#Economics#FailedScience#FakeScience#Economists#StupidOrCorruptOrBoth
— E.K-H (@AXECorg) November 20, 2021
The solemn burial of marginalismhttps://t.co/9MVsTvNma4
From #MacroFoundations follows that in the elementary case #RealWage equals #Productivity. pic.twitter.com/sw4pRTKJRP
Showing posts with label Constrained Optimization. Show all posts
Showing posts with label Constrained Optimization. Show all posts
November 20, 2021
Occasional Tweets: Marginalism is dead
September 1, 2021
Occasional Tweets: Marginalism ― the best-mumified stillbirth in the history of cargo cult science
#Economics#FailedScience#FakeScience#Economists#StupidOrCorruptOrBoth#Jevons
— E.K-H (@AXECorg) September 1, 2021
Marginalism is the landmark of scientific incompetencehttps://t.co/e8WmHvNz3O
The solemn burial of marginalismhttps://t.co/9MVsTvNma4
For more about Jevons see AXECquery.
For more about microfoundations see AXECquery.
***
Twitter Feb 25, 2019 Mummies worship is not regarded as a perversity among economists. As a matter of fact, it is the initiation ritual. The different sects have different ― spiritual or real ― mummies. Utility maximizers, for example, worship Bentham's mummy at the entrance of the Student Centre at the University College London (UCL). From the standpoint of science, economics is still at the animistic stage.
Twitter Mar 7, 2023
August 22, 2021
Occasional Tweets: Marginalism ― proto-scientific garbage for 150+ years
#Economics#FailedScience#FakeScience#Economists#StupidOrCorruptOrBoth
— E.K-H (@AXECorg) August 22, 2021
There is NO such thing as supply-demand-equilibrium.
Marginalism is the landmark of scientific incompetencehttps://t.co/e8WmHvNz3O
The solemn burial of marginalismhttps://t.co/9MVsTvNma4
For more about marginalism see AXECquery.
April 29, 2019
Econ 101: Supply-Demand-Equilibrium is dead for 150+ years
Comment on Dirk Ehnts on ‘The problem with the supply curve’
Blog-Reference and Blog-Reference
Dirk Ehnts reports: “Steve Keen uses a 1952 paper to make a very important point about neoclassical economics: There is a problem with the supply curve.” and concludes: “Microeconomics, the behavior of firms and households, is very important. Starting the subject by repeating theories that should have long been discarded blocks more relevant approaches from being taught. These new approaches could provide proper foundations of the behavior of firms and households if they are not based on ‘economic laws’ that are refuted by reality.”
All this is true, of course, but ultimately not very helpful: “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)
Because traditional Heterodoxy consistently failed at this methodological barrier economics students are still taught the ‘Totem of the Micro’, i.e. supply-demand-equilibrium.#1
The lethal blunder of microeconomics, though, does not start with the supply curve but with the neo-Walrasian axiom set: “HC1 There exist economic agents. HC2 Agents have preferences over outcomes. HC3 Agents independently optimize subject to constraints. HC4 Choices are made in interrelated markets. HC5 Agents have full relevant knowledge. HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985)
The pivotal propositions are HC3 and HC6. Methodologically, they are NONENTITIES like the Easter Bunny and Spiderman. The behavioral axiom HC3 makes economics marginalistic.#2, #3 In order to make constrained optimization work, a well-behaved production function is required. The production function is NOT the result of real-world observations but implicated by HC3.#4, #5, #6 The supply curve, in turn, follows from the assumed production function. So HC3 is the ultimate reason why there “is a problem with the supply curve”.
From this follows that the microfoundations HC1/HC6 have to be discarded. And this is the end of Econ 101 as we know it. Economics textbooks are worthless since Samuelson’s firstling of 1948.#7
The end of proto-scientific economics, though, is the beginning of scientific economics which is no longer based on false microfoundations but on true macrofoundations.#8, #9, #10
From the devastating critique of supply-demand-equilibrium follows the necessity of a Paradigm Shift. Traditional Heterodoxy never performed the Paradigm Shift but was content with the endless repetition of how “unrealistic” Orthodoxy is.
Because of this, both Orthodoxy and traditional Heterodoxy go down the scientific drain.
Egmont Kakarot-Handtke
#1 Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn
#2 The solemn burial of marginalism
#3 Marginalism is the landmark of scientific incompetence
#4 Putting the production function back on its feet
#5 Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?
#6 Mathiness and the Ur-Blunder
#7 The father of modern economics and his imbecile kids
#8 Essentials of Constructive Heterodoxy: The Market
#9 How to Get Rid of Supply-Demand-Equilibrium
#10 The Law of Supply and Demand: Here It Is Finally
Related 'There is NO such thing as supply-demand-equilibrium' and 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Why you should NEVER use supply-demand-equilibrium' and 'The monstrous utility-supply-demand-equilibrium failure'. For details of the big picture see cross-references Econ 101/Old Curriculum/New Curriculum and cross-references Paradigm Shift and the textbook Sovereign Economics. The macroeconomic Law of Supply and Demand is shown on Wikimedia AXEC64
Blog-Reference and Blog-Reference
Dirk Ehnts reports: “Steve Keen uses a 1952 paper to make a very important point about neoclassical economics: There is a problem with the supply curve.” and concludes: “Microeconomics, the behavior of firms and households, is very important. Starting the subject by repeating theories that should have long been discarded blocks more relevant approaches from being taught. These new approaches could provide proper foundations of the behavior of firms and households if they are not based on ‘economic laws’ that are refuted by reality.”
All this is true, of course, but ultimately not very helpful: “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)
Because traditional Heterodoxy consistently failed at this methodological barrier economics students are still taught the ‘Totem of the Micro’, i.e. supply-demand-equilibrium.#1
The lethal blunder of microeconomics, though, does not start with the supply curve but with the neo-Walrasian axiom set: “HC1 There exist economic agents. HC2 Agents have preferences over outcomes. HC3 Agents independently optimize subject to constraints. HC4 Choices are made in interrelated markets. HC5 Agents have full relevant knowledge. HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985)
The pivotal propositions are HC3 and HC6. Methodologically, they are NONENTITIES like the Easter Bunny and Spiderman. The behavioral axiom HC3 makes economics marginalistic.#2, #3 In order to make constrained optimization work, a well-behaved production function is required. The production function is NOT the result of real-world observations but implicated by HC3.#4, #5, #6 The supply curve, in turn, follows from the assumed production function. So HC3 is the ultimate reason why there “is a problem with the supply curve”.
From this follows that the microfoundations HC1/HC6 have to be discarded. And this is the end of Econ 101 as we know it. Economics textbooks are worthless since Samuelson’s firstling of 1948.#7
The end of proto-scientific economics, though, is the beginning of scientific economics which is no longer based on false microfoundations but on true macrofoundations.#8, #9, #10
From the devastating critique of supply-demand-equilibrium follows the necessity of a Paradigm Shift. Traditional Heterodoxy never performed the Paradigm Shift but was content with the endless repetition of how “unrealistic” Orthodoxy is.
Because of this, both Orthodoxy and traditional Heterodoxy go down the scientific drain.
Egmont Kakarot-Handtke
#1 Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn
#2 The solemn burial of marginalism
#3 Marginalism is the landmark of scientific incompetence
#4 Putting the production function back on its feet
#5 Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?
#6 Mathiness and the Ur-Blunder
#7 The father of modern economics and his imbecile kids
#8 Essentials of Constructive Heterodoxy: The Market
#9 How to Get Rid of Supply-Demand-Equilibrium
#10 The Law of Supply and Demand: Here It Is Finally
Related 'There is NO such thing as supply-demand-equilibrium' and 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Why you should NEVER use supply-demand-equilibrium' and 'The monstrous utility-supply-demand-equilibrium failure'. For details of the big picture see cross-references Econ 101/Old Curriculum/New Curriculum and cross-references Paradigm Shift and the textbook Sovereign Economics. The macroeconomic Law of Supply and Demand is shown on Wikimedia AXEC64
For more about supply-demand-equilibrium see AXECquery.
***
Wikimedia AXEC121i
April 5, 2018
Full employment, the Phillips Curve, and the end of gaganomics
Comment on David Glasner on ‘The Phillips Curve and the Lucas Critique’
Blog-Reference and Blog-Reference on Apr 6 and Blog-Reference on Apr 10 adapted to context
The utter failure of economics, of which the Phillips Curve is a well-known example, is due to microfoundations. Economics has to be based on objective macrofoundations. This methodological move is called Paradigm Shift.
Reminder: Economics is NOT about what people do; economics is about what the economy does. Economics is NOT a social science but a systems science.
The macrofoundations approach starts with behavior-free systemic axioms which define the elementary production-consumption economy: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw 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.
Under the ‘classical’ conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is the dependent variable and given by P=W/R, i.e., the market-clearing price is always equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.
As a corollary, this macroeconomic Law kills the commonplace Quantity Theory because the Quantity of Money is NOT among the price determinants.#1 The price is, under the ‘classical’ conditions, determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.
If the budget is not balanced, i.e. if the household sector either saves or dissaves, the macroeconomic Law of Supply and Demand takes the form shown on Wikimedia.#2
An expenditure ratio ρE greater than 1 indicates dissaving/credit expansion of the household sector, a ratio ρE less than 1 indicates saving/credit contraction. The ratio ρE provides the link to monetary theory.
The elementary production-consumption economy is the starting point. Subsequently, things become more complex. Under the conditions of market-clearing and independent wage rate and price-setting, employment becomes the dependent variable. The elementary version of the axiomatically correct (objective, systemic, behavior-free, macrofounded) Employment Law is shown on Wikimedia.#3, #4, #5
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
The complete Employment Law contains, in addition, profit distribution, the public sector, and foreign trade. These issues have been dealt with elsewhere.
Items (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρF, as defined in (iii), embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R. Or, the other way round, overall employment DECREASES if the average price P INCREASES relative to the average wage rate W with productivity R unchanged.
Roughly speaking, price inflation is bad for employment, and wage inflation is good. The systemic Phillips Curve defines an inverse relation between price P as the independent variable and employment L as the dependent variable. Since all variables of the macroeconomic Employment Law are measurable, the systemic Phillips Curve is testable. Note that there is no recourse to ridiculous behavioral assumptions like constrained optimization or rational expectations. Microfoundations are gone for good. Lucas's gaganomics is over.
