Debunking economists' favorite hallucinations

Comment on J.W. Mason on ‘At Age of Economics: How Should an Economist Be?’*

Blog-Reference and Blog-Reference

1. “The most obvious way that economics matters is that it has an enormous prestige in our society. Economists have a level of respect and authority that no other social scientist, arguably no other academic discipline possesses.”Economics is failed/fake science. #1

The prestige it has in society is a result of massive political promotion and not of any genuine scientific merits. #2

2. “It’s also important to realize that economics has come up with some very useful concepts, to make sense of this world around us: concepts like GDP or employment.”

In 200+ years, economists have not gotten the foundational concept of macroeconomic profit right. Because of this, the concept of GDP is provably false. #3

3. “… you’ll find a lot of useful tools within economics.”

The main tools are constrained optimization and supply-demand-equilibrium and both are methodological garbage, i.e., based on untenable axioms. #4 Because the foundations of economics are false, the whole analytical superstructure is scientifically worthless.

4. “And to be fair, there are plenty of prominent mainstream macroeconomists who have a lot of interesting and insightful things to say about real economies. The thing is that when they’re talking about the real world, they ignore what they doing their scholarly work.”

That is a euphemism for collective schizophrenia, i.e., of the fact that economists are either stupid or corrupt or both. #5

5. “But it’s almost impossible to imagine a non-ideological economics. … So as long as we live under capitalism, we are never going to have an established scientific study of capitalism.”

From J. W. Mason's and other scientifically incompetent economists' lack of imagination does NOT logically follow that economics cannot move above the level of proto-scientific garbage and political corruption. # 6

6. “If you want to think about capitalism as a system, you need to go back to Karl Marx.”

No! Marx was just another scientifically incompetent clown/useful idiot in the political Circus Maximus. #7 If you want to think about the economy, you have to move from false microfoundations and false macrofoundations to true macrofoundations.

Egmont Kakarot-Handtke

* Blog

#1 Wikipedia, economics, scientific knowledge, or political agenda pushing?

#2 The real problem with the economics Nobel

#3 The GDP-death-blow for the economics profession

#4 Get it econ suckers: behavioral microfoundations ⇒ false, systemic macrofoundations ⇒ true

#5 Schizonomics

#6 The Paradigm Shift is an accomplished fact

#7 Dear idiots, Marx got profit and exploitation wrong

***

Graphic AXEC121i

Macroeconomics ― still dead after 80+ years

Comment on Mason/Cochrane on ‘The American Rescue Plan as Economic Theory and Back to the 60s’

Blog-Reference and Blog-Reference on Mar 22

How can you know that both Mason's and Cochrane's macroeconomics is proto-scientific garbage? Search for the term profit and you will come up with nothing. So, both economists are doing economics without ever mentioning the foundational concept of economics. That is like doing physics without ever mentioning the concept of energy.

For this reason alone one can forget the whole discussion. Keynes messed up macroeconomics 80+ years ago because he was too stupid for elementary algebra.#1, #2 But economists have not realized anything to this very day.

The 3-sector macroeconomic Profit Law Q≡(G−T)+(I−S)+Yd implies Public Deficit = Private Profit. Therefore, the current policy of massive deficit-spending/money-creation will result in a profit explosion (the other factors taken out of the picture for the moment).

What unfolds before our eyes is that the Oligarchy pulls off the biggest redistribution of income/wealth in recent history. Deficit-spending/money-creation pushes up macroeconomic profit. So, private financial wealth grows in lockstep with public debt. WeThePeople owes the debt and is taxed for the interest payments to the Oligarchy in all eternity. The debt, to be sure, is rolled over and grows permanently. The rest happens beyond the time horizon.

Mason/Cochrane agree on: ‘what we need now is new textbooks and theories.’ It does not occur to them that we need to get rid, first of all, of scientifically incompetent economists.

Egmont Kakarot-Handtke

#1 Macroeconomics: Economists are too stupid for science

#2 The GDP-death-blow for the economics profession

Related: Kevin Hoover, The Struggle for the Soul of Economics, SSRN, in particular, the exit:

"In the end, saving the soul of economics comes down to three things:

1) Humility;

2) Vigorous criticism in the search for truth;

3) In the words of Charles Sanders Peirce, following “The First Rule of Reason” “which itself deserves to be inscribed on every wall of the city of philosophy: Do not block the way of inquiry.” [Peirce 1931, para. 135]"

For more about macroeconomics, see AXECquery.

For more about macrofoundations, see AXECquery.

