Ontological uncertainty is NOT the problem but economists’ ontological stupidity

Comment on Lars Syll on ‘Paul Krugman ― a methodological critique’

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When economists are asked why they have achieved little or nothing of scientific value in the last 200+ years, they answer that their subject matter is characterized by idiosyncratic difficulties, i.e. uncertainty and complexity. Here is the classical answer: “Years ago I heard Mr. Cobden say at a League Meeting that ‘Political Economy was the highest study of the human mind, for that the physical sciences required by no means so hard an effort’.” (Bagehot, 1885) #1

The simple fact of the matter, though, is that economists are scientifically incompetent. One good example is Keynes.#2, #3 Keynes is known as the discoverer of economic uncertainty and its disastrous implications for the sheer possibility of economic theory.

What is uncertainty? “In his 1937 article entitled ‘The General Theory of Employment,’ Keynes, responding to critics of the general theory, offered the following definition of uncertainty: By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty. . . . Or . . . the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence. . . . About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (Ferrari-Filho et al.)

Trivially true, indeed, except for the fact that ontological uncertainty is taken as a methodological excuse for the overall failure of economics: “One thing that’s missing from Krugman’s treatment of economics is the explicit recognition of what Keynes and before him Frank Knight, emphasized: the persistent presence of enormous uncertainty in the economy … Why is uncertainty so important? Because the more of it there is in the economy the less scope for successful maximizing and the more unstable are the equilibria the economy exhibits, if it exhibits any at all …” (Rosenberg, see Intro)

What economists overlook is that most of economic uncertainty is produced by the historically evolved bad design of the economy. Since Adam Smith, the economy is supposed to be a self-regulating system that produces optimal outcomes if not interfered with. Fact is, though, that the opposite is provably true. #4 As a result, it can be said that ontological economic uncertainty is, in most cases, the direct product of economists’ ontological stupidity.

Let us give one example.

As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic 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.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R. The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.

What is needed for a start is two things: (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii) a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. For the case of a balanced budget, the idealized transaction sequence of deposits/overdrafts at the central bank over the course of one period is shown under the label of Graphic AXEC98

The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector. The economy NEVER runs out of money. If employment L is doubled, the average stock of transaction money doubles. In a fiat money economy, growth is not hampered by a lack of a transaction medium.

The price is determined by the wage rate and productivity. Both vary over time unpredictably. Now, if one wants absolute price stability in the elementary production-consumption economy from beginning to eternity, one has to apply the simple rule: change of wage rate = change of productivity. That’s all. Productivity may be influenced by unpredictable weather conditions or external shocks; this uncertainty is compensated for by changes in the wage rate so that the market price P remains absolutely constant. Needless to emphasize that this also eliminates the problem of destabilizing price expectations.

The task of economists is NOT to senselessly repeat Keynes’ silly mantra ‘We simply do not know’, but to figure out how uncertainty can be eliminated from the economic system.

Do not expect that proven imbeciles like Paul Krugman or Lars Syll will ever figure out anything.

Egmont Kakarot-Handtke


#1 Failed economics: The losers’ long list of lame excuses
#2 Forget Keynes
#3 Cross-references Failed/Fake Scientists
#4 Proof of the inherent instability of the market economy

Related 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It' and 'Trust in economics as a science?' and 'Is Lars Syll’s stupidity really infinite?' and 'Cryptoeconomics ― the best of Lars Syll’s spam folder' and 'What is dead certain in an uncertain world: economists’ abysmal incompetence' and 'Uncertainty: ‘Whereof one cannot speak, thereof one must be silent’' and 'The scientific self-elimination of Heterodoxy' and 'Econogenics: economists pose a hazard to their fellow citizens'.

Redefining economics (I)

Comment on Lars Syll on ‘Probability and economics’

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Lars Syll sums up: “... neoclassical economics lacks sound foundations!” (See intro)

This, of course, is true, and just because of this, we have heterodox economics as a superior alternative, don’t we? Unfortunately, not, because Heterodoxy, too, lacks sound foundations. #1 And this leads one quite naturally to the conclusion: “... then one model is no more valid than another …” (See intro)

This conclusion is (i) false and (ii) self-defeating. Clearly, if there is no way to discriminate between a true and a false model, any further discussion is no better than medieval wordplay about dancing-angels-on-a-pinpoint. And how can Heterodoxy assert that Orthodoxy is unacceptable if no model is more valid than another? This is a blatant self-contradiction.

It is pretty obvious that Heterodoxy is in the same dark methodological wood as Orthodoxy, and this, in turn, explains why economics is caught in secular stagnation.

How to get out of the woods? Heterodoxy has, first of all, to stick to the scientific method, which is well-defined: “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)

Sticking to the scientific method implies that the heterodox economist avoids at all costs getting involved in questions that have no answer, to begin with, like whether God is male/female or is greed good? Or, more generally, Heterodoxy avoids applying concepts and tools where they are not applicable. Randomness is a case in point.

“From a realistic point of view we really have to admit that the socio-economic states of nature that we talk of in most social sciences — and certainly in economics — are not amenable to analyze as probabilities, simply because in the real world open systems that social sciences — including economics — analyze, there are no probabilities to be had!” (See intro)

Yes, indeed, and from this follows that Heterodoxy has to get out of the so-called social sciences. Why? Because, as a matter of principle, we can have neither deterministic nor probabilistic knowledge about human behavior.

“By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

From this follows: economics cannot be built upon an assumption about human behavior. Behavior is neither deterministic nor purely random. To be sure, there is nothing wrong with the concept of randomness, only with its application in economics. That is an old hat: “Alexander Rosenberg lays great emphasis on the role of intentionality in the social sciences, for in his view this role explains the nomological failures of the social sciences and supports the view that the social sciences (in anything like their current form) can never succeed in formulating real laws of human behavior.” (Hausman, 1992, p. 326)

The subject matter of economics is not homo oeconomicus but the economic system. Because of this, economics has to be redefined.
— Old definition, subjective-behavioral: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Lionel Robbins, 1935)
— New definition, objective-structural: “Economics is the science which studies how the monetary economy works.” (AXEC)

The original methodological blunder of Orthodoxy has been that it attempted to axiomatize human behavior. This is a fine example of what Feynman called cargo cult science, i.e., ‘The form is perfect. But it doesn't work.’ The correct approach consists of axiomatizing the objective structural relationships of the monetary economy (2014). Since Jevons, Walras, and Menger, neoclassical economists have not grasped the salient point of methodology.

In sum: Heterodoxy has to free itself from the social science illusion, which it has hitherto shared with Orthodoxy.#2 The joint failure speaks for itself.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.

#1 With regard to profit theory, see the proof Heterodoxy, too, is proto-scientific garbage
#2 PsySoc— the scourge of economics

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Graphic AXEC106m