From microfoundations to macrofoundations

Comment on Lars Syll on ‘New Keynesianism — an uncomfortable trade-off’

Blog-Reference and Blog-Reference and Blog-Reference on Apr 12

• Economics is a failed science. It consists actually of political and theoretical economics. Political economics is scientifically worthless.

• Psychology, sociology, behaviorism, political science, geopolitics, history, anthropology, evolutionary theory/Darwinism, institutionalism, law, ethics, criminology, or philosophy are NOT economics. The valid results of these independent disciplines are taken into economics by way of multidisciplinary cooperation if needed.

• Economics is NOT about human nature/behavior/action but about the evolution of the economic system as a whole.

• Partial analysis is of extremely limited value and in most cases runs directly into the Fallacy of Composition. Microfoundations have therefore to be replaced with macrofoundations.

• Macrofounded economics determines first of all the objective Profit Law because it is the key to all of economics. Those who do not understand what profit is, have no idea how the actual economy works. Objective economic laws are free of NONENTITIES and enable conclusive testing.

• Walrasianism, Keynesianism, Marxianism, Austrianism, MMT — the major approaches got profit wrong. All these approaches are scientifically worthless.

• Economics has nothing to offer to other disciplines — in particular not to sociology and political science — because it has produced not much, if anything, of scientific value since Adam Smith. The representative economist cannot even tell the essential difference between income and profit.

• The ongoing Paradigm Shift consists in the replacement of the subjective-behavioral axioms of methodological individualism with objective-structural axioms, i.e. by macrofoundations.#1

• People who have not realized in old age that maximization-and-equilibrium is scientific garbage will not be admitted to the new age because of proven scientific incompetence.

• Scientific imperialism will put an end to economics as cargo cult science: “So we really ought to look into theories that don’t work, and science that isn’t science.” (Feynman)

Egmont Kakarot-Handtke


#1 Objective Principles of Economics and Major Defects of the Market Economy.

Related 'Toward the true economic axioms' and 'Finalizing the Keynesian Revolution' and 'The monstrous utility-supply-demand-equilibrium failure' and 'From Orthodoxy, to Heterodoxy, to Metadoxy'

The macrofoundations axiom set that fully replaces the obsolete microfoundations is defined on the AXEC Project website.

External link, Amazon, King, J: The Microfoundations Delusion: Metaphor and Dogma in the History of Macroeconomics

The zombie wars are over

Comment on Scott Sumner on ‘Fiscal multiplier studies far worse than I thought’

Blog-Reference

Economics is a failed science. In more detail, this means that the major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — have not produced much scientific value, if anything, in more than 200 years.

Economists have not risen above supply-demand-equilibrium and have still not realized that this is poor science. Schumpeter already came close to a thumbs-down, but then made this concession: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (1994, p. 9), see also (2013)

Lacking sound scientific foundations (= episteme), economic debate up to the present consists of an inconclusive exchange of opinions (= doxa) between the four approaches. In other words, economics hitherto took place at the proto-scientific level, yet: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Economists obviously lack the true theory; Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives are provably false. So, what is needed is a termination of the senseless cross-talk among the four zombie approaches, because “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)

At the moment, economists produce mindlessly inconsistent models according to accustomed templates: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). No penny-drop, no realization that maximization and equilibrium are NONENTITIES.

In methodological terms, a Paradigm Shift means to completely replace the obsolete axiom sets of the four failed approaches with an entirely new set. To make this concrete, here is the axiom set of Walrasianism:
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, p. 109)

HC1 is just another expression of methodological individualism. Except for HC6, which is a petitio principii, all axioms are subjective-behavioral, which is to say, much too swampy.

Because the subjective-behavioral approaches have been a detour from the very start (as more than 150 years of blather since Jevons/Walras/Menger prove) they have now to be replaced by the objective-structural approach.

The 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 and is given by these three objective structural axioms:
(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.

From this minimal set, which is composed of measurable real and nominal variables, follow propositions that are testable. The nonentities of methodological individualism are gone.

Methodologically correct economics starts with the SYSTEMIC axioms of the monetary economy. This yields objective systemic laws, expressed, for example, as Profit Law or Employment Law. Systemic laws are readily testable, and this is the ONLY way to settle questions according to scientific standards.