***

AXEC121i

Keynesian macrofoundations are defective

Comment on J. W. Mason and Lance Taylor on ‘Saving, investment and the natural rate’

Blog-Reference

J. W. Mason gives a summary of Lance Taylor’s recent paper #1 without realizing that Lance Taylor continues the tradition of messing up the saving-investment issue.

Lance Taylor asks: “Today’s New ‘Keynesians’ have tremendous intellectual firepower. The puzzle is why they revert to Wicksell on loanable funds and the natural rate while ignoring Keynes’s innovations.” #1

Lance Taylor’s answer consists of a conspiracy hypothesis: “Wicksell and Keynes planted red herrings for future economists by concentrating on household saving and business investment.” Reality is much simpler, economists produce false theories because they are scientifically incompetent. The loanable funds theory is a case in point.

Roughly speaking, the loanable funds theory says that saving and investment are equalized by the interest rate mechanism, which is a variant of standard supply-demand-equilibrium. What economists have not realized until this day is that all three elements of the general market model (supply function, demand function, equilibrium) are NONENTITIES. This means that the Wicksellian model has already been dead in the cradle. However, as the saying goes: “The difficulty lies, not in the new ideas, but in escaping from the old ones …” This applies to Walrasians AND Keynesians.

Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.”

This elementary syllogism is conceptually and logically defective because Keynes never came to grips with profit (Tómasson et al., 2010). #2
 
Let this sink in: Keynes had NO idea of the fundamental concepts of economics, that is, of profit and income. His error/mistake carried over to National Accounting. #3 Therefore, it is NO surprise at all that loanable funds macro models do not fit the data.

The axiomatically correct profit equation for the investment economy reads Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditures. The profit equation gets a bit longer when government and foreign trade are included.

The difference between investment and saving I-Sm, plus distributed profit Yd, determines monetary profit Qm for the economy as a whole. Saving is NEVER equal to investment, neither ex-ante nor ex-post, and there is NO mechanism to equalize them, that is, NO such thing as supply-demand-equilibrium. The whole discussion about whether the Wicksellian interest rate mechanism or the Keynesian income mechanism establishes the equality/equilibrium of saving and investment is entirely vacuous. Because of this, the whole discussion about monetary policy and fiscal policy has NEVER had sound scientific foundations.

To conclude:
(i) All I=S/IS-LM models from Keynes/Hicks to the present are provably false.
(ii) The loanable funds/natural interest rate theory is provably false.
(iii) The classical and Keynesian profit theories are provably false.
(iv) The representative economist has not gotten (i) to (iii) for 80+ years. #4 This includes J. W. Mason and Lance Taylor.

Egmont Kakarot-Handtke


#1 The ‘Natural’ Interest Rate and Secular Stagnation: Loanable Funds Macro Models Don’t Fit the Data
#2 How Keynes got macro wrong and Allais got it right
#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#4 For details of the big picture, see cross-references Refutation of I=S

Related  'A new episode of one of the worst blunders of economics' and 'Loanable funds, lack of scientific firepower and abundance of political fartpower' and 'Wikipedia, economics, scientific knowledge, or political agenda pushing?'.

Stylized facts and vacuous interpretations

Comment on ‘The IMF on Investment since 2008’

Blog-Reference

Obviously, your post lacks an underlying coherent theory. To make a long argument (2015) short, the correct Employment Law for the investment economy is given with Graphic AXEC46.

The equation says that employment L increases with:
• investment expenditures I,
• an increasing expenditure ratio ρ_E (≡C/Y),
• an increasing factor cost ratio ρ_F (≡W/PR),
under the condition of product market-clearing, if price P and productivity R in the consumption and investment good industry, as well as distributed profit Yd, remain unaltered in the period under consideration, it decreases in the opposite case. The testable equation explains unemployment.

The income distribution affects the expenditure ratio rhoE. The dependency of the average expenditure ratio on wage income and distributed profit, and their different expenditure ratios, is given with eq. (30) in (2014).

The Employment Law above accounts coherently for both the effects of investment expenditures and distributional changes (and a bit more).

It is important to note that distribution theory crucially depends on profit theory. It is very probable that your profit theory is false (again, see 2014), and therefore your interpretation of the IMF data is pointless.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

Going beyond ink-blot association

Comment on J. W. Mason on ‘Causes and Effects of Wage Growth’

Blog-Reference

It is pretty clear that your post lacks an underlying coherent theory. Looking at data without a well-defined theoretical perspective is not different from reading tea leaves or from freely associating about an inkblot. Accordingly, the argument consists of a parade of various popular stories (here, five in total, i.e., labor/political, China/robot, Friedman, markup, NAIRU).

