Comment on Haynes Goddard on ‘David Sloan Wilson’s econ critique’
Blog-Reference
You say: “For years I debated with a close relative, a prominent political scientist at a major university, whether the economist’s utility maximization hypothesis was empty or not ― specifically, a tautology. Tautology because economists take as axiomatic that we seek to maximize utility. The framework readily yields downward sloping demand curves or an inverse relationship between price and quantity, a relationship widely confirmed empirically.”
Take notice that the statement: “The framework readily yields downward sloping demand curves ...” is provably false. You could know this from Mas-Colell et al., 1995, Sec. 4C or from Wikipedia#1.
The first section of your post is proto-scientific garbage and this continues until the end. Proof:
(i) You refer to the axioms of Orthodoxy. They are given with this set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)
These premises are forever unacceptable. It should be pretty obvious that the neo-Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).
Every model that contains a NONENTITY is a priori false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the wastebasket. The same holds for utility maximization and all other nonentities.
Take note that economics from Jevons/Walras/Menger to DSGE contains HC1/HC5 and therefore is proto-scientific garbage.
(ii) You refer to the “mathematical economist Roy Weintraub”. Take notice that mathematical economists misapplied mathematics because of a lack of real understanding.#2 By implication, the arguments of mathematical economists in defense of the orthodox research program are worthless. (Make no mistake, from this MISapplication does NOT follow that mathematics is inapplicable or useless in economics. The mathiness critique is beside the point.)
(iii) You argue: “Further, this utility assessing capability is an evolutionary result, and it would seem to fit squarely into Prof. Wilson’s favorite framework.”
Take note that from the fact that BOTH neoclassical microeconomics and evolutionary economics are degenerate research programs follows that it means NOTHING that they fit together and that neuroscience “confirms” utility maximization.
Neither neuroeconomics, behavioral economics, biology, complexity theory, chaos theory, common sense, nor more empirical work can save economics. All this is lipstick on the dead pig. Walrasianism, Keynesianism, Marxianism, and Austrianism are axiomatically false, that is, beyond repair. Nothing less than a Paradigm Shift will do.
Egmont Kakarot-Handtke
#1 Wikipedia Aggregate consumer demand curve
#2 For proof see Barzilai
Preceding The bigots of common sense and Evolutionary economics: Just another degenerate research program.
October 20, 2016
October 19, 2016
The bigots of common sense
Comment on Barkley Rosser on ‘David Sloan Wilson’s econ critique’
Blog-Reference
In your account of the various strands of evolutionary economics, you forgot the pivotal connection: Malthus is the key figure, he represents the deep unity of Political Economy and Darwinism.
Economics is a cargo cult science, that is, it always copied genuine science without ever getting on its own scientific feet. The history of economic thought consists of two main strands. First, economists copied Newtonian physics then they copied (re-imported) Darwinian biology. Having NO own scientific gravitas economists jumped on every bandwagon from game theory to evolutionary game theory, to chaos theory, to complexity theory and had their dilettantish fingers in every pie from psychology, sociology, anthropology, history, political science, social philosophy to biology/Darwinism.
Curiously, until this day the representative economist has no idea of the foundational concepts of his own discipline, that is, of profit and income. Walrasianism, Keynesianism, Marxianism, Austrianism is provably false.
The fundamental distinction in economics is between political economics and theoretical economics and the fact of the matter is that political economics (= agenda pushing) dominates theoretical economics (= science) since the founding fathers. And this is why economics never rose above the proto-scientific level.
The very characteristic of political economics is its rhetorical appeal to common sense. This started with Adam Smith: “... 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, 1994, p. 185)
This continued to Marshall and Keynes: “In the early thirties he [Keynes] confessed to Roy Harrod that he was ‘returning to an age-long tradition of common sense’.” (Coates, 2007, p. 11)
Now, David Sloan Wilson tries again to unite the scientific retards under the banner of common sense: “... [econ] is dominated by a single theoretical edifice ... The edifice is based upon a conception of human nature that is profoundly false, defying the dictates of common sense, before we even get to the more refined dictates of psychology and evolutionary theory.”
