Ground Control to David Glasner

Comment on David Glasner on ‘A Primer on Equilibrium’

Blog-Reference and Blog-Reference

Economics is the science that tries to figure out how the actual economy works. Scientific knowledge takes the form of a theory that satisfies the criteria of material and formal consistency. A theory is the humanly best mental representation of reality.

David Glasner and his interlocutors, though, do not talk about the economy but indulge in meta-communication. The whole discussion circles around the question of the content and meaning of different features and versions of the general equilibrium model. In their communicative parallel universe, they are mainly occupied with the difference between rational expectations, perfect foresight, perfect knowledge, complete knowledge, and so on.

Economic equilibrium does NOT exist. And it has been PROVEN that it does not exist. So ALL equilibrium theory ― partial and general ― is axiomatically false because this concept is built right into the premises of standard economics.#1 This is methodologically inadmissible. Axiomatically false means that the theory has to be shredded and fully replaced, there is no twisting and tweaking of behavioral assumptions that can save it.

This is NOT news: “At long last, it can be said that the history of general  theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin (Ingrao et al., 1991). It has been a dead alley because the most rigorous solution of the existence problem by Arrow and Debreu turns general  theory into a mathematical puzzle applied to a virtual economy that can be imagined but could not possibly exist, while the extremely relevant ‘stability problem’ has never been solved either rigorously or sloppily. General  theory is simply a research program that has run into the sands.” (Blaug, 2001)

Equilibrium is a NONENTITY, that is, it has nothing to do with the real world which is the subject matter of economics understood as science.

From this follows that the whole equilibrium paradigm has to be replaced. This, too, is NOT news: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1991)

Instead, David Glasner discusses the relationship between equilibrium and rational expectations. To see the absolute senselessness of this economics sitcom, equalize the NONENTITY equilibrium with angels-dancing-on-a-pinpoint and the nonentity rational expectations with navel-of-Adam, then David and Nick and Henry are clarifying the question of how many angels can dance on Adam’s navel ― without ever realizing that they are making fools of themselves.

Needless to emphasize that the participants are also confused about other foundational concepts like pure competition and profit and their relationship: “Pure competition simply means that transactors are price-takers. Perfect competition adds the condition that (economic as opposed to accounting) profit is zero.” The zero-profit economy is another NONENTITY that follows from the methodological fact that economists do not understand until this day the difference between income, profit, and distributed profit. So, the concept of zero-profit-perfect-competition, too, is a NONENTITY.

Standard economics is proto-scientific garbage. The concept of equilibrium has already been dead in the cradle 150 years ago. Since Jevons, Walras, Menger all talk about equilibrium is vacuous.

Ground Control to David Glasner. Your circuit’s dead, there’s something wrong. Can you hear me, David Glasner?

Egmont Kakarot-Handtke


#1 The prime primer on equilibrium

Heterodoxy and the re-invention of science

Comment on Asad Zaman on ‘Historical context for Keynes’

Blog-Reference

The scientific method is well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994)

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

NOBODY is obliged to do science. In fact, 99 percent of humanity live and die without the slightest idea of what science is all about. Everybody can use a knife or a shovel or a paddle without ever having heard of the Law of the Lever.

Science goes well beyond practical use and an intuitive understanding and tries to capture the invariant features of reality with utmost precision.#1 Archimedes wrote down the Law of the Lever more than 2200 years ago and it has not been changed since. Science is above the ever-changing mess of history.

Certainty, precision, and reliability are essential for cumulative progress because nothing can be built on swampy ground. This is why science insists on the proof of material and formal consistency.

As Hilbert put it: “If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ... The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge — a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability.”

While the sciences built their edifices higher and higher in the past 200+ years, economists still bum around in their flat swamp huts which are organized in four intellectual slums called Walrasianism, Keynesianism, Marxianism, and Austrianism.

