Occasional Xs: The futile attempt to recycle behavioral economics (VII)

 

#Economics#AllYouNeedToKnow

“On this day in 1910, Leon Walras died. A hugely influential economist and part of the marginal revolution, …” (EconomicsinTen)

The #MarginalRevolution is the result of the application of the behavioral hardcore proposition “HC2 agents individually…

— E.K-H (@AXECorg) January 5, 2025

Occasional Xs: Clueless economists / Science (LXXVII)

 

#Econ#FailedFakeScience

“… modern economics is failing us, says a Nobel Prize-winning economist.”

For 200+ years, #Economics claims to be #Science but is NOT. The major approaches (Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives) are mutually… pic.twitter.com/EgpEwC4a1l

— E.K-H (@AXECorg) March 27, 2024

For details of the big picture see cross-references Proto-Science/Cargo Cult Science/Fake Science 

Occasional Tweets: Economics ― the pluralism of idiotism (II)

 

#Economics#FailedScience#FakeScience#Economics does NOT need the #Pluralism of idiotism but the true theory. #Walrasianism, #Keynesianism, #Marxianism, #Austrianism, #MMT, are mutually contradictory, axiomatically false, and materially/formally inconsistent. pic.twitter.com/lNCJg2mGCg

— E.K-H (@AXECorg) January 9, 2022

For details of the big picture see cross-references Pluralism. 

MMT: So-called Progressives as trailblazers for Trumponomics

Comment on Bill Mitchell on ‘The distinguished economists just embarrass themselves’

Blog-Reference and Blog-Reference

There is microfounded standard economics, the Keynesian macro opposition, and MMT. Standard economics in its actual incarnation as DSGE is at the lowest possible proto-scientific level. Supply-demand-equilibrium is scientifically not more than a 150+ years old running gag. Keynesianism is methodologically not superior but simply replaces the most glaring idiocies of the neoclassical optimization-and-equilibrium world with plain common sense. Politically, Keynesianism relaxes the maxim of public budget balancing and extends it over the business cycle. MMT carries this one step further to permanent deficit spending, albeit with a progressive agenda. Progressive means that MMTers see themselves as trailblazers for the cause of the ninety-nine-percenters.

Accordingly, Bill Mitchell summarizes his critique of his academic peers as follows: “While I would not support the increased US fiscal deficits under current policy proposals from Donald Trump, I would welcome increased deficits if the policy mix was skewed towards introducing a Job Guarantee, improving public infrastructure, expanding the welfare support and improving schools and hospitals.”

MMTers have lobotomized the public for years with the twin slogans deficits are good for you and debt does not matter but now, as they have got what they argued for, they seem to be not so happy about the distributional consequences of the huge deficit blow-up.

This is a political farce. Macroeconomics, more specifically, the axiomatically correct sectoral balances equation tells everyone that Public Deficit = Private Profit and that it does not matter at all whether the deficit is produced by social or military spending or by tax reductions for the one-percenters. MMT claims that its economic policy agenda benefits the ninety-nine-percenters which is simply not the case.#1, #2

The only question is whether MMTers are so stupid that they do not understand how the monetary economy works or whether they deliberately deceive the public.

In his post, Bill Mitchell reproduces the familiar MMT sectoral balances chart#3, #4 and then goes on to explain: “The following graph shows the annual sectoral balances from 1960 to 2017. I then used the CBO’s projections from 2018 to 2028 to extrapolate the balances out to 2028:
1. Blue line – Government fiscal balance as a percent of GDP.
2. Green line – External balance as a percent of GDP.
3. Grey line – Private domestic balance as a percent of GDP.

The facts are obvious.

1. The US has a persistent and fairly stable current account deficit of around 2.5 to 3 percent. CBO does not expect that to change very much.

2. The fiscal retreat in recent years saw the private domestic balance shrink to nearly zero.

3. The projected movement in the fiscal state allows the private domestic sector to save overall and provides the conditions for that sector to start reducing its massive debt exposure, which, after all, was the cause of the GFC.