Useful input to the continuing discussion of the new paradigm is not to be expected from Walrasianism, Keynesianism, Marxianism, and Austrianism. So, let these scientific zombies go: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work ...” (McCauley, 2006, p. 17)

Egmont Kakarot-Handtke


References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.

Immediately preceding Austrian blather

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REPLY to Major.Freedom on Apr 3

(i) von Mises says: “The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply.” (2007, p. 293)

This is a vacuous Austrian waffle.

Profit is ultimately determined by the Profit Law, which states for the investment economy Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. This equation is testable with the precision of two decimal places.

(ii) von Mises says: “Economics is not about goods and services, it is about the action of living men.” (2007, p. 357)

This is how Austrians missed the subject matter of economics altogether and got lost in the woods of psychologism, thought-reading, second-guessing other people’s actions, and silly gossiping and storytelling. Because of this: Austrianism = gossip economics.

Correct definition: “Economics is the science that studies how the monetary economy works.”

(iii) von Mises says: “In the imaginary construction of a stationary economy, the total sum of all entrepreneurs’ profit equals the total sum of all entrepreneurs’ losses. (2007, p. 294)

This is provably false. In the stationary economy, it holds Qm≡Yd. #1


References
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. II. Indianapolis: Liberty Fund.

#1 The proofs are to be found in the working papers on SSRN

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REPLY to Major.Freedom on Apr 4

(i) You ask, “What are you trying to accomplish by your continual evasions?” For someone who has an irrefutable theory of human action, this is a stupid question. It is well known: “... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung.” (Morgenstern, 1941, p. 381)

So you certainly can interpret my behavior until you are blue in the face. Obviously, you are missing the subject matter: economics is NOT about economists but about the economy.

Economists try to figure out the objective systemic laws of the monetary economy. Speculation about other people’s behavior/actions and ad hominem argumentation is a moronic pursuit. Austrians are no economists. #1

(ii) You ask, “Did you know that the GDP equation, Y = G + I + C + (X−M), can be “predicted” to 14 million decimal places, provided that people trade goods at prices to within that accuracy?”

Did you know that the GDP equation is false? For proof, see (2012). Austrians have not figured this out to this day, but swallowed the underlying logical defect hook, line, and sinker. The GDP equation is an intelligence test for economists, and Austrians flunked it.

(iii) You say: “All Mises is saying is that entrepreneurial profit, not profit per se as in your childish equation above, exists because of uncertainty.”

Uncertainty is a psychological state, and it does not produce profit just like wishful thinking or greed does not produce a profit. Mises’ explanation is at the level of voodoo thinking. For the correct explanation of profit, see (2011).

(iv) Imagine for a moment an aircraft flying from, say, New York to Paris. Now we can ask why? One way to answer the question is to speculate about the motives and reasons of the passengers, the pilot, the crew, the flight controllers, and the managers and stockholders of the airline. The other way to look at flight is to think about the laws of aerodynamics, thermodynamics, and so forth.

The first way of explanation is the Austrian way, and it yields the same trivial psychologistic crap over and over again. Notice: Whatever the subjective motives and actions of passengers are, they do — as a matter of principle — NOT explain the phenomenon of flight.

The second way is the scientific method. Thinking people, this excludes Austrians, know that there is no such thing as an irrefutable law of human action that could explain flying.

So, just as flying is explained by the objective laws of physics, the economy is explained by the objective laws of economics.

Needless to say, Austrians never got the point: “Mises’ contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do.” (Foreword, von Mises, 2007, p. v)

This is as extremely profound as ‘the sun goes up’.

(v) You have already declared that you have won the debate. Do you realize that 'to win every debate' has been the selling proposition of the ancient Sophists, whom Plato famously criticized? Plato made it clear that a SCIENTIFIC debate is about episteme=knowledge and NOT about doxa=opinion and to twist an audience, or what Popper characterized as demonstration of ‘the bad taste of a finicky scholasticism’.

(vi) I agree that the action axiom is just as irrefutable as ‘Zeus threw the thunderbolt because he was angry’. What I say is that with your behavior/action approach, you will never come up with something helpful like the lightning conductor. And that is rather bad because you have won the debate, but Zeus hit you with the thunderbolt. Rest in peace, Austrians.


References
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. I. Indianapolis: Liberty Fund.

#1 Hayek was not an economist.

