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) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

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=Y_w.

Monetary profit is defined as Q_m≡C−Y_w and monetary saving is defined as S_m≡Y_w−C. It always holds Q_m≡−S_m, 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.

#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.

The future of economics: why you will probably not be admitted to it, and why this is a good thing

Comment on Merijn Knibbe on ‘Clarence Ayres on the economic concept of capital’

Blog-Reference and Blog-Reference

“... economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

Economics is a scientific failure. Being stranded in the middle of nowhere, evidently, nobody else is responsible than the confused drivers/passengers of the big omnibus themselves. These can be roughly divided into the major sects: Walrasians, Keynesians, Marxians, and Austrians. What all have in common are substandard scientific abilities. Generally speaking, the four approaches are built upon unacceptable premises and therefore violate Aristotle’s first principle of science: “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.” (Posterior Analytics)

What are the premises that are accepted by the majority of economists? 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 ...”. This starting point has to be abandoned because these premises are by no stretch of the imagination certain, true, and primary.

At this critical juncture, the economist has to make up his mind: either to defend the indefensible beliefs of one of the four sects or to replace the foundational assumptions and to begin in earnest with the overdue reconstruction of the whole theoretical superstructure of economics. Based on the history of economic thought, it is a fair bet that the representative economist will mess up things. However, this has to be proved, so here is the challenge.

The most elementary economic configuration is the production-consumption economy which consists of the household sector and the business sector which in turn consists initially of one giant fully integrated firm. This minimalist configuration is defined for one period by three equations.

(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.

If you cannot understand or accept these almost self-evident equations, which hold for the world economy as a whole and every closed national economy, you are out of economics. These premises are certain, true, and primary, or stated in relative terms, obviously superior to the neo-Walrasian axioms (Weintraub, 1985, p. 147) or to Keynes’ defective formal basis (1973, p. 63).

For the graphical representation of the three equations see Wikimedia AXEC31:

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 budget balancing, i.e. C=Yw, and 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 the general case.

Under the conditions of market-clearing and budget-balancing in each period, the price follows from the three equations as P=W/R (1), i.e. the market-clearing price is always equal to unit wage costs. To repeat, the price is for a start taken as the dependent variable, of course, it can be treated as an independent variable (2015). Also worth mentioning is that money as a transaction medium is left out here for brevity; for the full picture see (2015).

The elementary production-consumption economy works as follows. 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, the real wage W/P is invariably equal to the productivity R according to (1), and profit for the business sector as a whole is zero. All changes in the system are fully reflected by the market-clearing price P. The elementary production-consumption economy is reproducible for an indefinite number of periods.

The changes from period to period are formally given by:
(iv) W_t=W_t-1(1+w_t) The wage rate in period t — W_t — is given by the wage rate in the previous period W_t-1 and the rate of change for the current period w_t.
(v) R_t=R_t-1(1+r_t) analogous for productivity.
(vi) L_t=L_t-1(1+l_t) analogous for labor input.

The rates of change for future periods wt, rt, lt are random variables with an a priori unknown distribution function. Because of this, we cannot predict the price in period t=10 but we can test it in period t=10 or any other future period. As a matter of principle, (1) is a testable proposition.

Given the enumerated premises and conditions, the market-clearing price performs a random walk which is determined in turn by the random walks of wage rate and productivity. Equation (1) in combination with (iv) to (vi) replaces the ridiculous supply-demand-equilibrium model of Econ 101.

From the premises and conditions follows for a start:

• The elementary production-consumption economy constitutes itself through the interaction of real and nominal variables. There is no such thing as a ‘real’ economy, in other words, all ‘real’ models are a priori false.
• There is no such thing as equilibrium. The product market is cleared and the budget is balanced but the economy is not moved by an Invisible Hand toward some equilibrium, e.g. full employment. In other words, all equilibrium models are a priori false.
• The commonplace quantity theory does not hold. Inflation/deflation depends initially on the development of wage rate and productivity and nothing else. If the period changes of the wage rate are exactly equal to the changes in productivity i.e. wt=rt, absolute price stability prevails over all future periods despite the random variations of productivity and employment. Hence, price stability/inflation/deflation is not a monetary phenomenon.
• The marginal principle, which ultimately derives from the unacceptable behavioral assumption of utility maximization, does not apply and plays no role at all in price determination. All marginalist models are a priori false.
• Supply and demand functions are NONENTITIES. Well-behaved production functions and decreasing returns do not exist. These premises are neither required nor admissible.
• Neither the income distribution nor the distribution of the real product depends on the marginal principle. All marginalist distribution models are a priori false.

