Neither Walrasians nor Keynesians have a clear idea of the fundamental economic concepts income and profit, nor of the interdependence of qualitatively different markets. Critique of these approaches is necessary but not overly productive. A real breakthrough requires a new set of premises because no way leads from the accustomed behavioral assumptions to the understanding of how the economy works. More precisely, the hitherto accepted behavioral axioms have to be replaced by structural axioms. Starting from new formal foundations, this paper gives a comprehensive and consistent account of the objective interrelations of the monetary economy’s elementary building blocks.
July 24, 2013
Clueless
Comment on Fred Zaman on 'Rethinking Keynes’ non-Euclidian theory of the economy'
Blog-Reference
Blog-Reference
It seems that political economists have run out of arguments. Hence it is appropriate that this thread's summary is given by a theoretical economist: “..., before accepting the conclusions of any economist’s model as applicable to the real world, the careful student should always examine and be prepared to criticize the applicability of the fundamental postulates of the model; for, in the absence of any mistake in logic, the axioms of the model determine its conclusions.” (Davidson, 2002, p. 41)
Keynes has to be praised for “throwing over” the classical axioms (aka Euclidean). Post Keynesians have to be criticized for failing to establish a new set of axioms (aka non-Euclidean). Theoretical economics is, therefore, hanging in the air and, as a consequence, Political Economy with it. Economists have not yet done their science homework.
Egmont Kakarot-Handtke
References
Davidson, P. (2002). Financial Markets, Money and the Real World. Cheltenham, Northampton: Edward Elgar.
July 18, 2013
Economics and systems theory
Comment on Fred Zaman on 'Rethinking Keynes’ non-Euclidian theory of the economy'
Blog-Reference
The idea that systems theory could be useful in economics is not as novel as you might think. In fact, it provides the strongest backup for the claim of neoclassicals that what they do is science: “General systems theory (G.S.T.), of which general equilibrium theory is but a specification to certain economic problems, has existed for many years. … G.S.T., then, looks for, and finds, many structural similarities among fields of scientific analysis. To the extent that G.S.T. is a constructive approach to inquiry, general equilibrium theory in economics becomes rooted not just in the particular tradition that have generated the multi-fold extensions of the Arrow-Debreu-McKenzie [ADM] model, but in the very structural unities of science itself. To attack general equilibrium theory in economics as a legitimate model of reasoning is to simultaneously deny homeostatic reasoning to psychologists and morphogenetic analysis to the biologist. To argue that G.S.T. is inapplicable to economics is to negate claims that economics is a science.” (Weintraub, 1979, pp. 71-72)
To propagate systems theory seems not to be the way to a fundamental Paradigm Shift, rather to improve neoclassical systems theory, i.e. to more descriptive realism.
Apart from this, I would like to support your appeal to take systems theory seriously: “Concepts of equilibrium, homeostasis, adjustment, etc., are suitable for the maintenance of systems, but inadequate for the phenomena of change, differentiation, evolution, negentropy, production of improbable states, creativity, building-up of tensions, self-realization, emergence, etc;” (von Bertalanffy, 1969, p. 23)
Systems theorists realized this long ago but equibrilists are still behind the curve.
Egmont Kakarot-Handtke
References
von Bertalanffy, L. (1969). General Systems Theory. New York: Braziller.
Weintraub, E. R. (1979). Microfoundations. Cambridge, London, New York, etc.: Cambridge University Press.
Blog-Reference
The idea that systems theory could be useful in economics is not as novel as you might think. In fact, it provides the strongest backup for the claim of neoclassicals that what they do is science: “General systems theory (G.S.T.), of which general equilibrium theory is but a specification to certain economic problems, has existed for many years. … G.S.T., then, looks for, and finds, many structural similarities among fields of scientific analysis. To the extent that G.S.T. is a constructive approach to inquiry, general equilibrium theory in economics becomes rooted not just in the particular tradition that have generated the multi-fold extensions of the Arrow-Debreu-McKenzie [ADM] model, but in the very structural unities of science itself. To attack general equilibrium theory in economics as a legitimate model of reasoning is to simultaneously deny homeostatic reasoning to psychologists and morphogenetic analysis to the biologist. To argue that G.S.T. is inapplicable to economics is to negate claims that economics is a science.” (Weintraub, 1979, pp. 71-72)
To propagate systems theory seems not to be the way to a fundamental Paradigm Shift, rather to improve neoclassical systems theory, i.e. to more descriptive realism.
