May 1, 2017

Economics ― a doctor worse than the disease

Comment on Barkley Rosser on ‘So, let me play a game with you’ as an intermezzo of ‘Is Authoritarian Nationalism Mostly A Rural Phenomenon?’

Blog-Reference

You propose: “So let us consider an issue much discussed here by me, Sandwichman, Peter Dorman, Brenda Rosser, and occasionally others, namely environmental economics. Near as I can tell your discussion of profit has always been at a macro national income and product accounts level, never at the micro level.”

And you conclude: “If in fact your theory says that they do not count pollution costs in their internal financial calculations, and if you also say that they seek to maximize their profits as you define them, well, Egmont, your theory adds zero to current standard discussions and does not overturn any of it in any way.”

Let us agree on three things: (i) environmental protection is an issue since at least 3000 BC,#1 that is, an issue that is ― as a matter if principle ― independent of the current state of economics, (ii) environmental protection is multidisciplinary, that is, with a host of sciences bringing their specific knowledge to the table, (iii) in order to play a useful role economics, too, has to provide scientific knowledge.

This does not only hold for environmental protection but for economic policy IN GENERAL: “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 snag 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 the pivotal economic concept profit wrong.

From this follows that economic policy guidance NEVER had a sound scientific foundation since Adam Smith/Karl Marx. This in turn means that the well-meant advice of economists more often that not WORSENS the situation. Mass unemployment is a case in point. Put bluntly, scientifically incompetent economists are a hazard to their fellow citizens and humanity.

The PRIMARY task of economists is to develop the true economic theory. Economists have failed at this task because they dabbled in all disciplines from psychology, sociology, political sciences, geopolitics, law, history, anthropology, social philosophy, biology/ evolution theory,  ethics, philosophy, pedagocis to ecology but NEVER managed to define the core concepts of their own discipline properly.#2

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008) and this means that economics is the greatest nuisance in the history of the sciences. Before economics can contribute anything to human welfare or environmental protection it has to rise above the current proto-scientific level.

Because the foundational concept profit is axiomatically false the whole theoretical superstructure is false. Standard economics is built upon microfoundations, that is, upon a set of behavioral axioms.#3

This is methodologically the wrong starting point. Economics has to be macrofounded. The macrofounded Profit Law is shown on Wikimedia.#4 Its implications for economic policy are profound.

You argue: “Non-Pareto optimal dumping of pollution occurs because profit-maximizing firms who do not count their polluting activities as a cost that subtracts from their profits do not have an incentive not to pollute as they seek to maximize their profits.”

This, of course, is trivially true from the myopic micro perspective. But microeconomics is false because it always runs straight into the Fallacy of Composition. For the economy as a WHOLE holds as a general rule that total profit does NOT decrease if firms increase environmental protection. If capitalists were indeed a class instead of a bunch of micro-brained morons and think in class terms (as micro-brained Marx falsely claimed they do) they would recognise that pollution does NOT increase overall profit and enviromental protection does NOT reduce overall profit. From the macro perspective enviromental protection is no economic problem at all. It is a pseudo problem that derives ultimately from the scientific incompetence of economists.

What is true for the firm is NOT true for the economy. Microfounded economics is false. The representative economist has not gotten it since Jevons/Walras/Menger and it is pretty obvious that you will never get this: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 Wikipedia
#2 See also ‘Economists: Jacks of all trades ― except economics
#3 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) Every model that applies just one of the axioms is false.
#4 The Profit Law


Related 'Economists ― medics or barber surgeons?' and 'Note on Barkley Rosser on political/ scientific failure' and 'From the pluralism of false models to the true economic theory' and 'Economic policy guidance NEVER had sound scientific foundations' and 'Economists and the destructive power of stupidity' and 'From false micro to true macro: the new economic paradigm'

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REPLY 'Game over, Barkley Rosser' on May 2

You say: “In #3 you list four axioms that are not necessarily true, although their truth or falsity is also completely independent of accepting or rejecting your vacuous tautology of a theory of profit.”

The axioms HC1-HC5 are ― see the original paper of Weintraub ― the foundations of standard economics from Jevons/Walras/Menger to DSGE including all textbooks. You may know it or not, but as a standard economist you are committed to them. Krugman, for one, is very explicit about this: “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 maximization-and-equilibrium world you and all the other cargo cult scientists inhabit is a nowhere-world and every economist who takes the words maximization and equilibrium in his mouth is scientific toast.

You have argued “optimal dumping of pollution occurs because profit-maximizing firms who do not count their polluting activities as a cost that subtracts from their profits do not have an incentive not to pollute as they seek to maximize their profits.”