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COMMENT on Don Geddis on Apr 5

(i) Any discussion about the character of interlocutors leads away from the point at issue: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false. (Schumpeter, 1994, p. 11)

The question at issue is whether Austrianism is true or false, and not whether Major.Freedom is a tape recorder or a broken record.

(ii) Refutation is necessary but insufficient. Effective refutation consists of developing the new paradigm: “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)

And, by the way, it is not only Austrianism that is obsolete. Walrasianism, Keynesianism, and Marxianism have to be left behind the curve, too. From the huge heap of scientific garbage called economics, Austrianism is only an insignificant part. It goes down the drain with the whole of methodological individualism.

References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

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REPLY to Major.Freedom on Apr 6

(i) Physicists long ago proved that, given the laws of physics, a perpetual motion machine is impossible. This did not stop some people from submitting patent applications for perpetual motion machines to this very day.

It is the same thing with Austrians and other pseudo-scientific economists. “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)

Austrians are ignoring/violating scientific standards.

(ii) Austrianism subscribes to methodological individualism, which claims: “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)

Methodological individualism is (i) unacceptable for cogent methodological reasons, and (ii) has failed for everyone to see. General equilibrium theory in all variants (RBC, DSGE, etc) is indefensible, and the same holds for Austrianism as a fellow traveler of methodological individualism.

(iii) The major claim of Austrianism is that it solved the mind-body problem. Clearly, Austrians are in the wrong movie. Philosophy/psychology/metaphysics is NOT economics. The first problem to solve for an economist is the profit-income problem and NOT the mind-body problem.

(iv) NO way leads from the subjective action axiom to the objective Profit Law. It is irrelevant whether the action axiom is irrefutable or not. Austrians do not know what profit is, and by consequence, they have no idea how the economy works. The profit theory is the pivot of all of economics.

(v) The profit theory must be testable. This brings us back to the starting point of this thread. Vacuous theories like Austrianism are not testable and therefore not of interest for the point at issue.

(vi) You say, “I will declare for a third time that you lost the debate.” Did it ever occur to you that as a party to the debate, you have nothing to declare?

(vii) Austrianism is a zombie approach for more than 150 years, just like Walrasianism and everything else that subscribes to methodological individualism.

(viii) Economics needs a Paradigm Shift.


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

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COMMENT on Don Geddis on Apr 7

Science was there before economics was there. Economists either conform to scientific standards or are outside of science: they are in NO position to redefine scientific criteria.

Because economics — as represented by the four failed sects Walrasians, Keynesians, Marxians, Austrians — has never risen above the level of a proto-science, it has become popular among economists to question the standards, to lower them or, as Blaug aptly put it, ‘to play tennis with the net down’. When this is pointed out, economists make the somersault backward: ‘Economics is not a Science with a capital S’ (Solow).

The scientific method 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)

Logical consistency is secured by applying the axiomatic-deductive method, and empirical consistency is secured by applying state-of-the-art testing.

Economics fails on both counts: the axiomatic foundations are provably false, and testing is regularly inconclusive. So, economics has happily established itself in the swamp between true and false where ‘nothing is clear and everything is possible’ (Keynes).

The swamp between the hard rocks of true and false is the natural habitat of blathering frogs, of which there are four species, which are clearly identifiable by their respective axiom sets. The funniest species is the Austrian, which is in the possession of an irrefutable magic axiom but never managed to produce a testable proposition. So, there is NO WAY to get an Austrian frog ever out of the swamp. And of this, they are very proud.

No problem with this, of course. What has to be made crystal clear is that Austrians have never produced anything of scientific value. For proof, re-read Major.Freedom’s posts. With this stuff, the poor souls in scientific hell are tortured.

Time to become constructive now: let’s proceed with the paradigm shift.

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FAREWELL to Major.Freedom on Apr 8

Science was there before economics was there; that is, Newton was there before Adam Smith was there. Newton is famous for his ‘hypotheses non fingo’, which means, I do not waffle but prove.

“But he [A. Smith] had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter)

While physics has evolved exponentially, economics is stuck at the proto-scientific level of storytelling. The key narrative is supply-demand-equilibrium and it has been false already in Smith’s days. After 200+ years, compare the entirely vacuous General Equilibrium Theory with General Relativity Theory — is there any doubt that economics is a failed science?