4. If the fiscal deficit falls below the current account deficit then the private domestic sector starts to dissave overall – spend more than it earns and starts accumulating increased debt.

5. From the graph, there is not much leeway before that private domestic sector overall leveraging starts to occur, given the size of the external balance.

6. The on-going fiscal deficit is thus not only underpinning growth but also allowing the private domestic sector to deleverage its financial position (save overall).”

Note that the “private domestic sector” is the pivotal MMT construct. Its function/effect is to lump the household and the business sector together which makes profit invisible.#5 The business sector’s profit and the household sector’s saving are lumped together under “overall saving of the private domestic sector”. This methodologically inadmissible operation is called the Humpty Dumpty Fallacy.

The fact is that the Trump budget will explode private profit according to the axiomatically correct macroeconomic Profit Law Q_m≡Y_d+(I−S_m)+(G−T)+(X−M). Whether this profit boost for the one-percenters is really in accordance with their progressive agenda is a question for the MMTers to answer.

What Bill Mitchell seems not to know is this: because Public Deficit = Private Profit the one-percenters and their useful academic/journalistic spokespersons should consistently argue FOR deficit spending and the ninety-nine-percenters and their progressive academic/ journalistic spokespersons should consistently argue AGAINST it. Only fake progressives blaze the trail for Mr. Trump’s Make The Deficit Great Again.#6

Egmont Kakarot-Handtke


#1 MMT, money creation, stealth taxation, and redistribution
#2 MMT is ALWAYS a bad deal for the 99-percenters
#3 US Sectoral Balances

Source: billy blog

#4 Down with idiocy!
#5 MMT and the magical profit disappearance
#6 Keynes, Lerner, MMT, Trump and exploding profit

Related 'MMT and grassroots movements' and 'Political economics: Who hijacks British Labour?' and 'How MMT fools the ninety-nine-percenters' and 'Selling public debt with Ricardo’s tear gland rhetoric' and 'MMT: The one deadly error/fraud of Warren Mosler'.

***

REPLY to Matt Franko, Tom Hickey, Andrew Anderson on Apr 15

Your small talk about non-performing loans cannot distract from the great MMT embarrassment:
• Bill Mitchell deceives the public about the negative distributional effects of MMT policy for the ninety-nine-percenters.
• MMT is scientifically worthless because it is based on the Humpty Dumpty Fallacy which is a disqualifying methodological blunder.
• The self-stylization of MMT academics, Wall Street sponsors, and blogosphere sales-trolls as progressives is plain political fraud.

***

Twitter Feb 28, 2019

Source: Twitter

Objective Principles

Comment on Lars Syll on ‘Modelling consistency and real world non-coherence in mainstream economics’

Blog-Reference

You write: “This conclusion is based on two common erroneous statements. First, Walras’ general equilibrium theory is identified with Pareto’s general equilibrium theory; ...”

Pareto has not been mentioned at all in this thread until your recent post. Hence no conclusion has been based on Pareto.

Anyway. Let us take the opportunity and do away with Pareto. He obviously was a subjectivist: “The foundation of political economy and, in general, of every social science, is evidently psychology. A day will come when we shall be able to deduce the laws of social science from the principles of psychology ...” (Pareto, 2014, p. 20)

Subjectivists cling to the naive idea that the understanding of human behavior somehow leads to an understanding of how the economic system works. Since Pareto, Walras, Jevons, Marshall, Menger, et al. we have sufficient experience with this approach. And it is pretty obvious that it has failed completely.

Psychologism/sociologism inverts the Midas touch of science — to turn whatever it might touch into knowledge — into a curse: it turns everything it touches into the garbage.

So let us paraphrase Pareto: “The foundation of theoretical economics is evidently different from every social science. A day will come when we shall be able to deduce the laws of economics from the objective principles that constitute the economic system, that is, from a handful of elementary structural axioms.”#1

Egmont Kakarot-Handtke


References
Pareto, V. (2014). Manual of Political Economy. Oxford: Oxford University Press. URL

#1 For a start see the Curriculum of Constructive Heterodoxy aka Macrofoundations

Related 'How to get out of the Econ 101 PsySoc woods' and 'Objective Principles of Economics'.

