Success is the best method

Comment on Lars Syll on ‘Why science necessarily involves a logical fallacy’

Blog-Reference and Blog-Reference on Feb 15, adapted to context

When economists, who after more than 200 years have not figured out what exactly the difference between profit and income is, talk about science and logic things become a bit surreal.

One outstanding characteristic of Heterodoxy, in particular, is that deductivism or the axiomatic-deductive method is abhorred. Consequently, other methods are proposed. One among others is abduction.

This, to be sure, is perfectly legitimate. The question is this: if the abductive method is indeed superior, why not apply it and present concrete results? Success is the best argument. To recall, it was the discoveries of Galileo, Newton, or Einstein which cemented the reputation of the axiomatic-deductive method. This method sums up the personal experience of genuine scientists and postulates the primacy of theory over naive empiricism: “This indicates that any attempt logically to derive the basic concepts and laws of mechanics from the ultimate data of experience is doomed to failure.” (Einstein, 1934, p. 166)

It is a remarkable coincidence that Einstein deduced gravity waves from his theory in 1916 and in our days, 100 years later, they are observed. This success is a fine specimen for the primacy of theory and a smashing refutation of naive empiricism.

In marked contrast, abduction postulates the primacy of empiricism: “In inference to the best explanation we start with a body of (purported) data/facts/evidence and search for explanations that can account for these data/facts/evidence.” (See intro)

Now, the fundamental problem is that this may even work satisfactorily on a small scale, but the subject matter of economics is the economy, or more precisely, the world economy. Clearly, the world economy as such cannot be seen or experienced, so there is no other way than to start with a theoretical picture as a first approximation. And this is exactly what Popper has said “And in the social sciences it is even more obvious than in the natural sciences that we cannot see and observe our objects before we have thought about them. For most of the objects of social science, if not all of them, are abstract objects; they are theoretical constructions.” (1960, p. 135)

Here again, we have the primacy of theory. Popper, of course, was not the first to realize this, he got it from an economist: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’." (J. S. Mill, 1874, V.55)

Like nothing else, ‘abstract speculation’ puts the heterodox economist’s teeth on edge. The horror association is the absolutely vacuous formal exercise of general equilibrium theory. This green cheese nonentity, though, is clearly NOT what Mill had in mind when he spoke of ‘abstract speculation’. For him, facts had always the last word “The ground of confidence in any concrete deductive science is not the à priori reasoning itself, but the accordance between its results and those of observation à posteriori.” (Mill, 2006, p. 896-897)

The axiomatic-deductive method implies that the ultimate criterion for the assessment of a theory is empirical proof/refutation. The methodological blunder of standard economics has never been ‘abstract speculation’ but ‘empirically vacuous speculation’ of the type how-many-angels-can-dance-on-a-pinpoint.

The axiomatic-deductive method was never meant to be a fact-free logical exercise. It was Debreu who pushed it down this blind alley. It is fully justified to reject Debreu’s misapplication, but this gives one no good reason to relinquish the method.

So there is no real need to invent a new method for economics. The scientific method is well-defined and applies here as well “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

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

Economics never rose above logically and empirically inconsistent speculation and storytelling.

Egmont Kakarot-Handtke


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.

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COMMENT on Geoff Davies on Feb 18

As the economist and methodologist J. S. Mill already knew: Doubtless, the most effectual mode of showing how the Science of Economics may be constructed would be to construct it.

The Paradigm Shift has already taken off.#1 You missed it.


#1 For an overview see cross-references Paradigm Shift.

The unfinished Keynes (b)

Comment on Lars Syll on ‘The most important book in the history of economics’

Blog-Reference

It is trivial but worth repeating: political economics and theoretical economics are different things and have to be strictly kept apart. The core problem of economics as a science is that it is closely entangled with politics by its very nature. The biggest threat to theoretical economics is that it gets hijacked by those with a political agenda. It does not matter whether this agenda is good or bad in the current public opinion. Science is committed to its own criteria, or it ceases to be science.

But are we not all inescapably involved in the struggle between good and bad/evil? Politics, religion, and philosophy say so and urge everybody to take sides. But even if this were true, it cannot serve as a justification to hijack science or to let it be hijacked. What has to be recognized is that science is about true/false and not good/bad/evil. This distinction is part of the demarcation problem, which is the fundamental problem of methodology (Popper, 1980, p. 34).

