AXEC: New Foundations of Economics: Macroeconomics for retarded economists

January 14, 2018

Macroeconomics for retarded economists

Comment on Brian Romanchuk on ‘The Death of Mainstream Macro’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference on Jan 17 adapted to context

“Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.” (Peter Cooper)

Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock-bottom truth of all of economics. Too bad that this statement is materially/logically false.

The foundational error/mistake/blunder consists of the methodological fact that the two most important magnitudes of economics — profit and income — are ill-defined.#1 In order to see this one has to go back to the most elementary configuration, that is, the pure production-consumption economy which consists of the household and the business sector.#2

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Y_w, (ii) C is less than Y_w, (iii) C is greater than Y_w.

In case (i) the monetary saving of the household sector S_m≡Y_w−C is zero and the monetary profit of the business sector Q_m≡C−Y_w, too, is zero. The product market is cleared, i.e. X=O in all three cases.
In case (ii) monetary saving S_m is positive and the business sector makes a loss, i.e. Q_m is negative.
In case (iii) monetary saving S_m is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Q_m is positive.

It always holds Q_m≡−S_m, in other words, at the heart of the monetary circuit is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition and the definition of household sector saving.

Loss or profit are NOT income. Only distributed profit is income. The profit theory is false since Adam Smith.#3 As collateral damage, all I=S or IS-LM models are false.

Economists are too stupid for the elementary mathematics of accounting.#4 The statement total income equals total spending is simply false because of the all-important phenomenon of credit. Equipped with credit the household sector can spend MORE than its period income (= dissaving) or in the opposite case LESS (= saving). Total spending and total income are NEVER equal, the foundational intuition of macroeconomics is false ― and so is all the rest. Macroeconomics is dead since Keynes.#5

Egmont Kakarot-Handtke

#1 For details see How the Intelligent Non-Economist Can Refute Every Economist Hands Down and Keynes’ Missing Axioms Sec. 14-18
#2 The elementary production-consumption economy is given by three macro axioms: (A1) Y_w=WL wage income Y_w 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.
#3 See ‘Essentials of Constructive Heterodoxy: Profit’ and cross-references Profit
#4 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#5 How Keynes got macro wrong and Allais got it right

Wikimedia AXEC121i

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REPLY to Brian Romanchuk on Jan 14

You say “So you have proven that cash expenditures on investment by the business sector are truly an expense!”

I have proven nothing of the sort but I have indeed proven that macro is dead since Keynes and that you have not realized it until this very day.#1

#1 Note that nominal magnitudes Y_w, C, Q_m, and S_m are normally NOT identical with cash payments. For the relationship between the nominal flow magnitudes and the stock of cash see The creation and value of money and near-monies.

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COMMENT on Brian Romanchuk on Jan 15

Your discussion of macroeconomics is the usual echo chamber economics. You do not ask what the correct approach is but are content with stating that the current macro is crap and watching what your clueless peers are doing and opportunistically waiting for who fetches the most likes on Twitter or Facebook. You argue:

• “I had contact with hundreds of economists over the course of my career.” There is no use in talking with people who have not even realized that supply-demand-equilibrium is proto-scientific rubbish.

• “One of the requirements of being minimally competent was being able to read another researcher’s paper, and compare what they demonstrated within the body of the paper versus what the abstract says the paper accomplished.” This does not even prove minimal competency but only how low the scientific standards in economics are.

• “In summary, he [Krugman] argues that we could just use IS/LM … to analyse the policy response to the Financial Crisis.” If you have not realized until now that Krugman is not a scientist but a soapbox economist nothing can help you.#1, #2

• “The other line of defense of mainstream macro is that young researchers are doing all this amazing new work.” Macro is axiomatically false and the new generation is busily but senselessly digging at the same wrong place as the old generation.

• “One argument is that mainstream macro is more empirical.” Yes, but this does not help if the theory is axiomatically false, to begin with.

• “As should be clear, I pay almost no attention to the latest developments in mainstream macro. … Unless you are being paid to keep up with the latest research fads, it is probably safe to wait until some form of new consensus appears among researchers before actually reading the papers.” Very smart, indeed. What about getting off your ass and figuring things out for yourself?