***

Wikimedia AXEC121i

From one roadside ditch straight into the other

Comment on Lars Syll on ‘Modelling consistency and real world non-coherence in mainstream economics’

Blog-Reference

Walras has to be credited for making great methodological progress in comparison to what he called the English School, or, what may be called with more accuracy the Cambridge School of Loose Verbal Reasoning.

What Walras correctly pointed out was (i) that partial analysis does not allow for generalizations and therefore had to be replaced by total analysis and (ii) that the forbidding wish-wash of his contemporaries had to be replaced by rigorous argument.

The methodological credo of the Cambridge School of Loose Verbal Reasoning comes in different wordings but always with the same irresistible message for muddle heads.

“Marshall followed the maxim: Better to be ambigous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

“Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

“For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’" (Davidson, 1984, p. 574)

The Elements are quite clear on multiple occasions about Walras's take on proto-scientific economics.

“To state a theory is one thing; to prove it is another. I know that in economics so-called proofs which are actually nothing more than gratuitous assertions are doled out and find acceptance again and again. And precisely for this reason, I submit that economics will not attain the status of a science until economists are compelled to demonstrate that which they have hitherto been content, in the main, mainly to assert.” (Walras, 2010, p. 427)

Walras's critique, no doubt, was valid and still is. He got economics out of a deep roadside ditch — but only to steer it into the other. He based his approach on assumptions like utility, optimization, perfect foreknowledge, production function, supply/demand function, perfect competition, capital, equilibrium, etcetera. All these notions are nonentities.

Now the problem is: one can formulate a green-cheese assumption as vivid or colorful or suggestive or precise or rigorous as one likes — it does not help.

As Lawson put it: “It is a form of modelling consistency ... that underpins the notion of equilibrium itself. In modern mainstream economics the category equilibrium has nothing to do with the features of the real economy.” (See intro)

To paint dancing angels-on-a-pinpoint or supply-demand-equilibrium does not make either real. The crucial methodological mistake, however, is not so much in the painting or the formalism but in the underlying green-cheese assumptions.

Equilibrium is a nonentity and therefore all equilibrium models are false. There are many differences between Walras and the post-Walrasians. These do not count at all. Both approaches are based on the same set of nonentities. Therefore both are irrelevant.

Unfortunately, heterodox methodologists simply do not get the crucial point. “Tony Lawson traces this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.” (See intro)

The irrelevance of economics since Walras is not due to the deductive-axiomatic method but to green-cheese assumptionism.

Note in passing that Walras's general equilibrium is a zero profit economy (2015). Since his time economists have not become tired of presenting and discussing models which every intelligent layman could immediately dismiss as irrelevant.

Economics is still in the scientific roadside ditches — one half of economists is trapped in the Cambridge ditch the other in the Laussane ditch, neither moves along the real-world road.

Egmont Kakarot-Handtke


References
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and
the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Walras, L. (2010). Elements of Pure Economics. London, New York: Routledge. (1874).

Troubles with logic?

Comment on Lars Syll on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

Ezra Davar says about the Post-Walrasians: “In fact, each of them, when carefully examined, was trying to create his own general equilibrium theory — which formally resembles Walras’s approach — but actually is no more than a distortion of Walras’s theory.”

I agree with you. The Post-Walras approaches of  'Pareto, Cassel, Schlesinger, Wald, von Neumann, Hicks, Keynes, Lange, Patinkin as well as Arrow, Debreu, Friedman, Samuelson, Solow, and others' are defective and unacceptable.

From this, however, does not follow that Walras suddenly becomes acceptable.

The common denominator of all these approaches is that they are based on the notion of equilibrium. My post of 26th states: “Because equilibrium is a NONENTITY all equilibrium models are methodologically unacceptable. This includes Walras’s original model.”