Keynes had a political agenda, and this was his first priority. Let us agree for the moment that his attempt to alleviate unemployment was good and right without any qualification. Hence, we all can accept Keynes’ agenda — except for one point: Keynes used theoretical economics for political purposes. This is unacceptable according to science’s own ethics, which was well understood in J. S. Mill’s days.

“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (2006, p. 950)

Having taken politics out of the way, the next question is about the scientific content of the General Theory. Here we can — in very general terms — side with Allais: “... mais son [Keynes’s] insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70) In other words, Keynes saw the problems but could not solve them due to a lack of logical consistency.

“For, if anything, Keynes was the most intuitive of men.” (Moggridge, 1976, p. 33)

“It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent.” (Valentino, 1988, p. 239)

“But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)

In more specific terms, we can definitively declare that the formal foundations of Keynesianism are logically defective since the General Theory. Keynes' fundamental equations of macroeconomics, i.e., Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment, is indefensible. That is why Keynesianism is a failure.

The deeper reason is that Keynes — just like his predecessors and fellows — did not come to grips with profit. “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, pp. 12-13, 16)

It is no contradiction to acknowledge that Keynes was one of the good guys of political economics and not to accept the General Theory as a noteworthy contribution to theoretical economics. Good intentions are not a scientific criterion; only material and formal consistency count. So what is left?

Keynes’ economic policy ideas were not exactly innovative. “Public works to relieve the unemployed is an idea as old as the Bible; ...” (Blaug, 1998, p. 662)

Surprisingly, Keynes’ lasting scientific contribution relates to methodology. He spoke it out loud so that every fellow economist could hear it: Throw over the classical axioms and put theoretical economics on new foundations. What else could the Keynesian Revolution mean than a Paradigm Shift? Keynes pointed the way out of the swamp but did not follow it himself. Neither did the Post-Keynesians.

When a logically feeble economist like Krugman, who has not realized until this day that IS-LM is defective (2014) and that maximization-and-equilibrium is axiomatically inadmissible, eulogizes his ill-understood reference as ‘The most important book in the history of economics’, then you know for sure that economics is scientifically at the bottom of the barrel.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptables de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
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
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge 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.
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
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
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, 238–249. Cambridge, New York, etc.: Cambridge University Press.

On economists’ stupidity

Comment on Paul Krugman on ‘On Economic Stupidity’

Blog-Reference

(i) There are political economics and theoretical economics. Only the latter satisfies scientific standards which are well-defined and well-known. Genuine scientists stay instinctively clear of politics. Why? Because political reasoning is quite different from scientific reasoning. As Peirce aptly put it: “In short, it is no longer the reasoning which determines what the conclusion shall be, but it is the conclusion which determines what the reasoning shall be. This is sham reasoning.” (1931, 1.57)

There is no revolving door between politics and science; there is only one one-way out of science. Political economics has not produced anything of real scientific value since Adam Smith.

There is no trade-off between political and theoretical economics, it is a binary either/or: “But if a man occupies himself with investigating the truth of some question for some ulterior purpose, such as to make money, or to amend his life, or to benefit his fellows, he may be ever so much better than a scientific man, if you will ... but he is not a scientific man.” (Peirce, 1931, 1.45)

(ii) Now it could be said: forget the nitpicking distinction between normative/positive, all that counts is economic expertise in order to get out of the mess. And here is the snag: right policy depends on true theory. As a matter of fact, Krugman’s theory is provably false (2014). Because of this his economic policy advice has no more scientific content than a horoscope.

Boiled down to essentials, Krugman’s approach is “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” Now, maximization-and-equilibrium is methodological garbage since Jevons/Walras/Menger. Krugman has not gotten the point until this very day and this is nothing other than scientific incompetence.#1

“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)

Krugman does not have the true theory, so he has not much profound to say about right/ wrong or smart/stupid economic policy.

Non-economists tend to think that the expertise of economists can help to solve economic problems. This is a vain hope. Neither Walrasians, Keynesians, Marxians, nor Austrians know how the economy works. To ask an economist for expertise in a crisis is pretty much like a drowning person expecting help from a blind non-swimmer with a weight belt.

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
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce, Vol. I. Cambridge: Harvard University Press. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

#1 Economists’ three-layered scientific incompetence

Accounting for dummies

Comment on David Ruccio/Liam on ‘Why is slow growth a problem?’

Blog-Reference

You say, “This is a cost-accounting problem. Period. End of story. Any attempt to make it more complicated than that is intellectual masturbation IMO.”

