May 27, 2017

What is the fuss with New Economic Thinking all about?

Comment on Barkley Rosser on ‘Fighting Zombies with Zombies’


I said: ‘It is obvious from your posts that you never had a proper understanding of what axiomatization, equilibrium, or profit is all about and in this all-inclusive scientific incompetence you are the very personification of the representative economist.’

You answered: “… I actually read your papers on why Keynesian economics is incomplete, wrong, and so on.”

So, let us see whether you understood what you read.

The whole point of axiomatization is known since J. S. Mill: “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.”

Or, 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.”

By consequence, when the premises are false the whole analytical superstructure is false even if the intermediary logical steps are all correct. This is the case with the four main approaches. From this follows that the Walrasian-Keynesian-Marxian-Austrian premises have to be fully REPLACED. This is what paradigm shift means. Because economics is a failed science the paradigm shift is the PRIMARY task for ALL economists. This is what the much touted New Economic Thinking means.

What can actually be observed, though, is that the representative economist messes up new thinking just as he messed up old thinking.

You say, the first axiom [total income is wage rate times hours worked (WL) plus dividend times number of shares (DN)] is false because there is interest, royalties, land rent etc. Yes, there are many other phenomena in the economy but this is NOT the point. The point of axiomatization is to consistently formulate the MINIMUM set of premises and then to successively derive all other economic phenomena from the axioms. It holds: “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein)

Schumpeter understood this: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future.” In economics the most elementary systemic configuration is the pure consumption economy. So ALL of economics has to start HERE.

The immediately OBVIOUS point of the first axiom is that it does NOT state that total income is the sum of wage income and profit but that total income is the sum of wage income and DISTRIBUTED profit.

The crucial point of the first axiom is that it REPLACES the hitherto false concept of total income with the correct concept. From the first axiom then FOLLOWS profit as Qm≡DN-Sm. In methodological terms: the Profit Law follows as a theorem, profit is NOT in the axioms.

The idiocy of the representative economist consists in starting with the superficial assumption that profit is just another form of income.#1 This is dead-wrong. It is distributed profit that is just another form of income.#2 To treat profit as income is a category mistake.

The significance of the first axiom is that it brings the foundational concepts income, profit, and distributed profit in the logically correct relationship. This is something the founding fathers should have done 200+ years ago. Their inexcusable sloppiness has not been rectified by their equally incompetent heirs until this day. The first axiom is SUFFICIENT to send Walrasianism-Keynesianism-Marxianism-Austrianism directly into the scientific waste basket.

You say: “somehow he does not notice that output involves inputs besides labor.”

The second axiom replaces the unacceptable concept of a production function. The formal representation of the relationship between output, productivity and various inputs comes with the DIFFERENTIATION of the second axiom.#3 According to the methodological MINIMUM principle ― also known as Occam’s Razor ― the axioms contain ONE output and ONE input.#4

You say: “The problem is that the X or ‘quantity sold’ is completely meaningless. It is an aggregation that makes aggregating capital look like child’s play.”

Given the axioms, which refer explicitly to ONE giant firm, one has to proceed top-down by successive DIFFERENTIATION until one arrives at the individual agent. Differentiation is the OPPOSITE of bottom-up or aggregation. It is microfoundations and bottom-up that is the defining idiocy of Walrasianism, which literally PRODUCES the aggregation problem. With macrofoundations there is NO aggregation problem.

Your statement “X or ‘quantity sold’ is completely meaningless” is the ultimate proof of your illiteracy. The enumeration of the macrofoundational axioms starts with: “(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.” So X unambiguously refers to ONE firm and ONE product and is NOT an aggregate.

Economics is a failed science because economists are incompetent scientists. Their lethal blunder consists in the Fallacy of Insufficient Abstraction. The old sloppy micro-thinking of the representative economist has, for all to see, finally crashed against the wall at the end of the cul-de-sac. New thinking requires first of all the replacement of the PREMISES of the old thinking. As Hutchison put it: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.”

The axiomatic foundations of economics are false since 200+ years. The representative economist has proved beyond doubt that he is incapable of thinking, so new thinking is forever beyond his means. NOT ONE of Barkley Rosser’s arguments holds water.

New Economic Thinking starts with a new axiom set or it is just another futile variant of the same old proto-scientific Walrasian-Keynesian-Marxian-Austrian-Rosserian garbage. The methodological rule of New Economic Thinking is: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 See ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#2 For the correct treatment of interest, land rent, and nonmonetary profit see the papers on SSRN.
#3 See Section 4 of ‘Matter Matters: Productivity, Profit, and Non-Marginal Factor Prices
#4 For the introduction of capital see ‘Squaring the Investment Cycle

Immediately preceding 'Productivity and the zombie apocalypse'

Related 'New economic thinking, or, let’s put lipstick on the dead pig' and 'The thinking economist' and 'Smart young empirically-minded economists: another vain hope' and 'The stupidity of Heterodoxy is the life insurance of Orthodoxy' and 'Media-fake-farce-fraud-storytelling-macro' and 'Economics between cargo cult, farce, and fraud' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist'

Immediately following 'First Lecture in New Economic Thinking'