In addition, this includes Marshallian, Keynesian, Post Keynesian, New Keynesian, and New Classical equilibrium models. What could be unclear about all?

Egmont Kakarot-Handtke

What are Walrasians waiting for?

Comment on Lars Syll on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

Walras tried to formulate a general equilibrium theory (GET). Middle-of-the-road economists like Cassel were quite happy with it but when mathematicians like Wald and von Neumann looked closer at it they were struck by the naivete of economists. von Neumann pointed the way that led ultimately to Debreu, Arrow, and McKenzie. General equilibrium has therefore to be regarded as a correction of Walras's untenable model. This formal rectification, though, had to be bought with some unacceptable behavioral assumptions like the auctioneer.

As things turned out, GET in its mathematically correct neo-Walrasian form does not hold water either (Ackerman and Nadal, 2004; Ingrao and Israel, 1990).

So all arguments are on the table and there is no need for me to explain the numerous defects of the Walrasian approach to Ezra Davar who thinks the truth will come to him when he waits long enough (see his preceding post). All proofs are assembled at SSRN and come with a mouse click.

The crucial question is this. If all is clear and settled, why are there still Walrasians around? The answer is long known: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)

In economics, it is possible to argue ‘as if nothing had happened.’ And this means that, for some reason, the scientific mechanisms do not work properly. This explains why economics is a failed science.

For a heterodox economist, there is not one good reason to occupy himself with Walrasianism in any of its futile variants. The issue has been decided long ago.

Equilibrium is a NONENTITY. It falls to the remaining stray Walrasians to get the point and to rise to scientific standards.

Egmont Kakarot-Handtke


References
Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York: Routledge.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

Walras' vacuonomics

Comment on ‘Bob Solow, Matt Rognlie, Paul Romer, Mason Gaffney, the economic statisticians and rent incomes’

Blog-Reference

Among the numerous defects of Walras' approach, the worst is that it deals with a zero-profit economy. In other words, it talks about capitalism without profit. So it has not much to say about the real world.

For the correct relationship between profit, distributed profit, and land ownership see Essentials of Constructive Heterodoxy: Institutions.

Egmont Kakarot-Handtke

Walras is long gone

Comment on Lars Syll on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

Let me start with your summary. You [Ezra Davar] say: “In development of any science a continuity plays crucial role. So, it is impossible to neglect achievement of such authors as Smith, Marx, Walras, Marshall and so many others eminent authors.”

Since economics is scientifically in secular stagnation most economists, you included, have obviously lost sight of the idea of the scientific revolution: “... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

Apply your argument to Copernicus, Kepler, and Galileo in their relation to Ptolemy and you immediately see that continuity is not exactly the top priority of great scientists. This is especially so when they are confronted with savants (instead of real scientists): “These savants, as Galileo put it, first decided how the world should function in accordance with their preconceived principles. ... He openly criticized scientist and philosophers who accepted laws which conformed to their preconceived ideas as to how nature must behave. Nature did not first make men’s brains, he said, and then arrange the world so that it would be acceptable to human intellects.” (Kline, 1982, p. 48)

So let us, first of all, put the authors Smith, Marx, Walras, and Marshall into the category of savants and place them next to Ptolemy in the scientific Walhalla.

With regard to economics, the most deleterious of the preconceived ideas has been equilibrium: Wherever economics is used or thought about, equilibrium, is a central organising idea.” (Hahn, cited in Boland, 2003, p. 99)

In a previous post, I summarized ‘Because equilibrium is a NONENTITY all equilibrium models are methodologically unacceptable.’ And this means that the differences between the multitude of variants of equilibrium models play no role at all.

So your attempt to argue 'What Walras really meant’ is futile because if anything is indisputable then that Walras was an equilibrist. Of course, I agree with you that there are differences and overlaps between the original Walrasian, the input-output, and the Neo-Walrasian approach (see Mitra-Kahn 2008) but these are only of historical interest.