This is NOT such a great problem because everybody can choose (at least in principle) to intellectually settle down where they want. The problem starts as soon as somebody claims to do science but does not satisfy the criteria of material and formal consistency. This happened with economics. Economists claim to do science since Adam Smith/Karl Marx. What they in fact have done is cargo cult science or, more specifically, political economics. Political economics is agenda-pushing and fundamentally different from theoretical economics (= science). The very signature of political economics is to give a shit about scientific standards: “As some one has said, it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another.” (Fisher, 1911)

Needless to emphasize that political economics has NOT produced anything of scientific value in the last 200+ years. This holds for Orthodoxy AND Heterodoxy. Asad Zaman maintains that the failure of economics is “due to the adoption of axiomatic-deductive methodology by economists.” Nothing could be farther from the truth. Political economists have ― without exception ― either misapplied the axiomatic-deductive method or not applied it at all. It is a provable fact that both Walrasian microfoundations and Keynesian macrofoundations are false.#2

Because of this, the indispensable Paradigm Shift consists of replacing the false axioms of Orthodoxy and Heterodoxy with entirely new axioms and getting out of the swamp of political economics as fast as possible.

There is NO need to re-invent the scientific method, but there is an urgent need to re-invent economics. Asad Zaman and the rest of the deplorables of traditional Heterodoxy have to get their heads around the fact that economics is NOT about psychology, sociology, history, or politics but about how the economic system works.#3

Egmont Kakarot-Handtke


#1 See Nozick: Invariances; The Structure of the Objective World.
#2 Economics: The chief demerit is inconsistency
#3 For details of the big picture see cross-references Heterodoxy.

Related 'Methodology 101, economic filibuster, and the mother of all excuses' and 'Econ 101 is dead ― and now?' and 'The prime primer on equilibrium'

Macroeconomics for dummies (I)

Comment on Peter Cooper on ‘Short & Simple ― Total Spending Equals Total Income’

Blog-Reference

The heteconomist Peter Cooper says: “Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.” (See intro)

Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock-bottom truth of all of economics. Too bad that this statement is materially/logically false.

The foundational error/mistake/blunder consists of the methodological fact that the two most important magnitudes of economics — profit and income — are ill-defined.#1 In order to see this one has to go back to the most elementary configuration, that is, the pure production-consumption economy which consists only of the household and the business sector.#2

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Y_w, (ii) C is less than Y_w (iii) C is greater than Y_w.

• In case (i) the monetary saving of the household sector S_m≡Y_w−C is zero and the monetary profit of the business sector Q_m≡C−Y_w, too, is zero. The product market is cleared, i.e. X=O, in all three cases.
• In case (ii) monetary saving S_m is positive and the business sector makes a loss, i.e. Q_m is negative.
• In case (iii) monetary saving S_m is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Q_m is positive.

It always holds Q_m≡−S_m, in other words, at the heart of the monetary circuit is an identity: the business sector’s deficit equals the household sector’s surplus and the business sector’s surplus equals the household sector’s deficit. Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Q_m≡C−Y_w and the definition of household sector saving S_m≡Y_w−C. The causality runs from saving/dissaving of the household sector to loss/profit of the business sector.

Loss or profit is NOT income. Only distributed profit is income. The profit theory is false since Adam Smith.#3

Egmont Kakarot-Handtke


#1 How the Intelligent Non-Economist Can Refute Every Economist Hands Down and Keynes’s Missing Axioms Sec. 14-18
#2 The elementary production-consumption economy is given by three systemic axioms: (A1) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
#3 Essentials of Constructive Heterodoxy: Profit and cross-references Profit

Related 'The problem with macro in two words' and 'Macro for dummies (II)' and 'Macroeconomics ― dead since Keynes' and 'The canonical macroeconomic model'.

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Wikimedia AXEC121e and in newer notation AXEC121g, C and E_C are interchangeable

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REPLY to Schofield on Dec 13

Obviously, you cannot read. The point at issue is ‘Total Spending Equals Total Income’ and NOT the tautology ‘Total Contracting = Total Contracting.

Money is a related issue but an analytically different matter. See Essentials of Constructive Heterodoxy: Money, Credit, Interest.

