Don’t blame the model, blame the modeler

Comment Lars Syll on ‘Krugman’s modeling flim flam’

Blog-Reference and Blog-Reference on May 3

You can make a model with the earth in the center and the planets circling around, or you can make a model with the sun in the center and the planets circling around. The model is just a realization of the underlying theory. The underlying theory in this example is the theory of gravitation which is formally encapsulated in the inverse square law. This law has NOT been found by simple observation, it has been a mental construct. Gravitation can not be seen with the two natural eyes, only with the third eye of theory.

Model building is NOT the crucial part. It is the underlying theory that is decisive. Because a well-designed theory consists of premises as foundations and the theoretical superstructure as a logical consequence the crucial part is ultimately the premises.

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “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)

Methodologically, these premises are forever unacceptable but economists swallowed them hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The failure of methodological individualism is indisputable. The ultimate reason can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works. The Fallacy of Composition is the lethal blunder of microfoundations.

Because of this, the microfoundations approach has already been dead in the cradle. This leaves only one option. As Joan Robinson put it: “Scrap the lot and start again.”

Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

Keynes’ original blunder kicked off a chain reaction of errors/mistakes:
• All I=S/IS-LM models are false since Keynes and Hicks (2011).
• Keynes’s profit conundrum has not been solved by After-Keynesians.
• Keynes got the Employment Law/Phillips curve wrong (2012).

So, for Keynesianism holds also: “Scrap the lot and start again.”

The situation is this: ALL models that have been built and are still being built on either the Walrasian or the Keynesian axioms are false.

What is Krugman doing? He tells on his blog: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

From this, we can be sure that anything that Krugman ever said or will say has NO sound scientific foundation. ALL his models are defective because the Iron Methodological Law says: garbage in, garbage out. The quality of a model is determined by the scientific competence of its creator. No scientist will ever accept ‘maximization-and-equilibrium’ as a starting point for building an economic model. No scientist will ever accept Krugman.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

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Wikimedia AXEC121i

Society, you have a problem

Comment on Peter Radford on ‘Market Reflex’

Blog-Reference

(i) The claim ‘Free markets work best when left alone’ is either a political or a scientific statement. If it is politic it needs merely repetition, if it is scientific it needs proof.

(ii) NO scientific proof of the claim exists. General Equilibrium Theory as the most ambitious attempt is known to be a failure, e.g. (Ackerman et al., 2004).

(iii) The question about the functionality of the market system as a WHOLE cannot be decided in the political sphere with claims and counter-claims. BOTH, pro-market and anti-market ideology is sitcom stuff.

(iv) Economics claims to be a science and science is about proof and proof is about formal AND material consistency. “The chief demerit is inconsistency, ...” (Popper, 1994, p. 160)

(v) The Econ 101 student is taught supply-demand-equilibrium and he accepts this for the rest of his life as a satisfactory explanation — imperfections, stickiness, and distributional bias easily granted as properties of real life — of how the market system works. This has nothing to do with ideology but with flunking an intelligence test.

(vi) The crucial point is that the price mechanism does NOT work as standard economics hallucinates. Economists are PROVABLY wrong with regard to the two most important features of the economy: (1) the profit mechanism, and (2), the price mechanism. This holds for Orthodoxy but also for Heterodoxy.

(vii) The primary fault of economics is not that it is an ideology but that it is a failed science. The Palgrave Dictionary sums up: “A satisfactory theory of profits is still elusive.” (Desai). This means more than 200 years after Adam Smith neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian school can tell the difference between income and profit. Hence, they fail to capture the essence of the market economy. Clearly, when you do not understand profit you cannot understand how the market system works.

(viii) Standard profit theory is PROVABLY false. Therefore, the familiar story of the price mechanism is PROVABLY false. Therefore, the assertion ‘Free markets work best when left alone’ is PROVABLY false (2015).

(ix) Economic policy proposals of ALL schools lack sound scientific foundations.

Society, you have a problem: some feeble-minded poultry entrails readers are telling you how to run the economy.

Egmont Kakarot-Handtke


References
Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York: Routledge.
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, 154–184. London, New York: Routledge.

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AXEC117

The unintended consequences of deficit spending

Comment on David Andolfatto on ‘On the want of U.S. government debt’

Blog-Reference

You conclude: “There seems to be a strong presumption among people (Americans in particular) that the government should run its finances in the manner of a household. Economic theory is quite clear that this sentiment, however noble, is just plain wrong.”