“At long last, it can be said that the history of general equilibrium theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin ...” (Blaug, 2001, p. 160)

Let Walras rest in peace and equilibrium with him.

Equilibrium in whatever definition must not be taken into the premises. Methodologically, this amounts to a petitio principii (cf. Mill, 2006, pp. 819-827). Not admitted are, in addition, utility, optimization, and rational expectation. The first rule of theory-building says: never put NONENTITIES into the axiomatic premises (2014, p. 11).

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of Economic Perspectives, 15(1): 145–164.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014). The Logic of Value and the Value of Logic. SSRN Working Paper Series, 2399550: 1–20. URL
Kline, M. (1982). Mathematics. The Loss of Certainty. Oxford, New York: Oxford University Press.
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.
Mitra-Kahn, B. H. (2008). Debunking the Myths of Computable General Equilibrium Models. CEPA Working Paper 2008-1, 1–93. URL

For the correct and complete set of macrofoundations — structural axioms and behavioral propensity function — see Wikimedia AXEC137b.

What are the alternatives?

Comment on Lars Syll on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

You [Ezra Davar] ask "Is Input-Output Analysis of Leontief a nonentity?"

As far as it is used as a mathematical device it is not, as far as it abused to illustrate the Walrasian equilibrium of all markets it is. For a formal proof see (2013).

You say "So, our task to change them [the assumptions of general equilibrium] by much more realistic assumptions."

It is not so much a matter of assumptions. Each theory is based on axioms, so we have to move from the obsolete orthodox axiom set to a heterodox axiom set. This is what a Paradigm Shift is all about. Playing with realistic/unrealistic assumptions keeps economists busy without ever leading to worthwhile results.

You ask "What is an alternative?"

I agree with you, Keynes' approach is not an alternative to Walras'. It too suffers from severe methodological deficits. For a formal proof see (2011).

The alternative has already been pointed out by Joan Robinson: Scrap the lot and start again!#1

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN
Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2013). Walras’s Law of Markets as Special Case of the
General Period Core Theorem. SSRN Working Paper Series, 2222123: 1–12. URL

#1 For the new formal start with structural axioms and the behavioral propensity function see Wikimedia AXEc137b.

Walrasian double-blunder

Comment on Lars Syll on 'On the irrelevance of general equilibrium theory'

Blog-Reference

As far as economics is concerned, equilibrium is a nonentity; a metaphor that appeals to animistic thinking, but nothing real corresponds to it. On the other hand, the economy is not a pure random walk either. A better metaphor is therefore that of two drunkards tied together with a string that restricts their movements to a broader path, which, however, has no definitive endpoint or may even evolve toward a cliff.

Because equilibrium is a nonentity all equilibrium models are methodologically unacceptable. This includes Walras' original model.

In addition, this model gets the interdependence between product and labor market wrong.

Davar sums up: “In other words, in equilibrium, if a certain service is not fully employed, then its price is zero. For example, if unemployment exists, then wages should be equal to zero.”

Constructive Heterodoxy proves that, to the contrary, there is a positive feedback loop between wage rate and employment (2015). That is, with a wage rate of zero the economy simply vanishes. The correct Employment Law is given Wikimedia AXEC46:

If unemployment exists, the wage rate should rise. Yes, rise!

Walras equilibrium model contains at least two fatal errors/mistakes. It is as irrelevant as more recent versions.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

Walras's Law of Markets as special case of the General Period Core Theorem {39}

Working paper at SSRN

Abstract  From the set of the first three structural axioms follows the Period Core Theorem. It asserts that the product of the key ratios, which characterize the firm, the market outcome, and the income distribution, is always equal to unity. The theorem contains only unit-free variables, is testable in principle, and involves no behavioral assumptions. The differentiated Period Core Theorem applies to an arbitrary number of firms. Therefrom Walras's Law can be derived without recourse to demand and supply functions or the notion of equilibrium. It is shown that the familiar interpretation is methodologically illegitimate.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see Wikimedia AXEC61.