May 9, 2017

Austerity and the total disconnect between economic policy and science

Comment on Simon Wren-Lewis on ‘Underestimating the impact of austerity’

Blog-Reference and Blog-Reference

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 scientific standards are observed.

The sole criterion of science is true/false with truth defined as material and formal consistency: “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 economics is that neither Orthodoxy nor Heterodoxy has the true theory. Therefore, the economic policy proposals of BOTH orthodox AND heterodox economists lack sound scientific foundations: Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory, axiomatically false, and materially/formally inconsistent.#1

The discussion about austerity delivers the proof of the utter scientific incompetence of political economists. Until this day, the representative economist has NOT gotten the fundamental concept of his subject matter, i.e. profit, right.#2 To make the argument short, the correct profit equation for the economy as a whole is given here as Qm≡Yd+(I-Sm)+(G-T)+(X-M) which reduces to Qm≡G-T for Yd, I, Sm, X, M = 0. The reduced macroeconomic profit equation says that the monetary profit of the business sector Qm is equal to the deficit G-T of the public sector.

So, from the standpoint of simple self-interest the 1-percenters and their useful academic spokespersons should argue FOR deficit spending and the 99-percenters and their academic spokespersons should argue AGAINST it. Just the opposite happens since Adam Smith railed at public debt.

Fact is that the measured increase of the relation between profit and wage income in the past decades has no other cause than the increase of public and private deficit spending. It has NOTHING AT ALL to do with greed, productivity, the smartness of business people, or class struggle. These factors only influence the DISTRIBUTION of overall profit Qm BETWEEN the firms.

Because neither Orthodoxy nor Heterodoxy has the true profit theory their economic policy proposals are often counter-productive for the social groups/classes they speak for. The fact of the matter is that nobody has done more for the 1-percenters than deficit spending heterodox economists who claim to defend the peoples’ interests.

Economic disasters happen since 200+ years because political economists lack the true theory.#3 The general public is taken away by good-guy-bad-guy storytelling without realizing that economics has NO scientific foundation at all. Where the true theory should be, merely the pluralism of silly models is to be found.

Egmont Kakarot-Handtke

#1 For details, references, and proofs see Meta-references
#2 “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)
#3 See ‘Mass unemployment: The joint failure of orthodox and heterodox economics


Related 'True macrofoundations: the reset of economics' and 'Economics ― a doctor worse than the disease' and 'The stupidity of Heterodoxy is the life insurance of Orthodoxy' and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'