In the Employment Law, wage rate W and price P are the independent variables. So, under the condition of wage rate- and price-setting, the relationship between unemployment and wage rate or wage rate and the price is contingent, i.e., there is NO systemic relationship and no stable correlation.
This, in turn, means that there is NOTHING in the economic system that guarantees that the independent wage rate and price-setting lead somehow to full employment. The market economy is NOT a self-regulating system with an intrinsic tendency to full employment if left alone. Just the opposite, the market system is inherently unstable.
Because the fundamental premise of standard economics is provably false, the independent variables have to be taken as policy parameters. Wage rate- and price-setting have to be managed such that ρF drives employment towards full employment. Monetary and fiscal policies are unfit for the job.
The well-defined systemic Phillips Curve ends all senseless speculation/blather about whether wages rise if the economy approaches full employment or not, but tells policymakers exactly how to set the parameters in order to achieve full employment and zero inflation.#6
Egmont Kakarot-Handtke
#1 Forget Friedman, forget the Quantity Theory
#2 Wikimedia AXEC101 Law of Supply and Demand
#3 Wikimedia AXEC62 Employment Law
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#5 NAIRU, wage-led growth, and Samuelson's Dyscalculia
#6 For details of the big picture, see cross-references Employment/Phillips Curve
Related 'Economists never understood how the price mechanism works' and 'Mass unemployment: The joint failure of orthodox and heterodox economics' and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy' and 'Full employment through the price mechanism'.
Blog-Reference and Blog-Reference on Apr 6 and Blog-Reference on Apr 10 adapted to context
The utter failure of economics, of which the Phillips Curve is a well-known example, is due to microfoundations. Economics has to be based on objective macrofoundations. This methodological move is called Paradigm Shift.
Reminder: Economics is NOT about what people do; economics is about what the economy does. Economics is NOT a social science but a systems science.
The macrofoundations approach starts with behavior-free systemic axioms which define the elementary production-consumption economy: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw 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.
Under the ‘classical’ conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is the dependent variable and given by P=W/R, i.e., the market-clearing price is always equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.
As a corollary, this macroeconomic Law kills the commonplace Quantity Theory because the Quantity of Money is NOT among the price determinants.#1 The price is, under the ‘classical’ conditions, determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.
If the budget is not balanced, i.e. if the household sector either saves or dissaves, the macroeconomic Law of Supply and Demand takes the form shown on Wikimedia.#2
The elementary production-consumption economy is the starting point. Subsequently, things become more complex. Under the conditions of market-clearing and independent wage rate and price-setting, employment becomes the dependent variable. The elementary version of the axiomatically correct (objective, systemic, behavior-free, macrofounded) Employment Law is shown on Wikimedia.#3, #4, #5
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
The complete Employment Law contains, in addition, profit distribution, the public sector, and foreign trade. These issues have been dealt with elsewhere.
Items (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρF, as defined in (iii), embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R. Or, the other way round, overall employment DECREASES if the average price P INCREASES relative to the average wage rate W with productivity R unchanged.
Roughly speaking, price inflation is bad for employment, and wage inflation is good. The systemic Phillips Curve defines an inverse relation between price P as the independent variable and employment L as the dependent variable. Since all variables of the macroeconomic Employment Law are measurable, the systemic Phillips Curve is testable. Note that there is no recourse to ridiculous behavioral assumptions like constrained optimization or rational expectations. Microfoundations are gone for good. Lucas's gaganomics is over.
In the Employment Law, wage rate W and price P are the independent variables. So, under the condition of wage rate- and price-setting, the relationship between unemployment and wage rate or wage rate and the price is contingent, i.e., there is NO systemic relationship and no stable correlation.
This, in turn, means that there is NOTHING in the economic system that guarantees that the independent wage rate and price-setting lead somehow to full employment. The market economy is NOT a self-regulating system with an intrinsic tendency to full employment if left alone. Just the opposite, the market system is inherently unstable.
Because the fundamental premise of standard economics is provably false, the independent variables have to be taken as policy parameters. Wage rate- and price-setting have to be managed such that ρF drives employment towards full employment. Monetary and fiscal policies are unfit for the job.
The well-defined systemic Phillips Curve ends all senseless speculation/blather about whether wages rise if the economy approaches full employment or not, but tells policymakers exactly how to set the parameters in order to achieve full employment and zero inflation.#6
Egmont Kakarot-Handtke
#1 Forget Friedman, forget the Quantity Theory
#2 Wikimedia AXEC101 Law of Supply and Demand
#3 Wikimedia AXEC62 Employment Law
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#5 NAIRU, wage-led growth, and Samuelson's Dyscalculia
#6 For details of the big picture, see cross-references Employment/Phillips Curve
Related 'Economists never understood how the price mechanism works' and 'Mass unemployment: The joint failure of orthodox and heterodox economics' and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy' and 'Full employment through the price mechanism'.
***
Twitter/X Sep 10, 2025 Testing the Employment Law (and refuting the Phillips Curve trade-off between inflation and employment) is especially difficult because employment numbers are unreliable, particularly in the run-up to an election.
Twitter/X Sep 10, 2025
August 10, 2017
Sending Solow’s growth model to the dump of proto-scientific history
Comment on Luis C. Corchón on ‘A Malthus-Swan Model of Economic Growth’
Blog-Reference
Economics fits Feynman’s definition of a cargo cult science “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”
Orthodox economics messed up the theory of production. Georgescu-Roegen was quite clear about “… the completely faulty form by which standard economics represents a production process”. As a consequence, all growth models of the Solow-type since the QJE paper of 1956 are worthless. But the problem goes deeper. ALL microfounded models are worthless.
The whole theoretical superstructure of Orthodoxy is based upon this set of hardcore propositions a.k.a. axioms: “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)
In order to be applicable HC2, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. The compelling reason for the introduction of out-of-thin-air auxiliary assumptions is that without these specifications the axiom HC2 does NOT work and the whole of Marginalism, which hinges on HC2, falls apart.
It should be pretty obvious that the axiomatic core of Orthodoxy contains THREE NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5. Every theory/model that contains a NONENTITY is a priori false. This includes all Solow-type models.
Economics has to start — NOT with behavioral assumptions — but with the ‘monetary theory of production’ (Keynes). The elementary production-consumption economy is defined with systemic (= behavior-free) axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw 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.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimal, that is, it cannot be reduced further, only expanded. The set contains no nonentities like maximization or equilibrium and no normative assertions. Note that all variables are measurable.
For a start, it holds market-clearing X=O and budget-balancing C=Yw.
Monetary profit is defined as Qm≡C−Yw and monetary saving is defined as Sm≡Yw−C. It always holds Qm≡−Sm, which is the most elementary form of the macroeconomic Profit Law.
Under the conditions of market-clearing and budget-balancing in each period, the price follows as P=W/R, i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R, i.e. the real wage is equal to the productivity.
The changes in the wage rate from period to period are formally given by Wt=Wt-1(1+wt). Analogous for all other independent variables. The rates of change for future periods are, for a start, taken to be random variables.
With this, the formal framework of the elementary growth model for the elementary production-consumption economy is defined. The systemic formal framework#2, which combines the nominal and real key variables, fully replaces all Solow-type real models.
It does not matter how employment develops, that is, whether the labor force grows or shrinks over time. If the productivity remains constant with growing (shrinking) employment the real wage does not change. If productivity increases, so does the real wage. Labor gets always its full product. Monetary profit is zero. If the productivity declines the real wage heads towards the subsistence level. This, though, has nothing to do with exploitation. Needless to say at the subsistence level, all further expansion comes to a halt. This is the Malthusian outcome. The ultimate driver of real affluence is increasing returns.
This was the first step. In the second step investment and capital have to be added.#3
Egmont Kakarot-Handtke
#1 The future of economics: why you will probably not be admitted to it, and why this is a good thing
#2 The Economics God Equation (including distribution) is shown on Wikimedia AXEC25
For this equation Computational Irreducibility in the sense of Stephen Wolfram, A New Kind of Science, Wolfram Media, 1959, pp. 737 ff. holds.
#3 Squaring the Investment Cycle
Related 'Saving NEVER equals investment' and 'Is Nick Rowe stupid or corrupt or both?' and 'Macro for dummies' and 'Do first your macroeconomic homework!' and 'Settling the Theory of Saving' and 'Solow and the ludicrousness of economics' and 'Robert Solow and Lars Syll, fake scientists' and 'Solow and the ludicrousness of economics' and 'The moral of the story' and 'No future for the representative economist' and 'All economists together now: Solow’s Swan Song' and 'When substandard thinkers dabble in science it is called economics' and 'When substandard thinkers dabble in science it is called economics' and 'High profits and low economics' For details of the big picture see cross-references Failed/Fake Scientists and cross-references Paradigm Shift and cross-references Refutation of I=S.
Blog-Reference
Economics fits Feynman’s definition of a cargo cult science “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”
Orthodox economics messed up the theory of production. Georgescu-Roegen was quite clear about “… the completely faulty form by which standard economics represents a production process”. As a consequence, all growth models of the Solow-type since the QJE paper of 1956 are worthless. But the problem goes deeper. ALL microfounded models are worthless.
The whole theoretical superstructure of Orthodoxy is based upon this set of hardcore propositions a.k.a. axioms: “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)
In order to be applicable HC2, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. The compelling reason for the introduction of out-of-thin-air auxiliary assumptions is that without these specifications the axiom HC2 does NOT work and the whole of Marginalism, which hinges on HC2, falls apart.
It should be pretty obvious that the axiomatic core of Orthodoxy contains THREE NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5. Every theory/model that contains a NONENTITY is a priori false. This includes all Solow-type models.
Economics has to start — NOT with behavioral assumptions — but with the ‘monetary theory of production’ (Keynes). The elementary production-consumption economy is defined with systemic (= behavior-free) axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw 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.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimal, that is, it cannot be reduced further, only expanded. The set contains no nonentities like maximization or equilibrium and no normative assertions. Note that all variables are measurable.
For a start, it holds market-clearing X=O and budget-balancing C=Yw.
Monetary profit is defined as Qm≡C−Yw and monetary saving is defined as Sm≡Yw−C. It always holds Qm≡−Sm, which is the most elementary form of the macroeconomic Profit Law.
Under the conditions of market-clearing and budget-balancing in each period, the price follows as P=W/R, i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R, i.e. the real wage is equal to the productivity.
The changes in the wage rate from period to period are formally given by Wt=Wt-1(1+wt). Analogous for all other independent variables. The rates of change for future periods are, for a start, taken to be random variables.