“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. (Schumpeter)

What is your simple macro model? If you cannot answer this question you are out of economics and out of the discussion.

#1 Krugman is not an economist
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

***

REPLY to Brian Romanchuk on Jan 15

Thank you for the reference to your Bitcoin articles.

I have only one thing to criticize: the issue is macro and with Bitcoin, you switch to partial analysis in good old Marshallian tradition. What your analysis, first of all, shows is that microeconomic price theory does not work and, worse, that the one-size-fits-all explanation with supply-demand-equilibrium explains, in fact, nothing and never has.#1 Neither has general equilibrium theory, the very core of economics. In other words, 200+ years after Adam Smith, economists still do NOT know how the price mechanism works.

You say “Note how I explain how ‘simple’ models fail when applied to the straightforward question of valuing Bitcoin. How well is a simple model going to do when applied to all prices?”

Indeed, the explanation of the price mechanism has to start from macrofoundations and NOT from microfoundations or partial analysis. So we are back at macro.#2

The elementary macroeconomic Law of Supply and Demand is shown on Wikimedia.#3

This price formula gets, of course, longer with the increasing complexity of the economy. All these details are not needed at the moment.

The elementary macroeconomic Law of Supply and Demand says:#1
(i) An increase in the expenditure ratio ρ_E≡C/Y leads to a higher market clearing price (the Greek letter ρ stands for the ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, and a ratio ρ_E less than 1 indicates credit contraction. Credit expansion/ contraction, in turn, affects the quantity of money.
(ii) An increase in the ratio of wage rate to productivity W/R leads to a higher market-clearing price.

Roughly speaking, the macroeconomic Law of Supply and Demand explains the price level and its development over time. The equation contains only measurable variables and is therefore testable in principle. Starting with one product market, the way forward is differentiation.

The crucial differentiation is between primary markets (= perishable consumption goods from current production) and secondary markets (= durable goods). Both markets run on entirely different principles.#4 The formula above holds for the primary market.

In brief, the nominal anchor of the whole price system is unequivocally given by the macroeconomic Law of Supply and Demand. But from primary markets to secondary markets and then to Bitcoin is a longer analytical way.#5 In any case, holds, if it isn’t macro-axiomatized it isn’t economics, and ― definitely ― microfounded price theory is dead.

#1 The monstrous utility-supply-demand-equilibrium failure
#2 This is the correct core of macroeconomic premises: (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Y_w=WL wage income Y_w 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.
#3 Wikimedia AXEC101 Law of Supply and Demand, elementary production-consumption economy
#4 Primary and Secondary Markets
#5 The creation and value of money and near-monies

Knowledge only — no opinion

Science does not explain everything, but non-science explains nothing.

Neither orthodox nor heterodox economics satisfies the scientific criteria of material and formal consistency.

Economists cannot explain how the economy works. The Profit Theory is false since Adam Smith. There is much opinion and little knowledge.

Opinion is the realm of political economics, knowledge is the realm of theoretical economics.

Political economics is scientifically worthless.

Theoretical economics is built upon clearly stated premises, i.e., upon a set of axioms.

Orthodoxy got the axiomatic foundations wrong and Heterodoxy has none at all.

Economics is a failed science. Economists are incompetent scientists.

Profit

Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they all fail to capture the essence of the market economy.

Because of this, economists have nothing to offer in the way of a scientifically founded economic policy guidance.

The hybrid science

As a first approximation, one can agree on the general characteristic that the economy is a complex system.

However, with the term system one usually associates a structure with components that are non-human. In order to stress the obvious fact that humans are an essential component of the economic system the market economy should be characterized more precisely as a complex hybrid human/system entity.

The scientific method is straightforwardly applicable to the sys-component but not to the hum-component. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective system-component.

In gestalt-psychological terms the economic system is the foreground, individual behavior the background. Common sense wrongly insists that the hum-component must always be in the foreground. This fallacy compares to geo-centrism. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the Invisible Hand.

There are systemic laws but no behavioral laws. Systemic laws have the same methodological status as physical laws.

Neither Orthodoxy nor Heterodoxy can tell what the systemic laws of the actual monetary economy are.

Whether the outcome of the human/system-interaction is good or bad is a politcal question that lies outside of theoretical economics. Theoretical economics explains how the actual economy works - no less, no more.