Apart from this, I would like to support your appeal to take systems theory seriously: “Concepts of equilibrium, homeostasis, adjustment, etc., are suitable for the maintenance of systems, but inadequate for the phenomena of change, differentiation, evolution, negentropy, production of improbable states, creativity, building-up of tensions, self-realization, emergence, etc;” (von Bertalanffy, 1969, p. 23)
Systems theorists realized this long ago but equibrilists are still behind the curve.
Egmont Kakarot-Handtke
References
von Bertalanffy, L. (1969). General Systems Theory. New York: Braziller.
Weintraub, E. R. (1979). Microfoundations. Cambridge, London, New York, etc.: Cambridge University Press.
July 17, 2013
Keynes, Hayek, Kant
Comment on Fred Zaman on 'Rethinking Keynes’ non-Euclidian theory of the economy'
Blog-Reference
In the glorious days of economics, the great thinker Hayek was quipped by the great thinker Keynes: “... a remorseless logician can end up in Bedlam.” (Keynes, cited in Moggridge 1976, p. 36)
Economists in those days were already confused confusers (2013). This is not a lament but a statement of fact. Neither Keynes nor Hayek had a clear idea of the foundational concepts of income and profit. That's easy to prove.
We perfectly agree with Kant’s dictum: “Theory without empirical content is hollow. Empirical observations without [good & falsifiable] theory are directionless.”
Theory, though, starts with axioms, as Kant would have told you also.
Egmont Kakarot-Handtke
References
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
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Blog-Reference
In the glorious days of economics, the great thinker Hayek was quipped by the great thinker Keynes: “... a remorseless logician can end up in Bedlam.” (Keynes, cited in Moggridge 1976, p. 36)
Economists in those days were already confused confusers (2013). This is not a lament but a statement of fact. Neither Keynes nor Hayek had a clear idea of the foundational concepts of income and profit. That's easy to prove.
We perfectly agree with Kant’s dictum: “Theory without empirical content is hollow. Empirical observations without [good & falsifiable] theory are directionless.”
Theory, though, starts with axioms, as Kant would have told you also.
Egmont Kakarot-Handtke
References
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
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
July 16, 2013
Anything goes — for a while (II)
Comment on Fred Zaman on 'Rethinking Keynes’ non-Euclidian theory of the economy'
Blog-Reference
The analytical starting point determines the course of a theoretical investigation and ultimately the productiveness of an approach. The Classics took production and accumulation as their point of departure, the Neoclassicals exchange. Exchange implies behavioral assumptions and notions like rationality, optimization, and equilibrium. This approach has led into a blind alley. Why?
“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.” (Keynes, 1973, p. xxi)
To change a theory, therefore, means to change its premises or, in Keynes’ words, to ‘throw over’ the axioms. One can take this figuratively or literally. I take it literally and this means that the subjective-behavioral axioms of standard economics are fully replaced by objective-structural axioms. In Keynes' metaphor: we move from Euclidean to non-Euclidean axioms. To recall, Keynes preserved part of the foundational assumptions of orthodoxy. This halfway construction is unsatisfactory.
(2a) Axiomatization is indispensable because the methodological anything-goes mentality among economists is the proximate reason for the proto-scientific condition of theoretical economics. Because of conceptual sloppiness, neither orthodoxy nor heterodoxy has a clear idea of the fundamental economic concepts of income and profit. Doing economics without a clear idea of income and profit is like doing physics without a clear idea of force and mass — it cannot yield practical results, and it has not.
(2b) I have demonstrated that Keynes' formal basis is a limiting case of the structural axiom set. This means that there is no contradiction between the two formalisms, the latter is only more general (see Set and Subset, 2011, Sec. 20).
(2c) This implies that the concept of saving is also more general. Total saving is given axiomatically as monetary and nonmonetary saving. Monetary saving is identical to Keynes' definition. Nonmonetary saving is identical to Friedman's notion (see Primary and Secondary Markets, 2011, Sec. 4.2). The structural axiomatic approach consistently integrates Keynes and Friedman, although only with regard to consumption/saving.
(2d) The relation between monetary saving, liquidity, and interest rate has been dealt with in (2011, Sec. 9). The structural axiom set formally underpins Keynes' conception of liquidity preference. The commonplace quantity theory is refuted.
(2e) A summary of the structural-systemic axiomatic theory of saving has been given in Settling the Theory of Saving (2013). The classical notion of saving/time preference, which reappears in DSGE, is refuted.
(2f) The structural axiom set consists exclusively of measurable variables and yields testable propositions.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011a). Keynes’ Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011c). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–26. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan. (1936).