With this, the formal framework of the elementary growth model for the elementary production-consumption economy is defined. The systemic formal framework#2, which combines the nominal and real key variables, fully replaces all Solow-type real models.
It does not matter how employment develops, that is, whether the labor force grows or shrinks over time. If the productivity remains constant with growing (shrinking) employment the real wage does not change. If productivity increases, so does the real wage. Labor gets always its full product. Monetary profit is zero. If the productivity declines the real wage heads towards the subsistence level. This, though, has nothing to do with exploitation. Needless to say at the subsistence level, all further expansion comes to a halt. This is the Malthusian outcome. The ultimate driver of real affluence is increasing returns.
This was the first step. In the second step investment and capital have to be added.#3
Egmont Kakarot-Handtke
#1 The future of economics: why you will probably not be admitted to it, and why this is a good thing
#2 The Economics God Equation (including distribution) is shown on Wikimedia AXEC25
 |
| The Economics God Equation ® |
For this equation Computational Irreducibility in the sense of Stephen Wolfram, A New Kind of Science, Wolfram Media, 1959, pp. 737 ff. holds.
Related 'Saving NEVER equals investment' and 'Is Nick Rowe stupid or corrupt or both?' and 'Macro for dummies' and 'Do first your macroeconomic homework!' and 'Settling the Theory of Saving' and 'Solow and the ludicrousness of economics' and 'Robert Solow and Lars Syll, fake scientists' and 'Solow and the ludicrousness of economics' and 'The moral of the story' and 'No future for the representative economist' and 'All economists together now: Solow’s Swan Song' and 'When substandard thinkers dabble in science it is called economics' and 'When substandard thinkers dabble in science it is called economics' and 'High profits and low economics' For details of the big picture see cross-references Failed/Fake Scientists and cross-references Paradigm Shift and cross-references Refutation of I=S.
February 3, 2017
Paul the Menace
Comment on Paul Krugman on ‘Donald the Menace’
Blog-Reference
Paul Krugman presents himself as an economist, however, his main occupation is not economics but politics. In his capacity as a political commentator, he points out that the institution of the presidency has been hijacked by an incompetent and dangerous person.
This comment is the unintended proof that the institution of academic economics has been hijacked by agenda pushers and incompetent scientists.
Krugman defines himself as follows: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” What he completely overlooks is that maximization-and-equilibrium is not a scientifically acceptable starting point, that is, the acceptance of maximization-and-equilibrium is disqualifying for an economist.
Economists are not very smart. History shows that they swallow every logical blunder hook, line and sinker provided it is presented in the form of an easy-to-grasp narrative. The most prominent example in the history of economic thought is the diamond-water paradox. It goes as follows: “The paradox of value (also known as the diamond-water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.”#1
The paradox is solved by ‘thinking at the margin’ which is advertised as the outstanding characteristic of an economist. Accordingly, the price of diamonds is high relative to water because the marginal utility of diamonds is high relative to the marginal utility of water which in turn is normally more abundant than diamonds.
The idiotism of the answer is obvious, except for an economist. Water and diamonds cannot be compared in this way because water is consumed, i.e. it vanishes, and the very characteristic of diamonds is that they are NOT consumed but, just the opposite, they are the proverbial eternal store of value. Because of this, the determination of the prices of perishable and durable goods follows entirely DIFFERENT principles. The first thing to notice is that there is NO such thing as “the” market but that there are at least TWO entirely different types of markets.#2 This alone makes it clear, that the economist’s one-size-fits-all supply-demand-equilibrium explanation must be false.
By consequence, what in the first analytical step has to be done is to determine the relative prices of two perishable goods within the framework of what Keynes called the ‘monetary theory of production’. Barter models are out from the outset. The correct starting point is a pure hand-to-mouth economy where, for example, bread and wine are produced in two firms and fully consumed by the households in one and the same period. The stock of goods is zero at the beginning and at the end of the period. The total number of working hours is given and the wage rate is, for a start, equal in the bread and wine production. The wage income is fully spent. Because total consumption expenditures are equal to total wage income total profit of the business sector is zero.#3
For this elementary two-goods hand-to-mouth economy we get with a little algebra for the relative price of bread and wine Pb/Pw=Rw/Rb, that is, the relative price is inverse to the productivities, that is, the relative price or the exchange ratio is OBJECTIVELY given and INDEPENDENT of marginal utility. In other words, the production conditions determine relative prices. This amounts to a refutation of marginalism which is a subjective concept.
To see this more clearly, let us assume that the preferences of the households change from one period to the next. In order to cut out the details of the adaptation process, it is assumed that the household sector tells the business sector that it wants more wine and less bread. Accordingly, the business sector shifts labor from bread production to wine production. Because the wage rate is equal to total wage income and total consumption expenditures do not change. Only the partitioning of total expenditures changes according to the new preferences, that is, expenditures for wine go up and expenditures for bread go down. With a little algebra we arrive under the condition of market clearing and zero profit in both firms again at Pb/Pw=Rw/Rb, that is, a change of preferences or marginal utilities has NO effect on relative prices. In other words, demand is NOT a determinant of price. Changes in the partitioning of demand lead to a change of quantities and NOT to price changes.
This result plainly refutes marginalism. This gives a pause to recall where marginalism came from. Ultimately, marginalism can be traced back to the importation of calculus into economics and the translation of formalism into the BEHAVIORAL assumption of utility maximization under constraints. This assumption is part of the Walrasian axiom set which is given by: “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 upshot is that not only constrained optimization (HC2) is forever unacceptable as an axiom but rational expectations (HC4) and equilibrium (HC5), too. Therefore, marginalism or, more precisely, the microfoundations approach has already been dead in the cradle 140+ years ago. The representative economist and Paul Krugman have not realized this until this very day. The water-diamond story is still told as exemplary for how economists think ‘at the margin’ and every student generation since Walras/Jevons/Menger swallows this methodological crap without turning an eyelid.
Maximization-and-equilibrium economists like Krugman are groping in the dark with regard to the two most important features of the market economy: the profit mechanism and the price mechanism. And this means that their economic policy advice lacks a sound scientific foundation. And this, in turn, means that they are a hazard to their fellow citizens roughly on a par with ‘Donald the Menace’.#4
Egmont Kakarot-Handtke
#1 Wikipedia
#2 Primary and Secondary Markets
#3 The Logic of Value and the Value of Logic and The Value of Water and Diamonds: Back to Square One and The Pure Logic of Value, Profit, Interest
#4 Economists and the destructive power of stupidity
Related 'Scientific suicide in the revolving door' and 'Krugman is not an economist'
Blog-Reference
Paul Krugman presents himself as an economist, however, his main occupation is not economics but politics. In his capacity as a political commentator, he points out that the institution of the presidency has been hijacked by an incompetent and dangerous person.
This comment is the unintended proof that the institution of academic economics has been hijacked by agenda pushers and incompetent scientists.
Krugman defines himself as follows: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” What he completely overlooks is that maximization-and-equilibrium is not a scientifically acceptable starting point, that is, the acceptance of maximization-and-equilibrium is disqualifying for an economist.
Economists are not very smart. History shows that they swallow every logical blunder hook, line and sinker provided it is presented in the form of an easy-to-grasp narrative. The most prominent example in the history of economic thought is the diamond-water paradox. It goes as follows: “The paradox of value (also known as the diamond-water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.”#1
The paradox is solved by ‘thinking at the margin’ which is advertised as the outstanding characteristic of an economist. Accordingly, the price of diamonds is high relative to water because the marginal utility of diamonds is high relative to the marginal utility of water which in turn is normally more abundant than diamonds.
The idiotism of the answer is obvious, except for an economist. Water and diamonds cannot be compared in this way because water is consumed, i.e. it vanishes, and the very characteristic of diamonds is that they are NOT consumed but, just the opposite, they are the proverbial eternal store of value. Because of this, the determination of the prices of perishable and durable goods follows entirely DIFFERENT principles. The first thing to notice is that there is NO such thing as “the” market but that there are at least TWO entirely different types of markets.#2 This alone makes it clear, that the economist’s one-size-fits-all supply-demand-equilibrium explanation must be false.
By consequence, what in the first analytical step has to be done is to determine the relative prices of two perishable goods within the framework of what Keynes called the ‘monetary theory of production’. Barter models are out from the outset. The correct starting point is a pure hand-to-mouth economy where, for example, bread and wine are produced in two firms and fully consumed by the households in one and the same period. The stock of goods is zero at the beginning and at the end of the period. The total number of working hours is given and the wage rate is, for a start, equal in the bread and wine production. The wage income is fully spent. Because total consumption expenditures are equal to total wage income total profit of the business sector is zero.#3
For this elementary two-goods hand-to-mouth economy we get with a little algebra for the relative price of bread and wine Pb/Pw=Rw/Rb, that is, the relative price is inverse to the productivities, that is, the relative price or the exchange ratio is OBJECTIVELY given and INDEPENDENT of marginal utility. In other words, the production conditions determine relative prices. This amounts to a refutation of marginalism which is a subjective concept.
To see this more clearly, let us assume that the preferences of the households change from one period to the next. In order to cut out the details of the adaptation process, it is assumed that the household sector tells the business sector that it wants more wine and less bread. Accordingly, the business sector shifts labor from bread production to wine production. Because the wage rate is equal to total wage income and total consumption expenditures do not change. Only the partitioning of total expenditures changes according to the new preferences, that is, expenditures for wine go up and expenditures for bread go down. With a little algebra we arrive under the condition of market clearing and zero profit in both firms again at Pb/Pw=Rw/Rb, that is, a change of preferences or marginal utilities has NO effect on relative prices. In other words, demand is NOT a determinant of price. Changes in the partitioning of demand lead to a change of quantities and NOT to price changes.
This result plainly refutes marginalism. This gives a pause to recall where marginalism came from. Ultimately, marginalism can be traced back to the importation of calculus into economics and the translation of formalism into the BEHAVIORAL assumption of utility maximization under constraints. This assumption is part of the Walrasian axiom set which is given by: “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 upshot is that not only constrained optimization (HC2) is forever unacceptable as an axiom but rational expectations (HC4) and equilibrium (HC5), too. Therefore, marginalism or, more precisely, the microfoundations approach has already been dead in the cradle 140+ years ago. The representative economist and Paul Krugman have not realized this until this very day. The water-diamond story is still told as exemplary for how economists think ‘at the margin’ and every student generation since Walras/Jevons/Menger swallows this methodological crap without turning an eyelid.
