January 14, 2015

More error than trial

Comment on Lars Syll on '"New Keynesian" haiku economics'


Science is a trial-and-error process and that means that the quantitatively greater part of what scientists produce eventually turns out to be waste. This is no problem at all – provided there is a method of, so to speak, separating gold from gravel.

In science, we have two criteria: formal and material consistency. Theories that are logically defective or are refuted by facts end on the waste heap. The separation process does not work, of course, with an immediate 100 percent efficiency. So, at any point in time, there are some false theories held and defended in the public domain by honest scientists. However, by sticking to the scientific method we develop in the course of time what Popper called verisimilitude, i.e., an approximation to the truth.

What we can observe is, indeed, that this process does not seem to work properly in economics. What we see is the refinement of an approach that has been wrong-footed from the very beginning. Everyone who looks closely into the matter cannot fail to recognize that the heterodox critique of Orthodoxy is to the point.

The curious thing, however, is that there seems to be a lack of serious attempts to overcome the Jevons-Walras-Menger paradigm.

“Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

The best-known exception was, of course, Keynes. The problem with Keynes is that he often had the right intuition but could not translate his ideas into the form of a logically consistent theory. Yet, this is the very task of the economist.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

While Keynes did not succeed with the intended paradigm shift it is certainly the case that with his educated common sense he was closer to the real world than the 'crazy models' of contemporary New Classicals or New Keynesians.

When one advances in Keynes's innovative spirit and avoids his conceptual and logical errors/mistakes then one can derive the macroeconomic Employment Law (2014, eq. (22)) which is shown on Wikimedia AXEC07

From this equation follows confirmation of Keynes' intuitive arguments:
“So, what Keynes actually did argue in General Theory, was that the classical proposition that lowering wages would lower unemployment and ultimately take economies out of depressions, was ill-founded and basically wrong.”
“During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.” (see intro)

The final conclusion appears a bit paradox: The formal part of the General Theory is defective, however, Keynes' assertions with regard to the interrelation of wage rate and employment are correct. The sticky-wages argument of New Keynesianism, on the other hand, is far beside the point (not to speak of its theoretical poverty).

There has been no real scientific progress in economics since Keynes.

Egmont Kakarot-Handtke

Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
Cambridge University Press.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
Method in Economics and Econometrics. Cambridge: MIT Press.