In the next analytical steps, the number of firms is increased, which leads to the determination of relative prices, and the conditions of market clearing and budget-balancing are lifted, which gives rise to the phenomena of inventory changes, profit/loss,#1, and the increase/decrease of the stocks of money and debt. It is pretty obvious that all economic phenomena can successively be derived from the three premises (i) to (iii). Stock-flow consistency is guaranteed ab initio.

In order to develop the first economic theory since Adam Smith that satisfies the scientific criteria of formal and material consistency, the unacceptable foundational propositions of Walrasianism, Keynesianism, Marxianism, and Austrianism have to be abandoned. Scientists would immediately perform the necessary Paradigm Shift but economists are no scientists. Their acceptance of the maximization-and-equilibrium world for more than 100 years is forever disqualifying. Because of this, the still confused sorta-kinda economists are kindly asked to leave the big omnibus now.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
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


#1 Profit and the collective failure of economists

Immediately preceding Economics as a fool’s paradise.

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POINTER on Economist's View

No, economists do not understand what is in their models.

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ANSWER to Bragi on Jan 4

This is the corpus delicti from the General Theory “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit theory.

“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., 2010, pp. 12-13, 16)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.

For the formal proof see Why Post Keynesianism Is Not Yet a Science.

Keynesians will not make it into the future of economics because of proven logical incompetence over more than 80 years.

References
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

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REPLY Brain-dead blather, comment on anne on Jan 4

You give good advice “Take a Krugman model, such as IS-LM and clearly explain what is not understood”.

Let me return the good advice: Read more, think more, and blog less.

IS-LM is provably false since the 1930s but the representative economist has realized nothing for more than 80 years. This includes you and, of course, Paul Krugman, see Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It.

Here is the core of the proof.

The formal basis of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

This two-liner 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., 2010, pp. 12-13, 16)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all IS-LM models. See also Why Post Keynesianism Is Not Yet a Science.

Keynesians will not make it into the future of economics because of proven logical incompetence — they have no idea of what is in their models. This includes you and, of course, Paul Krugman — the proto-scientific proponent of model bricolage.

The scary fact of the matter is economists cannot tell the difference between profit and income [“A satisfactory theory of profits is still elusive.” Desai, 2008, p. 10] but tell politicians and the central bank how to run the economy.


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

Related 'Summary on "Musings on Whether We Consciously Know More or Less than What Is in Our Models…"' and 'Wikipedia, economics, scientific knowledge, or political agenda pushing?'

For details of the big picture see cross-references Paradigm Shift.

For more about Paul Krugman see AXECquery.

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Wikimedia AXEC172

Predictably confused

Comment on Lars Syll on ‘Sir David Hendry on the inadequacies of DSGE models’

Blog-Reference

“The future is unpredictable.” (Feynman, 1992, p. 147) Four words! Compare this to what economists have uttered about this issue without getting one iota further. But wait, are physicists not famous for their accurate predictions? Could it be that economists have gotten something badly wrong?

Let us have a closer look. If you show a physicist an apple tree and ask him when every single apple will fall, then he will tell you that this kind of event is not predictable. But he can tell you something else. If an apple has started to fall then he can tell you exactly its location and velocity after t seconds. The physicist ‘predicts’ the coordinates with high precision and everyone can test them. (OK, you did not want to know this to begin with, and exactly these layman's expectations regularly cause irritations with science.)

Likewise: imagine somebody throws blindly three coins into a large sandbox. Clearly, the three coins form a random triangle and no one can predict its form and size. Yet, the mathematician can ‘predict’ with certainty that the sum of angles is 180 degrees (if the sandbox is Euclidean).

