February 9, 2017

The key to macro and Keen's debt-employment model

Comment on Jason Smith on 'Qualitative economics done right, part 2'

Blog-Reference

Like Walrasian, Keynesian, Marxian, Austrian models, Steve Keen’s model is provable false. For details see
― Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn
― Keenonomics, aggregate demand/change of debt, and some misleading critique
― Putting the production function back on its feet
― The key relationship between employment and growing/shrinking debt
― Debunking Squared.

Heterodox economists are scientifically just as incompetent as orthodox economists.

Egmont Kakarot-Handtke

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REPLY to Jason Smith on Feb 9

You say: “Therefore we don’t really know what the key to macro is.”

YOU don’t know, WE know. This is the elementary core of foundational macro propositions, a.k.a. axioms: (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These macro axioms are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimal, that is, it cannot be reduced further, only expanded. The set is behavior-free, contains no nonentities like constrained maximization or equilibrium and no normative assertions. All variables are measurable.

For more details see: How to restart economics

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REPLY to Tom Hickey on Feb 9

You say: “The problem is that there are an infinite # of explanations that can be given for anything. Most will likely be absurd or highly implausible, and so can be rejected out of hand. But there may be several plausible explanations. Science is about distinguishing the best explanation available from contenders.”

Confronted with the vastness and complexity of reality every branch of the sciences faces the problem where to start. John Stuart Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

Krugman, for example, is quite explicit about how he has solved the starting problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

The neoclassical world is given with these hard core propositions, a.k.a 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)

These microfoundations are the wrong starting point as everybody knows by now. So they have to be replaced by the correct macrofoundations. This is the actual challenge.

For details see ‘Economists’ three-layered scientific incompetence’ and ‘Macro poultry entrails reading

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REPLY to Jason Smith on Feb 10

You say: “There doesn’t seem to be any comparison with data at this link or at the links in your previous comment.”

Your attention span seems to be worse than that of a fruit fly. To recall, the question at issue is ‘What the key to macro is’ (see your post above)

I have given you the key with the systemic axiom set A1/A3. As you well know, deriving a testable formula from a theory and testing the formula are two DIFFERENT things. Einstein did not test relativity theory himself, it was Eddington who measured the bending of light during a solar eclipse. Higgs did not test his formula himself, it was the folks at CERN who did it and they had to build first the biggest machine ever.

In the post ‘The key relationship between employment and growing/shrinking debt’ you can find the elementary relationship between employment and credit expansion/contraction and the conclusion: “the employment equation delivers the testable formal underpinning of the empirical correlations found by Keen. Both elements support each other nicely.”

It is a long way from the premises/axioms/foundational propositions/principles to the testing of the implications of the well-defined axiom set. Yet, obviously, one has FIRST to get the axiomatic starting point right. Both, the Walrasian microfoundations and the Keynesian macrofoundation are provable false. So the starting problem has to be solved FIRST.#1 It has been solved with A1/A3.

Testing the systemic employment function is an entirely DIFFERENT matter.#2 To mix up the two fundamental methodological questions is a bit dilettantish. There is a productivity enhancing division of labor: economic theory provides the testable propositions, econometrics does the testing. The theoretical part has been settled with A1/A3. It is time for the econometricans to come up to speed now.

#1 “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (J. S. Mill)
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

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REPLY to Matthew Franko on Feb 10

You say: "The author seems to emphasize the ability of a model to predict the future."

Predicting the future is the business of charlatans/prophets/agenda pushers/morons. See
― Science does NOT predict the future
― ICYMI Prediction/Forecasting
― Prediction does not work? Try retrodiction first.

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REPLY to Matthew Franko on Feb 10

You say: “People make successful predictions every day...”

Scientists know better: “The future is unpredictable.” (Feynman)

See also ‘Predictably confused

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REPLY to Jason Smith on Feb 10

Your physics example shows that you are good at testing. Fine. Here is, let us call it the Leverrier challenge: “Thirty years after Laplace wrote this apotheosis of mechanics, something happened that tended to prove that mechanics has the power over existence as he described it. In 1846 a French astronomer, Urbain Leverrier, at the end of some calculations in which he confronted the astronomical observations of the known planets with the results of an appropriate mechanical system, was led to proclaim that there existed a still unknown planet, which, moreover, must be visible in a certain region of the sky. Direct observation of that region soon confirmed the existence of that planet, now called Neptune. Neptune, therefore, was discovered not by scanning the firmament with telescope, but ‘at the tip of a pencil.’ We can very well imagine the dream that this feat must have inspired in all social scientists, especially in economists. It is the dream of being able to predict the location of any share on the firmament of the Stock Exchange Market, whether tomorrow or one year from now, by solving certain equations that govern the motion of that market. Undoubtedly, the essence of that dream must still be nursed in the subconscious of many modern economists. The role of such a hope in the founding of the Cowles Commission is evidenced by several articles in the early volumes of Econometrica.” (Georgescu-Roegen, 1979)