What is curious about the deficit discussion since Keynes is that profit is entirely left out of the picture. The ultimate reason is that Keynes got profit theory wrong and After-Keynesians simply parroted Keynes’ blunder. As a result, conventional profit theories are provably false until this day. As the Palgrave Dictionary summarizes “A satisfactory theory of profits is still elusive.” (Desai). This is not exactly a great scientific achievement.#1

The profit definition for the most elementary case of the production-consumption economy is given by Q_m≡C−Y_w. Legend: Q_m monetary profit, C consumption expenditures, Y_w wage income. The monetary profit of the business sector is equal to the deficit spending of the household sector.

The Profit Law for the investment economy reads Q_m≡Y_d+I−S_m.#2 Legend: Q_m monetary profit, Y_d distributed profit, S_m monetary saving, I investment expenditure.

When we leave this part unaltered for the moment and add the government sector, we have: the increase of overall monetary profit of the business sector is equal to the deficit of the government sector, Public Deficit = Private Profit.

Here we arrive at the irony/absurdity of the balanced budget discussion. Normally, the Friends-of-the-Workers argue in favor of public deficit spending to push employment. This has the unintended consequence that overall profits increase one-to-one with the growth of public debt. On the other hand, the Friends-of-the-Capitalists argue in favor of deficit reduction to balance the government’s budget. This has the unintended consequence that overall profits decrease. In full ignorance of the profit effect on the distribution of income and wealth, BOTH sides argue ultimately AGAINST their own interest. Obviously, this constitutes the worst violation of orthodox economics's foundational principles, i.e., self-interest and utility maximization.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith
#2 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment eq. (18)

Note on the employment multiplier

Refers to Chris Dillow On Multipliers

Blog-Reference

The multiplier discussion lacks sound theoretical foundations. The most elementary version of the correct Employment Law for the economy as a whole is given on Wikimedia AXEC62:

The multiplier is composed of the ratios ρ_E and ρ_F:#1
— An increase in the expenditure ratio ρ_E≡C/Y leads to higher employment.
— An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. The Law contains only measurable variables and is testable. This should end the groping in the dark and the inconclusive wish-wash.

Egmont Kakarot-Handtke


#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

Economic policy has gone wrong because economic theory has gone wrong

Comment on Stephen Grenville on ‘Rethinking economics: Cohen and DeLong’

Blog-Reference and Blog-Reference

You conclude: “Of course it is easy to find fault in this latest effort to pick apart what has gone wrong with economic policy-making. But each successive contributor to the debate identifies three common themes ... pernicious influence of doctrine ... income mal-distribution ... misallocation of our best talent into finance.”

The explanations of Piketty, Gordon, Summers, Cohen, DeLong miss the crucial point, that is, the scientific incompetence of economists. The point is this: “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)

Economists have no true theory. Economics is a failed science. Lacking the true theory means that economists do not understand how the actual monetary economy works and from this follows that they are, as a matter of principle, in NO position to give policy recommendations. To derive policy recommendations from defective models is not different from reading poultry entrails.

Economists have no true theory because they are incompetent scientists. The profit theory is false since Adam Smith (2014) and neither Walrasians, nor Keynesians, nor Marxians, nor Austrians have realized this to this very day. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10). Clearly, when the profit theory is false then distribution theory and employment theory are false as a logical consequence. When the foundations of a theory are defective the whole superstructure implodes sooner or later.

Rethinking economics, therefore, does NOT mean to recalibrate economic policy but to scrap Walrasianism, Keynesianism, Marxianism, Austrianism and to perform the long-overdue paradigm shift, that is, to rebuild economic theory from axiomatic scratch. Nothing less will do.

Right policy depends on true theory. There is no use to blame the political parties or the Fed or the government, ultimately scientifically incompetent economists bear the intellectual responsibility for the social devastations of unemployment or financial breakdown.

Rethinking economics means in very practical terms to retire incompetent economic thinkers.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. 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
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

Economic recommendations out of the swamp between true and false

Comment on Anonymous on Noah Smith on ‘Policy recommendations and wishful thinking’

Blog-Reference

The swamp between the hard rocks of true and false is the natural habitat of quacking frogs, of which there are four species: Walrasians, Keynesians, Marxians, Austrians. These approaches contradict each other. As a matter of logic, only one can be true, but all four can be false. The latter is actually the case. This leaves economists with (i) the scientific alternative, i.e. to initiate the necessary paradigm shift, and (ii), the political alternative, i.e. to be content with the pluralism of false theories and to continue fooling around in the swamp between true and false where “nothing is clear and everything is possible.” (Keynes)

Because economics, as represented by the four failed sects, has never risen above the level of a proto-science it has become popular among economists to question the standards, to lower them or, as Blaug aptly put it, ‘to play tennis with the net down’. When this is pointed out, economists make the Pavlovian salto mortale backward. Here is the complete list of silly 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)

The bottom line of this verbiage is that economists are incompetent scientists and that economics is what Feynman called a cargo cult science. But having no idea about how the actual economy works means that economists are in NO position to give policy recommendations.