Blog-Reference
The analytical starting point determines the course of a theoretical investigation and ultimately the productiveness of an approach. The Classics took production and accumulation as their point of departure, the Neoclassicals exchange. Exchange implies behavioral assumptions and notions like rationality, optimization, and equilibrium. This approach has led into a blind alley. Why?
“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.” (Keynes, 1973, p. xxi)
To change a theory, therefore, means to change its premises or, in Keynes’ words, to ‘throw over’ the axioms. One can take this figuratively or literally. I take it literally and this means that the subjective-behavioral axioms of standard economics are fully replaced by objective-structural axioms. In Keynes' metaphor: we move from Euclidean to non-Euclidean axioms. To recall, Keynes preserved part of the foundational assumptions of orthodoxy. This halfway construction is unsatisfactory.
(2a) Axiomatization is indispensable because the methodological anything-goes mentality among economists is the proximate reason for the proto-scientific condition of theoretical economics. Because of conceptual sloppiness, neither orthodoxy nor heterodoxy has a clear idea of the fundamental economic concepts of income and profit. Doing economics without a clear idea of income and profit is like doing physics without a clear idea of force and mass — it cannot yield practical results, and it has not.
(2b) I have demonstrated that Keynes' formal basis is a limiting case of the structural axiom set. This means that there is no contradiction between the two formalisms, the latter is only more general (see Set and Subset, 2011, Sec. 20).
(2c) This implies that the concept of saving is also more general. Total saving is given axiomatically as monetary and nonmonetary saving. Monetary saving is identical to Keynes' definition. Nonmonetary saving is identical to Friedman's notion (see Primary and Secondary Markets, 2011, Sec. 4.2). The structural axiomatic approach consistently integrates Keynes and Friedman, although only with regard to consumption/saving.
(2d) The relation between monetary saving, liquidity, and interest rate has been dealt with in (2011, Sec. 9). The structural axiom set formally underpins Keynes' conception of liquidity preference. The commonplace quantity theory is refuted.
(2e) A summary of the structural-systemic axiomatic theory of saving has been given in Settling the Theory of Saving (2013). The classical notion of saving/time preference, which reappears in DSGE, is refuted.
(2f) The structural axiom set consists exclusively of measurable variables and yields testable propositions.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011a). Keynes’ Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2011b). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011c). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–26. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan. (1936).
July 15, 2013
Anything goes — for a while (I)
Comment on Fred Zaman on 'Rethinking Keynes’ non-Euclidian theory of the economy'
Blog-Reference
Your post comes to the heart of the matter. Please allow me to answer it in two separate parts. The second part will follow within one or two days.
(1a) I am aware that you wrote an article about who is a Post Keynesian. By rephrasing Eichner's title [Why Economics is Not Yet a Science] I by no means intended to take a hand in that discussion. Whether Eichner is a Post Keynesian or not is tangential to the content of my paper Why Post Keynesianism is Not Yet a Science (2013).
(1b) My point of departure is the quote: “For Keynes, as for Post Keynesians, the guiding motto is 'it is better to be roughly right than precisely wrong!'" (Davidson, 1984, p. 574). It is this motto that I attack because it provides the justification for conceptual carelessness, and I am by no means the first to realize that intellectual sloppiness is the hallmark of both neoclassical and Keynesian economics:
“I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (von Neumann, quoted in Mirowski, 2002, p. 146 fn. 49), see also Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist (2013).
(1c) The methodological anything-goes mentality is the main reason for the proto-scientific condition of theoretical economics.
(1d) The stated purpose of my paper is to demonstrate that conceptual and formal sloppiness leads to theoretical errors. It is well known that a theory that contains logical errors is worthless even if it makes good sense from a political point of view. To resume that Keynesianism is logically defective is not anti-Keynesian. The errors can be corrected, and it can even be shown that some of Keynes's verbal statements that were hitherto hanging in the air are fortified by a correct formal underpinning. That is: axiomatization is healthy for Post Keynesianism.
(1e) I have demonstrated that a correct formalism would have saved the life of Post Keynesianism in the Phillips Curve debate, see Keynes Employment Function and the Gratuitous Phillips Curve Disaster (2012).
(1f) I think two of your statements deserve rigorous refutation:
• You can define anything you want but as a sage once said: “A rose by any other name will smell as sweet!”
• ... the two cited equations [Y=C+I, S=Y−C] are simply accounting identities — and by definition, they can not be false as long as one accepts the definitions. But I=S is merely an ex-post accounting identity and by itself is just as true for neoclassical economics as for anything else — including Marxian economics.
