 10 evonomics, 11 Institute for New Economic Thinking, 12 Worthwhile Canadian Initiative.

Time to get these stupid and corrupt political folks and the rest of Prateek Agarwal’s Top 100 list out of economics. The paradigm shift is overdue.

#1 For details of the bigger picture see cross-references Political economics

***
REPLY to Barkley Rosser on Jun 12

You say: “I would say I am doing better on empirical outcomes of forecasting here than you are.”

Of course, you are. Prediction/forcasting is since time immemorial the preferred artifice of political/religious brainwashers and con artists. Science does not predict.#1 But on YouTube you get as many predictions of the imminent economic collapse, WW3, and the Second Coming of Christ as you wish.

If you want to refute the systemic axiom set why do you not simply promote the testing of the structural-axiomatic Phillips curve?#2 In science, empirical testing, not futile blathering and stuttering LOL decides the matter.

#1 See ‘Science does NOT predict the future’ and ‘ICYMI Prediction/Forecasting’ and ‘Macro poultry entrails reading’ and ‘Enough! Economists, retire now!
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

***
REPLY to Barkley Rosser on Jun 13

The title of this thread is: “EconoSpeak In The Top 100 Economics Blogs”. Top 10/100 charts are a well-established instrument of attention-, reputation-, and trend management. Every highschool dropout in the marketing and PR business knows how to apply this simple and cost-effective instrument for selling crap to the crowd and telling the herd where to run.

To apply this instrument in the entertainment industry, though, is one thing, to apply it in the sciences is another thing. In the sciences the primary objective is NOT the growth of popularity but the growth of knowledge. To award something like Oscars in the sciences is nothing less than a takeover by the all-devouring Circus Maximus and the inevitable transmogrification of scientists into sitcom clowns.

As everybody knows by now, economics is a cargo cult science and since 200+ years as Political Economy integral part of the Circus Maximus, so a Top 100 list of economics blogs seems to be sorta-kinda appropriate.

Whatever Prateek Agarwal thinks he is doing or whatever he is trying to achieve does not matter. What he in fact does is to stabilize and reinforce established stupidity, scientific incompetence, and the political corruption of both orthodox and heterodox economics. Fact is that Walrasianism, Keynesianism, Marxianism, Austrianism is scientifically indefensible.

So, NOTHING what is said and proposed and argued for or against by the representative economist on the economics blogs has a sound scientific foundation.#1 Economists do not know what profit is, this is a proven fact.#2 Because of this, economics blogs have been ― until recently ― the biggest self-debunking show on earth.

In order to get out of the proto-scientific swamp, what is needed as a first step is a Top 10/100 list of blogs ranked according to the degree of stupidity, scientific incompetence, and violation of scientific standards. As Barkley Rosser and his sidekick Sandwichman have proven again in this thread, EconoSpeak deserves to be at the top of the Top 100 chart of proto-scientific rubbish and political blather.

#1 See also ‘Just another wreck
#2 See ‘Profit and the collective failure of economists

***
REPLY to Barkley Rosser on Jun 14

You say: “many of these people look to us to help provide this understanding and maybe even some policy answers.”

Yes, but other people have already realized that they will NOT get any help from economists, just the contrary: “… Napoleon claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

This, for example, is true for employment policy.#1 Because employment theory is false economists bear the intellectual responsibility for the social devastation of mass unemployment from the Great Depression onward.#2

You cite the big challenges (global warming, rising income inequality, speculative bubbles). The idea that orthodox or heterodox economists solve these questions is ridiculous because economists cannot make two steps without falling over their own feet. Here is the classical case: “His Collected Writings show that he [Keynes] 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.)

And so it goes on since 80 years. After-Keynesians cannot tell until this day what macroeconomic profit is.#3 And you hallucinate: “Oh, and we all know what profits are.”

Economists have not solved the Profit Puzzle until this day and there are not more than ten persons around the world who understand the significance of the conceptual disaster at the very heart of economics.#4 You are certainly not among them.

Because economists cannot solve the elementary questions of their subject matter they are unfit for solving any problem humanity might have. And this will last until the inescapable paradigm shift happens.

#1 See ‘Unemployment is high because economics is false: period, full stop, end of story
#2 See ‘Economists and the destructive power of stupidity
#3 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#4 “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008, p. 10)

June 10, 2017

Think deeper

Comment on Bradford DeLong on ‘RETHINK 2%’

Blog-Reference and 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)

The fact of the matter is that economists do NOT have the true theory. More precisely, economists do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.