This is not a problem, though. Economists need only give up the claim that what they do is science as explicitly expressed in the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” in order to bring public perception in line with reality.

Science is about true/false, all else is sitcom claptrap. After more than 200 years of scientific failure, the world has enough of brain-dead economic blather, worthless policy recommendations, and silly excuses.

Egmont Kakarot-Handtke


Immediately preceding Why don’t economists simply shut up for a while?

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REPLY to Kain on Apr 29

You say: ‘Of course they [profit theories] can be different and correct at the same time.’ Only in the intellectual swamp of economics which is the preferred habitat of confused confusers and compulsive blatherers.

(i) Take notice that The Profit Theory is False Since Adam Smith.

(ii) As a consequence of (i) the concept of GDP is false, see ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’ and 'The GDP-death-blow for the economics profession'.

(iii) As a consequence of (i)/(ii) Walrasianism, Keynesianism, Marxianism, and Austrianism are provably false. Because profit is the pivotal concept in economics it holds without exception: when profit is ill-defined the whole theoretical superstructure falls apart.

(iv) Because economists do not understand profit they do not understand how the actual monetary economy works.

(v) Because of the abysmal logical incompetence of economists since Adam Smith economics is a failed science. There is nothing to choose between Orthodoxy and Heterodoxy. See The nothing-to-choose dilemma.

(vi) Because the axiomatic foundations of economics are provably false economists are in NO position to give any economic policy advice. Instead, they have urgently to do some scientific homework: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison)

Conclusion: Because the axiomatic foundations of economic theory are provably false economic policy guidance is worthless or even counter-productive. Economists are a menace to their fellow citizens.

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REPLY to Anonymous on Apr 29

You say “... spare me the true/false bullshit.”

(i) Science is about true/false and nothing else. Scientific criteria are well-defined as formal and material consistency.

(ii) Science was there before economics was there. Economists either accept the rules/ethics of science or are not accepted as scientists.

(iii) Economics is a failed science. For the main approaches, proof of either logical or material inconsistency has already been provided.

(iv) Economists are proof-deniers: “... suppose they did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics.” (Hands)

(iv) Proof-denial violates scientific standards. Economists violate them on a daily basis at least since the 1940s: “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.” (Morgenstern, 1941)

(v) Economic policy proposals have no sound scientific foundations. Thus, policy disputes resemble nothing so much as a quarrel between poultry entrails readers. Krugman’s application of IS-LM is a case in point.

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REPLY to Kain on Apr 30

(i) You insist that there are multiple ways to define profit/income. This widespread methodological hallucination is the hallmark of confused confusers and explains why economists fall regularly over their own conceptual feet. See The Humpty Dumpty Methodology.

(ii) Your advocacy of Post Keynesianism is futile because the formal foundations of Post Keynesianism are provably false. See Why Post Keynesianism Is Not Yet a Science.

(iii) Godley/Lavoie have moved farthest in the right direction but they, too, got profit wrong. See proof in The Emergence of Profit and Interest in the Monetary Circuit.

(iv) Post Keynesians have not realized in more than 70 years that Keynes messed up macrofoundations. See Finalizing the Keynesian Revolution.

(v) For the overdue paradigm shift from microfoundations to macrofoundations see The problem with macro in two words.

(vi) Post-Keynesianism is over just like Walrasianism. Time to come up to speed.

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REPLY to Kain on May 2

You say: “So basically you would have to refute Kalecki’s profit equation and claim your own is better than his, if you want to truly debunk the Post Keynesians.”

High time for you to come up to speed, see What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example and 'The Levy/Kalecki Profit Equation is false'.

The refutation of Keynes, Marx, Keen you could also find on SSRN if you were not too much occupied with giving silly advice.

Heterodox schizo

Comment on Asad Zaman on ‘The Veil of Money’

Blog-Reference

In his post, The Education of an Economist Asad Zaman argues: “I don't support having a ‘science’ of economics — I have argued in my paper on Deification of Science that scientific methods cannot be applied to study of human societies because we have free will, agency, can choose our destinies, and our actions are not subject to mathematical laws.”

Now he accuses standard economics of NOT being a science: “Many leading economists have come to agree with Nobel Laureate Stiglitz that modern economic theory represents the triumph of ideology over science.”

This is manifest methodological schizo. The actual fact of the matter is that NEITHER Orthodoxy NOR Heterodoxy satisfies the well-defined criteria of science, i.e. formal and material consistency.