(1g) I have refuted the first statement in Keynes's Missing Axioms (2011, Sec. 17-20) and Why Post Keynesianism is Not Yet a Science (2013, Sec. VI-VIII)
(1h) I have refuted the second statement in The Common Error of Common Sense: An Essential Rectification of the Accounting Approach (2012).
For details, see my forthcoming post.
Egmont Kakarot-Handtke
References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2011). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2012a). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2012b). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2013a). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2013b). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Blog-Reference
Your post comes to the heart of the matter. Please allow me to answer it in two separate parts. The second part will follow within one or two days.
(1a) I am aware that you wrote an article about who is a Post Keynesian. By rephrasing Eichner's title [Why Economics is Not Yet a Science] I by no means intended to take a hand in that discussion. Whether Eichner is a Post Keynesian or not is tangential to the content of my paper Why Post Keynesianism is Not Yet a Science (2013).
(1b) My point of departure is the quote: “For Keynes, as for Post Keynesians, the guiding motto is 'it is better to be roughly right than precisely wrong!'" (Davidson, 1984, p. 574). It is this motto that I attack because it provides the justification for conceptual carelessness, and I am by no means the first to realize that intellectual sloppiness is the hallmark of both neoclassical and Keynesian economics:
“I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (von Neumann, quoted in Mirowski, 2002, p. 146 fn. 49), see also Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist (2013).
(1c) The methodological anything-goes mentality is the main reason for the proto-scientific condition of theoretical economics.
(1d) The stated purpose of my paper is to demonstrate that conceptual and formal sloppiness leads to theoretical errors. It is well known that a theory that contains logical errors is worthless even if it makes good sense from a political point of view. To resume that Keynesianism is logically defective is not anti-Keynesian. The errors can be corrected, and it can even be shown that some of Keynes's verbal statements that were hitherto hanging in the air are fortified by a correct formal underpinning. That is: axiomatization is healthy for Post Keynesianism.
(1e) I have demonstrated that a correct formalism would have saved the life of Post Keynesianism in the Phillips Curve debate, see Keynes Employment Function and the Gratuitous Phillips Curve Disaster (2012).
(1f) I think two of your statements deserve rigorous refutation:
• You can define anything you want but as a sage once said: “A rose by any other name will smell as sweet!”
• ... the two cited equations [Y=C+I, S=Y−C] are simply accounting identities — and by definition, they can not be false as long as one accepts the definitions. But I=S is merely an ex-post accounting identity and by itself is just as true for neoclassical economics as for anything else — including Marxian economics.
(1g) I have refuted the first statement in Keynes's Missing Axioms (2011, Sec. 17-20) and Why Post Keynesianism is Not Yet a Science (2013, Sec. VI-VIII)
(1h) I have refuted the second statement in The Common Error of Common Sense: An Essential Rectification of the Accounting Approach (2012).
For details, see my forthcoming post.
Egmont Kakarot-Handtke
References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2011). Keynes’s Missing Axioms. SSRN Working Paper Series, 1841408: 1–33. URL
Kakarot-Handtke, E. (2012a). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2012b). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2013a). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2013b). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
July 14, 2013
Hopeless, but not serious
Comment on Fred Zaman on 'Rethinking Keynes’ non-Euclidian theory of the economy'
Blog-Reference
Perhaps we agree on the following.
The neoclassical approach is inadmissible. This needs no further elaboration because enlightened Neoclassicals have already abandoned it.
The Keynesian approach is inadmissible because it is formally defective. The proof has been given in (2013).
The heterodox camp has unearthed many flaws of standard economics but failed to develop an alternative that satisfies scientific standards, i.e. material and formal consistency.
Even Paul Schächterle's fresh theory of the labor market cannot give us much impetus because he overlooked that it is well-known textbook stuff (Samuelson and Nordhaus, 1998, p. 229, Fig. 13-4).
As an old Viennese saying goes: the situation is hopeless, but not serious.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Blog-Reference
Perhaps we agree on the following.
The neoclassical approach is inadmissible. This needs no further elaboration because enlightened Neoclassicals have already abandoned it.
The Keynesian approach is inadmissible because it is formally defective. The proof has been given in (2013).
The heterodox camp has unearthed many flaws of standard economics but failed to develop an alternative that satisfies scientific standards, i.e. material and formal consistency.
Even Paul Schächterle's fresh theory of the labor market cannot give us much impetus because he overlooked that it is well-known textbook stuff (Samuelson and Nordhaus, 1998, p. 229, Fig. 13-4).
As an old Viennese saying goes: the situation is hopeless, but not serious.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
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