Maximization-and-equilibrium economists like Krugman are groping in the dark with regard to the two most important features of the market economy: the profit mechanism and the price mechanism. And this means that their economic policy advice lacks a sound scientific foundation. And this, in turn, means that they are a hazard to their fellow citizens roughly on a par with ‘Donald the Menace’.#4
Egmont Kakarot-Handtke
#1 Wikipedia
#2 Primary and Secondary Markets
#3 The Logic of Value and the Value of Logic and The Value of Water and Diamonds: Back to Square One and The Pure Logic of Value, Profit, Interest
#4 Economists and the destructive power of stupidity
Related 'Scientific suicide in the revolving door' and 'Krugman is not an economist'
November 14, 2016
Heterodoxy’s popular but silly math denial
Comment on Lars Syll on ‘Formalized economics bordering on the insane’
Blog-Reference
It is well known that orthodox economics is misapplied math (Mirowski). The abuse has been criticized under the label mathiness but in fact, has a wider methodological dimension. The problem with economists is that they are cargo cult scientists: “... they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.” (Feynman) What is missing is a deeper understanding of science and mathematics and the relation between the two.
Metaphorically speaking, scientists put first their trousers on and then their boots, economists do it the other way round: “The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein)
In the same vein: “Surely it would be considered absurd, bordering on the insane, if a surgical procedure was implemented because a tool for its implementation was devised by a medical doctor who knew and believed in topological fixed-point theorems?” (Velupillai, see intro)
The absurdity began with economists borrowing the tool ― calculus ― from physics and making a behavioral axiom out of it: “HC2 agents individually optimize subject to constraints.” (Weintraub) This has been the fundamental methodological mistake: the tool came first and the pivotal behavioral assumption was tailored to the tool.
Walras’s determination of general equilibrium was found wanting by mathematicians: “You know, Oskar, if those books are unearthed sometime a few hundred years hence, people will not believe they were written in our time. Rather, they will think that they are about contemporary with Newton, so primitive is their mathematics. Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (von Neumann) And this critique led eventually to the fixpoint theorem.
However, the formal rectification left Walras’s conceptual root structure unchanged: “It seems clear that Debreu intended his Theory of Value to serve as the direct analog of Bourbaki's Theory of Sets, right down to the title. ... But this required one very crucial maneuver that was nowhere stated explicitly: namely, that the model of Walrasian general equilibrium was the root structure from which all further scientific work in economics would eventuate.” (Weintraub)
Walras’s root structure is defined with this 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)
Two things should be obvious: (i) the axiom set contains three nonentities (HC2, HC4, HC5) and is therefore forever unacceptable, and (ii), when the conceptual root structure is false then it does not help much to express it in set-theoretical terms. Formalization does not make a false behavioral assumption like utility maximization true.
When the elementary framework of concepts consists of economic nonentities then no amount of formalization helps and math cannot unfold its specific strength. Physics took off not until the foundational concepts of energy, mass, force, velocity, acceleration, etcetera were clearly defined and properly understood.
Economics is still at the proto-scientific level and the representative economist cannot even tell the difference between profit and income.#1 In order to get out of utter confusion and to put economics on firm ground formalization is indispensable: “I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. ... Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. ... In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial.” (Suppes)
Orthodoxy has misapplied formalization and traditional Heterodoxy has never been able to put it to good use. With incompetent scientists, it is no wonder that economics is a failed science. As long as Heterodoxy insists on storytelling and is unable to apply the enormous leverage of mathematics it will not get out of its proto-scientific burrow.
With regard to mathiness holds: from the misapplication of Orthodoxy does not follow the non-application of traditional Heterodoxy but the proper application of constructive Heterodoxy.#2
Egmont Kakarot-Handtke
#1 Profit and the collective failure of economists
#2 For the complete and consistent set of foundational equations see cross-references Paradigm Shift.
For details of the big picture see cross-references Heterodoxy and cross-references Math/Mathiness.
Blog-Reference
It is well known that orthodox economics is misapplied math (Mirowski). The abuse has been criticized under the label mathiness but in fact, has a wider methodological dimension. The problem with economists is that they are cargo cult scientists: “... they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.” (Feynman) What is missing is a deeper understanding of science and mathematics and the relation between the two.
Metaphorically speaking, scientists put first their trousers on and then their boots, economists do it the other way round: “The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein)
In the same vein: “Surely it would be considered absurd, bordering on the insane, if a surgical procedure was implemented because a tool for its implementation was devised by a medical doctor who knew and believed in topological fixed-point theorems?” (Velupillai, see intro)
The absurdity began with economists borrowing the tool ― calculus ― from physics and making a behavioral axiom out of it: “HC2 agents individually optimize subject to constraints.” (Weintraub) This has been the fundamental methodological mistake: the tool came first and the pivotal behavioral assumption was tailored to the tool.
Walras’s determination of general equilibrium was found wanting by mathematicians: “You know, Oskar, if those books are unearthed sometime a few hundred years hence, people will not believe they were written in our time. Rather, they will think that they are about contemporary with Newton, so primitive is their mathematics. Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (von Neumann) And this critique led eventually to the fixpoint theorem.
However, the formal rectification left Walras’s conceptual root structure unchanged: “It seems clear that Debreu intended his Theory of Value to serve as the direct analog of Bourbaki's Theory of Sets, right down to the title. ... But this required one very crucial maneuver that was nowhere stated explicitly: namely, that the model of Walrasian general equilibrium was the root structure from which all further scientific work in economics would eventuate.” (Weintraub)
Walras’s root structure is defined with this 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)
Two things should be obvious: (i) the axiom set contains three nonentities (HC2, HC4, HC5) and is therefore forever unacceptable, and (ii), when the conceptual root structure is false then it does not help much to express it in set-theoretical terms. Formalization does not make a false behavioral assumption like utility maximization true.
When the elementary framework of concepts consists of economic nonentities then no amount of formalization helps and math cannot unfold its specific strength. Physics took off not until the foundational concepts of energy, mass, force, velocity, acceleration, etcetera were clearly defined and properly understood.
Economics is still at the proto-scientific level and the representative economist cannot even tell the difference between profit and income.#1 In order to get out of utter confusion and to put economics on firm ground formalization is indispensable: “I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. ... Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. ... In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial.” (Suppes)
Orthodoxy has misapplied formalization and traditional Heterodoxy has never been able to put it to good use. With incompetent scientists, it is no wonder that economics is a failed science. As long as Heterodoxy insists on storytelling and is unable to apply the enormous leverage of mathematics it will not get out of its proto-scientific burrow.
With regard to mathiness holds: from the misapplication of Orthodoxy does not follow the non-application of traditional Heterodoxy but the proper application of constructive Heterodoxy.#2
Egmont Kakarot-Handtke
#1 Profit and the collective failure of economists
#2 For the complete and consistent set of foundational equations see cross-references Paradigm Shift.
For details of the big picture see cross-references Heterodoxy and cross-references Math/Mathiness.
November 12, 2016
How to end the futile economics zombie ping-pong
Comment on Simon Wren-Lewis on ‘Do New Keynesians assume full employment?’
Blog-Reference
It is impossible for Nick Rowe and Simon Wren-Lewis to get their heads around the fact that Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false, that is, beyond repair. So ― not to get them out from behind the curve ― just for the record: it is pointless to pick one aspect, e.g. employment, and to discuss the respective faults or merits of some model variants. The iron methodological rule says: when the axioms are false the whole analytical superstructure is false.
Already Keynes knew this: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.”
Standard economics is built upon false premises. Therefore, the way forward is to bury all variants for good and to fully replace the false Walrasian micro axioms and the false Keynesian macro axioms by true macro axioms.#1
This is the correct set of premises: (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. (A1) Yw=WL wage income Yw 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.
(A1) to (A3) defines the elementary production-consumption economy.#2 Note that the set of foundational equations is ENTIRELY FREE of behavioral assumptions like constrained/intertemporal optimization or equilibrium, that is, the axiom set is OBJECTIVE SYSTEMIC. This new analytical workhorse fully replaces Nick Rowe’s hallucinatory behavioral construct.
In the elementary production-consumption economy, this is what happens if, for example, the productivity falls, due to some shock, by 50 percent: the price doubles because the correct Law of Supply and Demand says for the most elementary case that P=W/R, i.e., the market-clearing price is equal to unit wage costs or, in other words, the real wage is equal to the productivity at any employment level, i.e. W/P=R. This is the objective-systemic configuration to start with. The usual guessing ping-pong about what agents might maximize or expect or do has always been futile, is futile with Nick and Simon, and will be futile for all eternity.
From the minimalist formal core, (A1) to (A3) follows with consistent logical steps the investment economy with the systemic Employment Law, a.k.a. Phillips curve.#3,#4
The systemic Employment Law says that employment increases if productivity falls and all other variables are held constant. Secular stagnation results from productivity and price rising faster than the wage rate, with all other variables held constant.
To paraphrase a summary of Blaug: ‘At long last, it can be said that the history of general theory from Walras to Arrow-Debreu and on to DSGE and New Keynesianism has been a journey down a blind alley, and it is the set A1/A3 to have finally hammered down the nails in the coffin.’
Egmont Kakarot-Handtke
#1 How to restart economics and From microfoundations to macrofoundations
#2 For a detailed description see ‘The future of economics: why you will probably not be admitted to it, and why this is a good thing’
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 Wikimedia AXEC62
You say: “in Keynes y=I+C consumption is spending from current income only like, you know, the marginal propensity to consume, consume out of what?”
Yes, I know what Keynes said. And I know also (i) what Keynes said is false, (ii) After-Keynesians have not realized it until this day.
This is what Keynes said in the General Theory “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)
This syllogism is conceptually and logically defective 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.)
Because profit ― the pivotal magnitude of economics ― is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.#1
Neither pro-Keynesians nor anti-Keynesians detected Keynes's foundational error/mistake in the last 80 years. It was Allais who got the elementary mathematics of national accounting right.#2
Keynes was not a great thinker but what came after him is abysmal. Anonymous is a case in point.
#1 For the formal proof see Why Post Keynesianism Is Not Yet a Science.
#2 How Keynes got macro wrong and Allais got it right
Blog-Reference
It is impossible for Nick Rowe and Simon Wren-Lewis to get their heads around the fact that Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false, that is, beyond repair. So ― not to get them out from behind the curve ― just for the record: it is pointless to pick one aspect, e.g. employment, and to discuss the respective faults or merits of some model variants. The iron methodological rule says: when the axioms are false the whole analytical superstructure is false.