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NOTE of peterc on 14 December 2016 at 3:11 AM:

“Hi Egmont. I’d prefer you didn’t clog up the blog with essentially the same comments you have posted at many other sites along with the numerous links to your blog and dozens of SSRN papers, most of which are basically just the same paper repeated with a different title and cosmetic alterations. (Yes, I have had a look over them in the past.)

If you do insist on posting comments here, kindly refrain from attacking other commenters (“Obviously, you cannot read”) or insulting readers (“Macro for dummies”) and state your point in a polite manner.

Unlike your contributions, the comments of Schofield and numerous others have added — and continue to add — a great deal of value to the blog. I consider your contributions basically to be graffiti, especially when they appear in response to introductory posts. They create noise, at best, and confusion at worst for newcomers to economics.

Please consider going away and not coming back unless and until you are prepared to engage in discussion in a constructive fashion.

For now, I am keeping your comments on moderation. I will exercise my right not to publish them, when I see fit, without explanation or apology.

Peter”

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#PointOfProof

The monetary circuit and how economists got it wrong

Comment on Peter Cooper on ‘The Monetary Circuit & Compatibility of Marx, Kalecki and Keynesian Macro’

Blog-Reference and Blog-Reference

The heteconomist Peter Cooper says: “There appears to be a considerable degree of compatibility between Marx and various Kalecki- and Keynes-influenced approaches to macroeconomics.” (See intro)

The compatibility consists in the fact that all these approaches are provably false. In other words, until this day neither orthodox nor heterodox economists have managed to give a formally consistent description of the monetary circuit. The blatant incompetence of economists is the ultimate reason why economics is a failed science.

The current state of economics is that the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory and axiomatically false.

For the short refutation of Kalecki, Keynes, Minsky, and Keen see Heterodoxy, too, is proto-scientific garbage#1 The complete formal proofs are given in separate papers.#2

Debunking is necessary but insufficient. As Blaug put it: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” What is needed is to move on from falsified approaches to the materially and formally correct theory. In methodology, this is called a Paradigm Shift.#3 The opus magnum consists of replacing false Walrasian microfoundations and false Keynesian macrofoundations with entirely new macrofoundations.#4 Nothing less will do.

The true theory does not emerge from the mixing of failed approaches. The true theory satisfies the well-defined criteria of material and formal consistency. What the heteconomist Peter Cooper offers is as inconsistent as one can get.

Both Orthodoxy and Heterodoxy never came to grips with science, with the foundational concept of profit, and with the working of the monetary circuit, we happen to live in.

Egmont Kakarot-Handtke


#1 Heterodoxy, too, is proto-scientific garbage
#2 Profit for Marxists and Debunking Squared
#3 The Emergence of Profit and Interest in the Monetary Circuit
#4 From Orthodoxy to Heterodoxy to Metadoxy

Related 'Why economists know nothing' and 'Rethinking MMT' and 'The false foundations of economics' and 'Wikipedia and the promotion of economists’ idiotism' and 'From false micro to true macro: the new economic paradigm' and 'The final implosion of MMT' and 'Economists still don’t get Econ 101 right' and 'Kalecki got it wrong, Allais got it right' and cross-references Kalecki.

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COMMENT on peterc on Dec 20

You write “Hi Magpie. Kalecki is starting from accounting identities. In particular, in the simplest model:
Income = Wages + Gross Profit
Income = Consumption + Gross
Investment Proceeds = Prime Cost + Wages + Gross Profit.”

Note that the first equation, i.e. Income = Wages + Gross Profit, is already false. For proof see (2011; 2012; 2014)

References
Kakarot-Handtke, E. (2011). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL

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REPLY to peterc on Dec 22 and additional Blog-Reference

You compare Marx, Kalecki, and Keynes. The first thing a logically talented person notes is that the three authors use different definitions of profit and income. Now, a logically talented person knows (i) only one approach can be true, or (ii), all three are false. This has been known for more than 2700 years: “There are always many different opinions and conventions concerning any one problem or subject-matter ... This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion ... on the other.” (Popper, 1994)

The intellectual Lumpenproletariat has no problem with scrambling an arbitrary number of contradictions in their confused brains but for a scientist this is unacceptable: “[economists] pursue the consistency of the theories they make, for he who contradicts himself proves nothing.” (Klant, 1988)

Because the definitions of income and profit by Marx, Kalecki, and Keynes are inconsistent these three authors prove NOTHING. You can find the proof of inconsistency elsewhere.#1 From this proof follows that the widely used definition Income = Wages + Profits is false. And since Kalecki starts with this definition he, too, is false and his whole analytical superstructure falls apart. It is as simple as that.