While the future is ‘unpredictable’ certain aspects may be ‘predictable’ with high precision. Therefore, we can agree with Keynes that “the price of copper and the rate of interest twenty years hence” is unpredictable without accepting his famous all-round capitulation “We simply do not know.” (Keynes, 1937, p. 214)

Example: an elementary consumption economy can be described by this deductively derived formula (AXEC06). This formula holds in every single period from the past to the future (2014, eq. (12)). In other words, we have a testable economic law. Test it twenty years hence and you will find out that it is true. Where, then, does the difficulty with prediction come in? The crucial point is that the variables that underly the four rhos are unpredictable random variables.

Perhaps it sounds a bit paradoxical: there are deterministic economic laws that hold ‘on the whole’ while the components vary at random or are even uncertain in Keynes's sense. So the concept of uncertainty can coexist with the concept of economic law. Hence, Keynesian uncertainty should not stop us from looking out for deterministic and testable economic laws. Attention, they are with absolute certainty not to be found where misguided Orthodoxy has looked for in the past!

The otherwise redundant DSGE debate shows that the representative economist is still a bit confused about the different aspects of prediction.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Kakarot-Handtke, E. (2014). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL

Stubbornly in the wrong research program

Comment on Fredrick Welfare on ‘The Keynes-Ramsey-Savage debate on probability’

Blog-Reference

You say: “The failure to update beliefs and predictions given contradictory evidence constitutes irrationality.”

Because you do not understand the relationship between theory and evidence, you — as both orthodox and heterodox economists — do not understand what science is all about.

“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.” (Galileo, quoted in Popper, 1994, p. 84)

The key words are ‘sheer force of intellect.’ And this gives you the explanation of why economists are stuck in a pointless wish-wash about utility, equilibrium, expected utility, uncertainty, and the abuse of mathematics by formalizing nonentities. There is not much difference between the Ramsey-Keynes debate and the angels-on-a-pinpoint debate of yore.

Indeed, is there any difference in pseudo-logical hypotheticalness between “angels can fly because they have wings” and “... that people had to behave in this way because if they did not, people would devise schemes that made money at their expense”? And is it not astounding that economists buy these kinds of arguments? And what does this tell you about their ‘sheer force of intellect?’

Egmont Kakarot-Handtke


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.

We simply do not know — so let us move on

Comment on Lars Syll on ‘The Keynes-Ramsey-Savage debate on probability’

Blog-Reference

Science restricts itself to things that can be known. In marked contrast, non-scientists prefer to spend their lifetime on questions that cannot be answered. Let us face the fact, it is not primarily solutions that most people are really interested in, it is more the perpetual inconclusive talk about beliefs. Solutions only spoil the fun.

Economists are traditionally fond of talking about NONENTITIES like equilibrium, utility, or rational expectations. It seems that this bad habit has a debilitating effect also on mathematicians. Our actual question is not whether statistical mechanics is good enough for physics and there is absolutely no need to discuss the finer points of quantum mechanics. Why? Because quantum mechanics and locality and all the rest are irrelevant to economics. All that is relevant about uncertainty and unpredictability is known at least since J. S. Mill and has been stated unmistakably by other well-known people.

• “The phenomena with which this science [of human nature] is conversant being the thoughts, feelings, and actions of human beings, it would have attained the ideal perfection of a science if it enabled us to foretell how an individual would think, feel, or act, throughout life, with the same certainty with which astronomy enables us to predict the places and the occultations of the heavenly bodies. It needs scarcely be stated that nothing approaching to this can be done.” (Mill, 2006, p. 846)
• “The future is unpredictable.” (Feynman, 1992, p. 147)
• “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire.” (Popper, 1960, p. 139)
• “... it has even been argued that economic explanations involving rational choice are a species of ‘folk psychology’, explaining actions in terms of beliefs and desires, variables that cannot be measured independently of the actual choices we want to predict, so that they are no genuine predictions at all.” (Blaug, 1994, p. 113)

Keynes only used more words to restate the obvious: “The sense in which I am using the term [uncertainty] 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, or the obsolescence of a new invention … About these matters, there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (1937, p. 214)

