April 15, 2017

How to overcome the manifest silliness of Econ 101 and save the economy

Comment on Noah Smith on ‘Why the 101 model doesn’t work for labor markets’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference on Apr 16

The Econ 101 labor market theory does not work because it is based on microfoundations. Microfoundations are given with the neo-Walrasian axiom set: “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)

From these axioms together with some auxiliary assumptions follows what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium, which is the representative economist’s all-purpose tool.

This approach is false on all methodological counts, that is, supply-demand-equilibrium is a NONENTITY. General inapplicability implies that it is also inapplicable to the labor market.

Microfoundations is the wrong approach. This explains why economics is a failed science. The correct approach is macrofoundations.#1

The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is shown on Wikimedia.#2 From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(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 employment equation contains in addition profit distribution, the public sector and foreign trade.

Item (i) and (ii) cover Keynes’s familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what standard economics teaches: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price.” (Tobin)

False theory leads to false policy guidance. Scientifically incompetent economists bear the intellectual responsibility for the social devastation of mass unemployment.

The systemic employment equation contains nothing but measurable variables and is therefore readily testable. There is no need for further brain-dead supply-demand-equilibrium blather: as always in science, a test decides the matter.

Egmont Kakarot-Handtke

#1 The macrofoundations approach starts with three systemic (= behavior-free) axioms: (A0) The objectively given and most elementary 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.
#2 For details see cross-references Employment

Related 'How economists murdered the economy and got away with it' and 'Economics is a science? You must be joking!' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'The father of modern economics and his imbecile kids' and 'Coming soon: the canonical economics textbook' and cross-references Econ 101

REPLY to Tom Hickey on Apr 16

The concept of rent is ill-defined because economists do not know since Smith and Ricardo what profit is. See ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

REPLY to JoeMac on Apr 17

“Every model is unrealistic” is an argument from the list of economists’ silliest excuses.#1 Time to bring yourself methodologically up to speed.

The point is NOT that Econ 101 is ‘unrealistic’ but that it is PROVABLE FALSE.#2 And the fact of the matter is that economists in their abysmal scientific incompetence have NOT realized it in the past 60 years.#3

#1 Failed economics: The losers’ long list of lame excuses
#2 All models are false because all economists are stupid
#3 The father of modern economics and his imbecile kids

COMMENT on Bruce Wilder on Apr 17

Supply-demand-equilibrium is one of the most annoying constructs in the history of sciences but every student generation since Walras/Jevons/Menger swallowed this methodological crap without turning an eyelid.

Nobody with two brain cells can start with a NONENTITY like utility maximization, derive phantasmagorical functions and then wonder why econometrics runs straight into an identification problem.

It is NOT so that there were no timely warnings from genuine scientists: “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)

Every economist who has accepted supply-demand-equilibrium as a reasonable description of how the market system works has flunked the competence test.* There is no way around the nullification of all scientific credentials (Master, PhD, Peer Reviewer, Journal Editor, Professor, Nobel Laureate) economists ever received since Walras/Jevons/Menger. Heterodox economists are NOT exempted because they failed to develop an alternative to supply-demand-equilibrium since Veblen.

* See ‘How to Get Rid of Supply-Demand-Equilibrium

ICYMI on Apr 17

Econ 101 is dead.#1

Psychology, sociology, politics, history have to be left to psychologist, sociologists, political scientists, and historians.#2 Economics is about how the economic system works.

Supply-demand-equilibrium is based on behavioral axioms (= microfoundations) and because of this methodological blunder the whole analytical superstructure as presented in the textbooks since 60+ years is provable false.#3

Econ 101 doesn’t work for the labor market and it doesn’t work anywhere else.

Economists’ memo: If it isn’t macro-axiomatized, it isn’t economics.

#1 See ‘Methodology 101, economic filibuster, and the mother of all excuses
#2 See ‘A farewell to PsySoc economics
#3 See ‘The father of modern economics and his imbecile kids

REPLY to JoeMac on Apr 20

I said: “The point is NOT that Econ 101 is ‘unrealistic’ but that it is PROVABLE FALSE.”

You said: “I don’t understand your point. No one is against using empirical evidence to refute models.”

Provable false means false in the SAME way false as the Geo-centric theory is false, that is, TOTALLY false, that is, logically and empirically false. The consequence is that Econ 101 is OUT of science just as the Geo-centric theory or the flat-earth theory or the phlogiston theory are out of science.

Econ 101 is based on microfoundations which are given with the neo-Walrasian axiom set: “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)

This axiom set contains three nonentities. Every theory/model that contains a nonentity is a priori false. In other words, Econ 101 is axiomatically false since Walras/Jevons/Menger. In still other words, economics from supply-demand-equilibrium to DSGE is false as clearly as 2+2=5 is false.

There is NO choice between partial equilibrium or total equilibrium because ALL models that contain equilibrium (HC5) are false. The same holds for (HC2) and (HC4).

From this follows that the microfoundations paradigm has to be FULLY replaced just as the Geo-centric paradigm had to be fully replaced by the Helio-centric paradigm.

In simple terms: axiomatically false is as different from ‘unrealistic’ as a death sentence is from a traffic ticket.

Econ 101 is one of the most annoying constructs since the ancient Greeks invented science 2000+ years ago but the representative economist has not realized it until this day. Econ 101 is out of science, the representative economist is out of science, and JoeMac is out of science. Which part of ‘out of science’ do you not understand?