Because of this, economic policy guidance never had sound scientific foundations. This holds also for the RETHINK 2% letter to the Federal Reserve Board of Governors#1 which in turn is based on Josh Bivens’s article.#2

Note for a start that Josh Bivens does not mention profit ― the pivotal variable of economics ― once. From this follows that his underlying profit theory is false. And from this in turn follows that his whole argument is false. ALL models that do not explicitly define macroeconomic profit are false.

The elementary version of the correct objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia.#3 This equation says ― among other things ― that an increase of the factor cost ratio rhoF=W/PR leads to higher employment. The ratio rhoF embodies the price mechanism.

In order to focus on the crucial point imagine the FED has the means to directly influence the price P and increases it by 2%, all other variables unchanged. The correct macroeconomic employment equation tells us that employment falls. Bad move.

Next try. The FED sets the change of price to zero and instead increases the wage rate W by 2 %. The correct macroeconomic employment equation tells us that employment rises. Good move.

What supply-demand-equilibrium economists never understood is that the price mechanism DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF down - employment down - and so on. In other words, the market economy is inherently unstable.#4 Standard employment theory is false. The proposal to get the economy going by increasing price inflation is the direct result of the complete lack of understanding how the market economy works.

Egmont Kakarot-Handtke

#1 Letter to the Federal Reserve Board of Governors
#2 Josh Bivens ‘Is 2 percent too low?
#3 Wikimedia For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 See also ‘How Wicksell and the rest got inflation/deflation wrong


Related 'Economic bungee jumping without cord'

Textbooks and the mental cloning of dumb economists

Comment on Lars Syll on ‘Economics textbooks transmogrifying truth — wages and unemployment’

Blog-Reference and Blog-Reference

Lars Syll summarizes: “Unfortunately, Jones macroeconomics textbook is not the only one containing this kind of utter nonsense on Keynes. Similar distortions of Keynes’s views can be found in, e. g., the economics textbooks of ‘New Keynesian’ economists like Greg Mankiw and Paul Krugman.”

Economics textbooks are false from Samuelson’s classic until today.#1 Not only because of occasional distortions but because both Walrasian microfoundations and Keynesian macrofoundations are axiomatically false. Therefore, it does not suffice to rectify occasional distortions and misrepresentations.

One can readily agree with Lars Syll: “Keynes in General Theory devoted substantial attention to the subject of wage rigidities, he certainly did not hold the view that wage rigidities were ‘the reason … for the high unemployment of the Great Depression’.” This, though, cannot alter the fact that Keynes’s employment theory as a whole is provable false.

Keynes’s critique of Orthodoxy was always spot on but from this does not follow that his own approach was much better. Keynes based macroeconomics on logically and conceptually defective foundations and neither After-Keynesians nor Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 80 years.

Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (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.)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of Keynesian macroeconomics falls apart: (i) all I=S/IS-LM models are provable false; (ii) the investment multiplier is formally defective; (iii) the error/mistake in Keynes’s profit theory remained undetected; (iv) the error/mistake in Keynes’s employment function remained undetected.#2

The rectification of Keynes’s false employment function gives the correct relationship between wages and unemployment.#3 The price mechanism does NOT work as supposed, that is, a reduction of the average wage rate does NOT increase employment for the economy as a whole. The correct systemic employment equation says exactly the opposite.

From this follows for economic policy that a third tool in addition to monetary and fiscal policy is needed. What has to be achieved is a rectification of the price mechanism. This has nothing to do with stickiness or frictions or other imperfections. Fact is: the perfectly working price mechanism INCREASES unemployment in the economy because there is a positive feedback loop built right into the core of the market economy. Macro-economically it is NOT wage rate down ― employment up, but it is wage rate down ― employment down. This, and NOT stickiness, is the crux.

Textbook economics has not gotten the price mechanism right until this day. Supply-demand-equilibrium is simply a bad joke. Economic policy advice never had sound scientific foundations. Applied textbook economics, both in the Walrasian and Keynesian version, ruins the economy.