It seems that the irrefutable magic action axiom somehow did not work.

Economists are confused confusers, and Austrians are the worst of them. See Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist.


Related 'From microfoundations to macrofoundations'

For more about von Mises, see AXECquery.

Austrian blather

Reply to Major.Freedom on 'Fiscal multiplier studies — it's far worse than I thought'

Blog-Reference

(i) I did not ask you for a “good piece of advice”, so do not pester me with it.

(ii) My pivotal point is that there is no such thing as a specific BEHAVIORAL axiom in economics because axioms have to be ‘certain, true, and primary’. This is definitively not the case with the maximization axiom HC3 of Neoclassics and the action axiom of Praxeology.

Strictly speaking, a ‘behavioral axiom’ is an oxymoron. This has been known to scientists of all ages: “The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions.” (Brown, 2011, p. 211)

From the general proposition that human action is original or, alternatively, target-oriented with any number of possible targets NOTHING specific follows. So, after the first step, one is already at the end of the road.

This, in turn, explains why Praxeology is a failed approach: “Now, at any rate, we have an explanation for why the assumptions of economic theory about individual action have not been improved, corrected, sharpened, specified, or conditioned in ways that would improve the predictive power of the theory. None of these things have been done by economists because they cannot be done. The intentional nature of the fundamental explanatory variables of economic theory prohibits such improvement.” (Rosenberg, 1992, p. 149)

For cogent methodological reasons: (1) economic theory cannot be built upon a behavioral assumption like the maximization axiom or the action axiom or any other, for that matter, and (2), as a matter of principle, NO way leads from the explanation of individual human behavior to the explanation of how the monetary economy works. Because of this, ALL subjective-behavioral approaches are bound to fail.

(iii) You say about the action axiom “It is IMPOSSIBLE for it to be proven false.” Obviously, you did not realize that this is NOT a strong point but, just the contrary, the very antithesis of science: “But a method that can explain everything that might happen explains nothing.” (Popper, 1960, p. 154)

To recall, when the ancient Greek thinkers, who invented science, heard a man saying “I can explain everything, Zeus did it, and you cannot prove me wrong” they showed him the way to the temple and threw him out of the academy.

(iv) This thread is about testing. As long as Austrians cannot produce a testable proposition about the overall profit of the monetary economy they have nothing worthwhile to say. Who does not understand profit understands nothing. Folk psychology is not economics.

(v) I do not engage in criticizing Praxeology or Austrianism. I understand that there must be something like economics for the scientifically retarded and I am quite content that you faithfully stick to it.

(vi) If you wish to prove the structural-axiomatic approach wrong it suffices to empirically refute the Profit Law. All else is obsolete Austrian blather.


References
Brown, K. (2011). Reflections on Relativity. Raleigh: Lulu.com.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
Rosenberg, A. (1992). Economics ― Mathematical Politics or Science of Diminishing Returns? Chicago: University of Chicago Press.

Related 'The futility of testing economics blather' and 'Hayek was not an economist' and 'Both Austrianism and MMT are proto-scientific garbage' and 'Austrians, too, are either stupid or corrupt or both'.

For more about Austrianism see AXECquery.

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REPLY to Major.Freedom on Apr 2

You say: “It [Praxeology] is strictly a theory of human action.” It is obviously beyond your horizon that human action is the realm of the so-called social sciences (psychology, sociology, anthropology, political science, history, etc.). Economics is about the behavior of the monetary economy. So, economics is a system science (2014). The so-called social sciences have been accurately characterized by Feynman as cargo cult sciences (see Wikipedia). Praxeology is a case in point.

So there is no need at all to clarify the finer points of Praxeology just as there is no need to quarrel about whether geocentrism worked with 20 or 25 epicycles because geocentrism has been buried long ago and everybody — except Flat-Earthers and Austrians — understands by now that epicycles are NONENTITIES like angels and the Easter Bunny.

You say: “But we are not God, and we are not superhuman. We are human.” Trivially true, but not much follows from brain-dead tautologies.

Folk psychology and the "subtle and sophisticated process of self-reflection" are not economics. Praxeology is proto-scientific garbage and more is not to say about it.

Science is well-defined as formal and empirical consistency (Klant, 1994, p. 31). No genuine scientist ever had a problem with this definition. Curiously, those who are known not to have produced one tiny piece of science can exactly explain why the scientific method does not work.