It is remarkable that the representative economist simply does not accept the obvious even when politely told by one of the greatest mathematicians: “Walras approached Poincaré for his approval. ... But Poincaré was devoutly committed to applied mathematics and did not fail to notice that utility is a nonmeasurable magnitude. ... He also wondered about the premises of Walras’s mathematics: It might be reasonable, as a first approximation, to regard men as completely self-interested, but the assumption of perfect foreknowledge ‘perhaps requires a certain reserve’.” (Porter, 1994, p. 154)

What Walras’ neoclassical heirs can either not see or not accept is that they are in the wrong research program: “The failure to find such a law [between desire, belief and action] or any approximation to it that actually improves our ability to predict consumer behaviour any better than Adam Smith could have resulted on the one hand in a reinterpretation of the aims of economic theory away from explaining individual human action, ...” (Rosenberg, 1994, p. 224)

And this is the spoilsport. “... if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362)

Because economics is definitively ‘not a science of behavior’ (Hudík, 2011), the subject matter of economic theory has to be changed.

• Old definition, subjective-behavioral: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
• New definition, objective-structural: “Economics is the science which studies how the monetary economy works.”

Why tell the world ad nauseam ‘We simply do not know’ when scientific knowledge about the actual monetary economy is possible?#1, #2

Egmont Kakarot-Handtke


References
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepentant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 109–136. London, New York: Routledge.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL
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, volume 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, 128–170. Cambridge: Cambridge University Press.
Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pp. 216–235.
London, New York: Routledge.

#1 If it isn’t macro-axiomatized, it isn’t economics
#2 For details see cross-references New Curriculum

Related 'Opinion, conversation, interpretation, blather: the economist’s major immunizing stratagems' and 'Lars Syll, fake scientist'.

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Wikimedia AXEC121e

How to consistently start off on the wrong foot

Comment on Lars Syll on ‘The Keynes-Ramsey-Savage debate on probability’

Blog-Reference

Economists have the talent to mess up everything they touch. Curiously, everything that works fine in the real sciences does not seem to work in economics. The long-standing mathiness discussion corroborates this observation. More than one physicist has wondered about the ‘unreasonable effectiveness of mathematics in the natural sciences’ (Wigner) and this led Velupillai to wonder about the ‘unreasonable ineffectiveness of mathematics in economics.’ The same holds for probability theory and empirical testing.

In a sense, economists had the bad luck that when Adam Smith started to think about the economy mathematical tools had already proven their unreasonable effectiveness. So economists could not resist applying them as they found them. It can be said that neoclassical economics has literally been built around calculus (Mirowski, 1995). This was the first big mistake.

“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, quoted in Schmiechen, 2009, p. 368)

The whole mathiness discussion is a surface phenomenon that covers the underlying incompetence of economists to create their own mathematical tools. Therefore, a precise distinction has to be made. One can agree with Keynes that constrained optimization is pointless as a formal embodiment of human behavior, but one cannot agree with him that mathematics or formalization is entirely misplaced in economics. The same holds for probability theory.

The task of Heterodoxy is therefore to quit the bad habit of taking prefabricated tools from the math department and instead of developing their own tools. As a matter of fact, this has already been done. For the application of Popper's idea of propensity to human behavior in the economic realm see (2015).

With regard to Keynes and methodology, we should agree that his valuable contributions to economics lay elsewhere (2011). “I consider that Keynes had no real grasp of formal economic theorizing (and also disliked it), and that he consequently left many gaping holes in his theory. I none the less hold that his insights were several orders more profound and realistic than those of his recent critics.” (Hahn, 1982, pp. x-xi)

Egmont Kakarot-Handtke


References
Hahn, F. H. (1982). Money and Inflation. Oxford: Blackwell.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL

Totem, voodoo, and tabu

Comment on Lars Syll on ‘Loanable funds’

Blog-Reference see also Blog-Reference

“Economic models that integrate banking with macroeconomics are clearly of the greatest practical relevance at the present time.” (See intro)

This is certainly a point we all can agree upon. The challenge for theoretical economics is, first of all, to explain how the undifferentiated product market, the labor market, the secondary market, and the financial market (including money) fit together.