Narrative vs.Theory

Psychological, sociological or behavioral assumptionism cannot yield anything other than a gossip model of the world. Second-guessing the agents is not economic analysis.

Science deals exclusively with propositions that can in principle be decided by objective means. The rest is opinion, faith, phantasy, motive speculation, allegation, hallucination, myth, paranoia, ink-blot association, psychology, philosophy, in one word: storytelling.

Storytelling is the original mode of communication in the social realm — except science.

Political economics is storytelling and, by default, the natural habitat of confused confusers. Walrasianism, Keynesianism, Marxianism, Austrianism are social narratives and not scientifically valid representations of reality.

"The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions." (Fisher)

In marked contrast, theoretical economics lives up to the standards of material and formal consistency. A scientific theory is the best mental representation of reality that is humanly possible.

Theory starts with a set of objective and consistent axioms.

Paradigm Shift

"The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy." (Feynman)

"As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction." (Nell)

"The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory." (Blaug)

"Is it not a fact, which stares at us from the histories of all sciences, that it is much more difficult for the human mind to forge the most elementary conceptual schemes than it is to elaborate the most complicated superstructure when those elements are well in hand?" (Schumpeter)

"The task of producing knowledge against the grain requires imagination." (Mirowski)

"A new idea is extremely difficult to think of. It takes a fantastic imagination." (Feynman)

"The scientific imagination dreams of explanations and laws." (Peirce)

"It is brilliance of imagination which makes the glory of science." (Evans)

"... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations." (Clower)

Selftest and to watch for

You apply one of these items

• supply-demand-equilibrium,

• general equilibrium,

• marginal utility,

• well-behaved production functions,

• total income = value of output,

• total income = wages + profits,

• I=S,

• wage rate down - employment up,

• behavioral axioms?

Then you are out of science because of unnoticed material or formal inconsistency.

Every economist who uses the concept of equilibrium is scientifically incompetent because she/he failed to notice that equilibrium is an economic nonentity.

Practically this means: as soon as the word equilibrium appears in an economic text it can be thrown into the waste basket. The same holds for all other nonentities.

The vast majority of economists deals mainly with nonentities. This is why Walrasianism, Keynesianism, Marxianism, Austrianism is scientifically worthless.

Since Adam Smith, economic policy guidance has no sound scientific foundations.

To be replaced (1)

The core premises of Orthodoxy are uncertain and false and this fully explains the failure of the research program.

“As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: 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)

The inescapable Paradigm Shift consists of the move from this obsolete hard core to the superior set of structural axioms.

To be replaced (2)

The fundamental equations of macroeconomics have been formulated by Keynes in two lines.

"Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment."

This elementary syllogism is demonstrably false. The demonstration consists in the proof that Keynes could not solve the Profit Puzzle. Neither did Post-Neo-New-Keynesians.

In the most general terms, the economics Paradigm Shift consists in switching from the behavior-centric bottom-up approach to the structure-centric top-down approach. This is comparable to the Copernican turn from geo-centrism to helio-centrism.

Consensus

Economics is a science without scientists. Because they are ignorant of the elementary difference between profit and income, the present generation of economists has not made and cannot make a significant contribution to the discussion about how the actual economy works.

Every orthodox or heterodox economist can convince himself/herself that their profit theory is defective.

Every non-economist can — by applying elementary logic — convince himself that conventional profit theories are false. See 'How the intelligent non-economist can refute every economist hands down'.

Because the profit theory is false the whole of conventional economic theory has to be rejected.

"What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse." (McCauley)

No scientist will ever accept Walrasianism, Keynesianism, Marxianism, or Austrianism. These approaches are logically and/or empirically refuted. This is the actual methodological state-of-art. Walrasians, Keynesians, Marxians, or Austrians are still at the proto-scientific stage. These approaches cannot be improved, only abandoned.

Economists are a public nuisance because they have an opinion on everything but knowledge of nothing.