So, we have the following situation with regard to the Quantity Theory:
• Keynes’ critique of the QTM, the neutrality of money, in particular, is valid.
• Keynes’ own theory of money is provably false (2011).

It is of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to push an agenda, and the goal of theoretical economics is to explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, scientific standards are observed.

Neither orthodox nor heterodox monetary theory satisfies scientific standards. BOTH Friedman and Keynes were political economists, that is, agenda pushers but NOT scientists. The same holds for Stiglitz and, of course, for the outspoken opponent of the ‘Deification of Science’ Asad Zaman.

Economics is a science without scientists. Something has gone badly wrong.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL

Related 'Refutation of Asad Zaman’s heterodox methodology: all arguments you ever need'

The economist as storyteller (I)

Comment on Chris Dillow on ‘Why not full employment?’

Blog-Reference and Blog-Reference on Apr 26 and Blog-Reference on Apr 28 adapted to context

The average person dislikes an objective explanation (e.g. the thunderbolt is an electromagnetic phenomenon subject to physical laws) and likes a subjective explanation (e.g. Zeus threw the thunderbolt because he was angry/vengeful/authoritarian). The scientific explanation takes the form of a theory, and the non-scientific explanation takes the form of a narrative. Almost all societal communication consists of storytelling/blather/ wish-wash/truisms, and only a tiny part has scientific content.

Economics claims to be a science, yet it has never risen above the level of storytelling. Accordingly, the subjective explanation of unemployment (UE) takes the following forms.

Psychologism: the unemployed actually enjoy UE, are indifferent, have resigned, suffer. Darwinism: UE’s are unfit, unqualified, lack motivation, and are beyond help. Moral hazard: UE is the result of a wrong incentive structure or perverted rewards/punishments, UE’s game the system. Mind reading: leisure is rationally preferred by UE’s over working at the given wage. Moralizing: the UE’s deserve their fate. Blaming: UE is a self-inflicted blowback of irrational behavior, i.e. of sticky wages, strikes, and shirking. Historicism: today’s unemployment is the result of known adverse external shocks and identifiable wrongheaded measures of DEMs/REPs/FED/GOV since WWII. Sociologism: the UE’s do have not enough leverage for changes in their favor; they are brainwashed into acceptance of everything. UE is deliberately created by capitalists/oligarchs/one-percenters/government as a means of social control. UE’s are the losers in a rigged power-play.

Within this tiny intellectual box of folk psychology, folk sociology, folk history, and folk politics economic storytelling has taken place since 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)

The time travel fantasies about Harlem, Haight-Ashbury, Paris, or Surbiton above show that economics has stagnated since Adam Smith. Clearly, from retarded storytellers, no solution to any economic problem is ever to be expected.

While dabbling in the so-called social sciences, economists overlooked that economics is a systems science and that it is their task to explain how the actual monetary economy works. To this day, economists still need to understand what profit is. It should be evident that they will never find it out by second-guessing and interpreting and understanding human behavior. This is NOT how science works. What is currently discussed among economists as employment theory is sitcom garbage.

Storytelling is not prohibited, of course, and neither is the pluralism of any number of false theories, but there is no place for storytellers in the sciences. So, economists have to stop pretending to do science and have to be expelled from the sciences because of proven incompetence for more than 200 years.

Egmont Kakarot-Handtke


Related 'Why do workers not tar and feather economists?' and 'Economics, methodology, morals ― a creepy freak-show' and 'The economist as storyteller (II)' and 'Economics as storytelling and entertainment for the masses' and 'Narrative economics and the imperatives of the sitcom' and 'If religion is opium of the people, economics is crack of the people' and 'Economics: Stories, narratives, and disinformation' and 'Economic narratives are for the scientific garbage dump' and 'Media-fake-farce-fraud-storytelling-macro'.

For details about the axiomatically correct employment theory see cross-references Employment.

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Wikimedia AXEC139e

Why don’t economists simply shut up for a while?

Comment on Noah Smith on ‘Policy recommendations and wishful thinking’

Blog-Reference

You say “You shouldn’t prefer Model B over Model A just because one leads to ‘hope’ and the other to ‘hopelessness’.

Let us put it more bluntly: economists should not do political economics. The distinction between political and theoretical economics is of utmost importance. The main differences are
(i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
(ii) In political economics anything goes; in theoretical economics, scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. Scientific truth is well-defined as formal and material consistency (Klant, 1994, p. 31).

Political economics (= non-science, opinion) and theoretical economics (= science, knowledge) are based on different modes of thinking “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

The pseudo-inquirers of political economics use economic theory as a means to push an agenda. Thus, they corrupt economics. Political economists like Smith, Ricardo, Marx, Keynes, Hayek, or M. Friedman have produced not much, if anything, of scientific value. What we have is Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency.