You say: “You can start from your own definitions, but this doesn’t really have a bearing on Kalecki, who did not share the same starting position.”

It is a widespread self-delusion among the intellectual Lumpenproletariat that everybody is entitled to make his own definitions. This is NOT the case.#2 It should be pretty obvious that all physicists apply the same definitions of energy, work, velocity, potential/kinetic energy etcetera, and that these foundational concepts are consistently defined. And this explains why physics is a success while economics never rose above the level of incoherent blather.#3

What is known for 2300+ years* ― except to economists ― is: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009)

So what has to be done instead of comparing the proto-scientific garbage of Marx, Kalecki, and Keynes is to move from their false macrofoundations to true macrofoundations.


#1 Debunking Squared
#2 Humpty Dumpty is back again
#3 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist

* Short overview The Stillbirth of Science in Greece

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Wikimedia AXEC183

Unit circle

The prime primer on equilibrium

Comment on David Glasner on ‘A Primer on Equilibrium’

Blog-Reference and Blog-Reference and Blog-Reference

David Glasner discusses the relationship between equilibrium and rational expectations. Thus he takes it for granted that something like equilibrium exists in the economy. This premise, though, is faulty and it does not matter much that it is shared by the majority of economists.

The majority accepts the neo-Walrasian axiom set with these 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)

It is a primitive methodological error/mistake/blunder to take equilibrium into the premises and then to establish and discuss the properties of general equilibrium. This error/mistake/blunder — known since antiquity as petitio principii #1 — is an age-old characteristic of incompetent scientists or savants: “These savants, as Galileo put it, first decided how the world should function in accordance with their preconceived principles. ... He openly criticized scientists and philosophers who accepted laws which conformed to their preconceived ideas as to how nature must behave. Nature did not first make men’s brains, he said, and then arrange the world so that it would be acceptable to human intellects.” (Kline, 1982)

The methodologically correct way is to give a description of the interrelationships of fundamental economic magnitudes and then to see how this elementary system behaves. Logically, there are three possibilities: explosion, implosion, or steady-state/equilibrium and we CANNOT KNOW at the beginning of the analysis what the outcome will be. Intuition is a bad guide because the rates of change of an explosion/implosion may be so small as to be practically imperceptible. Because of this, we are ― as a matter of methodological principle ― NOT allowed to take one of the three possible outcomes into the premises. Note, that the physicists had the same problem with the universe.#2

The key question that stands at the beginning of economics is in Keynes’ words: “... is the existing economic system in any significant sense self-adjusting.” This question has to be answered and not circumvented by putting the answer into the premises.

When the methodologically correct route is taken, then it turns out that the monetary economy is, in fact, unstable, that is, NO such thing as an equilibrium exists, neither in the short nor in the long run.#3

The right thing to do is throw the neo-Walrasian axiom set and all its NONENTITIES without further ado out of the window and to move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations and to NEVER use the word equilibrium in an economic text again.

Egmont Kakarot-Handtke


#1 Wikipedia
#2 See the story of the cosmological constant and Einstein’s “biggest blunder”
#3 Could we, please, all focus on the key question of economics?

Related 'Equilibrium is a NONENTITY like dancing angels on a pinpoint' and 'Ground Control to David Glasner' and 'Major Defects of the Market Economy'.

For more about why the economy is not self-adjusting see AXECquery.

Equilibrium is a nonentity like dancing angels on a pinpoint

Comment on David Glasner on ‘A Primer on Equilibrium’

Blog-Reference and Blog-Reference and Blog-Reference

Economics is a failed science and this is the current state in Hume’s apt metaphor: “... when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.”