About the relationship between common sense and science all has been said by the great methodologist J. S. Mill: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”
The very characteristic of science is to TRANSCEND common sense. Therefore, there is no need at all to go into the details of Wilson’s soapbox economics, his appeal to common sense is sufficient to disqualify him as a scientist.
Egmont Kakarot-Handtke
Immediately preceding Evolutionary economics: Just another degenerate research program
Immediately following New economic thinking ― false promises and hopes
Blog-Reference
In your account of the various strands of evolutionary economics, you forgot the pivotal connection: Malthus is the key figure, he represents the deep unity of Political Economy and Darwinism.
Economics is a cargo cult science, that is, it always copied genuine science without ever getting on its own scientific feet. The history of economic thought consists of two main strands. First, economists copied Newtonian physics then they copied (re-imported) Darwinian biology. Having NO own scientific gravitas economists jumped on every bandwagon from game theory to evolutionary game theory, to chaos theory, to complexity theory and had their dilettantish fingers in every pie from psychology, sociology, anthropology, history, political science, social philosophy to biology/Darwinism.
Curiously, until this day the representative economist has no idea of the foundational concepts of his own discipline, that is, of profit and income. Walrasianism, Keynesianism, Marxianism, Austrianism is provably false.
The fundamental distinction in economics is between political economics and theoretical economics and the fact of the matter is that political economics (= agenda pushing) dominates theoretical economics (= science) since the founding fathers. And this is why economics never rose above the proto-scientific level.
The very characteristic of political economics is its rhetorical appeal to common sense. This started with Adam Smith: “... 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, 1994, p. 185)
This continued to Marshall and Keynes: “In the early thirties he [Keynes] confessed to Roy Harrod that he was ‘returning to an age-long tradition of common sense’.” (Coates, 2007, p. 11)
Now, David Sloan Wilson tries again to unite the scientific retards under the banner of common sense: “... [econ] is dominated by a single theoretical edifice ... The edifice is based upon a conception of human nature that is profoundly false, defying the dictates of common sense, before we even get to the more refined dictates of psychology and evolutionary theory.”
About the relationship between common sense and science all has been said by the great methodologist J. S. Mill: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”
The very characteristic of science is to TRANSCEND common sense. Therefore, there is no need at all to go into the details of Wilson’s soapbox economics, his appeal to common sense is sufficient to disqualify him as a scientist.
Egmont Kakarot-Handtke
Immediately preceding Evolutionary economics: Just another degenerate research program
Immediately following New economic thinking ― false promises and hopes
October 18, 2016
Go, Heterodoxy, move on!
Comment on Peter Radford on ‘Can we move on?’
Blog-Reference
Peter Radford summarizes the current state of economics: “Economics has failed.” What we have is: “An attic full of cobwebs, old ideas, outdated tools, incoherent junk that we have forgotten how to use, and faded memories of long ago issues that have little or no relevance to today.”
He concludes with a call to arms: “We move on.”
How? By reiterating the superficial but popular critique of unrealism and mathiness? By propagating history books like Polanyi’s Great Transformation? By advocating pluralism, i.e., the mutual acknowledgment of false theories? By producing alternative “incoherent junk” like Post Keynesianism?
Economics is a bit complicated because there is (i) political economics vs. theoretical economics, and (ii) orthodox economics vs. heterodox economics (see the 2x2 map on Graphic #1)
The situation is this: political economics (= agenda pushing) dominates theoretical economics (= science) since the founding fathers and has not produced much, if anything, of scientific value in the last 200 years.
Heterodoxy has always argued that something might be wrong with Orthodoxy. To be sure, Heterodoxy’s rejection of Orthodoxy is right. In 2016, no thinking being can defend orthodox economics any longer. The problem with traditional Heterodoxy is that it has not produced much, if anything, of scientific value either.
Economics is what Feynman famously called a cargo cult science because BOTH Orthodoxy and traditional Heterodoxy do NOT satisfy the scientific criteria of material and formal consistency.