The task of theoretical economics is to figure out how the actual monetary economy works — not less, not more. Political economists of all colors have failed at this task. The current discussion between G. Friedman, Romer, DeLong, Krugman, Mason, and other agenda pushers is a case in point. Because theoretical economics has been materially/formally inconsistent since the founding fathers, economic policy guidance NEVER has had sound scientific foundations.

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

He forgot to add: economists who have not done their scientific homework are asked to keep their opinions for themselves because we have already more than enough of this low-IQ stuff.

Egmont Kakarot-Handtke


References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.

Related: 'Wikipedia, economics, scientific knowledge, or political agenda pushing?' and 'Your economics is refuted on all counts: here is the real thing'.

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REPLY to Kaleberg

You cannot compare “the standard model and general relativity” with the proto-scientific state of economics. Economists have not even arrived at something like the Law of the Lever which Archimedes has developed 2200+ years ago.

The representative economist ― and this includes you ― cannot tell the difference between income and profit and this means that he does not understand the pivotal concept of his subject matter (2014), which in turn means that he has NO idea how the economy works.

It is #PeakStupidity when incompetent scientists argue that the two most advanced physical theories are “false”. Economics is false already at the scientific kindergarten level of supply-demand-equilibrium.

Schumpeter tried in vain to put some lipstick on the pig “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (1994, p. 9)

Economics is proto-scientific garbage from supply-demand-equilibrium to DSGE.


References
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
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford  University Press.

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REPLY to Dane Van Dyck

Science is NOT about trust or credibility or belief, science is about proof. The criteria of proof are well-known: logical and material consistency.

The royal road for non-economists to economics starts with profit theory, see How the Intelligent Non-Economist Can Refute Every Economist Hands Down.

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REPLY to Kain on Apr 27

Not so! The profit theories of, for example, Keynes, Kalecki, Minsky, Keen are different. They cannot all be correct at the same time. But they can all be false. And this is actually the case. See Heterodoxy, too, is proto-scientific garbage.

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REPLY to Anonymous on Apr 27

You say “I’ve been reading Krugman for years and I find him hard to trust completely, even though I like him, find him fascinating, and find he’s often right.”

Note: (i) Science is NOT about trust or credibility or belief, (ii) Science is NOT about like/dislike, (iii) science is about true/false, (iv) scientific criteria are well-defined as formal and material consistency.

Krugman’s policy proposals have NO sound scientific foundation. His underlying models are PROVABLY false, see Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It.

Your sitcom-assessment of Krugman (fascinating, likable) is beside the point and itself a reliable indicator of scientific incompetence.

Immediately following Economic recommendations out of the swamp between true and false.

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Wikimedia AXEC136g

Why do workers not tar and feather economists?

Comment on Chris Dillow on ‘Why not full employment?’

Blog-Reference and Blog-Reference

Economists nowadays wonder “... unemployment not only has an economic cost in terms of lost output, but a massive psychological cost because the unemployed are significantly unhappier than those in work.” Does anybody remember that economics always claimed that the market system produces full employment?

“From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; — meaning by this in some significant, but not clearly defined sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product. .... Evidently, this amounts to the same thing as full employment.“ (Keynes, quoted in Baumol, 1999, p. 200)

It seems that employment theory urgently needs rectification. To cut the meticulous formal derivation short (2015; 2014; 2012), the most elementary version of the axiomatically correct Employment Law for the economy as a whole is given on Wikipedia AXEC62.

From this equation follows:
(i) An increase in the expenditure ratio ρ_E leads to higher employment L (the letter ρ stands for ratio). An expenditure ratio ρ_E>1 indicates credit expansion, and a ratio ρ_E<1 indicates credit contraction of the household sector.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Items (i) and (ii) are familiar since Keynes. What is missing in the Keynesian employment multiplier, though, is the ratio ρ_F as defined in (iii). This variable embodies the macroeconomic price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

This is the very opposite of what standard economics teaches. “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997, p. 11)

The explanation of unemployment is given by the fact that the price mechanism does NOT work as the representative economist hallucinates. Ultimately, unemployment is caused by the scientific incompetence of economists, therefore the economic and psychological costs of unemployment can be directly attributed to them.

Egmont Kakarot-Handtke


References
Baumol, W. J. (1999). Retrospectives: Say’s Law. Journal of Economic Perspectives, 13(1): 195–204. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Tobin, J. (1997). An Overview of the General Theory. In G. C. Harcourt, and P. A. Riach (Eds.), The 'Second Edition' of The General Theory, Vol 2, 3–27. Oxon: Routledge.