Obviously you subscribe to axiom HC2 = agents individually optimize subject to constraints. Above you addressed me with: “you list four axioms that are not necessarily true”.

Conclusion: As a standard economist you are by definition committed to the neo-Walrasian axioms HC1-HC5, however, you maintain that they “are not necessarily true”. Among persons with more than one brain cell this is called a contradiction.

Fact is that the neo-Walrasian axiom set HC1-HC5 is methodologically forever unacceptable. Every model that applies just one of the axioms is false. This holds for the ‘normal’ models like supply-demand-equilibrium as well as for models that deal with environmental issues.

Conclusion: ALL neo-classical environmental models are axiomatically false and therefore scientifically worthless.

Your statement “Non-Pareto optimal dumping of pollution occurs because profit-maximizing firms who do not count their polluting activities as a cost that subtracts from their profits …” is trivially true under the CONDITION that one accepts HC2 as true axiom which NO scientifically competent person ever will.

Because the microfoundations HC1-HC5 and ALL inferences that follow from them are methodologically forever unacceptable the whole of economics has to move from false microfoundations to true macrofoundations. This is called a paradigm shift.

From the true macrofoundations follows, among others, the Profit Law and the employment equation which are readily testable.* So, the only question is: are these objective relationships materially and formally consistent and NOT AT ALL whether the Profit Law is useful in the discussion about environmental policies. This is as idiotic as the question whether the Law of Gravity is useful in the discussion about environmental policies.

An economists who takes part in a policy discussion without knowing the macroeconomic Profit Law* is a laughing stock just like a physicist who does not know the Law of Gravity.

Your political agenda-pushing lacks sound scientific foundations.

* See ‘How to overcome the manifest silliness of Econ 101 and save the economy’ and ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down

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REPLY 'Retire before you are retired' on May 2

Imagine, Newton has just published the Law of Gravity and a man comes to him and says: Isaac, your Law is vacuous and absolutely useless in my molehill research.#1

True, but irrelevant. Just as presenting your academic CV is irrelevant. Your whole argumentation is way beside the point, it does NOT prove what you are repetitively asserting.

The salient point is that economists are supposed to explain how the (world-) economy works (= economic universe) and not how the firm works or how the consumer decides between strawberry and blueberry yogurt. These questions can be left to junior consultants and psychologists.

The salient methodological point is that NO way leads from the understanding of human behavior (= microanalysis) to the understanding of the behavior of the economy (= macroanalysis). Partial analysis is NOT generalizable.

Fact is that the subject matter of economics is misspecified: “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)#2

This commitment to methodological individualism translates into 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 microfoundations supply-demand-equilibrium is derived and then it goes on to General Equilibrium and ends with the welfare theorems. Because methodological individualism is false, the behavioral microfoundations HC1-HC5 are false. Because the axioms are false, General Equilibrium is false and the welfare theorems go down the toilet.

The WHOLE of standard economics is cargo cult science and you are part of it. ALL variants of behavioral economics have to be thrown out of economics as dilettantish and utterly useless folk psychology/sociology. Marginalism is dead since 140+ years but the representative economist has NOT realized it.

The failure of maximization-and-equilibrium economics means that economic policy guidance NEVER had sound scientific foundations from Adam Smith/Karl Marx to Barkley Rosser. It’s all political blather in the bluff package of science.

Let this sink in: molehill economists from Adam Smith/Karl Marx to Barkley Rosser cannot tell how the profit of the economy as a whole is determined. With their utter scientific incompetence they bear the intellectual responsibility for the social devastation of mass unemployment since the Great Depression ― among others.

Napoleon realized this long ago: “Late in life, moreover, he 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)#3

So, let us stop listening to Barkley Rosser and his silly molehill buddies and do real scientific work, that is, the paradigm shift.

#1 “There is no doubt a strong tendency to revolt against abstract reasoning. Human nature has a strong ‘factish’ element in it. The reasonings of Principia are now accepted. But in the beginning they were ‘mere crotchets of Mr. Newton’s’” (Bagehot)
#2 See ‘How Arrow pushed economics over the cliff
#3 See ‘Economists and the destructive power of stupidity

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REPLY  'Ciao, Barkley Rosser' on May 3

You say: “Regarding that set of five axioms that you got from some oddball paper by Roy Weintraub, it simply is not the set of axioms that underlie standard general equilibrium theory, although some of them are part of the set.”