Egmont Kakarot-Handtke

#1 See ‘The father of modern economics and his imbecile kids
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 See ‘Toward a non-Neanderthal employment policy

June 9, 2017

Just another wreck

Comment on Paul Krugman on ‘Wrecking the Ship of State’

Blog-Reference

Donald Trump may be wrecking the state but only after Paul Krugman has wrecked economics.*

Egmont Kakarot-Handtke

* See 'Krugman and the scientific implosion of economics' and 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It' and 'Krugman is not an economist' and 'The Krugman curse'


Related 'First Lecture in New Economic Thinking' and 'Economics: The Battle of Frogs and Mice is over' and 'Enough! Economists, retire now!' and 'Not a question of simplicity but of stupidity' and 'Don’t tell me that Krugman’s economics is false, tell me instead what is true' and 'End of a storyteller' and 'What is dead certain in an uncertain world: economists’ abysmal incompetence' and 'The general theory of scientific incompetence' and 'Is Paul Krugman necessary?' and 'When fake scientists call out on fake politicians' and 'Economics: From proto-science to freak show' and 'On economists’ stupidity' and 'Economists for all seasons or just confused confusers?' and 'Paul the Menace' and 'Economics and corruption' and 'Soap box economics' and 'Forget Krugman, forget Keynes, forget economists' and 'Why don’t economists simply shut up for a while?' and 'Low-IQ economics: the beginner’s guide' and 'Will economics ever become a science?' and 'Don’t blame the model, blame the modeler' and 'Scientific suicide in the revolving door'

MMT: No sound basis

Comment on Terry Sullivan on ‘Austerity Is A Sham: The Road to Resilience’

Blog-Reference

Terry Sullivan writes: “Recently, a friend of mine sent me a video explaining the doctrine of Modern Monetary Theory. In the most recent The Nation magazine (May 22, 2017), there is a feature article on it. Economists such as James Galbraith, Dean Baker, and Paul Krugman have quietly admitted that the theory has a sound basis.”

Everybody can climb on a soap box and make a save-the-world economic policy proposal EXCEPT an economist because: “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)

The problem is that economists do NOT have the true theory. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got profit wrong. This includes MMT.#1

Economics claims to be a science but is NOT. Economists claim to know how the economy works but do NOT. From this follows that economic policy guidance with regard to monetary, fiscal and employment policy has NO sound scientific foundation. This applies to orthodox and heterodox economics and this applies to the whole issue of austerity.#2

Egmont Kakarot-Handtke

#1 See ‘Where MMT got macro wrong
#2 For the details of the bigger picture see
Austerity and the idiocy of political economists
Austerity and the utter scientific ignorance of economists
Austerity and the total disconnect between economic policy and science

June 8, 2017

Just revealed: IS-LM is dead since 80 years

Comment on Bradford DeLong on ‘On the negative information revealed by Marvin Goodfriend’s “I don’t teach IS-LM”’

Blog-Reference and Blog-Reference

Brad DeLong summarizes: “But I believe that whenever anybody says “I don’t teach IS-LM” they are one of:
1. Making completely implausible and wrong claims about how the economy works.
2. Being lazy and/or stupid.
3. Declaring a tribal affiliation to xxx that I think has shed a lot more heat than light on real issues.”

Fact of the matter is that IS-LM is axiomatically false. Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This elementary syllogism is conceptually 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.)

Keynes had no idea what profit is, neither had After-Keynesians. As a result, all I=S models, all IS-LM models, the Keynesian multiplier, Post Keynesianism, and New Keynesianism are false.#1

So, whenever anybody says “I apply a variant of IS-LM” they are one of:
1. Taking provable false macro axioms as formal foundations.
2. Not knowing what profit, i.e. the pivotal economic magnitude, is.
3. Being moronic and/or imbecile and/or committing scientific suicide.”#2

Egmont Kakarot-Handtke

#1 See also ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
and ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#2 For details of the big picture see cross-references Refutation of I=S

***
Blog capture Jun 8 18:20

***
Blog capture Jun 8 19:06

Soap box economics

Comment on Lars Syll on ‘Labour’s manifesto — not continued austerity — is what the UK needs’

Blog-Reference

In the political sphere we have freedom of speech, so everybody can climb on a soap box and make an economic policy proposal: “A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy is failing to satisfy. In the thirties we had Major Douglas, and social credit ― it can all be done with a fountain pen ― and Warren and Pearson who convinced President Roosevelt that raising the dollar price of gold would raise the price of everything else and bring the slump to an end. The cranks are to be preferred to the orthodox because they see that there is a problem. Nowadays we have plenty of cranks taking up the problems that the economists overlook.” (Joan Robinson)

Everybody can climb on a soap box and make an economic policy proposal EXCEPT an economist because: “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)

The problem is that economists do NOT have the true theory. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got profit wrong.