Agreed, let us treat it as an accounting problem. And let us de-complicate the economy to the bare bones. #1

The most elementary economy is the production-consumption economy, and it consists of the business and the household sectors. For a start, the business sector produces and sells one consumption good. The business sector is fully integrated from the intake of raw material to the output of the final product. With one giant firm, we have the simplest of all possible cases.

First period: the business sector pays 100 monetary units (million, billion, trillion Euro, Dollar, Yuan) to the household sector, and the household sector spends exactly this amount on consumption goods. There is no saving of the household sector. The business sector’s profit is zero, and the price of the consumption good is equal to unit wage costs. The real wage is equal to productivity.

For the economy as a whole, there is no gap. The business sector fully recovers its wage costs. This can happen at ANY level of employment, so full employment is no problem. However, problems can arise on the monetary side. If employment is doubled, for instance, then wage income doubles and this means that transaction money must double. In a well-designed economy, the central bank can provide the necessary transaction balances out of nothing.

Interim result: It is possible in principle to run the elementary production-consumption economy at any level of employment and to grow or shrink at will, provided the central bank finances the wage bill, whatever it is. The business sector makes neither profit nor loss. The economy is reproducible for an indefinite number of periods.

Second period: the household sector saves 10 monetary units (S=10) and spends 90 units. Now, the business sector makes a loss (Q=−10). The market-clearing price is lower than unit wage costs. There is no change in inventory.

Accounting result: saving = loss [Q≡−S]. The complementary notion of saving is NOT investment but loss. If the household sector dissaves 10 monetary units (S=−10), i.e., spends 110, then the business sector makes a profit (Q=10). So growing household sector debt is the ULTIMATE source of profit (NOT productivity increases, NOT risk-taking, NOT wage-cutting, NOT firing people, NOT the other brain-dead common sense explanations from the microeconomic ant-perspective).

At the central bank’s balance sheet, we have, in the case of pure credit money, at the end of the 2nd period, 10 units of current deposits of the household sector and an equal amount of current overdrafts of the business sector in the case of saving. Without going further into details, it should be obvious that the rate of interest on the asset side and the rate of interest on the liability side must be such that their difference covers the wage costs of the central bank under the condition of zero profit. Again, there is no gap or problem if the economy is well-designed. Needless to emphasize that it is actually NOT well-designed.

How to organize a well-functioning economy is a question neither orthodox nor heterodox economists have figured out in more than 200 years. No question, if there is something like a scientific hell, Walrasians, Keynesians, Marxians, and Austrians will be dammed to discuss their proto-scientific garbage in eternity with dull Econ 101 students as the sole audience.

Takeaway: You have to thoroughly rework your website. Flag-waving is not a substitute for thinking or proper accounting.

Egmont Kakarot-Handtke


#1 For the formal underpinning, see the post Economists cannot do the simple math of profit — better keep them out of politics or the SSRN working paper Economics for Economists

Related 'Have data, lack theory' and 'The common error of common sense: An essential rectification of the accounting approach' and 'A tale of three accountants'. For details of the big picture, see cross-references Accounting.

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REPLY to Liam of Feb 12 on Feb 13

First, you say, “This is a cost-accounting problem. Period. End of story. Any attempt to make it more complicated than that is intellectual masturbation IMO.”

Next, you say, “I won’t agree to your FIRST model because it is so far from reality that it is hardly worth commenting on.”

So, you first ask for a simple picture of the economy, and when you get the simplest possible picture, you complain that a lot of details are missing. This is the outworn catch-22 schizo that is endemic in economic discussions (2013).

If you had done your homework and looked into some of my working papers, you would have realized that the elementary consumption economy has already been differentiated in ALL directions. So, (i) your ‘realism vs. abstraction’ kindergarten game falls flat, and (ii), you make it quite clear that you are not aware of the basics of methodology: “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.” (Morgenstern, 1941, p. 373)

With regard to your challenge, the error/mistake is already in the first line. You write “A = all cost components of price comprised of wages, earnings, or dividends.” Note that dividends are not a cost component. Better if you get your price theory right first (2011).

Advocating social credit is one thing, and claiming that it is based on sound economic theory is quite another thing — in your case, it is definitely not.

You make the same mistake as standard economics, that is, to start with an agent/firm and to go bottom-up, i.e., microfoundations, leads to nowhere, yet to start with the economy as a whole and then to go top-down, i.e., macrofoundations, yields consistent and testable propositions. Every economist could know this by now from the evident failure of Walrasianism.