Already Keynes knew this: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.”
Standard economics is built upon false premises. Therefore, the way forward is to bury all variants for good and to fully replace the false Walrasian micro axioms and the false Keynesian macro axioms by true macro axioms.#1
This is the correct set of premises: (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. (A1) Yw=WL wage income Yw 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.
(A1) to (A3) defines the elementary production-consumption economy.#2 Note that the set of foundational equations is ENTIRELY FREE of behavioral assumptions like constrained/intertemporal optimization or equilibrium, that is, the axiom set is OBJECTIVE SYSTEMIC. This new analytical workhorse fully replaces Nick Rowe’s hallucinatory behavioral construct.
In the elementary production-consumption economy, this is what happens if, for example, the productivity falls, due to some shock, by 50 percent: the price doubles because the correct Law of Supply and Demand says for the most elementary case that P=W/R, i.e., the market-clearing price is equal to unit wage costs or, in other words, the real wage is equal to the productivity at any employment level, i.e. W/P=R. This is the objective-systemic configuration to start with. The usual guessing ping-pong about what agents might maximize or expect or do has always been futile, is futile with Nick and Simon, and will be futile for all eternity.
From the minimalist formal core, (A1) to (A3) follows with consistent logical steps the investment economy with the systemic Employment Law, a.k.a. Phillips curve.#3,#4
The systemic Employment Law says that employment increases if productivity falls and all other variables are held constant. Secular stagnation results from productivity and price rising faster than the wage rate, with all other variables held constant.
To paraphrase a summary of Blaug: ‘At long last, it can be said that the history of general theory from Walras to Arrow-Debreu and on to DSGE and New Keynesianism has been a journey down a blind alley, and it is the set A1/A3 to have finally hammered down the nails in the coffin.’
Egmont Kakarot-Handtke
#1 How to restart economics and From microfoundations to macrofoundations
#2 For a detailed description see ‘The future of economics: why you will probably not be admitted to it, and why this is a good thing’
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 Wikimedia AXEC62
***
REPLY to Anonymous on Nov 18You say: “in Keynes y=I+C consumption is spending from current income only like, you know, the marginal propensity to consume, consume out of what?”
Yes, I know what Keynes said. And I know also (i) what Keynes said is false, (ii) After-Keynesians have not realized it until this day.
This is what Keynes said in the General Theory “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)
This syllogism is conceptually and logically defective 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.)
Because profit ― the pivotal magnitude of economics ― is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.#1
Neither pro-Keynesians nor anti-Keynesians detected Keynes's foundational error/mistake in the last 80 years. It was Allais who got the elementary mathematics of national accounting right.#2
Keynes was not a great thinker but what came after him is abysmal. Anonymous is a case in point.
#1 For the formal proof see Why Post Keynesianism Is Not Yet a Science.
#2 How Keynes got macro wrong and Allais got it right
June 5, 2016
Economics reading: a kind of mental bulimia
Comment on Peter Radford on ‘Gordon, McCloskey and growing pains’
Blog-Reference
You say: “Economists actually do think they know something about economics. Whether they know much about economies is the open question. This is because the relationship between economics and real life economies is somewhat vague.” (See intro)
You speak of economists as if heterodox economists were no part of it. The fact is that BOTH orthodox AND heterodox economists do not know how the actual economy works (2014a; 2015).
Yes, neoclassical growth theory is rubbish, but McCloskey is no alternative, she is firmly trapped in rhetoric, storytelling, sociology, and history, and still thinks that economics is a social science. Urgent update: the so-called social sciences are what Feynman called cargo cult sciences.
Yes, economics is a failed science, but Heterodoxy is an integral part of it. The scientific incompetence of traditional Heterodoxy consists of “a failure of reason to find suitable alternatives” (Feyerabend).#1
You say: “It is simply not possible to explain growth without reference to its context: the cultural, institutional, political, social, and geographic factors that enabled it to take root.”
Yes, but the cultural, institutional, political, social, and geographic factors are the subject matter of OTHER sciences and have to be imported by way of multidisciplinary cooperation. The subject matter of economics proper is the economy as a complex system. So economics has to refocus itself and leave all subjective/behavioral/human nature issues to psychology, sociology, history, political sciences, etc., and focus on the objective systemic properties of the (world-) economy.
Orthodoxy has failed at this task because it is predicated on methodological individualism. In Krugman’s words, “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” Indeed, from this starting point, NO way leads to the correct theory of economic growth. Historians, on the other hand, are not equipped with the true economic theory and because of this they, too, cannot understand economic growth.
The result of devouring economics junk is: “No wonder I have a headache and have nothing to say.” At this point, the fault of Heterodoxy is to throw in the towel. The correct way is this: “If we feel misgivings ... all we have to do is to start appropriate research. Anything else is pure filibustering.” (Schumpeter, 1994, p. 577)
It is time now to switch from the proto-scientific orthodox and heterodox garbage to the real scientific stuff (2014b).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014a). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2014b). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
#1 For details of the big picture see cross-references Heterodoxy
Blog-Reference
You say: “Economists actually do think they know something about economics. Whether they know much about economies is the open question. This is because the relationship between economics and real life economies is somewhat vague.” (See intro)
You speak of economists as if heterodox economists were no part of it. The fact is that BOTH orthodox AND heterodox economists do not know how the actual economy works (2014a; 2015).
Yes, neoclassical growth theory is rubbish, but McCloskey is no alternative, she is firmly trapped in rhetoric, storytelling, sociology, and history, and still thinks that economics is a social science. Urgent update: the so-called social sciences are what Feynman called cargo cult sciences.
Yes, economics is a failed science, but Heterodoxy is an integral part of it. The scientific incompetence of traditional Heterodoxy consists of “a failure of reason to find suitable alternatives” (Feyerabend).#1
You say: “It is simply not possible to explain growth without reference to its context: the cultural, institutional, political, social, and geographic factors that enabled it to take root.”
Yes, but the cultural, institutional, political, social, and geographic factors are the subject matter of OTHER sciences and have to be imported by way of multidisciplinary cooperation. The subject matter of economics proper is the economy as a complex system. So economics has to refocus itself and leave all subjective/behavioral/human nature issues to psychology, sociology, history, political sciences, etc., and focus on the objective systemic properties of the (world-) economy.
Orthodoxy has failed at this task because it is predicated on methodological individualism. In Krugman’s words, “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” Indeed, from this starting point, NO way leads to the correct theory of economic growth. Historians, on the other hand, are not equipped with the true economic theory and because of this they, too, cannot understand economic growth.
The result of devouring economics junk is: “No wonder I have a headache and have nothing to say.” At this point, the fault of Heterodoxy is to throw in the towel. The correct way is this: “If we feel misgivings ... all we have to do is to start appropriate research. Anything else is pure filibustering.” (Schumpeter, 1994, p. 577)
It is time now to switch from the proto-scientific orthodox and heterodox garbage to the real scientific stuff (2014b).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014a). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2014b). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
#1 For details of the big picture see cross-references Heterodoxy
April 21, 2016
The solemn burial of Marginalism
Comment on Chris Dillow on ‘Limits of marginal productivity theory’
Blog-Reference
In order to tackle the problem of wages, profits, and employment economics has to switch from microfoundations to macrofoundations. The Paradigm Shift is achieved as follows.
(A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw 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.
These premises are certain, true, and primary, and therefore satisfy ALL methodological requirements. The macro axiom set contains NO NONENTITIES like utility, maximization, equilibrium, or a well-behaved production function. For the graphical representation of the absolute formal minimum set, see Wikimedia#1.
At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of (i) budget balancing, i.e. C=Yw, and (ii) market-clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that the wage rate W is an AVERAGE if the individual wage rates are different among the employees, which is normally the case. These details are not needed at the beginning but come later with DIFFERENTIATION.
Under the conditions of (i) market-clearing and (ii) budget-balancing in each period the price is derived as P=W/R (1), i.e. the market-clearing price is in the most elementary case equal to unit wage costs. This is the elementary form of the macroeconomic Law of Supply and Demand which, in a later step, has to be generalized for an arbitrary number of markets.
The first thing to notice is that the real wage W/P is invariably equal to the productivity R according to (1). So, for the economy as a WHOLE, the marginal principle does NOT hold. The real wage is NOT equal to marginal productivity — because there is NO marginal productivity — because there is NO such thing as a well-behaved production function. The real wage is equal to productivity in the most elementary case (see Wikimedia#2).
Marginalism MUST ASSUME a well-behaved production function in order to make the green cheese assumption of constrained optimization work. This is methodologically ILLEGITIMATE and known since antiquity as petitio principii. To fool around with assumed NONENTITIES is like kindergarten kids playing with Spiderman, Tooth Fairy, and Easter Bunny.
For the economy as a WHOLE holds: If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price P rises. If productivity increases the price falls. In any case, labor gets the whole product, and profit for the business sector as a whole is invariably zero. So, the next question is where does profit come from? This question has NEVER been answered by standard economics. So economists have NO idea of the most important phenomenon of their subject matter.
All changes in the system are reflected by the market-clearing price. The most elementary economy is REPRODUCIBLE for an indefinite number of periods under the interim condition of no external limitations. With further DIFFERENTIATION one eventually arrives at the axiomatically correct Employment Law #3 and eventually at a single firm, that is, at micro.
What is standard economics? Krugman put it thus: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.
And this is why Krugman and the rest of standard economics are a failure. If the premises are false the whole theoretical superstructure implodes with karmic necessity. It is as simple as that: garbage in, garbage out. This methodological truism, though, is forever beyond the ant horizon of marginalist losers.
Egmont Kakarot-Handtke
#1 Wikimedia AXEC31 Elementary production-consumption economy with market-clearing and budget-balancing
#2 The formula for the general case is given on Wikimedia AXEC28.
#3 Wikimedia AXEC62 The structural-systemic Employment Law
Related 'Putting the production function back on its feet' and 'Mathiness and the Ur-Blunder' and 'Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?' and 'Sending Solow’s growth model to the dump of proto-scientific history'.
Immediately preceding Marginalism is the landmark of scientific incompetence.
Blog-Reference
In order to tackle the problem of wages, profits, and employment economics has to switch from microfoundations to macrofoundations. The Paradigm Shift is achieved as follows.
(A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw 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.