So, here is the challenge: (i) I have given you the correct macro axioms, (ii) from these axioms follows the systemic employment equation#1 which gives one employment in dependence of, inter alia, changes of household sector’s debt ‘at the tip of a pencil’, (iii) the results should be in agreement with Keen’s numbers or with the US numbers or with previous Phillips curve studies. This is retrodiction.#2, (iv) From successful retrodiction one can then proceed to conditional prediction (which has NOTHING to do with predicting the future or the Stock Market).

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
The equation has to be augmented with government deficit/surplus and foreign trade deficit/surplus.
#2 See ‘Prediction does not work? Try retrodiction first

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REPLY to Jason Smith on Feb 11

You say: “It is the responsibility of the researcher to show how the equations fit the data. As I do here on my blog: I posit some equations (“axioms”) and then look at what they say about the data.”

Your description of what you are doing on your blog fits perfectly Feynman’s description of 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 a proper understanding of methodology. Here is the axiomatic-deductive method in brief directly from the horse’s mouth: “A complete system of theoretical physics consists of concepts and basic laws to interrelate those concepts and of consequences to be derived by logical deduction. It is these consequences to which our particular experiences are to correspond, and it is the logical derivation of them which in a purely theoretical work occupies by far the greater part of the book. This is really exactly analogous to Euclidean geometry, except that in the latter the basic laws are called ‘axioms’; and, further, that in this field there is no question of the consequences having to correspond with any experiences.” (Einstein)

Cargo cult scientists reduce the complete system of theoretical economics to: “I posit some equations (“axioms”) and then look at what they say about the data.” (J. Smith)

Note first that “some equations” is NOT the same thing as “axioms” which is pretty obvious from Einstein’s quote. And, second, what you call “some equations” is NOT the same what Einstein calls “consequences to be derived by logical deduction” from axioms.

It is the defining characteristic of cargo cult scientists that they imitate the scientific method without any understanding.#1

Every economist can know that the neo-Walrasian axioms#2 are provable false. Therefore, all “consequences to be derived by logical deduction” are false, that is, the whole analytical superstructure falls apart.

Faced with manifest failure, every economist has this choice: (i) to do the inescapable paradigm shift and to replace the false neo-Walrasian microfoundations by true macrofoundations, or (ii), to continue with cargo cult science.

Needless to emphasize that the representative economist, who has forever disqualified himself by accepting silly constructs like supply-demand-equilibrium as explanation of how markets work, cannot take up the challenge of a paradigm shift.

It is the first and foremost responsibility of the researcher to come up with the true theory: “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)

Until this day, economists have not even gotten the foundational concepts profit and income right. This is like medieval physics before the concepts of mass, force, energy were properly understood.

Plucking “some equations” out of thin air and doing some data fitting exercises with some fancy tools borrowed from the physics/math department is NOT a substitute for figuring out the true economic theory.

#1 See also Mirowski’s ‘More Heat Than Light’
#2 “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)

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REPLY to Jason Smith on Feb 12

You say: “I take I(A) = I(B) for processes A and B to be an axiom, derive the equation of motion dA/dB = k A/B, and then see if the solutions to that differential equation match up with any of “our particular experiences” (i.e. data).”

What you are doing is to apply the technique of differential equations to economics where it is not applicable because something like well-behaved functions does NOT exist.

This is the same mistake as with production functions. These do NOT exist but are introduced in order to apply constrained optimization which follows from the absolutely idiotic behavioral assumption of utility maximization which is given as axiom HC2 of the neo-Walrasian axiom set (see footnote #2 above).

The first mistake of cargo cult economics has been to borrow the concept of well-behaved functions from the physics/math department. The fact of the matter is, that there simply are NO such things as supply-, demand-, or production functions. In other words, the whole of marginalism lacks a proper foundation. Standard economics is nothing but a ridiculous behavioral INTERPRETATION of calculus which in turn depends on well-behaved functions which do NOT exist.