Related 'The economist as storyteller'

For more about iatrogenic economics see AXECquery.

The problem with macroeconomics in two words

Comment on Angus on ‘The Problem with Macro in one blogpost’

Blog-Reference and Blog-Reference and Blog-Reference on Apr 24 adapted to context

The two words are scientific incompetence. Yet, to explain how economics became one of the most embarrassing failures in the history of scientific thought requires some more words.

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “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)

Methodologically, these premises are forever unacceptable but economists swallowed them hook, line and sinker from Jevons/Walras/Menger onward to DSGE. The failure of methodological individualism is indisputable. The ultimate reason can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works.

Because of this, the microfoundations approach has already been dead in the cradle. This leaves only one option. As Joan Robinson put it: "Scrap the lot and start again."

Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

Keynes’ original blunder kicked off a chain reaction of errors/mistakes:
• All I=S/IS-LM models are false since Keynes and Hicks (2011).
• Keynes’ profit conundrum has not been solved by After-Keynesians.
• Keynes got the Employment Law/Phillips curve wrong (2012).

So, for Keynesianism holds also: "Scrap the lot and start again."

What has to be done is to fully replace the Walrasian and Keynesian axioms with methodologically correct macrofoundations. The paradigm shift is achieved as follows.
A0. The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw 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.

For the graphical representation of the ABSOLUTE formal minimum see link #1. (A1) to (A3) asserts: At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of (i) budget balancing, i.e. C=Yw, and (ii) market-clearing, i.e. X=O.

Under the conditions (i)/(ii) the price is derived in each period as P=W/R (1), i.e. the market-clearing price is in the most elementary case equal to unit wage costs. This is the elementary form of the macroeconomic Law of Supply and Demand (#2).

The first thing to notice is that the real wage W/P is invariably equal to the productivity R according to (1). So, for the economy as a WHOLE, the marginal principle does NOT hold. This explodes the welfare theorems. The second point to notice is that from (A1)-(A3) follows the correct macroeconomic Profit Law for the production-consumption economy as Qm≡−Sm and the investment economy as Qm≡Yd+I−Sm.

To this day, neither Walrasians, nor Keynesians, nor Marxians, nor Austrians got profit right. No more proof of scientific incompetence is needed. Remains only one question: how do we get rid of these folks?

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

#1 Wikimedia
#2 For more details see the working papers at SSRN

***

REPLY to Gene Callahan on Apr 25

“What we must avoid ... is the bad taste of a finicky scholasticism — getting tied up in little assertions or minor criticism for the sake of criticism.” (Popper, quoted in Redman, 1993, p. 64)

There is a longer version of Weintraub’s set of axioms: “The [neo-Walrasian] program is organized around the following hardcore propositions:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

HC1 contains the explicit commitment to methodological individualism. THIS commitment is shared by the Austrian school in general and Menger in particular: “The Austrian School is a school of economic thought that is based on the concept of methodological individualism – that social phenomena result from the motivations and actions of individuals. It originated in the late-19th and early-20th century Vienna with the work of Carl Menger ... and others.” (Wikipedia)

For ALL variants of methodological individualism holds: NO way leads from the explanation of individual behavior/action to the explanation of how the economic system works. Because of this, methodological individualism (a.k.a. microfoundations) and Austrianism with it and Menger with it have been dead in the cradle in the late-19th century (2013; 2014). Austrians have not realized this to this day.

It is a matter of indifference whether Menger subscribed explicitly to HC2/HC5. It suffices to subscribe to HC1 for vanishing forever in the proto-scientific woods.

***

REPLY to geoih on Apr 26

The Iron Methodological Rule states ‘garbage in, garbage out’. And this fully explains the failure of economics.

Euclid’s axioms of geometry had REAL content. “In Einstein's words, geometry constituted one of the oldest physical theories. In the preface to his Principia Newton treats geometry as a branch of mechanics, i.e. as a branch of physics: Therefore geometry is founded in mechanical practice and is nothing but that part of universal mechanics which accurately proposes and demonstrates the art of measuring.” (Zahar, 1980, p. 3)

The neo-Walrasian axiom set has NO real content but consists of NONENTITIES. Utility, constrained maximization, equilibrium, angels, and the Easter Bunny are nonentities, in other words, the axiom set HC1-HC6 is vacuous (2014). By consequence, the WHOLE theoretical superstructure (General Equilibrium Theory, DSGE, etc.), too, has no real content.

Economists accepted provable false green cheese behavioral assumptions as axioms. The failure of the microfoundations-of-macro project is just another proof of the Iron Rule ‘garbage in, garbage out’.