Economists habitually think they can solve any problem by painting supply-demand-equilibrium and taking Walras's Law into account. In the apt characterization of Leijonhufvud economists either summon up the spirits of the ‘totem of the micro’ or the ‘totem of the macro’ with the mantra of market forces.

All this has nothing to do with a scientific explanation because (i) supply function, demand function, and equilibrium are NONENTITIES, and (ii) the markets are in intricate ways interlocked (the quantitative volume of the financial market is the numerical integral of flow-differences in the product market; the real wage is uno actu determined in the product market; etcetera).

The loanable funds theory is a case in point for the failure of supply-demand-equilibrium economics. The argument in the intro is a telling example of the actual state of theoretical ignorance and confusion.

What first has to be done is tabooing supply-demand-equilibrium. All equilibrium models are false. A set of equations is not a suitable mathematical tool, but a stochastic simulation is. Second, both Walrasian and Keynesian approaches have to be put aside as useless and misleading.

This clears the ground for Constructive Heterodoxy and the consistent and comprehensive theory of how the various financial markets emerge as integral parts of the monetary circuit which links all markets (2015).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–31. URL

[The title alludes to the fallacy of animistic thinking which underlies all market force explanations.]

Heterodoxy simply does not apply ergodicity

Comment on ‘Why the ergodic theorem is not applicable in economics’

Blog-Reference

Imagine a rather elementary economy. Total employment is L, the wage rate is W. So total wage income is Y=WL. The household sector's total consumption expenditures are C and equal to price P times quantity bought X, i.e. C=PX. The productivity is R, so output is O=RL. In the initial period the market is cleared X=O and the budget is balanced C=Y.*

Now, let the five elementary variables L, W, P, R, X vary at random. The respective rates of change are symmetrical around zero and a distribution function is defined so that each path meets the condition of ergodicity. Hence, by construction, each path and the whole economy is initially ergodic.

When we run a simulation we observe a changing stock of inventory, because O-X is always different from zero, and a changing stock of money, because Y-C is always different from zero. The two stocks follow random paths.

Next, the agents enter. The business sector sets the price in order to bring the inventory to a target value and to clear the market. Likewise the household sector adapts consumption expenditures in order to bring the stock of money to a target value and to balance the budget.

Obviously, the economy is no longer ergodic. The reason is that agents are target oriented and interfere with pure randomness. Their behavior is formally defined by the propensity function (2015) which eliminates the initial ergodicity through directed randomness.

Ultimately, this has nothing at all to do with uncertainty or nomological machines or rational expectations. The sheer existence of agents in a pure random system suffices to eliminate initial ergodicity.

No heterodox economist worth his salt would ever apply ergodicity. True, orthodox economists still do but they are already irrecoverably over the cliff. Thus, it does not really matter.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. URL

*   For the complete formalism see here and for the graphical representation here
** See also the related post on RWER

Intertwined real and monetary stochastic business cycles {36}

Working paper at SSRN

Abstract  There is no such thing as a ‘real’ economy. The task, therefore, is to consistently reconstruct the fluctuations of employment and output from the interactions of real and nominal variables. The present paper does exactly this. No nonempirical concepts like utility, equilibrium, rationality, decreasing returns or perfect competition are applied. The analysis runs rigorously in objective structural axiomatic terms. Therefrom follows that it is the factor cost ratio, i.e. the relation of the nominal variables wage rate and price and the real variable productivity that, for any given level of effective demand, drives the fluctuations of employment and output.

Schumpeter and the essence of profit {04}

Working paper at SSRN

Abstract  Schumpeter had a clear vision of the developing economy, but he did not formalize it. The quest for a germane formal basis is in the following guided by the general question: what is the minimum set of foundational propositions for a consistent reconstruction of the evolving money economy? We start with three structural axioms. The claim of generality entails that it should be possible to free Schumpeter's approach from its irksome Walrasian legacy and to give a consistent formal account of the elementary circular flow that served him as a backdrop for the analysis of the entrepreneur-driven market system.