Economics claims to be a science but is NOT. Economists claim to know how the economy works but do NOT. From this follows that economic policy guidance with regard to monetary, fiscal and employment policy has NO sound scientific foundation. This applies to orthodox and heterodox economics and this applies to the whole issue of austerity.*

Egmont Kakarot-Handtke

* For the details of the bigger picture see
Austerity and the idiocy of political economists
Austerity and the utter scientific ignorance of economists
Austerity and the total disconnect between economic policy and science
The general theory of scientific incompetence
Economic policy guidance out of the scientific kindergarten
Economics as poultry entrails reading
Post Keynesianism, too, is proto-scientific rubbish

June 7, 2017

Note on Lars Syll on ‘Cauchy logic’ in economics

Blog-Reference and Blog-Reference on Jun 8

“The truth is, that common-sense, or thought as it first emerges above the level of the narrowly practical, is deeply imbued with that bad logical quality to which the epithet metaphysical is commonly applied; and nothing can clear it up but a severe course of logic.”

This is the key message of Peirce to Heterodoxy.

The misapplication of the concept of random draw has nothing to do with the mathematical concept of limit. Hence the conclusion: “It’s — just as the Cauchy mathematical logic of ‘defining’ away problems — not tenable”, is far beside the point, in fact infinitely far.

What heterodox economists as utterly incompetent scientists indeed need is a “severe course of logic.”*

Egmont Kakarot-Handtke

* See ‘Heterodoxy, too, is scientific junk

Banana economics

Comment on Barkley Rosser on ‘Trump Blows Up The Gulf Cooperation Council’

Blog-Reference

The last signal I received from Barkley Rosser was LOL which is the perfect analogue of a ship’s last signal SOS.

Barkley Rosser got everything wrong in his career as an economist but he was not alone in his bottomless scientific incompetence.#1 He never understood what profit is but had a fine grasp of folk psychology, folk sociology, and history as documented in his post ‘Some Saudi-US History’. In marked contrast to the majority of substandard economists, who never rise above the level of vacuous storytelling, he was always and everywhere strictly committed to facts: “Philby would convert to Islam and take several wives. He was also the father of later Soviet spy, Kim Philby.”

Except for gossip, Barkley Rosser knows nothing. As a fervent busybody, though, he has an opinion on everything. His achievements in the fields of attention- and reputation management qualifies him for a political economist.

However, the first fundamental fact of life to notice is that science and politics do not mix, never did, and never will. Hence, a decision has to be made: either―or. After all, according to the still upheld self-definition economics is a science.

If economics cannot satisfy the well-defined criteria of science ― material and formal consistency ― it faces the option of to either leave science voluntarily or to be thrown out eventually. This is not a catastrophe, though, economics can live happily thereafter as part of the entertainment industry with grand debates about free markets, voluntary unemployment, housing bubbles, the absurd distribution of income/wealth, and taxation as the perennial torture by the Antichrist=State. All that has to be done is to renounce the title of science. Because to keep this title much longer would be misleading and even fraudulent.

Walrasianism, Keynesianism, Marxianism, Austrianism are materially/formally inconsistent. In other words, they are scientifically indefensible. The problem is that all four approaches are tied to political groups/interests and are used as a means of persuasion/propaganda/ justification. The current versions of economics have no scientific value, merely some political utility.

When Krugman supports the Democrats, when Wren-Lewis and Keen support Labour/Corbyn, when Varoufakis fights for democratizing the Eurozone, and Barkley Rosser comments on KSA/UAE/Qatar has this anything to do with science? What have they and Hayek and Keynes and Friedman in common? NEITHER of these so-called economists has a scientifically valid theory about how the economy works. So, ALL political filibuster ― right-wing/left-wing does not matter ― is scientifically worthless.

Political economists have made economics a banana science. Orthodox and heterodox economists have NO scientifically valid theory of how the monetary economy works. They do not even understand what profit is. In other words, economists have not done their scientific homework. What are the odds that these ignoramuses can ever make a sensible contribution to politics?

Economists have to entirely withdraw from politics and to focus on how to perform the scientific U-turn called paradigm shift. The new and extremely tight definition of the subject matter is: Economics is the science which studies how the monetary economy works. Banana economics has to be left behind in the cesspool of failed/fake science.

Egmont Kakarot-Handtke

#1 See ‘Profit and the collective failure of economists

June 6, 2017

Profit and distribution: a primer

Comment on Cecchetti & Schoenholtz on ‘Labor’s Declining Share: A Primer’#1

Blog-Reference

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive” (Desai, 2008) and this is the most damning verdict about economics. After 200+ years economists cannot tell the difference between profit and income. This is the current state of economics: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.#2

Quite naturally, because profit theory is false distribution theory, too, is false.