When Peter Radford states “Economics has failed.” he somehow forgets to mention the involvement of traditional Heterodoxy: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004)
The COMMON failure of Orthodoxy and Heterodoxy is encapsulated in this devastating summary: “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)
After more than 200 years, neither orthodox nor heterodox economists know what profit is or what the difference between profit and income is. #2 Because they have NO idea of the foundational concepts of their subject matter, economists cannot explain how the actual economy works, which means that their economic policy guidance has NEVER had sound scientific foundations. Scientifically incompetent economists bear the ultimate responsibility for unemployment/depression/deflation/stagnation.
Current economics is not much more than political blather and the difference between Orthodoxy and traditional Heterodoxy is that the former is more rightist and the latter is more leftist. #3 This is a political distinction that tells NOTHING about the scientific value of an approach, which is ZERO in both cases.
From the standpoint of science follows: yes, failed economists, move on, get out of the way! And, most important of all, stop telling the general public that what you are doing is science.
Egmont Kakarot-Handtke
#1 Graphic AXEC83 Map of current economics
#2 The Profit Theory is False Since Adam Smith
#3 For the new paradigm, see cross-references
Blog-Reference
Peter Radford summarizes the current state of economics: “Economics has failed.” What we have is: “An attic full of cobwebs, old ideas, outdated tools, incoherent junk that we have forgotten how to use, and faded memories of long ago issues that have little or no relevance to today.”
He concludes with a call to arms: “We move on.”
How? By reiterating the superficial but popular critique of unrealism and mathiness? By propagating history books like Polanyi’s Great Transformation? By advocating pluralism, i.e., the mutual acknowledgment of false theories? By producing alternative “incoherent junk” like Post Keynesianism?
Economics is a bit complicated because there is (i) political economics vs. theoretical economics, and (ii) orthodox economics vs. heterodox economics (see the 2x2 map on Graphic #1)
The situation is this: political economics (= agenda pushing) dominates theoretical economics (= science) since the founding fathers and has not produced much, if anything, of scientific value in the last 200 years.
Heterodoxy has always argued that something might be wrong with Orthodoxy. To be sure, Heterodoxy’s rejection of Orthodoxy is right. In 2016, no thinking being can defend orthodox economics any longer. The problem with traditional Heterodoxy is that it has not produced much, if anything, of scientific value either.
Economics is what Feynman famously called a cargo cult science because BOTH Orthodoxy and traditional Heterodoxy do NOT satisfy the scientific criteria of material and formal consistency.
When Peter Radford states “Economics has failed.” he somehow forgets to mention the involvement of traditional Heterodoxy: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004)
The COMMON failure of Orthodoxy and Heterodoxy is encapsulated in this devastating summary: “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)
After more than 200 years, neither orthodox nor heterodox economists know what profit is or what the difference between profit and income is. #2 Because they have NO idea of the foundational concepts of their subject matter, economists cannot explain how the actual economy works, which means that their economic policy guidance has NEVER had sound scientific foundations. Scientifically incompetent economists bear the ultimate responsibility for unemployment/depression/deflation/stagnation.
Current economics is not much more than political blather and the difference between Orthodoxy and traditional Heterodoxy is that the former is more rightist and the latter is more leftist. #3 This is a political distinction that tells NOTHING about the scientific value of an approach, which is ZERO in both cases.
From the standpoint of science follows: yes, failed economists, move on, get out of the way! And, most important of all, stop telling the general public that what you are doing is science.
Egmont Kakarot-Handtke
#1 Graphic AXEC83 Map of current economics
#2 The Profit Theory is False Since Adam Smith
#3 For the new paradigm, see cross-references
October 17, 2016
Evolutionary economics: Just another degenerate research program
Comment on Noah Smith on ‘David Sloan Wilson’s econ critique’
Blog-Reference
Economics is a bit complicated because there is (i) political economics vs. theoretical economics, and (ii) orthodox economics vs. heterodox economics (see the 2x2 map at Graphic #1)
The situation is this: political economics (= agenda-pushing) dominates theoretical economics (= science) since the founding fathers and has not produced much, if anything, of scientific value for the last 200+ years.