In his paper, Weintraub gave a VERBAL description of the neo-Walrasian axiom set. It has been FORMALIZED in detail by Debreu, Arrow, Hahn, Mas-Colell et al. The curious thing is that the axioms differ slightly between authors which only tells us that neoclassical economics is NOT properly axiomatized and that the representative economist does NOT know what the formal foundations of his paradigm are. But you certainly agree that maximization-and-equilibrium is the common core of ALL neoclassical axiom sets. Because these two axioms are false, ALL variants of standard economics are false.

You say: “Pretty obviously you are uninterested in microeconomics.” This is NOT the case. Fact is that I am uninterested in your molehill-monty-python economics. My argument is that to start with behavioral axioms and then to proceed bottom-up to macro is false. The methodologically correct way is to start with macrofoundations and then to proceed top-down. This is what paradigm shift means.#1

You say: “you have airily dismissed, and I think have essentially admitted you have nothing to substantive to say about, namely environmental economics.” The PRIORITY of the economist is to say something SUBSTANTIVE about the ECONOMY. You have failed on the core task and because of this your environmental economics is distractive blather. An economist who cannot tell what profit is cannot contribute anything to an economics issue much less so to any other issue.

You are an economist but cannot tell what profit is. You are not alone in your abysmal incompetence: “Nor do the modern variants add anything whatever on this score. For Debreu profits are simply a nonissue, while Arrow and Hahn make only passing reference to profits ― and that only as a historical introduction. Whatever may be the usefulness of these idealized theoretical constructs, they cannot be said to throw any light on the profit issue; surely, therefore, they fail to capture the essence of a capitalist market economy. (Obrinsky, 1981)

You say: “Your theory apparently might help us achieve full employment, although somehow you have never explained exactly how.” Stop blathering, learn reading, follow the link and the references.#2 Even better, take the remote control, sit down on the couch and watch sitcoms.

#1 See ‘How to finally hammer down the nails in the coffin of Monty Python economics’ and ‘Essentials of Constructive Heterodoxy: Behavior
#2 See ‘How economists murdered the economy and got away with it

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REPLY  'Yes, it is hard to believe, Barkley Rosser' on May 4

I do understand that you cannot accept a refutation but there is really no need to publicly demonstrate that you have NO idea what axiomatization is all about.

So, just for the record.

I said: “In his paper, Weintraub gave a VERBAL description of the neo-Walrasian axiom set. It has been FORMALIZED in detail by Debreu, Arrow, Hahn, Mas-Colell et al.”

Weintraub’s first axiom reads: “HC1 economic agents have preferences over outcomes.”

Now you say: “Here are the axioms on the preference sets 1. completeness 2. reflexivity 3. transitivity 4. continuity 5. monotonocity 6. convexity.” This set of CONDITIONS is merely the detailed SPECIFICATION of the notion of PREFERENCES in Weintraub’s axiom HC1.

Your six conditions are auxiliary, just as the specification of a production function is auxiliary to the axiom set HC1-HC5. The simple reason for the introduction of these ILLEGITIMATE auxiliary conditions is that without these specifications the second axiom “HC2 agents individually optimize subject to constraints” does NOT work and the WHOLE of marginalism, which hinges alone on HC2, BREAKS DOWN.

You say: “the axioms on the preference sets of agents [are] sufficient for the existence of general equilibrium.”

This is clearly NOT the case. Equilibrium is INTRODUCED with the fifth axiom: “HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” This methodological blunder is known since antiquity as petitio principii.

You say: “None of them [the axioms/conditions] have anything to do with a theory of profit, any theory of profit. Just not a part of it.” Of course not, profit cannot be put into the axioms but has to be DERIVED from them just like the Pythagorean theorem is DERIVED from the Euclidean axioms.

The point is that the correct profit law/profit theorem* FOLLOWS from macrofoundations, i.e. the set of objective/behavior-free/systemic axioms, but NOT from the neo-Walrasian microfoundations. From microfounations follows NOTHING about profit for the economy as a whole. This is why the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive” which is the most damning verdict about standard economics. After 200+ years economists cannot tell what profit is.

The point of axiomatization is that the WHOLE of economics follows consistently from the correct macro axiom set just like the WHOLE of Euclidean geometry follows from the Euclidean axiom set. The whole of standard economics is false because the neo-Walrasian axioms HC1-HC5 (including all auxiliary conditions) are false. And this is why a paradigm shift is needed.

This is known at least since 1990: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al.)

After you have made a complete fool of yourself you can now enjoy your retirement.

* The Profit Law


Immediately following 'True macrofoundations: the reset of economics'