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. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

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REPLY to Liam on Feb 14

I have no problem at all with CH Douglas’s political program; I have only a problem with his underlying economic theory. The point is: right policy depends on true theory. If you intend to fly to the moon, you first have to figure out the law of gravity (and some others). If you want to improve the economy, you first have to figure out how it works.

This is an economics blog, and in my understanding, the ultimate goal is to replace standard economics, which is provably false, with the true economic theory.

“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)

Economists do not have the true theory. Neither Walrasians, nor Keynesians, nor Marxians, nor Austrians, nor Douglasians know how the economy works. So they are in no position to promise a ‘better’ economy. Worse, with false economic theories in their scientifically incompetent micro brains, economists actually cause or worsen crises.

How convincing are economists who promise to create the Good Society but cannot do elementary accounting? To recall, the profit theory has been false since Adam Smith. Economists literally do not know what they are talking about.

So: first get economics right, then get the economy right.

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REPLY to Liam on Feb 16

“...the tens of thousands (millions over the past century) of people” who stand with you are certainly a veritable political force but they have no say in scientific matters. Science is about logical and empirical proof.

If you can refute my main point, let me know.

And this is the main point: You cannot tell the difference between profit, income, and distributed profit, and because of this, you have no idea about how the actual economy works.

Have data, lack theory

Comment on David Ruccio on ‘Why is slow growth a problem?’

Blog-Reference and Blog-Reference

Everybody knows: the economy does not function as economics textbooks say. This holds — with damaging consequences — in particular for the labor market. The fatal professional incompetence consists of:
• To this day, the representative economist has not realized that the overall systemic interdependencies establish a POSITIVE feedback loop between the (aggregate) product and the (aggregate) labor market.
• To this day, the representative economist cannot tell the difference between income and profit.

In the following, a sketch of the formally and empirically correct employment and profit theory is given.

The most elementary version of the Employment Law is shown on Graphic AXEC62a

 From this equation follows inter alia:
(i) An increase in the expenditure ratio ρ_E leads to higher employment. An expenditure ratio ρ_E>1 indicates credit expansion, a ratio ρ_E<1 indicates credit contraction/debt repayment.
(ii) Increasing investment expenditures I exert a positive influence on employment; a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F=W/PR leads to higher employment. This implies that a HIGHER average wage rate W leads to HIGHER employment. This is, of course, contrary to conventional economic wisdom (2015).
(iv) The complete and testable Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and the trade balance with the rest of the world.

Points (i) and (ii) are familiar Keynesian stuff. Let us focus here alone on the factor cost ratio ρ_F as defined in (iii). This variable embodies the price mechanism, which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment increases if the average wage rate W increases relative to the average price P and productivity R.

In order to avoid worldwide unemployment and deflation, the average wage rate must, therefore, rise worldwide. For the relationship between real wage, productivity, profit, and real shares, see (2015, Sec. 10)

The axiomatically correct Profit Law reads Qm≡Yd+I−Sm (2014, p. 8, eq. (18)) #1 Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditures.

The Profit Law gets a bit more complex when foreign trade and government are included. The equation says (for the world economy as a whole):
(v) Strong growth = high investment I is good for the overall monetary profit of the business sector as a whole.
(vi) Strong consumption expenditures = low saving Sm or even dissaving -Sm = growing consumer debt is good for profit.
(vii) By implication, high government deficit spending = growing public debt is good for profit.
(viii) High profit distribution Yd is good for profit.

Profit and profit distribution constitute a self-reinforcing feedback loop. The same holds for profit and investment. These built-in positive feedback loops explode the notion of equilibrium: the monetary economy is NOT a self-optimizing equilibrium system.

Note that overall profit has nothing to do with productivity or low wages. These and other factors affect only the distribution of overall profit between firms or countries. Note also that the profit equation holds for the USA, Russia, China, the EU, and all other countries/ associations; that is, it does not matter at all whether one has a market economy or private property or free enterprise or any other of the alleged characteristics of capitalism.

David Ruccio has to do a lot of scientific homework to make his data speak.

Egmont Kakarot-Handtke


References
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). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

#1 See Graphic AXC09 or Graphic AXEC08 or Graphic AXEC42.

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REPLY to graccibros of Feb 11

From the same set of equations follow consistently the real shares (which, of course, have nothing at all to do with marginal productivity). For details, see the 23 pages of the working paper The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?.