Here is the collection of the most ridiculous excuses: “Economics is a strange sort of discipline. The booby traps I mentioned often make it sound as if it is all just a matter of opinion. That is not so. Economics is not a Science with a capital S. It lacks the experimental method as a way of testing hypotheses. . . . There are always differences of opinion at the cutting edge of a science, . . . . But they last longer in economics . . . and there are reasons for that. As already mentioned, rival theories cannot be put to an experimental test. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once. The inferences that can be made from history are always uncertain, always disputable, . . . You can’t even count on a long and undisturbed run of history, because the ‘laws’ of behavior change and evolve. Excuses, excuses. But the point is not to provide excuses. (Solow, 1998, x-xi)

The obvious explanation is missing: the scientific incompetence of economists. The first thing to understand is that there are no ‘laws of behavior’ but that there are objective and testable systemic laws.

After more than 200 years economists can still not tell the difference between profit and income. Economics is at the level of medieval physics before the concept of potential and kinetic energy was properly understood. Austrians, too, cannot explain how the economy works but they have any number of excuses for why they have achieved nothing of scientific value.

You say: “We’re pigeons playing chess, pooping on the board, and flying away.” Again trivially true, dear Austrians, but now take your poop and play somewhere else. As Shaw put it "People who say it cannot be done should not interrupt those who are doing it."


References
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.
Solow, R. M. (1998). Foreword, volume William Breit and Roger L. Ranson: The Academic Scribblers. Princeton: Princeton University Press, 3rd edition.

Related 'The zombie wars are over'.

The futility of testing economics blather

Comment on Scott Sumner on ‘Fiscal multiplier studies far worse than I thought’

Blog-Reference

Economics is what Feynman called a cargo cult science, that is, the outer form looks like science, but it is not science, and it does not work. Science is well-defined by material and formal consistency (Klant, 1994, p. 31). Somehow, economists messed up both formal theory building and empirical testing.

The crucial point is that there is no use at all to discuss statistical problems when the theory to be tested is defective, to begin with. Roughly speaking, it is pointless to discuss what confidence level is appropriate for testing the hypothesis that seven angels can dance on a pinpoint.

The actual situation in economics is that Walrasianism, Keynesianism, Marxianism, and Austrianism are provably false (for IS-LM, in particular, see 2014). Therefore, you can test until you are blue in the face without the slightest chance of arriving at a meaningful result.

All this, in turn, means that economic policy advice or what economists tell about the market economy has no sound foundation whatsoever. “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

It is pretty obvious that neither orthodox nor heterodox economists have developed the true economic theory. The ultimate cause is that economists are scientifically incompetent.#1

Let us take Walrasianism as an example here: “The program is organized around the following hardcore propositions:
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, p. 109)

It is pretty obvious that HC3 and HC6 are NONENTITIES like angels, unicorns, or the Easter Bunny. If the foundational propositions, a.k.a. axioms, are false, the whole theoretical superstructure is false, and because of this, the whole of Neoclassics is false for more than 140 years.

It is known since the ancient Greeks: “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)

Now, there is NO such thing as a ‘certain, true, and primary’ proposition about human behavior. Economics is NOT a so-called social science like psychology/sociology, and NOT a natural science like physics, but a systems science. Because there is no such thing as a behavioral axiom, HC3 above, as well as Praxeology, is an abysmal methodological blunder.

Therefore, methodologically correct economics starts with the SYSTEMIC behavior of the monetary economy. There are objective systemic laws, for instance, the Profit Law (2015). Systemic laws contain NO NONENTITIES but only measurable variables and are readily testable.

There is no place for Walrasianism, Keynesianism, Marxianism, Austrianism, and their retarded proponents in science.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.

#1 Why economics is a failed science ― 24 excuses and 1 explanation

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REPLY to Ray Lopez on Mar 31

It is not such a good idea to project one’s own incompetence onto others. The average wage rate is well-defined and can be straightforwardly derived by aggregation of the differentiated wage structure.

See Fig. 3 in The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? and Fig. 1 in Geometrical Exposition of Structural Axiomatic Economics (II): Qualitative and Temporal Aggregation.

For the future: whenever you detect a logical flaw, it is always in your short-attention-span goldfish brain.