Cecchetti & Schoenholtz’s post starts with the observation: “For at least the past 15 years, and possibly for several decades, labor’s share of national income has been declining and capital’s share has been rising in most advanced and many emerging economies.” And they conclude: “But the race for a better understanding of what drives the income distribution is just getting started, so we still have a great deal to learn about what determines labor’s share.”

In order to get a better understanding, the very first thing to do is to get the profit theory right.#3. The axiomatically correct Profit Law is given with Qm≡Yd+(I-Sm)+(G-T)+(X-M) and reduces to Qm≡(I-Sm)+(G-T) for Yd, X, M=0; Legend: Qm total monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports.

Nominal labor share l is in the elementary version of Cecchetti & Schoenholtz given as quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, l=Yw/(Yw+Qm)=1/(1+Qm/Yw).

This gives us the drivers of the falling labor share l which simply translates into Qm rises faster than Yw. Now monetary profit Qm for the world economy as a whole is in turn determined by growth expressed as investment expenditures I, monetary saving/dissaving Sm, and government deficit G-T. This is a testable proposition because all variables are measurable. Roughly speaking, growth of the capital stock (predominantly in Asia) and growth of overall household and government sector debt explains the decline in the worldwide labor share l over the past decades.#4

Egmont Kakarot-Handtke

#1 Money and Banking blog
#2 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#3 See also ‘First Lecture in New Economic Thinking
#4 To determine the real shares is another matter that has been dealt with elsewhere.


Related 'Where MMT got macro wrong' and 'Austerity and the idiocy of political economists' and 'Rethinking the Distribution' and 'Keynesianism as ultimate profit machine'

June 5, 2017

Hijackers, agenda pushers, PsySocs and other morons

Comment on Oleg Komlik on ‘Theodor Adorno on the division between economics and sociology’

Blog-References

Oleg Komlik quotes Adorno: “My thesis is quite simply that the strict division between economics and sociology, the consequence of which is unquestionably to dismiss the Marxian theory ante portas, causes the decisive social interests of both disciplines to disappear; and that precisely through this separation they both fail to assert their real interests, what really matters in them.”

All confusion about economics derives from the fact that there are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

In the beginning, there was Political Economy. J. S. Mill defined it clearly as a social science: “The fundamental problem, therefore, of the social science, is to find the laws according to which any state of society produces the state which succeeds it and takes it place.” Or, a bit more specific with regard to economics: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.”

Economics started as a hodgepodge of sociology, history, folk psychology, and folk philosophy, which came under the heading of utilitarianism.

Classical Political Economy was carried one step further with methodological individualism: “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)

Methodological individualism is clearly defined by this set of behavioral 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)

Axiomatization is not only laudable but methodologically indispensable: “We should also like to underline Debreu’s effective reference to Bacon when he says that ‘citius emergit veritas ex errore quam ex confusione.’ It would be a mistake to lower the level of analysis and clarification. The only way possible is a thorough reexamination of the theory’s basic hypotheses, i.e., a true paradigmatic revolution.” (Ingrao et al.)

Orthodox economics remains firmly rooted in the social sciences because it is defined by behavioral axioms. Yet, orthodox economics is widely considered as scientific failure. To replace Orthodoxy requires the replacement of HC1-HC5 by an entirely new set of axioms. This is what a true paradigmatic revolution is all about.

What is true for Walrasianism holds for the rest of economics. The current state is this: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. How could this happen? Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. As a result of the utter scientific incompetence of political economists economics is a failed science.

There is no way around this: economists need the one true theory and not the pluralism of false theories: “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)

Everybody knows: the so-called social sciences in general and political economics in particular NEVER got anything off the ground. Feynman called them cargo cult sciences: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”#1

What is needed is a strict SEPARATION between the so-called social sciences and economics.#2 Separation of the subject matter, of course, does NOT exclude cooperation and the exchange of knowledge. Economics has to be clearly redefined as system science:
  • Old definition, subjective-behavioral: Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
  • New definition, objective-systemic: Economics is the science which studies how the monetary economy works.
All Human Nature issues can be left to psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory etcetera. What is needed is the strict separation (i) of science and politics, and (ii), of the so-called social sciences and economics. There is NO other way out of the proto-scientific cul-de-sac of economics.#3

Adorno never understood what profit is#4, whether his understanding of sociology was much better is doubtful.

Egmont Kakarot-Handtke

#1 See also ‘What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 See ‘Economics is NOT about Human Nature but the economic system
#3 For the axiomatically true theory see ‘True macrofoundations: the reset of economics
#4 See ‘Profit for Marxists