Related 'Accounting for dummies'.

Economists cannot think as well as we thought

Comment on ‘Markets Don't Work as Well as We Thought’

Blog-Reference

The problem is not so much that economists do not understand how financial markets work, the problem is that economists do not understand how the market economy works.

Walrasianism, Keynesianism, Marxianism, and Austrianism are provable false. The fundamental flaw is that economists cannot tell the difference between the elementary concepts of income and profit. This is like medieval physics before the difference between kinetic and potential energy was clearly understood.

One of the big unanswered questions of the history of human thought is how economists ever came to hallucinate that the proto-scientific stuff they produce for more than 200 years is something other than what the genuine scientist Feynman called cargo cult science.

Egmont Kakarot-Handtke


Related ‘Economists’ three-layered scientific incompetence’ and ‘Economists are a menace to their fellow citizens’ and ‘Economists cannot do the simple math of profit — better keep them out of politics’.

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CHALLENGE  economistsview links-for-02-11-16

Funny, how you are politically groping in the dark. Did it ever occur to you that none of your arguments has a sound theoretical foundation?

Right policy depends on true theory.

“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)

Lacking the true theory, economists promote for more than 200 years opinion instead of knowledge.#1

Before blogging, do your scientific homework first (e.g. 2015)


References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

#1 Economists’ three-layered scientific incompetence

Economists’ three-layered scientific incompetence

Comment on Asad Zaman on ‘Project: A heterodox macro textbook’

Blog-Reference and Blog-Reference

Economics is a failed science. This means more specifically for the history of economic thought: Orthodoxy has failed to produce anything of real scientific value and Heterodoxy has failed to develop a superior alternative. Thus, economics is stuck since its inception at the proto-scientific level “... we know little more now about ‘how the economy works,’ or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower, 1999, p. 401)

The failure of economics is provable and therefore no longer a matter of debate.

1st layer: Wrong subject matter

Since Adam Smith, economics claims to be a science. It started as a mixture/intersection of sociology and political science: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.” (J. S. Mill, 1874, V.39)

Economics has been understood as Political Economy. Economists saw themselves as agenda pushers for some greater good and science as a means to that end. The idea of pure science, i.e. the completely independent pursuit of knowledge, never occurred to the inventors of utility maximization.

With respect to the subject matter, there is no difference between Mill and Marx “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, ...” (Marx, 1906, M.9)

With Jevons/Walras/Menger the focus shifted to methodological individualism and economics became a mixture/intersection of psychology, sociology, and political science.

Economics is NOT a science of individual/social/political behavior — this is the social science delusion#1 — but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”

As a consequence, the Copernican turn in economics consists of the methodological switch from behavior-centered bottom-up, i.e. microfoundations, to structure-centered top-down, i.e. macrofoundations of the world economy. All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/Darwinism, political science, philosophy, etcetera) and are taken in from these by way of multi-disciplinary cooperation. To paraphrase J. S. Mill: ‘Economics as a systems science presupposes all the physical and social sciences; it takes for granted all such of the truths of those sciences as are concerned with the working of the economic system.’ (cf. Mill, 1874, V.29)

Economists must, first of all, stop the dilettantish dabbling in the so-called social sciences and in politics and focus on their proper subject matter. What they have collectively produced so far in their own domain is scientific garbage.

2nd layer: Wrong axiomatization

Orthodoxy defines itself briefly as “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)

More explicitly and formally, i.e. axiomatically, Orthodoxy has been defined as “The [neo-Walrasian] 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)

The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is an indefensible methodological blunder. Likewise for HC3.

HC6 and HC3 are methodologically unacceptable as axioms. Because of this the whole set of hardcore propositions — the sorta-kinda starting point — breaks apart and with it the WHOLE theoretical superstructure of Orthodoxy.

Keynes identified the pivotal methodological blunder correctly “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

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

This elementary syllogism is conceptually and logically defective because Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12) As a result, all I=S models including the Keynesian multiplier are false (2014) and with it the WHOLE Post-Keynesian theoretical superstructure.

To see the enormity of intellectual failure one has to let this sink in: Keynes had no idea of the fundamental concepts of economics, viz. profit and income. This did not hinder him to push his economic policy agenda. Keynes’ policy proposals never had sound theoretical foundations but were at best commonsensical.