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REPLY to Tom Brown on Mar 31

As I said above, there is NO such thing as a behavioral axiom. This applies to the maximization axiom HC3 of Walrasianism, on which the whole of marginalism rests, and this applies to the action axiom of Praxeology (see Wikipedia).

In other words, the axiomatic foundations of both Walrasianism and Austrianism are methodologically defective. In still other words, both approaches are pseudo-scientific garbage.

For the correct formalization of intentional behavior, see Essentials of Constructive Heterodoxy: Behavior and The Propensity Function as General Formalization of Economic Man/Woman.

Major.Freedom advertises Praxeology as follows: “Praxeology actually is the solution to the mind-body dichotomy problem, or as it is also known, the subject-object dichotomy, or the idealist-materialist dichotomy.”

Funny thing, the Austrians have solved the old mind-body chestnut, but cannot, until this very day, tell the differences between profit and income. From all ridiculous economic blatherers, Austrians are the worst.

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REPLY to Ray Lopez on Mar 31

Did it ever occur to you that there must be something fundamentally wrong with economics? To talk about blatant NONENTITIES like utility, equilibrium, rational expectations, and so on is the ONLY way economists have found in more than 200 years to capture reality?

Here are some more NONENTITIES: expected utility, rationality/bounded rationality/animal spirits, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, total income=value of output, I=S, real-number quantities/prices, ergodicity. Every theory/model that contains one of these NONENTITIES goes directly into the wastebasket.

On the other hand, economists do not know what profit is. In contradistinction to the NONENTITIES utility, monetary profit is a very real and measurable magnitude. Everybody can touch it in the cash box or see it on the bank account with the precision of two decimal places. The fact of the matter is that economists have not figured out to this day what the overall profit of an economy is and what its determinants are. As the Palgrave Dictionary sums up: “A satisfactory theory of profits is still elusive.”

The very characteristic of scientific thinking is to deal with entities, preferably with measurable entities like profit, and NOT with blatant NONENTITIES like utility/maximization/ equilibrium.

Because of this, it is not necessary to lose more than the combi-word NONENTITIES-low-IQ-blather about the Cambridge Capital Controversy.

To recall: propositions that contain NONENTITIES are not testable in principle. And this is why economic debates get lost in nirvana with a probability of 100 percent. The CCC is a case in point.

Make no mistake, economists are quite satisfied with inconclusive outcomes. Inconclusiveness is the very survival strategy of the scientifically incompetent.

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COMMENT on Scott Sumner on Apr 1

With regard to multipliers, the fact of the matter is that already Keynes’ simple investment multiplier has been defective.

Keynes defined the formal foundations of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

This elementary two-liner is conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

The three main points of the axiomatically correct approach are:
• All I=S models are false since Hicks (2011; 2014) (for the proof see Toward the true economic axioms).
• The correct Profit Law for the investment economy reads Q_m≡Y_d+I−S_m (2014, p. 8, eq. (18)). Legend: Q_m monetary profit, Y_d distributed profit, I investment expenditures, S_m monetary saving. S_m establishes the connection to the money/credit market.
• The correct Employment Law/Phillips Curve is given with Graphic AXEC62. For details, see the Have data, lack theory.

It is no surprise at all that testing the fiscal multiplier, which in turn is based on IS-LM, yields no results. When the theory is wrong, testing is pointless, and econometric shop talk is a waste of time. Better test the structural axiomatic employment multiplier first.


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. 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 'Austrian blather'

The very real problem of the representative economist

Comment on Talldave on “The very real problem of wage inequality”

Blog-Reference

After more than 200 years, it is obvious that economics is a failed science. What has been produced so far is much opinion and little knowledge. Economists, of course, have an explanation for this. No, it is not that they are scientifically incompetent, but, somehow, it is the fault of their specific subject matter. Here is the one-fits-all excuse.

“Economics is a strange sort of discipline. The booby traps I mentioned often make it sound as it is all just a matter of opinion. That is not so. Economics is not a Science with a capital S. It lacks the experimental method as a way of testing hypotheses. . . . There are always differences of opinion at the cutting edge of a science, . . . . But they last longer in economics . . . and there are reasons for that. As already mentioned, rival theories cannot be put to an experimental test. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once. The inferences that can be made from history are always uncertain, always disputable, . . . You can’t even count on a long and undisturbed run of history, because the ‘laws’ of behavior change and evolve. Excuses, excuses. But the point is not to provide excuses.” (Solow, 1998, pp. x-xi)

The fact of the matter is that the representative economist has not grasped until this very day what science is all about. He is devotedly committed to what Feynman identified as cargo cult science (see Wikipedia).