Metaphorically speaking, scientists put first their trousers on and then their boots, economists as cargo cult scientists do it the other way round: “The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein)

Your application of differential equations to economics proves the complete lack of understanding of methodology and economics. What you have in economics is, for example, output O per period and quantity sold X and the delta O-X which is the change of stock. Hence, the change of stock per period is the DISCRETE AND MEASURABLE economic counterpart of the first derivative of a well-behaved function. In economics difference equations apply for processes and NOT differential equations.*

What you are doing on your blog is brainless cargo cult economics.

* This, by the way, is the methodological blunder of Keen’s approach that produces the well-known types of cycles/explosions/implosions which are mere software artifacts with NO correspondence in reality.

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REPLY to Jason Smith on Feb 12

You say: “They’re actually well-defined differential equation limits (via Kurtz theorem) of stochastic processes (bounds via Gronwall’s lemma).”

Of course, they have done a great job in the math department, but my argument has been that in economics only difference equations are applicable.#1 It is always the same mistake of EconoPhysics that fancy tools are borrowed from the physics/math department and applied where they are not applicable#2 ― this is the very definition of cargo cult science.#3

You say: “But I think we’ve established that you are refusing to compare your results to empirical data.” That is NOT the case. I have challenged you to test the systemic employment equation. Your answer has been: “Why should I do this?” (see your post of Feb 10)

You say: “One of your equations (eq. 24)#4 is total nonsense.” Note, the relevant equation is the systemic employment equation/true Phillips curve eq. (33). Eq. (24) restates only the truism that over ALL periods total consumption expenditures and total income are equal in the pure consumption economy, that is, cumulated saving and dissaving cancels out eventually. In other words, all debts have to be paid back eventually.

It is eq. (33) which establishes, inter alia, the relationship between growing/shrinking debt and employment. The equation contains only measurable variables and is testable with existig data after proper specification. Theoretical economics has done its job, now econometricians can do theirs.

I am looking forward to an empirical refutation of standard employment theory and a corroboration of systemic employment theory.

#1 For more details see ‘Primary and Secondary Markets
#2 See also ‘Toolism! A Critique of EconoPhysics
#3 See also Jonathan Barzilai ‘An Open Letter to the President of the American Economic Association
#4 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

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REPLY to Jason Smith on Feb 13

We certainly agree about scientific method: “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)

Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

We certainly agree that BOTH the theoretical part (= securing logical consistency of axioms and derived testable propositions) AND the empirical part (= securing material consistency) has to be done properly, that is, without violating well-defined methodological standards.

We certainly agree that both parts are usually NOT done by the same person because they require different qualifications. Example: Einstein did not test relativity theory himself.

From the true statement that theories have to be properly formulated and tested does NOT follow as a methodological rule that both tasks have to be performed by the SAME person.

Your argument that I have provided the employment equation (as an alternative to Keen) but not the data therefore misses the point. The part of theoretical economics is (in analogy to theoretical physics) to provide TESTABLE propositions. NOBODY ever criticized Einstein for not having tested the field equation himself.

So it is NOT “a nice trick to play for the null hypothesis” but NORMAL practice to put forward a proposition for testing by an independent and qualified third party.

For the testable content of the structural employment equation I refer you to the posts ‘Unemployment ― the fatal consequence of economists’ scientific incompetence’ and ‘Macroeconomics without Keynes’.

Your argument that “If you plug in all the definitions, you get back L = L.” is a formal proof that the employment equation has been consistently derived from the axioms and definitions and NOT a proof that it has no content. Never heard of Wittgenstein’s quip: “The propositions of logic are tautologies.”? So L=L does NOT come as a surprise when you REVERSE the deduction.

When you cannot see the empirical content of the structural employment equation (= true Phillips curve) the fault is NOT in the equation.

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REPLY to Jason Smith on Feb 14

Let us return for a moment from the structural employment equation to the point at issue, i.e., that you are doing cargo cult sience, more precisely, that you grab an equation out of thin air, borrow an unsuitable tool from the physics/math department, and fool around on your PC with data from the St.Louis Fed. This is a brain-dead exercise because the theoretical frame in which your equations are embedded is axiomatically false. To recall, what is actually at issue on this thread is the relationship between employment and debt.

So, what we are talking about is employment theory. What orthodox employment theory says is this: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin, 1997)

What textbook economics says is that there is a NEGATIVE relationship between wage rate and employment. If you were able to read the structural employment equation you would realize immediately that the MACROECONOMIC relationship between wage rate and employment is POSITIVE.