These premises are certain, true, and primary, and therefore satisfy ALL methodological requirements. The macro axiom set contains NO NONENTITIES like utility, maximization, equilibrium, or a well-behaved production function. For the graphical representation of the absolute formal minimum set, see Wikimedia#1.
At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of (i) budget balancing, i.e. C=Yw, and (ii) market-clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that the wage rate W is an AVERAGE if the individual wage rates are different among the employees, which is normally the case. These details are not needed at the beginning but come later with DIFFERENTIATION.
Under the conditions of (i) market-clearing and (ii) budget-balancing in each period the price is derived as P=W/R (1), i.e. the market-clearing price is in the most elementary case equal to unit wage costs. This is the elementary form of the macroeconomic Law of Supply and Demand which, in a later step, has to be generalized for an arbitrary number of markets.
The first thing to notice is that the real wage W/P is invariably equal to the productivity R according to (1). So, for the economy as a WHOLE, the marginal principle does NOT hold. The real wage is NOT equal to marginal productivity — because there is NO marginal productivity — because there is NO such thing as a well-behaved production function. The real wage is equal to productivity in the most elementary case (see Wikimedia#2).
Marginalism MUST ASSUME a well-behaved production function in order to make the green cheese assumption of constrained optimization work. This is methodologically ILLEGITIMATE and known since antiquity as petitio principii. To fool around with assumed NONENTITIES is like kindergarten kids playing with Spiderman, Tooth Fairy, and Easter Bunny.
For the economy as a WHOLE holds: If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price P rises. If productivity increases the price falls. In any case, labor gets the whole product, and profit for the business sector as a whole is invariably zero. So, the next question is where does profit come from? This question has NEVER been answered by standard economics. So economists have NO idea of the most important phenomenon of their subject matter.
All changes in the system are reflected by the market-clearing price. The most elementary economy is REPRODUCIBLE for an indefinite number of periods under the interim condition of no external limitations. With further DIFFERENTIATION one eventually arrives at the axiomatically correct Employment Law #3 and eventually at a single firm, that is, at micro.
What is standard economics? Krugman put it thus: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.
And this is why Krugman and the rest of standard economics are a failure. If the premises are false the whole theoretical superstructure implodes with karmic necessity. It is as simple as that: garbage in, garbage out. This methodological truism, though, is forever beyond the ant horizon of marginalist losers.
Egmont Kakarot-Handtke
#1 Wikimedia AXEC31 Elementary production-consumption economy with market-clearing and budget-balancing
#2 The formula for the general case is given on Wikimedia AXEC28.
#3 Wikimedia AXEC62 The structural-systemic Employment Law
Related 'Putting the production function back on its feet' and 'Mathiness and the Ur-Blunder' and 'Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?' and 'Sending Solow’s growth model to the dump of proto-scientific history'.
Immediately preceding Marginalism is the landmark of scientific incompetence.
April 19, 2016
Marginalism is the landmark of scientific incompetence
Comment on Chris Dillow on ‘Limits of marginal productivity theory’
Blog-Reference
You conclude: “It could be that marginal product theory — just like simple-minded talk of incentives — is as much ideology as science.”
It could also be that it is merely the usual brainless waffling economists’ are widely known for.
Standard economics is built upon this set of hardcore propositions, a.k.a. axioms: “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, 1985, p. 147)
Marginalism follows logically from the behavioral assumption of constrained optimization HC2. What can be said with certainty is that the whole set of Walrasian axioms is methodologically inadmissible. By implication, standard marginalistic distribution theory falls flat.
It is of utmost importance to realize that the concept of marginal productivity is long dead. So it is a welfare-diminishing waste of time to mention, criticize, and discuss it.
The root defect of the familiar distribution theories is that the representative economist cannot even tell the difference between income and profit (2012; 2014). This is not exactly a noteworthy achievement.
Marginal distribution theory is the widely visible landmark of economists’ scientific incompetence. The elimination of the misery demands a Paradigm Shift from microfoundations as embodied in HC1/HC5 to macrofoundations.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN Working Paper Series, 2012793: 1–13. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
COMMENT 'The zero productivity of economists' on Apr 20
All feathers are subject to the Law of Gravitation, but the trajectory of a flying feather on a windy day is a random walk with a downward bias. The underlying law is totally obscured by historical accidents. The very characteristic of a scientist is to abstract from the unique historical accidents while the dilettante is inextricably glued to it. Every economist could know this from J. S. Mill: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation.’” (1874, V.55)
To tackle the problem of distribution by looking at a concrete case of wage-setting at Aston Villa is a fine example of the methodological blunder that is rampant in economics. This nuisance comes under the general heading of methodological individualism.
“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, 1994, p. 1)
This research program has abysmally failed. The scientific productivity of economists has been consistently zero since Jevons/Walras/Menger. How does it come that their wages have been greater than zero? In economics, to be sure, there is no relationship between performance and reward at all.
Economics is not a science but an employment program for wannabe scientists. Keynes once proposed “to fill old bottles with banknotes, bury them at suitable depths in disused coalmines” and then “to dig the notes up again”. This is pretty much the same thing as discussing the marginal productivity theory over and over again. To make economics a science, first of all, requires to bury economists “at suitable depths in disused coalmines.”
Methodological individualism is finished. Marginalism is finished. For the correct distribution theory, see (2014).
References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741 1–23. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Immediately following The solemn burial of Marginalism.
Blog-Reference
You conclude: “It could be that marginal product theory — just like simple-minded talk of incentives — is as much ideology as science.”
It could also be that it is merely the usual brainless waffling economists’ are widely known for.
Standard economics is built upon this set of hardcore propositions, a.k.a. axioms: “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, 1985, p. 147)
Marginalism follows logically from the behavioral assumption of constrained optimization HC2. What can be said with certainty is that the whole set of Walrasian axioms is methodologically inadmissible. By implication, standard marginalistic distribution theory falls flat.
It is of utmost importance to realize that the concept of marginal productivity is long dead. So it is a welfare-diminishing waste of time to mention, criticize, and discuss it.
The root defect of the familiar distribution theories is that the representative economist cannot even tell the difference between income and profit (2012; 2014). This is not exactly a noteworthy achievement.
Marginal distribution theory is the widely visible landmark of economists’ scientific incompetence. The elimination of the misery demands a Paradigm Shift from microfoundations as embodied in HC1/HC5 to macrofoundations.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN Working Paper Series, 2012793: 1–13. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
***
All feathers are subject to the Law of Gravitation, but the trajectory of a flying feather on a windy day is a random walk with a downward bias. The underlying law is totally obscured by historical accidents. The very characteristic of a scientist is to abstract from the unique historical accidents while the dilettante is inextricably glued to it. Every economist could know this from J. S. Mill: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation.’” (1874, V.55)
To tackle the problem of distribution by looking at a concrete case of wage-setting at Aston Villa is a fine example of the methodological blunder that is rampant in economics. This nuisance comes under the general heading of methodological individualism.
“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, 1994, p. 1)
This research program has abysmally failed. The scientific productivity of economists has been consistently zero since Jevons/Walras/Menger. How does it come that their wages have been greater than zero? In economics, to be sure, there is no relationship between performance and reward at all.
Economics is not a science but an employment program for wannabe scientists. Keynes once proposed “to fill old bottles with banknotes, bury them at suitable depths in disused coalmines” and then “to dig the notes up again”. This is pretty much the same thing as discussing the marginal productivity theory over and over again. To make economics a science, first of all, requires to bury economists “at suitable depths in disused coalmines.”
Methodological individualism is finished. Marginalism is finished. For the correct distribution theory, see (2014).
References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741 1–23. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Immediately following The solemn burial of Marginalism.
For more about marginalism see AXECquery.
January 30, 2016
How Heterodoxy keeps the Naked-Emperor Zombie alive
Comment on Asad Zaman on ‘Fundamental Flaws of Conventional Economics’
Blog-Reference
All thinking economists are agreed: orthodox economics is, as Keen famously put it, a naked emperor (2011), or as Quiggin put it, a zombie (2010). This is not news, the embarrassment is well advanced in years “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, 1980, p. 1)
The list of defects is indeed almost endless — and exactly this is the problem. As a matter of methodological principle, the proof of one inconsistency should be enough to refute a theory. Ironically, Orthodoxy has delivered this proof themselves “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)
The orthodox approach is refuted by every trick in the book — yet it is still trolling around with silly model bricolage. It seems that critique and refutation are not enough to get rid of a failed approach. This, though, is also well known.
• “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, 1998, p. 703)
• “If we feel misgivings ..., all we have to do is to start appropriate research. Anything else is pure filibustering.” (Schumpeter, 1994, p. 577)
• “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)
• “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)
• “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., 1990, p. 362)
Let us call this the problem of the missing alternative or the nothing-to-choose dilemma. What is common to Orthodoxy and Heterodoxy is the incompetence to find a superior alternative to what is easily recognizable as a failed approach: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248) This is a program for secular stagnation. Until a promising alternative is available, the Zombie cannot die.
A repetitive critique of Orthodoxy is a waste of time. Students need to know how the market economy works and need no historical account of how their ancestors messed up both theory and methodology. The sooner all this scientific garbage is referred to the historians of economic thought, the better.
Asad Zaman has not yet got the point but repeats the multitude of already known defects. The curious fact is that Keynes has already pointed the way: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)
These premises are well-known for more than 150 years “For it would not be too much of an oversimplification to present the field as having progressed smoothly and steadily, developing theories of ever greater power and broader scope within an essentially unchanged explanatory framework, based on the concepts of optimizing individual behavior and market equilibrium, that were already central to economic thought in the previous century.” (Woodford, 1999, p. 2)
Or, in the blog version of Krugman: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.
And here you have it! What we know with absolute certainty is that the new economic paradigm has to be free of these green cheese assumptions. So, there is no need at all to take notice of any peer-reviewed article or textbook or any post which contains maximization-and-equilibrium. Economic policy proposals of marginalists can simply be laughed out of every debate. Because of this, there is no need at all to criticize and discuss DSGE or RBC or the freshwater/saltwater junk on a heterodox blog. What is more, there is no need to criticize and discuss Walrasianism, Keynesianism, Marxianism, and Austrianism. All this is obsolete stuff.