Heterodoxy has always argued that something might be wrong with Orthodoxy. To be sure, Heterodoxy’s rejection of Orthodoxy is right. In 2016, no thinking being can defend orthodox economics any longer. The problem with traditional Heterodoxy is that it has not produced much, if anything, of scientific value either.
Economics is what Feynman famously called a cargo cult science because BOTH Orthodoxy and traditional Heterodoxy do NOT satisfy the scientific criteria of material and formal consistency.
Evolutionary economics is part of Heterodoxy since Thorstein Veblen asked, “Why is Economics Not an Evolutionary Science?” The next was Marshall with his famous call for a new methodology: “The Mecca of the economist lies in economic biology.” Evolutionary economics is institutionalized in different countries and communicates its research in the Journal of Evolutionary Economics.
David Sloan Wilson has had a great insight: “Nevertheless, I had faith that evolution could say something important about the regulatory systems that economists preside over, even if I did not yet know the details.” This insight has occurred many times before, and it is only new and exciting to the average dull Econ 101 student.
Evolutionary economics has been tried, and it has failed: “In a recent series of publications, ‘Generalized Darwinism’ has been proposed as a new overarching research strategy that is based on the assumption of a fundamental homology between evolution in nature and the evolution of the economy. The principles of variation, selection, and retention that have been distilled from evolutionary biology by isolating abstraction are claimed to be generally valid. It is suggested to apply these abstract principles as a unifying framework for all evolutionary theories. By a brief reconstruction of the different historical forms of Darwinism we have shown that the identification of these abstract principles with Darwinism is misleading. Moreover, on a priori grounds other principles — non-Darwinian or even anti-Darwinian ones like, e.g., orthogenesis, saltationism, or neo-Lamarckism — could claim a similar plausibility in explaining economic evolution.” (Levit et al., 2011, p. 559)
David Sloan Wilson advertises a common-sense approach. This, of course, appeals to all economists who have not much more than that. As a matter of fact, Wilson’s approach is fundamentally flawed. The first thing to be clear about is: economics is NOT about psychology, human behavior, sociology, politics, biology, anthropology, etcetera. Economics is about the properties and the working of the economic SYSTEM.
ALL Human-Nature approaches are bound to fail. The ultimate reason can be stated as a methodological impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works.
Egmont Kakarot-Handtke
References
Levit, G. S., Hossfeld, U., and Witt, U. (2011). Can Darwinism be "Generalized" and of What Use Would This Be? Journal of Evolutionary Economics, 21(4): 545–562. DOI DOI10.1007/s00191-011-0235-3. URL
#1 Graphic AXEC83 Map of current economics
While you were asleep, a very smart methodologist has found out that “... economics is not a science of behaviour”. (Hudík, 2011)
So, the point is NOT “that it’s just very hard to make a general mathematical model of human behavior” but that there is NO NEED to make such a model. To speculate about constrained optimization, bounded rationality, animal spirits, or rational expectations is just as brain dead as to speculate about how many angels can dance on a pinpoint.
While you were asleep, the very definition of economics has been changed from: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16) to “Economics is the science which studies how the monetary economy works.” (2014)
Now, go and wake up your Econ 101 teacher and tell him that he is fired.
References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Robbins, L. (1935). An Essay on the Nature and Significance of Economic Science. London, Bombay, etc.: Macmillan, 2nd edition.
Immediately following The bigots of common sense.
Blog-Reference
Economics is a bit complicated because there is (i) political economics vs. theoretical economics, and (ii) orthodox economics vs. heterodox economics (see the 2x2 map at Graphic #1)
The situation is this: political economics (= agenda-pushing) dominates theoretical economics (= science) since the founding fathers and has not produced much, if anything, of scientific value for the last 200+ years.
Heterodoxy has always argued that something might be wrong with Orthodoxy. To be sure, Heterodoxy’s rejection of Orthodoxy is right. In 2016, no thinking being can defend orthodox economics any longer. The problem with traditional Heterodoxy is that it has not produced much, if anything, of scientific value either.