It should be possible to establish which of the two opposing propositions is true. In fact, the Great Depression and the current mass unemployment gives one a clear hint that orthodox labor market theory is dead wrong.

Now, a hint is not a proof. The fact of the matter is that the relationship between wage rate and employment is but one element of the complete employment equation.#1 Other factors are the expenditure ratio rhoE, i.e. credit expansion/contraction, productivity, prices, investment expenditures, distributed profits etcetera.

So, what has to be tested with the utmost precision and reliable data is a very detailed employment equation and not just a simple correlation. This is a challenging task for the best econometricians. And it resembles more what they are doing at CERN than your rather self-delusional fooling around with excel-file data.

What the employment equation makes possible is to carry out what is in methodology known as experimentum crucis (see Wikipedia), that is, to answer the fundamental question of employment theory, that is, whether the relationship between wage rate and employment is positive or negative. This is on a par with the question of whether the Geo-centric or the Helio-centric model is true.#3

If an economic equation ever had real content then the structural employment equation. And if you were a scientist instead of a cargo cult scientist you would hurry to test it instead of spreading methodological crap. Your blathering about Einstein and Poincaré symmetry is a blatant distraction.#2

Poincaré, by the way, debunked economic cargo cult science long ago: “Walras approached Poincaré for his approval. ... But Poincaré was devoutly committed to applied mathematics and did not fail to notice that utility is a nonmeasurable magnitude. ... He also wondered about the premises of Walras’s mathematics: It might be reasonable, as a first approximation, to regard men as completely self-interested, but the assumption of perfect foreknowledge ‘perhaps requires a certain reserve’.” (Porter, 1994)

Walras did not get the point and neither did you. So, the real take-away for economists from Einstein is the famous dictum: “Only two things are infinite, the universe and economists’ stupidity, and I’m not sure about the former.”#4

If you want to refute the structural employment equation, test it and do not tell that it is not testable. It is a simple question to decide empirically: is the macroeconomic relationship between wage rate and employment negative as standard economics claims or positive as the structural employment curve claims? This goes in one with determining the relationship between employment and debt.

Stop dropping methodological crap on people.

#1 See the elementary version for the investment economy
#2 For details go to the AXEC blog and enter Einstein in the search field.
#3 See ‘The one stone that kills orthodox and heterodox employment theory
#4 This is what Einstein said about the LOGICAL PRIORITY of theory over testing:
“Whether you can observe a thing or not depends on the theory which you use. It is theory which decides what can be observed.”
“... the axioms Science is the attempt to make the chaotic diversity of our sense-experience correspond to a logically uniform system of thought”
“If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way?”
“... any attempt logically to derive the basic concepts and laws of mechanics from the ultimate data of experience is doomed to failure.”

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ANSWER of Jason Smith of Feb 14

I had to ban commenter AXEC / E.K-H from this blog because the conversation was not productive. AXEC did not appear to listen to or understand what was being said, frequently repeating errors even after being corrected.

To some degree I find arguing with people fun. It helps hone my skills and sometimes you learn something you might never have stumbled across until you tried to debunk the pet theory of some random person on the internet who decided your blog is the perfect venue for it.

But at some point it becomes monotonous. What happened to taking in information? If I say something and then you say something that could only have been said if I never said what I said, then there's really no progress.

AXEC: Einstein never tested his own theory!

Jason: Yes he did. He computed the perihelion shift of Mercury.

AXEC: Yes, but Einstein never tested his own theory, so I need not be bothered with looking up widely available data to see if my equations have any bearing on reality.

Jason: Again, Einstein did test his general theory. He also showed it reduced to Newtonian physics in the non-relativistic limit.

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For the record: The first calculation of the deflection of light by mass was published by Johann Georg von Soldner in 1801. Einstein calculated the relativistic deviation of light two times. Ironically, he got it wrong the first time in 1908 without realizing it until 1915. Luckily for him, the First World war prevented testing. It was Eddington (and two other expeditions to Brazil and Russia) who tried in 1919 to actually test = measure the deviation during a solar eclipse. Einstein did NOT test relativity himself (see my post of Feb 10).

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NOTE on Mike Norman Blog on Feb 15

For the record: The parallel discussion on the Information Transfer Economics blog ‘Qualitative economics done right, part 2’ got to the core of the matter. It ended with Jason Smith deleting my post of Feb 14. Here it is (post of Feb 14 above).

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