Storytelling is the natural mode of communication in political (i.e., proto-scientific) economics. As Hicks once summed up a similar discussion:
“As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong.” (1939, p. 184)

Inconclusiveness is a convenient stratagem because “... you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158). Exactly for this reason, it is methodologically unacceptable.

In order to get out of this medieval angels-on-a-pinpoint discussion, a theoretical fixpoint is needed that satisfies the criteria of material and formal consistency. To make a long argument (2015; 2014; 2012) short, the correct Employment Law for the investment economy is given with Graphic AXEC46

The equation says that employment L increases with:
• investment expenditures I,
• an increasing expenditure ratio ρ_E (≡C/Y),
• an increasing factor cost ratio ρ_F (≡W/PR),
under the condition of product market-clearing if price P and productivity R in the consumption and investment good industry as well as distributed profit Yd remain unaltered in the period under consideration. A falling average wage rate for the business sector as a whole increases unemployment.

The testable structural Employment Law is general; it includes the working of the wage-price mechanism and contains Keynes's argument as a special case. Finally, it holds under inflationary and deflationary conditions.

The testable structural Employment Law terminates inconclusive wish-wash and unambiguously determines the relationship of wage rate, price, productivity, aggregate demand, income distribution, and employment.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

Vacuonomics II

Comment on J. W. Mason on ‘A Quick Point on Models’

Blog-Reference

Economists are in a state of manifest self-delusion. They are convinced that what they do is science.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

Keynes provides as good an example as any classical or neoclassical economist. JW Mason writes:
“According to Keynes the purpose of economics is ‘to provide ourselves with an organised and orderly method of thinking out particular problems’.” (See intro post)

Let us accept this for the moment and see how it plays out in practice. As a centerpiece of his General Theory Keynes formulated the foundational syllogism of macroeconomics: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

The fault of Keynes' syllogism is in the premise income = value of output. It can be formally demonstrated that this equality holds only in the limiting case of zero profit in both the consumption and investment good industry (2014b). Keynes himself felt that something was wrong with profit but he could not identify 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, p. 12)

Keynes was first and foremost a political economist and this means — as a matter of principle — that methodological trivia are never allowed to derail the good cause: “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 real scientist's motto is of course ‘It is better to be precisely right than roughly wrong.’ When von Neumann considered the overall poor performance of economics he came to this conclusion: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)

Indeed, when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. It is with profit where the confusion about saving ‘equals’ investment starts. In addition, when income and profit are not correctly defined then distribution theory goes down the tube. And this in turn means that Piketty's study lacks sound conceptual foundations already long before he comes to the definition of capital.

The representative economist is not much disturbed by all this. He builds one zero profit I=S model after the other (2014a). Economics has its own methodology: “The test of a good model is not whether it corresponds to the true underlying structure of the world, but whether it usefully captures some of the regularities in the concrete phenomena we observe.” (see intro)

The sun goes up: this model ‘usefully captures some of the regularities we observe.' Indeed. Another regularity for more than two hundred years is that the representative economist cannot tell the difference between income and profit. It can hardly be denied that this distinction is fundamental for all economic models. Yet, neither in the Keynesian nor the Walrasian context it is carried out correctly.

The quickest point on economic models is therefore that they do not satisfy the most elementary methodological requirements. Or, in Joan Robinson's unsurpassable tweet format: Scrap the lot and start again.

Egmont Kakarot-Handtke


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
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 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. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan. (1936).
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
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

From opinion recycling to real scientific progress

A general comment on this blog's [The Slack Wire] content

Blog-Reference

It is widely known that the representative economist does not understand how the economy works. Many explanations have been advanced. Putting aside all individual specifics and exceptions for the moment, the main reason is this.

Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionalists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit (cf. Desai, 2008). Hence, 'they fail to capture the essence of a capitalist market economy' (Obrinsky, 1981, p. 495).

Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014b; 2014a). Because of this economists have nothing to offer in the way of scientifically founded advice.

“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 important to distinguish between political and theoretical economics. In political economics 'anything goes'; in theoretical economics, scientific standards are observed. The fundamental rule that guarantees the self-government of the scientific community demands to accept refutation. Refutation refers to material and formal consistency.

“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, p. 369)

Political economics is ignorant of this rule and preoccupied with recycling 'dead ideas' (Quiggin, 2010). This explains the secular stagnation of economics.

Because they lack the correct profit theory the contributions to this blog cannot claim to offer more than personal opinion. Of opinions, though, economics always had plenty. What is needed is knowledge ― scientific knowledge, that is.

Egmont Kakarot-Handtke


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
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.