About me

“Bottom line is that your profit law is just a definition you made up nobody else agrees with, nobody. You are all alone with your precious tautology.” Barkley Rosser

“In any event, your entire theory is based on you doing macro accounting in wacky fashion that nobody agrees with.” Brian Romanchuk

"Your stuff is at least original: it's quite cool after a couple of decades at this to see a fresh Economics. But real promises are not advanced: they were around for millennia until the Greeks obscured them with Metaphysics." Chris Cook

"No mate, they're you-blockers. You have all the personality traits of a crank, and the rest of them have tired of you. You could be 100% right, and you'd still die as your only follower." Steve Keen

"What you are doing fills is all with joy, your constructive critique is most welcome!"

Achim Truger,

German Council of Economic Experts,

in a failed attempt to be ironic

"200+ years of thought and yet you are the only one who gets it—or even understands your argument. Thank god we have you, pseudonymous Twitter user. Otherwise no one would know."

William Luther

Assistant Professor of Economics

in a failed attempt to be funny

"Egmonts profit law is the perfect equation that demonstrates this in action. Put the equation into a spreadsheet and then add government spending and watch how it flows into profits. Enter in some debt (-Sm) and watch too how that flows into profits. It can't go anywhere else."

Dean

About the rest of economics

Walrasianism, Keynesianism, Marxianism, Austrianism, MMT, Pluralism are mutually contradictory, axiomatically false, materially/ formally inconsistent. Economics is a failed science.

“There are three classes of people: those who see. Those who see when they are shown. Those who do not see.” Leonardo da Vinci

In economics, the overwhelming majority belongs to Class III. This explains why economics is after 200+ years still at the proto-scientific level.

The obvious task for every economist is to advance from cargo cult science and political agenda-pushing to science. This is absolutely beyond the means of Class III people.

For 200+ years now, economists are not scientists but agenda pushers, useful idiots, clowns in the political Circus Maximus.

Nopopop

This blog does not add to any popular/un- popular opinion.

This blog does not hand out advice about how to avoid taxes, to get rich on the stock market, to be successful in business, to increase the wealth of nations, to run an economy, to maximize welfare, to prevent national/global bankruptcy, to improve the institutional setup of society, to get out of national/global depression, nor about how to save humankind or any subgroup thereof.

This blog is about the true theory of the actual monetary economy.

"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)

Focus

Science is of primary interest and importance. Scientists are of secondary interest.

With regard to science, most people lose focus easily because of a natural preference for anecdotes and gossip over facts or subjectivity over objectivity.

Hence, Schumpeter once considered it necessary to remind his habitually disoriented fellow economists: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

Science is about true/false and nothing else.

Disclaimer

Missing Blog-Reference links: AXEC does not guarantee that their comments can at any time be recovered from where they have been posted intitially because the availability depends on the publication policy of the blog owner which is implicitly accepted on entering a debate. See also: 'Economists: Incompetent? Stupid? Corrupt?'

Texts: Parts of arbitrary length of any of the author's texts is and will be used again by the author in papers, books, websites, blogs, and other media without explicit reference. The right to make corrections or minor textual improvements on reutilization is reserved. Therefore, it is always a good idea to double-check for the latest version.

Caution: Do not expect a corroboration of your political view. Neither a refutation. Political economics has been scientifically worthless since Adam Smith. Politics has to be separated from economics because it is categorically different from science. The best science can do and has always done is to prove beyond reasonable doubt that you have been objectively wrong or ignorant until now. Science goes beyond the naive common sense of today and becomes the sophisticated common sense of tomorrow.

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Outlook

To recall, while political economics is storytelling, theoretical economics adheres to scientific standards.

The first task of theoretical economics is to get the axiomatic foundations right. This is what J. S. Mill called the opus magnum. Neither Orthodoxy nor Heterodoxy came up with a reasonable solution to this day. This explains the secular stagnation of economics.

There is no serious alternative to structural axiomatic economics. This is not a matter of opinion but of proof. The sole criteria are material and formal consistency.

All of economics has to be reconstructed from the ground up.

Major economic policy implication

The price mechanism does not work as standard economics hypothesizes. The axiom-based Employment Law states that overall employment increases if the average wage rate increases relative to average price and productivity. This gives one the lever to improve the employment situation all over the world and to fend off deflation without rising debt and without artificial capacity growth. To increase the average price relative to the average wage rate and productivity increases unemployment.

Right policy depends on true theory.

“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)

Lacking the true theory, economists promote for more than 200 years opinion instead of knowledge.