Economics is what Feynman famously called a cargo cult science because BOTH Orthodoxy and traditional Heterodoxy do NOT satisfy the scientific criteria of material and formal consistency.
Evolutionary economics is part of Heterodoxy since Thorstein Veblen asked, “Why is Economics Not an Evolutionary Science?” The next was Marshall with his famous call for a new methodology: “The Mecca of the economist lies in economic biology.” Evolutionary economics is institutionalized in different countries and communicates its research in the Journal of Evolutionary Economics.
David Sloan Wilson has had a great insight: “Nevertheless, I had faith that evolution could say something important about the regulatory systems that economists preside over, even if I did not yet know the details.” This insight has occurred many times before, and it is only new and exciting to the average dull Econ 101 student.
Evolutionary economics has been tried, and it has failed: “In a recent series of publications, ‘Generalized Darwinism’ has been proposed as a new overarching research strategy that is based on the assumption of a fundamental homology between evolution in nature and the evolution of the economy. The principles of variation, selection, and retention that have been distilled from evolutionary biology by isolating abstraction are claimed to be generally valid. It is suggested to apply these abstract principles as a unifying framework for all evolutionary theories. By a brief reconstruction of the different historical forms of Darwinism we have shown that the identification of these abstract principles with Darwinism is misleading. Moreover, on a priori grounds other principles — non-Darwinian or even anti-Darwinian ones like, e.g., orthogenesis, saltationism, or neo-Lamarckism — could claim a similar plausibility in explaining economic evolution.” (Levit et al., 2011, p. 559)
David Sloan Wilson advertises a common-sense approach. This, of course, appeals to all economists who have not much more than that. As a matter of fact, Wilson’s approach is fundamentally flawed. The first thing to be clear about is: economics is NOT about psychology, human behavior, sociology, politics, biology, anthropology, etcetera. Economics is about the properties and the working of the economic SYSTEM.
ALL Human-Nature approaches are bound to fail. The ultimate reason can be stated as a methodological impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works.
Egmont Kakarot-Handtke
References
Levit, G. S., Hossfeld, U., and Witt, U. (2011). Can Darwinism be "Generalized" and of What Use Would This Be? Journal of Evolutionary Economics, 21(4): 545–562. DOI DOI10.1007/s00191-011-0235-3. URL
#1 Graphic AXEC83 Map of current economics
***
COMMENT on Some guy on Oct 18While you were asleep, a very smart methodologist has found out that “... economics is not a science of behaviour”. (Hudík, 2011)
So, the point is NOT “that it’s just very hard to make a general mathematical model of human behavior” but that there is NO NEED to make such a model. To speculate about constrained optimization, bounded rationality, animal spirits, or rational expectations is just as brain dead as to speculate about how many angels can dance on a pinpoint.
While you were asleep, the very definition of economics has been changed from: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16) to “Economics is the science which studies how the monetary economy works.” (2014)
Now, go and wake up your Econ 101 teacher and tell him that he is fired.
References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Robbins, L. (1935). An Essay on the Nature and Significance of Economic Science. London, Bombay, etc.: Macmillan, 2nd edition.
Immediately following The bigots of common sense.
October 16, 2016
A new episode of one of the worst blunders of economics
Comment on Jo Michell on ‘What is the loanable funds theory?’
Blog-Reference
“Throughout the 1920s and 1930s the focus was increasingly on the role of the equality of saving and investment, but the semantic squabbles that dominated much of the debate (the distinctions between ‘ex-ante,’ and ‘ex-post,’ ‘planned’ and ‘realized’ saving and investment, the discussion of whether the equality of saving and investment was an identity or an equilibrium condition) reflected a deeper confusion.” (Blanchard, 2000, p. 1378)
As always in economics, confusion is not resolved but warmed up in irregular intervals. Jo Michell starts a new episode of loanable funds storytelling with this statement: “OK, but saving equals investment by definition in macroeconomic terms: the famous S=I identity. How can there be a market that operates to ensure equality between two identically equal magnitudes?”
This statement, which was already false in the 1930s, is a paradigmatic example of the enduring scientific incompetence of economists.