The ground has been cleared over and over again. Debunking has been wildly successful, now the only worthwhile task is construction, or, to paraphrase the great economist and methodologist J. S. Mill: ‘Doubtless, the most effectual mode of showing how the science of Economics may be constructed, would be to construct it ...’ (2006, p. 834)#1
Egmont Kakarot-Handtke
References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, Melbourne: Cambridge University Press.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics. Mimeo, 1–32. URL
#1 How to restart economics
Blog-Reference
All thinking economists are agreed: orthodox economics is, as Keen famously put it, a naked emperor (2011), or as Quiggin put it, a zombie (2010). This is not news, the embarrassment is well advanced in years “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, 1980, p. 1)
The list of defects is indeed almost endless — and exactly this is the problem. As a matter of methodological principle, the proof of one inconsistency should be enough to refute a theory. Ironically, Orthodoxy has delivered this proof themselves “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)
The orthodox approach is refuted by every trick in the book — yet it is still trolling around with silly model bricolage. It seems that critique and refutation are not enough to get rid of a failed approach. This, though, is also well known.
• “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, 1998, p. 703)
• “If we feel misgivings ..., all we have to do is to start appropriate research. Anything else is pure filibustering.” (Schumpeter, 1994, p. 577)
• “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)
• “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)
• “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., 1990, p. 362)
Let us call this the problem of the missing alternative or the nothing-to-choose dilemma. What is common to Orthodoxy and Heterodoxy is the incompetence to find a superior alternative to what is easily recognizable as a failed approach: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248) This is a program for secular stagnation. Until a promising alternative is available, the Zombie cannot die.
A repetitive critique of Orthodoxy is a waste of time. Students need to know how the market economy works and need no historical account of how their ancestors messed up both theory and methodology. The sooner all this scientific garbage is referred to the historians of economic thought, the better.
Asad Zaman has not yet got the point but repeats the multitude of already known defects. The curious fact is that Keynes has already pointed the way: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)
These premises are well-known for more than 150 years “For it would not be too much of an oversimplification to present the field as having progressed smoothly and steadily, developing theories of ever greater power and broader scope within an essentially unchanged explanatory framework, based on the concepts of optimizing individual behavior and market equilibrium, that were already central to economic thought in the previous century.” (Woodford, 1999, p. 2)
Or, in the blog version of Krugman: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.
And here you have it! What we know with absolute certainty is that the new economic paradigm has to be free of these green cheese assumptions. So, there is no need at all to take notice of any peer-reviewed article or textbook or any post which contains maximization-and-equilibrium. Economic policy proposals of marginalists can simply be laughed out of every debate. Because of this, there is no need at all to criticize and discuss DSGE or RBC or the freshwater/saltwater junk on a heterodox blog. What is more, there is no need to criticize and discuss Walrasianism, Keynesianism, Marxianism, and Austrianism. All this is obsolete stuff.
The ground has been cleared over and over again. Debunking has been wildly successful, now the only worthwhile task is construction, or, to paraphrase the great economist and methodologist J. S. Mill: ‘Doubtless, the most effectual mode of showing how the science of Economics may be constructed, would be to construct it ...’ (2006, p. 834)#1
Egmont Kakarot-Handtke
References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, Melbourne: Cambridge University Press.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics. Mimeo, 1–32. URL
#1 How to restart economics
January 21, 2016
Full methodological illiteracy
Comment on Asad Zaman on ‘Axiomatic economics — the Bourbaki-Debreu delusion’
Blog-Reference
Asad Zaman interprets the history of science thus: “The scientific method arose as a rejection of the axiomatic method used by the Greeks for scientific methodology. It was this rejection of axiomatics and logical certainty in favour of empirical and observational approach which led to dramatic progress in science.”
Zaman’s understanding of methodology is substandard, to say the least. It is a widely known fact that modern physics is unthinkable without the prior move from Euclidean to non-Euclidean axioms. The following quotes speak for themselves, and they say exactly the opposite of Zaman.
“This seemingly pre-established harmony between the mathematics and the subsequent physics has been a cause for puzzlement among historians and philosophers of science. One example of such a coincidence is the relationship between the mathematics of Hilbert space and the formulation of Quantum Mechanics. Another very good example is the development of Riemannian Geometry prior to the emergence of GTR. It was as if Gauss, Riemann, Ricci and Levi-Civita had Einstein in mind when constructing their non-Euclidean geometries.” (Zahar, 1980, p. 4)
“A complete system of theoretical physics consists of concepts and basic laws to interrelate those concepts and of consequences to be derived by logical deduction. It is these consequences to which our particular experiences are to correspond, and it is the logical derivation of them which in a purely theoretical work occupies by far the greater part of the book. This is really exactly analogous to Euclidean geometry, except that in the latter the basic laws are called ‘axioms’; and, further, that in this field there is no question of the consequences having to correspond with any experiences. But if we conceive Euclidean geometry as the science of the possibilities of the relative placing of actual rigid bodies and accordingly interpret it as a physical science, and do not abstract from its original empirical content, the logical parallelism of geometry and theoretical physics is complete.” (Einstein, 1934, pp. 164-165)
“Some day, when physics is complete and we know all the laws, we may be able to start with some axioms, and no doubt somebody will figure out a particular way of doing it so that everything else can be deduced.” (Feynman, 1992, p. 50)
For anyone who can read, this does not sound like a ‘rejection of axiomatics’ by cutting-edge physics. Neither did Einstein ever reject ‘the axiomatic method used by the Greeks’. Just the reverse!
“Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics. In a certain sense, therefore, I hold it to be true that pure thought is competent to comprehend the real, as the ancients dreamed.” (Einstein, 1934, p. 167)
For ancients, read ancient Greeks, the inventors of science and the axiomatic-deductive method: “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. (Aristotle, Posterior Analytics).
With Zaman’s methodology, Heterodoxy will not produce any scientific knowledge of anything.
Egmont Kakarot-Handtke
References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Zahar, E. (1980). Einstein, Meyerson and the Role of Mathematics in Physical Discovery. The British Journal for the Philosophy of Science, 31(1): 1–43. URL
Related 'Axiomatics — the heterodox bugbear' and 'Bagehot’s wisdom and the silliness of modern economists' and 'Economists’ proto-scientific methodology' and 'Lousy scientists'
REPLY Heterodoxy methodology — back to the future, comment on Bruce Wilder on Jan 22
You propose “to grant broad assent to Alan Kirman.” Since Kirman gives a condensed version of the well-researched history of General Equilibrium Theory (Ingrao et al., 1990), there cannot be anything other than assent.
The point is, what are the conclusions of the demise of GET? Basically, we have two:
(i) Paradigm shift: “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., 1990, p. 362)
(ii) To abandon the axiomatic-deductive method because “It was this rejection of axiomatics and logical certainty in favor of empirical and observational approach which led to dramatic progress in science.” (Zaman)
It should be clear to everyone by now that there is no such thing as a choice or trade-off between logical and material consistency. Science requires always both “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
Since the axiomatic-deductive method guarantees logical consistency, it cannot be abandoned. But alone it is insufficient. The results of axiomatic-deductive operations must be observable (=material consistency).
By the way, has Zaman ever heard that the concept of the Atom goes back to the ancient Greeks, and does he think that they derived it from observation? Or does he think that Plank saw a Quantum under the microscope? Galileo did not figure out the Law of the Falling Bodies empirically by jumping off the tower of Pisa, but by first studying Euclid.
Zaman’s naive realism/empiricism is not a tenable methodological position. It is outdated for more than 2300 years.#1
Conclusion: The demise of GET (and by consequence RBC, DSGE, etc) makes a Paradigm Shift, i.e., a replacement of the axiomatic foundations of economic theory, necessary. That is the proper task of Heterodoxy.
References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
#1 Bagehot’s wisdom and the silliness of modern economists
REPLY Comment on Silwyson of Jan 27
You comment on my post: “You have glossed over an important part of your Einstein quote: “experience of course remains the sole criterion of the serviceability of a mathematical construction ...”
Be sure that I have chosen this quote exactly because Einstein clarifies here in one brief statement the relationship between empiricism and formalism.
For more details about the correct understanding of methodology, see How to restart economics.
REPLY Comment on Silwyson of Jan 30
You say, “Economists do not understand science.” Yes, indeed, but this includes Zaman and you. You cite Aristotle and Galileo, so let us look closely into the matter.
Roughly speaking, Aristotle put the Law of Motion thus: every body moves to its natural place of rest. Then he took a stone and threw it skywards. The stone came down some meters away. Never in the history of mankind has a law been better empirically tested and confirmed without exception.
Against this, Galileo said, roughly, every body moves in a straight line until eternity. An empirical proof could not be given until space flight was possible.
Nevertheless, this counterintuitive assertion reappears as the first axiom of motion in Newton’s Principia. (Axiomata Sive Leges Motus, Wikipedia)
And this is what Galileo told naive empiricists and commonsensers, and brain-dead realists about the essence of science: “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (quoted in Popper, 1994, p. 84)
References
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. Chapter Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.
Blog-Reference
Asad Zaman interprets the history of science thus: “The scientific method arose as a rejection of the axiomatic method used by the Greeks for scientific methodology. It was this rejection of axiomatics and logical certainty in favour of empirical and observational approach which led to dramatic progress in science.”
Zaman’s understanding of methodology is substandard, to say the least. It is a widely known fact that modern physics is unthinkable without the prior move from Euclidean to non-Euclidean axioms. The following quotes speak for themselves, and they say exactly the opposite of Zaman.
“This seemingly pre-established harmony between the mathematics and the subsequent physics has been a cause for puzzlement among historians and philosophers of science. One example of such a coincidence is the relationship between the mathematics of Hilbert space and the formulation of Quantum Mechanics. Another very good example is the development of Riemannian Geometry prior to the emergence of GTR. It was as if Gauss, Riemann, Ricci and Levi-Civita had Einstein in mind when constructing their non-Euclidean geometries.” (Zahar, 1980, p. 4)
“A complete system of theoretical physics consists of concepts and basic laws to interrelate those concepts and of consequences to be derived by logical deduction. It is these consequences to which our particular experiences are to correspond, and it is the logical derivation of them which in a purely theoretical work occupies by far the greater part of the book. This is really exactly analogous to Euclidean geometry, except that in the latter the basic laws are called ‘axioms’; and, further, that in this field there is no question of the consequences having to correspond with any experiences. But if we conceive Euclidean geometry as the science of the possibilities of the relative placing of actual rigid bodies and accordingly interpret it as a physical science, and do not abstract from its original empirical content, the logical parallelism of geometry and theoretical physics is complete.” (Einstein, 1934, pp. 164-165)
“Some day, when physics is complete and we know all the laws, we may be able to start with some axioms, and no doubt somebody will figure out a particular way of doing it so that everything else can be deduced.” (Feynman, 1992, p. 50)
For anyone who can read, this does not sound like a ‘rejection of axiomatics’ by cutting-edge physics. Neither did Einstein ever reject ‘the axiomatic method used by the Greeks’. Just the reverse!
“Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics. In a certain sense, therefore, I hold it to be true that pure thought is competent to comprehend the real, as the ancients dreamed.” (Einstein, 1934, p. 167)
For ancients, read ancient Greeks, the inventors of science and the axiomatic-deductive method: “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. (Aristotle, Posterior Analytics).
With Zaman’s methodology, Heterodoxy will not produce any scientific knowledge of anything.
Egmont Kakarot-Handtke
References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Zahar, E. (1980). Einstein, Meyerson and the Role of Mathematics in Physical Discovery. The British Journal for the Philosophy of Science, 31(1): 1–43. URL
Related 'Axiomatics — the heterodox bugbear' and 'Bagehot’s wisdom and the silliness of modern economists' and 'Economists’ proto-scientific methodology' and 'Lousy scientists'
***
REPLY Heterodoxy methodology — back to the future, comment on Bruce Wilder on Jan 22
You propose “to grant broad assent to Alan Kirman.” Since Kirman gives a condensed version of the well-researched history of General Equilibrium Theory (Ingrao et al., 1990), there cannot be anything other than assent.
The point is, what are the conclusions of the demise of GET? Basically, we have two:
(i) Paradigm shift: “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., 1990, p. 362)
(ii) To abandon the axiomatic-deductive method because “It was this rejection of axiomatics and logical certainty in favor of empirical and observational approach which led to dramatic progress in science.” (Zaman)
It should be clear to everyone by now that there is no such thing as a choice or trade-off between logical and material consistency. Science requires always both “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
Since the axiomatic-deductive method guarantees logical consistency, it cannot be abandoned. But alone it is insufficient. The results of axiomatic-deductive operations must be observable (=material consistency).
By the way, has Zaman ever heard that the concept of the Atom goes back to the ancient Greeks, and does he think that they derived it from observation? Or does he think that Plank saw a Quantum under the microscope? Galileo did not figure out the Law of the Falling Bodies empirically by jumping off the tower of Pisa, but by first studying Euclid.
Zaman’s naive realism/empiricism is not a tenable methodological position. It is outdated for more than 2300 years.#1
Conclusion: The demise of GET (and by consequence RBC, DSGE, etc) makes a Paradigm Shift, i.e., a replacement of the axiomatic foundations of economic theory, necessary. That is the proper task of Heterodoxy.
References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
#1 Bagehot’s wisdom and the silliness of modern economists
***
REPLY Comment on Silwyson of Jan 27
You comment on my post: “You have glossed over an important part of your Einstein quote: “experience of course remains the sole criterion of the serviceability of a mathematical construction ...”
Be sure that I have chosen this quote exactly because Einstein clarifies here in one brief statement the relationship between empiricism and formalism.
For more details about the correct understanding of methodology, see How to restart economics.
***
REPLY Comment on Silwyson of Jan 30
You say, “Economists do not understand science.” Yes, indeed, but this includes Zaman and you. You cite Aristotle and Galileo, so let us look closely into the matter.
Roughly speaking, Aristotle put the Law of Motion thus: every body moves to its natural place of rest. Then he took a stone and threw it skywards. The stone came down some meters away. Never in the history of mankind has a law been better empirically tested and confirmed without exception.
Against this, Galileo said, roughly, every body moves in a straight line until eternity. An empirical proof could not be given until space flight was possible.
Nevertheless, this counterintuitive assertion reappears as the first axiom of motion in Newton’s Principia. (Axiomata Sive Leges Motus, Wikipedia)
And this is what Galileo told naive empiricists and commonsensers, and brain-dead realists about the essence of science: “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (quoted in Popper, 1994, p. 84)
References
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. Chapter Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.
January 9, 2016
Bagehot’s wisdom and the silliness of modern economists
Comment on Nanikore on ‘Krugman on models (II)’
Blog-Reference
You say “Chomsky basically sums up the problem I have with modern economics: Too much abstraction.”
As a matter of fact, the problem with abstraction and empiricism is very old and it has been settled long ago. Methodological news, though, travels with glacial speed in economics.
Bagehot observed 130 years ago: “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;’ Flamstead, the greatest astronomical discoverer of his day — the man of facts, par excellence — so called them; they have irresistibly conquered; but at first even those most conversant with the matter did not believe them.” (1885, PE. 23)
It did not go unnoticed that the best-known champion of empiricism had been empirically refuted: “And it is very remarkable that he should not have remembered it as he speaks of Lord Bacon, for the method which he suggests is exactly that which Lord Bacon himself followed, and owing to the mistaken nature of which he discovered nothing. The investigation into the nature of heat in the Novum Organum is exactly such a collection of facts as Mr. Cohn suggests; — but nothing comes of it.” (1885, PE. 21)
One can gauge the stagnation of economic methodology by a comparison of Nanikore’s arguments with Bagehot’s description “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ — that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark — sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them. (1885, PE.13)
It is true, of course, that modern economics is proto-scientific garbage. However, the problem is not ‘too much abstraction’ but moronomic abstraction. Clearly, utility maximization is not an abstraction of anything, it is simply a silly hypothesis about human behavior. No theory that is based upon it can be taken seriously. Thus far the critique of so-called empiricists is valid.
Empiricists, though, cannot get their head around the fact that there is, strictly speaking, no such thing as empiricism: “Indeed, there is no such thing as an uninterpreted observation, an observation which is not theory-impregnated.” (Popper, 1994, p. 58)
Because of this, theory comes first and observation (in contrast to mere perception) comes second.#1 Most heterodox economists do not understand this and still argue as Hume argued “Geometry assists us in the application of this law, by giving us the just dimensions of all the parts and figures which can enter into any species of machine; but still the discovery of the law itself is owing merely to experience, and all the abstract reasonings in the world could never lead us one step towards the knowledge of it. When we reason a priori, and consider merely any object or cause, as it appears to the mind, independent of all observation, it never could suggest to us the notion of any distinct object, such as its effect; much less, show us the inseparable and inviolable connexion between them.” (2011, 27)
This is patently false. To recall, the atom is not something that had been observed by the ancient Greeks. On the contrary, it had been a product of pure abstract reasoning and it has been ‘observed’ only 2500 years later.
The great economist and methodologist J. S. Mill understood this very well “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’." (1874, V.55)
This, clearly, has never been meant as a license for the application of green cheese assumptions like constrained optimization, rational expectation, or equilibrium. The methodological defect of this kind of assumptions is not that they are abstract or that they have been formalized, the fatal defect is that they are NONENTITIES.#2 Empiricists have not and cannot in principle save the situation — only a Paradigm Shift can. An empirical turn without a preceding theoretical turn is as smart as putting on the boots before the trousers.
Egmont Kakarot-Handtke
References
Bagehot, W. (1885). The Postulates of English Political Economy. Library of Economics and Liberty. URL
Hume, D. (2011). An Enquiry Concerning Human Understanding. Project Gutenberg EBook. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.
#1 Buddha on the microeconomic men in the dark
#2 How the intelligent non-economist can refute every economist hands down
Blog-Reference
You say “Chomsky basically sums up the problem I have with modern economics: Too much abstraction.”
As a matter of fact, the problem with abstraction and empiricism is very old and it has been settled long ago. Methodological news, though, travels with glacial speed in economics.
Bagehot observed 130 years ago: “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;’ Flamstead, the greatest astronomical discoverer of his day — the man of facts, par excellence — so called them; they have irresistibly conquered; but at first even those most conversant with the matter did not believe them.” (1885, PE. 23)
It did not go unnoticed that the best-known champion of empiricism had been empirically refuted: “And it is very remarkable that he should not have remembered it as he speaks of Lord Bacon, for the method which he suggests is exactly that which Lord Bacon himself followed, and owing to the mistaken nature of which he discovered nothing. The investigation into the nature of heat in the Novum Organum is exactly such a collection of facts as Mr. Cohn suggests; — but nothing comes of it.” (1885, PE. 21)
One can gauge the stagnation of economic methodology by a comparison of Nanikore’s arguments with Bagehot’s description “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ — that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark — sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them. (1885, PE.13)
It is true, of course, that modern economics is proto-scientific garbage. However, the problem is not ‘too much abstraction’ but moronomic abstraction. Clearly, utility maximization is not an abstraction of anything, it is simply a silly hypothesis about human behavior. No theory that is based upon it can be taken seriously. Thus far the critique of so-called empiricists is valid.
Empiricists, though, cannot get their head around the fact that there is, strictly speaking, no such thing as empiricism: “Indeed, there is no such thing as an uninterpreted observation, an observation which is not theory-impregnated.” (Popper, 1994, p. 58)
Because of this, theory comes first and observation (in contrast to mere perception) comes second.#1 Most heterodox economists do not understand this and still argue as Hume argued “Geometry assists us in the application of this law, by giving us the just dimensions of all the parts and figures which can enter into any species of machine; but still the discovery of the law itself is owing merely to experience, and all the abstract reasonings in the world could never lead us one step towards the knowledge of it. When we reason a priori, and consider merely any object or cause, as it appears to the mind, independent of all observation, it never could suggest to us the notion of any distinct object, such as its effect; much less, show us the inseparable and inviolable connexion between them.” (2011, 27)
This is patently false. To recall, the atom is not something that had been observed by the ancient Greeks. On the contrary, it had been a product of pure abstract reasoning and it has been ‘observed’ only 2500 years later.
The great economist and methodologist J. S. Mill understood this very well “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’." (1874, V.55)
This, clearly, has never been meant as a license for the application of green cheese assumptions like constrained optimization, rational expectation, or equilibrium. The methodological defect of this kind of assumptions is not that they are abstract or that they have been formalized, the fatal defect is that they are NONENTITIES.#2 Empiricists have not and cannot in principle save the situation — only a Paradigm Shift can. An empirical turn without a preceding theoretical turn is as smart as putting on the boots before the trousers.
Egmont Kakarot-Handtke
References
Bagehot, W. (1885). The Postulates of English Political Economy. Library of Economics and Liberty. URL
Hume, D. (2011). An Enquiry Concerning Human Understanding. Project Gutenberg EBook. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.
#1 Buddha on the microeconomic men in the dark
#2 How the intelligent non-economist can refute every economist hands down
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