July 31, 2017

Economists: just too stupid for counting

Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’

Blog-Reference and Blog-Reference

The mathiness problem of economists does not consist in the application of advanced mathematics but in the incapacity to apply the straightforward arithmetic of accounting.

Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market clearing holds, that is, quantity sold = output, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.

Nobody could be more down to earth and historically accurate than Mr. A and Mrs. H. At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers:
(a) National accounts, pure consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.

The accountants are pleased that their respective numbers are exactly equal. This means that both have captured reality, i.e., every single transaction in the period under consideration, accurately.

At the end of the second period, they meet again and compare their numbers. This time they have:
(b) National accounts, consumption expenditures greater than wage income, C > Yw.

The accountants are again pleased that their respective numbers are exactly equal but this time their accounts show balances.

Says Mr. B, I call my balance profit or loss, as the case may be, more specifically I define monetary profit as Qm≡C-Yw.

Well, says Mrs. H, I call my balance saving or dissaving, as the case may be, more specifically I define monetary saving as Sm≡Yw-C.

Then they calculate their respective balances and find out, to nobody’s, surprise that Qm=-Sm. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise that is NOT backed by a real world transaction.

Next day, the two accountants hand their numbers = Figure (b) over to the economist. Says the economist, hmm, for my purposes I have to rearrange the accounts, after all, profit has to be treated as the income of capital analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does NOT realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income:

The economist now says to himself, obviously, Gross Domestic Income GDI is ‘equal’ to consumption expenditures, which follows from the definitions GDI≡Yw+Qm and Qm≡C-Yw ergo GDI≡C. Let us call the right-hand side of the business sector’s account Gross Domestic Product GDP for the general case of the sum of consumption expenditures and investment expenditures, i.e. GDP≡C+I. Then we have always GDI≡GDP. This, Gross Domestic Income is ‘equal’ to Gross Domestic Product, is the fundamental macroeconomic accounting identity ― the unassailable quantitative/empirical bedrock of economics.

The economist’s exercise is, of course, futile because profit is NOT the income of capital but the mirror image of dissaving, i.e. the household sector’s increase of debt. Income is a flow and profit is a balance of flows and to lump the two together is sheer stupidity.

From the graphics, it is immediately obvious that Keynes’ foundational identity “Income = value of output” is false. Why? Because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)#1

Because economists ― Keynes, Keynesians, Post Keynesians, Anti-Keynesians and all the rest ― cannot even do the elementary mathematics of accounting the profit theory is false since Adam Smith.#2 This means because economists cannot do their little math ALL of economics is proto-scientific rubbish.

Egmont Kakarot-Handtke

#1 See also ‘Economists do not solve problems, they are the problem
#2 For more details see cross-references Accounting and cross-references Profit and cross-references Incompetence

REPLY to Neil Wilson on Jul 31

Economics is a failed science because economists are scientifically incompetent. The proof is in the misapplication of mathematics. Of course, this is NOT how economists explain their failure. They come up like a Pavlovian dog with explanations = excuses#1 like these:

“In mathematics, an object is something we can quantify. Now comes the problem: in economics, what we need to identify is the relation between emotions (greed, fear of loss, investor euphoria, etc.) and behavior (buying, selling, tolerance for risk, and so forth). Alas, this requires that we mathematize emotions. To my knowledge, no one has succeeded in doing this in some 8,000 years of recorded history.”

“Isn’t the problem just the level of complexity of the system? The fundamental agents in economic models, people, all have huge variation in possible actions. We then have self-consciousness and reflexivity. We react to each other’s actions; then, as a system, react again to the changed situation.”#2

“What economists ought to do is take a more inductive (historical) approach. This is exactly what the tradition’s best thinkers have done, but the approach is not currently popular in academia.” (Cavalla)

“Economics uses mathematics in the same way medieval religions use Latin. It is to give an air of mystery and power to the charlatans doing the ‘interpretation’.” (Wilson)

All this sounds plausible but demonstrates only a poor understanding of science. Economics suffers from the fact that the subject matter is ill-defined. Economics is NOT a social science but a system science. The subject matter is the structure and behavior of the economic system, and all questions about Human Nature/motives/behavior/action are the business of other disciplines (psychology, sociology, anthropology, political science, history etc.). The beauty of the correct systemic approach is that a system is mathematically unambiguously defined.#3 So, there is no mathiness problem but only the problem of blatherers who pointlessly gossip about other peoples’ motives and behavior but cannot tell since 200+ years what profit is.

#1Failed economics: The losers’ long list of lame excuses
#2 Complexity and stupidity
#3 The Economics God Equation