References
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Zahar, E. (1980). Einstein, Meyerson and the Role of Mathematics in Physical Discovery. The British Journal for the Philosophy of Science, 31(1): 1–43. URL

Heterodoxy: From bad to better or from bad to worse?

Comment on Asad Zaman on ‘The Education of an Economist’

Blog-Reference and Blog-Reference on Apr 26 adapted to context

“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)

You say: “In our PhD Economics program at Stanford, we learnt nothing about the history of major economic events of the twentieth century. Instead, we were taught the rather arcane and difficult skill of building models.”

Yes, standard economics is cargo cult science and your education has been a waste of time and money. The question is, how does Heterodoxy proceed from this common understanding of the actual situation?

Obviously, criticizing model bricolage and mathiness and unrealism is fully justified but not very productive. What is the alternative? The flight to naive empiricism and history is the wrong way. The acceptance of the pluralism of false models is the wrong way. To discuss Trump vs. Clinton is the wrong way.

“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.” (Blaug, 1998, p. 703)

Orthodoxy has failed, no doubt, but traditional Heterodoxy has failed to develop a superior alternative. Economics, represented by the four sects Walrasians, Keynesians, Marxians, Austrians, is still at the proto-scientific stage.

One possible reaction to this embarrassment is to give up the idea of scientific truth in economics and to resort to anything goes. This attitude is rather popular among heterodox economists — and it is self-defeating.

“If economics cannot aspire to any substantive knowledge of economic relationships, it cannot speak with authority about questions of economic policy.” (Blaug, 1990, p. 111). Without this aspiration, economics degenerates to mere opinion, pluralism of false theories, and in the last consequence to brain-dead political blather.

For economists the mission is clear since J. S. Mill: develop the true theory. The true theory of the market economy is neither to be found in Econ 101 nor in the textbooks nor in the journals nor in the newspapers nor in the history books. There is a lot to do for constructive Heterodoxy.

Egmont Kakarot-Handtke


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield: Edward Elgar.
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

***

REPLY to Nanikore on Apr 26

“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)

Standard economics is cargo cult science. The question is, how does Heterodoxy proceed from this common understanding of the actual situation?

Obviously, criticizing model bricolage and mathiness and unrealism is fully justified but not very productive. What is the alternative? The flight to naive empiricism and history is the wrong way. The acceptance of the pluralism of false models is the wrong way. To discuss Trump vs. Clinton is the wrong way.

“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.” (Blaug, 1998, p. 703)

Orthodoxy has failed, no doubt, but Heterodoxy has failed to develop a superior alternative. Economics, represented by the four sects Walrasians, Keynesians, Marxians, Austrians, is still at the proto-scientific stage.

One possible reaction to this embarrassment is to give up the idea of scientific truth in economics and to resort to anything goes and storytelling. This attitude is rather popular among heterodox economists — and it is self-defeating.

“If economics cannot aspire to any substantive knowledge of economic relationships, it cannot speak with authority about questions of economic policy.” (Blaug, 1990, p. 111). Without this aspiration, economics degenerates to mere opinion, pluralism of false theories, and in the last consequence to brain-dead political blather.

True, Krugman does “not understand the problem with models” but neither does Nanikore or the Swedish branch of Heterodoxy.


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield: Edward Elgar.
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

***

REPLY to David Chester on Apr 27

You remind me: “You are missing out the Georgist School of macroeconomic thought and philosophy.”

True, but my argument applies to the Georgist School as well.

It is of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, scientific standards are observed.

It is perfectly legitimate to push an agenda. That’s NOT the point. The point is that agenda pushers use economic theory as a means to an end. And that is the wrong priority from the viewpoint of science.

Adam Smith, Ricardo, Marx, Henry George, Keynes, Hayek, or Friedman were political economists. I do not criticize their political objectives, I criticize that they were lousy scientists, that is, their respective theories do not satisfy the scientific criteria of formal and material consistency. In other words, when the underlying theory is provable false economic policy proposals are hanging in midair. It does no matter how good and sensible they appear, they are scientifically worthless.

This said I agree with the Georgist School that the treatment of land in standard economics is false since Ricardo (2011).

I do not agree, though, with this job description ‘consequential macroeconomics–rationalizing is about how our social system works.’

To figure out how the social system works is the task of sociology and/or political science. The task of economics is to figure out how the economic system works.

The ludicrousness of economists derives from the fact that they have failed on their mission and cannot explain how the actual monetary economy works (2015) but tell the world how to improve society — which is none of their business as scientists.


References
Kakarot-Handtke, E. (2011). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

Econ and math: Forever talking at cross purposes?