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 the representative economist has 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 Wicksell’s natural-rate 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.” (1973, p. 63)
This elementary syllogism is conceptually and logically defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). #1
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. Post-New-After-Keynesians never detected and rectified Keynes’ lethal blunder.
The 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 nor otherwise, 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. Both models are provably false. Because of this, the discussion about monetary and fiscal policy has NEVER had sound scientific foundations, and as a consequence, economic policy guidance became the very CAUSE of unemployment/deflation/depression/stagnation.
To conclude: #2
(i) All I=S/IS-LM models from Keynes/Hicks onward 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.
The representative economist has not gotten (i) to (iii) for 80+ years. This includes Joe Michell. Whoever states in 2016: “... saving equals investment by definition in macroeconomic terms...” flunks the entry-level intelligence test of science.
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 For details and formal proofs, see cross-references Refutation of I=S
Related 'Keynesian macrofoundations are defective'
Blog-Reference
“Throughout the 1920s and 1930s the focus was increasingly on the role of the equality of saving and investment, but the semantic squabbles that dominated much of the debate (the distinctions between ‘ex-ante,’ and ‘ex-post,’ ‘planned’ and ‘realized’ saving and investment, the discussion of whether the equality of saving and investment was an identity or an equilibrium condition) reflected a deeper confusion.” (Blanchard, 2000, p. 1378)
As always in economics, confusion is not resolved but warmed up in irregular intervals. Jo Michell starts a new episode of loanable funds storytelling with this statement: “OK, but saving equals investment by definition in macroeconomic terms: the famous S=I identity. How can there be a market that operates to ensure equality between two identically equal magnitudes?”
This statement, which was already false in the 1930s, is a paradigmatic example of the enduring scientific incompetence of economists.
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 the representative economist has 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 Wicksell’s natural-rate 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.” (1973, p. 63)
This elementary syllogism is conceptually and logically defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). #1
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. Post-New-After-Keynesians never detected and rectified Keynes’ lethal blunder.
The 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 nor otherwise, 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. Both models are provably false. Because of this, the discussion about monetary and fiscal policy has NEVER had sound scientific foundations, and as a consequence, economic policy guidance became the very CAUSE of unemployment/deflation/depression/stagnation.
To conclude: #2
(i) All I=S/IS-LM models from Keynes/Hicks onward 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.
The representative economist has not gotten (i) to (iii) for 80+ years. This includes Joe Michell. Whoever states in 2016: “... saving equals investment by definition in macroeconomic terms...” flunks the entry-level intelligence test of science.
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 For details and formal proofs, see cross-references Refutation of I=S
Related 'Keynesian macrofoundations are defective'
***
Graphic AXEC143
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?'.
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?'.
October 15, 2016
Stuck with the economics prisoner’s dilemma
Comment on Peter Radford on ‘Blind leading the blind’
Blog-Reference
“The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.” (Feynman)
Heterodoxy has always argued that something might be wrong with Orthodoxy. In the discussion about a new curriculum, Peter Radford reiterates: “Micro, if anything, is worse than macro. It is so utterly disconnected from reality that it is incapable of anything other than talking about itself.” (See intro)
Heterodoxy’s rejection of Orthodoxy is right. In 2016 no thinking being can defend orthodox economics any longer. The disturbing fact, though, is (i) that traditional Heterodoxy is right but for the wrong reasons, and (ii), that what traditional Heterodoxy has produced as an alternative so far is also proto-scientific garbage.
Traditional Heterodoxy is caught in the same blind alley as Orthodoxy by naively believing that economics is about the behavior of agents and that economics is a social science. Because of this common foundational error, Heterodoxy has been unable to overthrow the orthodox paradigm and to “replace it by something”, which, indeed, “is not so easy”. The critique of unrealism or mathiness is easy but does not go to the root of the problem.
A paradigm is defined by its axioms. Orthodox economics is built upon this set of foundational hardcore propositions: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985)
The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the Walrasian hardcore contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).