One of the crucial points of science — known since Aristotle (see Wikipedia) — is that one starts from correct premises. It is pretty obvious that a subjective concept like utility does not fit the methodological requirements.

Unfortunately, you have not realized this yet. Proof? You say: “If utility cannot be part of an economic theory, then you can’t study economics at all.” From the fact that you cannot do it, though, does not logically follow that others cannot do it either. This is the Fallacy of Composition — the most common among the numerous logical blunders in economics.

Of course, some people have clearly identified the crux: “... 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)

Utility is a psychological assumption, and the representative economist has to get rid of it. You cannot do it? That is perfectly OK, you are free to stay behind the curve as long as you wish.

Standard economics is based on the concept of utility. This program has failed. Not to realize this is the very proof of scientific incompetence. It is as simple as that.

Egmont Kakarot-Handtke


References
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Solow, R. M. (1998). Foreword, volume William Breit and Roger L. Ranson: The Academic Scribblers. Princeton: Princeton University Press, 3rd edition.

Preceding The very real problem of zero scientific utility

The very real problem of zero scientific utility

Comment on Scott Sumner on ‘The very real problem of wage inequality’

Blog-Reference

Some day in the history of economic thought, economists left science and became part of the entertainment industry. Thinking, of which there was never much in the first place, has now been entirely replaced by storytelling and gossip. Fittingly, you conclude your post with “That’s because an economy that allows Cruise to be very rich will generate more good films for me to watch.”

This economy will hopefully also allow you to get entirely out of economics and devote all your time to action movie watching.

It is rather obvious that your data-decorated distribution theory is a cartoon.

(i) There is no such thing as ‘a share of profit in income,’ but there is ‘a share of distributed profit in income’. Most economists do not realize that profit and distributed profit are fundamentally different economic entities. Profit is not a factor income, and it cannot be functionally attributed to capital. Because of this, the distribution of the period output has nothing to do with any marginal product of labor or capital. Because the profit theory is false since Adam Smith, distribution theory has been fundamentally flawed for more than 200 years (2014b).

(ii) The representative economist cannot tell the difference between profit and income to this very day. This is comparable to a physicist who cannot tell the difference between force/energy or acceleration/velocity.

(iii) Keynes, too, messed up the profit theory, and he knew it. “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 and Bezemer, 2010, pp. 12-13, 16)

(iv) This failure kicked off a chain reaction of errors/mistakes because when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. Therefore, as collateral damage, all I=S models are junk.

(v) All this happened in the 1930s. To this very day, economists have not realized that all IS-LM models are logically defective — among them Paul Krugman and you (2014a). Otherwise, it is not explicable that you label your post ‘Praising Krugman’.

You characterize yourself as utilitarian, so let me sum up thus: the total and marginal scientific utility of your distribution theory is exactly zero.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
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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ICYMI (ssumner, September 13)

The point of my post is not to ‘engage in a discussion’ but to inform you that you violate scientific standards.

“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)

Please take notice: the issue has been decided, and your distribution theory is provably false. The correct distribution formula is testable and refutable and this is how matters are settled in science.

“Accordingly, scientists, in their critical discussions, do not attack the arguments which might be used to establish, or even to support, the theory under examination. They attack the theory itself, qua solution of the problem it tries to solve.” (Popper, 1994)

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ICYMI (ssumner, September 13)

You ask with reference to your distribution theory: “How can you know it’s wrong, if you don’t know what it is?”

(i) All theories/models that take one or more of the following concepts into the premises are scientifically worthless: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities.

(ii) You call yourself a utilitarian.

(iii) No way leads from false premises, i.e., nonentities, to the understanding of how the actual economy works. From (i) and (ii) follows that your approach as a whole is methodologically unacceptable, and this implies the distribution theory as a logical part thereof. That is sufficient. There is no need to discuss details, as there is — in analogy — no need to discuss epicycles when geocentrism as a whole has been refuted. It is as simple as that, but I’ll give 100 to 1 odds that you couldn’t understand or accept it.