So, we have two reliable indicators of the intellectual incapacity of present-day economists: Keynesians are for more than 80 years in the dark. Sorta-kinda Neoclassicals are for more than 140 years in the dark. Because they have methodologically disqualified themselves neither Keynesians nor Walrasians can be taken seriously. The same holds for Marxists and Austrians. Economic policy advice has until this day no sound theoretical foundations because economic theory itself has no sound axiomatic foundations.

3rd layer: Wrong formalization

“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, Posterior Analytics)

Certain/true/primary premises are hard to come by “There is no more fertile source of error than apparently trivial premises.” (Schumpeter, 1994, p. 269)

To state one’s hardcore premises consistently is the indispensable methodological minimum, to formalize them correctly is an additional step. The pivot of formalization is “Formal axiomatic systems must be interpreted in some domain ... to become an empirical science.” (Boylan et al., 1995, p. 198)

Debreu in his axiomatization of Walrasianism did explicitly the opposite, that is, he disconnected “Allegiance to rigor dictates the axiomatic form of the analysis where the theory, in the strict sense, is logically entirely disconnected from its interpretations.” (Debreu, 1959, p. x)

Debreu missed the crucial point: “From the axiomatic point of view, mathematics appears thus as a storehouse of abstract forms — the mathematical structures; and it so happens — without our knowing why — that certain aspects of empirical reality fit themselves into these forms, as if through a kind of preadaptation. ... It is only in this sense of the word ‘form’ that one can call the axiomatic method a ‘formalism’.” (Bourbaki, 2005, p. 1276)

NOT ALL mathematical structures incorporate a ‘certain aspect of empirical reality’, which means, that there is a “whole crop of monster-structures, entirely without application” (Bourbaki, 2005, p. 1275, fn. 9).

Debreu’s axiomatization of Walrasian General Equilibrium is a mathematical monster-structure that is due to Debreu’s misunderstanding of what formalization is all about. For parallel fatal mistakes with regard to the applicability of mathematical operations in the theory of value see (Barzilai, 2016).

In sum: economists misapply on a regular basis what they take from the ‘storehouse of abstract forms’. The problem is not the application of mathematics per se but the dilettantish application. Generally speaking, the economic content and the mathematical form do not fit together. Hence, the ultimate methodological blunder of what is widely criticized as mathiness has always been this “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists.” (Georgescu-Roegen, 1979, p. 317)

A mathematical form that has no interpretation in the monetary economy is vacuous at best and misleading at worst. Because of this, no economic policy proposals can ever be derived from such a model, or, to put the other way round, all policy proposals derived from incorrectly formalized models have no more scientific value than a horoscope.

The cumulated three-fold blunder of orthodox and heterodox economics manifests itself in one of the greater embarrassments in the history of science, that is, that the representative economist cannot tell the difference between the elementary concepts of income and profit.#2 This is like a physicist who cannot tell the difference between potential and kinetic energy. After more than 200 years of dilettantism and failure, there is no place for Walrasians, Keynesians, Marxians, and Austrians in the scientific community.

Egmont Kakarot-Handtke


References
Barzilai, J. (2016). Slutsky’s Mathematical Economics. Scientific metrics working paper, 1–5. URL #3
Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Volume II, 1265–1276. Oxford, New York: Oxford University Press.
Boylan, T. A., and O’Gorman, P. F. (1995). Beyond Rhetoric and Realism in Economics. Towards a Reformulation of Economic Methodology. London: Routledge.
Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post Keynesian Economics, 21(3): 399–414. URL
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. 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. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford 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
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.

#1 For a full-horizon overview see Meta-References.
#2 How the intelligent non-economist can refute every economist hands down
#3 For the full scope of economists' mathematical incompetence see Jonathan Barzilai, Scientific Metrics Publications

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REPLY  comment on larrymotuz of Feb 12

I have replaced the neo-Walrasian axioms HC1 to HC6 with the objective-structural set of foundational propositions nHC1 to nHC3. See The creative destruction of Wren-Lewis.

This is what a Paradigm Shift is all about. For more details see cross-references Paradigm Shift.

The objective-structural set of foundational propositions yields testable equations, e.g. for employment and profit. See Have data, lack theory

You or anybody else can test the equations at any time. I will certainly accept an empirical refutation. This is how science works.

You take as hardcore proposition 4): “We eat without full knowledge of nutrients in the foods we eat, but, if we can afford it, we are naturally inclined to eat balanced diets.”

Could it be that you have seen too much health channel advertising or do you really think this is heterodox economics?

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Amazon, Jonathan Barzilai, April 5, 2022