Nowadays, all scientists agree that angels, phlogiston, epicycles, superman, and the Easter Bunny are nonentities. As far as economics is concerned we can agree that utility, constrained optimization, intertemporal optimization, rational expectation, well-behaved production functions or supply-demand-equilibrium are nonentities just like the Easter Bunny. Every model that contains a nonentity is A PRIORI false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the wastebasket. The same holds for all other nonentities.
Keynes had the right intuition: “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.” The orthodox premises are given with HC1/HC5.
The fact of the matter is that Keynes’s premises, too, are provably false.#1 As Feynman said, replacing a false paradigm is not so easy. What we have as a result is not only the orthodox ‘blind leading the blind’ but in addition, the heterodox blind running after the orthodox blind with the superficial critique of unrealism.
The most ridiculous economist is a Post-New-After-Keynesian who explains the functioning of the economy with SS-curve―DD-curve―equilibrium as, for example, with IS-LM.#2
Rethinking economics means discarding the failed paradigms and fully replacing Walrasian microfoundations and Keynes’s flawed macrofoundations with something new which has to be entirely FREE of nonentities and of behavioral assumptions. What BOTH Orthodoxy and Heterodoxy have to realize is that economics is a systems science.#3
The economics prisoner’s dilemma is: Orthodoxy has to be thrown out of science but traditional Heterodoxy cannot be admitted to science. The problem is how to get rid of all this hopeless ‘throng of superfluous economists’ (Joan Robinson).
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 From Orthodoxy to Heterodoxy to Metadoxy
Blog-Reference
“The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.” (Feynman)
Heterodoxy has always argued that something might be wrong with Orthodoxy. In the discussion about a new curriculum, Peter Radford reiterates: “Micro, if anything, is worse than macro. It is so utterly disconnected from reality that it is incapable of anything other than talking about itself.” (See intro)
Heterodoxy’s rejection of Orthodoxy is right. In 2016 no thinking being can defend orthodox economics any longer. The disturbing fact, though, is (i) that traditional Heterodoxy is right but for the wrong reasons, and (ii), that what traditional Heterodoxy has produced as an alternative so far is also proto-scientific garbage.
Traditional Heterodoxy is caught in the same blind alley as Orthodoxy by naively believing that economics is about the behavior of agents and that economics is a social science. Because of this common foundational error, Heterodoxy has been unable to overthrow the orthodox paradigm and to “replace it by something”, which, indeed, “is not so easy”. The critique of unrealism or mathiness is easy but does not go to the root of the problem.
A paradigm is defined by its axioms. Orthodox economics is built upon this set of foundational hardcore propositions: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985)
The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the Walrasian hardcore contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).
Nowadays, all scientists agree that angels, phlogiston, epicycles, superman, and the Easter Bunny are nonentities. As far as economics is concerned we can agree that utility, constrained optimization, intertemporal optimization, rational expectation, well-behaved production functions or supply-demand-equilibrium are nonentities just like the Easter Bunny. Every model that contains a nonentity is A PRIORI false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the wastebasket. The same holds for all other nonentities.
Keynes had the right intuition: “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.” The orthodox premises are given with HC1/HC5.
The fact of the matter is that Keynes’s premises, too, are provably false.#1 As Feynman said, replacing a false paradigm is not so easy. What we have as a result is not only the orthodox ‘blind leading the blind’ but in addition, the heterodox blind running after the orthodox blind with the superficial critique of unrealism.
The most ridiculous economist is a Post-New-After-Keynesian who explains the functioning of the economy with SS-curve―DD-curve―equilibrium as, for example, with IS-LM.#2
Rethinking economics means discarding the failed paradigms and fully replacing Walrasian microfoundations and Keynes’s flawed macrofoundations with something new which has to be entirely FREE of nonentities and of behavioral assumptions. What BOTH Orthodoxy and Heterodoxy have to realize is that economics is a systems science.#3
The economics prisoner’s dilemma is: Orthodoxy has to be thrown out of science but traditional Heterodoxy cannot be admitted to science. The problem is how to get rid of all this hopeless ‘throng of superfluous economists’ (Joan Robinson).
Egmont Kakarot-Handtke
#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 From Orthodoxy to Heterodoxy to Metadoxy
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