What has led economists astray is the concept of equilibrium. Methodology 101 tells us: every economist who accepts supply-demand-equilibrium as an explanation of how markets work disqualifies himself as a scientist.

The state of imbecility is documented by the acceptance of TWO nonentities, viz. equilibrium, and rational expectations.

Egmont Kakarot-Handtke


Related ‘Methodology 101, economic filibuster, and the mother of all excuses’ and ‘The road that turned out to be a blind alley’ and 'Forget equilibrium' and 'Equilibrium is stone dead — and now?' and 'The market economy is inherently unstable and economists never grasped it' and 'Axiomatized nonentities and the failure of methodologists' and 'Economics between Angelology and Nonentitylogy' and 'Could we, please, all focus on the key question of economics?'

Immediately following The prime primer on equilibrium

Methodology 101, economic filibuster, and the mother of all excuses

Comment on Noah Smith on ‘More about the Econ 101 theory of labor markets’

Blog-Reference

The ancient Greeks started science with the distinction between doxa (= opinion) and episteme (= knowledge). And scientific knowledge is well-defined by material and formal consistency.

Obviously, economics is a failed science, that is, there is NO knowledge that satisfies scientific criteria. This means economists are forced to backpedal methodologically or in Blaug’s words ‘to play tennis with the net down.’

How this is done? Watch Noah Smith: “What falsification really means ― or should mean, anyway ― is that a theory is shown to not work as well as we’d like it to under a well-known set of conditions. So since people have different expectations for a theory ― some demand that theories work with high degrees of quantitative precision, while others only want them to be loose qualitative guides ― whether a theory has been falsified will often be a matter of opinion.”

Here you have it, we are back at opinion and all scientific retards happily agree because opinion means nothing other than (i) anything goes, and (ii), the coexistence of false theories. And this is what we actually have: the major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism, MMT ― are mutually contradictory and axiomatically false.

A scientist is supposed to abandon a falsified theory. This does not happen in economics. Morgenstern reminded his fellow economists long ago: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.”

Walrasianism, Keynesianism, Marxianism, Austrianism, MMT is provably false, i.e. materially and formally inconsistent, but they are still around ‘as if nothing had happened’.

Because falsification in the original sense does not happen, the heap of scientific garbage grows with every peer-reviewed issue of ranked quality journals. All grand debates end where they started, that is, in the swamp of conceptual confusion, undecidability, impenetrable mishmash, category error, and inconclusiveness. As Clower put it: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790 after Adam Smith completed the last revision of The Wealth of Nations.”

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

Or: “We know all that. Nothing is perfect … The assumptions are reasonable. The assumptions don’t matter. The assumptions are conservative. You can’t prove the assumptions are wrong. The biases will cancel. We can model the biases. We’re only doing what everybody else does. Now we use more sophisticated techniques. If we don’t do it, someone else will. What would you do? The decision-maker has to be better off with us than without us … The models aren’t totally useless. You have to do the best you can with the data. You have to make assumptions in order to make progress. You have to give the models the benefit of the doubt. Where’s the harm?” (Freedman)

Economics could be ignored as Circus Maximus were it not for the fact that the scientific incompetence of economists is the ultimate cause of mass unemployment, deflation, depression, stagnation. No state/society can afford the intellectual deadweight of its economists.

Let us come to the methodological key point. Standard 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)

The representative economist has not realized it, but methodologically these premises are forever unacceptable. It should be pretty obvious that the neo-Walrasian hardcore 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 all other NONENTITIES.

Conclusion: The labor market theory is false in the incarnation as partial supply-demand-equilibrium (S-D-E) and a fortiori in the incarnation as general equilibrium.#1 Methodology 101 tells us: Every economist who accepts supply-demand-equilibrium as an explanation of how the market system works disqualifies himself as a scientist.

Egmont Kakarot-Handtke


#1 Unemployment is high because economics is false

Immediately preceding Econ 101 is dead ― and now?