Comment on John Legge on ‘Maths of competitive equilibrium’

Blog-Reference

Standard economics is built upon this set of hardcore propositions, a.k.a. axioms: “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)

Marginalism follows logically from the green cheese behavioral assumption of constrained optimization HC2. From this follows ultimately the biggest ever idea of economics: supply-demand-equilibrium.

What can be said with certainty is that the whole set of Walrasian axioms is methodologically inadmissible. From this follows that supply-demand-equilibrium is proto-scientific garbage. Hence, the proof that the competitive equilibrium is unstable is for the birds because, to begin with, equilibrium is a NONENTITY.

What has to be done is to fully replace HC1/HC5, that is, one has to switch from microfoundations to macrofoundations. The paradigm shift is achieved as follows.
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw 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.

These premises are certain, true, and primary, and therefore satisfy ALL methodological requirements. The macro axiom set contains NO NONENTITIES like utility, maximization, and equilibrium. For the graphical representation of the absolute formal minimum set, see link #1.

At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of (i) budget balancing, i.e. C=Yw, and (ii) market-clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function.

Under the conditions of (i) market-clearing and (ii) budget-balancing in each period the price is derived as P=W/R (1), i.e. the market-clearing price is in the most elementary case equal to unit wage costs. This is the elementary form of the Law of Supply and Demand.

The first thing to notice is that the real wage W/P is invariably equal to the productivity R according to (1). So, for the economy as a WHOLE, the marginal principle does NOT hold. The real wage is NOT equal to marginal productivity. This explodes the welfare theorems.

The fatal blunder of standard economics does NOT reside in the instability of equilibrium but in taking equilibrium into the axioms (see also #2). This is a petitio principii.

Egmont Kakarot-Handtke


#1 Wikimedia The pure consumption economy with market clearing and budget balancing 
#2 Mathiness is NOT the problem — scientific incompetence is.

High profits and low economics

Comment on Robert Solow on ‘Why Wages Aren’t Keeping Up’

Blog-Reference

Distribution theory suffers from the known fact that, after more than 200 years, economists still cannot tell the difference between income, profit, distributed profit, and retained profit. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

Therefore both, the defenders and attackers of the market economy have one property in common: they have no idea of what they are talking about. Distribution theory has come down to superficial observation, psychologism, sociologism, moralizing, and political blather.

Political economics is beside the point because overall monetary profit is determined by OBJECTIVE structural factors. Total profit of an investment economy is given with the formula shown on Wikimedia AXEC42

The profit ratio Qm/Y increases with the expenditure ratio of the household sector, the investment ratio of the business sector, and the distributed profit ratio. An expenditure ratio greater than 1 means that the debt of the household sector grows. Household sector and government sector deficits are the main driving forces of the business sector’s overall profit. Productivity plays NO role.

The crucial point is that bargaining power plays NO role at all for overall profit, it plays only a role in the distribution of total profit AMONG firms and the distribution of total output AMONG households. Roughly speaking this means that the familiar concepts of exploitation and class are superficial and misleading, see Profit for Marxists.

The relationship between wage and profit, too, is not well understood. A fall in the average wage rate has a deflationary effect but does NOT affect the profit ratio (if the expenditure, the investment, and the distributed profit ratio in the formula above are kept constant for the moment).

The pivotal point is those familiar distribution theories are false. For details see The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?.

Conclusion: Solow’s post combines superficial observations with a provably false distribution theory.

Egmont Kakarot-Handtke

For details of the big picture see cross-references Profit/Distribution

***

COMMENT on don on Apr 22

Imagine for a moment the economy consists of two firms that produce the same good and are initially identical. The wage income of both firms is fully spent on the consumption good, so the overall profit in this simplified economy is initially zero and the market-clearing price is P=W/R, i.e. equal to unit wage costs.

Now the wage rate in firm A is halved and that in firm B remains unaltered because of a strong union. Profit in firm A increases. Because total wage income falls total consumption expenditures fall and the market-clearing price falls. This leaves firm B with a loss. The profit of firm A is equal to the loss of firm B and the TOTAL profit in the economy is still ZERO.

So what in effect happens is a REDISTRIBUTION of profit among firms. The union power in firm B has NO effect on OVERALL profit of the business sector, it has only an effect upon the REDISTRIBUTION of total output among the households, i.e. the real wage of firm B employees rises and falls for firm A employees.

If firms A and B belong to different countries the same argument applies to the world economy.

Your mistake is to look at one sector, and then to generalize what can be observed there, e.g. wage down/profit up, for the whole economy. This is the Fallacy of Composition. The total analysis shows: wage A down/profit A up/total profit UNCHANGED/price down/deflation. And this is roughly what you can observe if you take the world economy as a whole.

The elementary mistake of distribution theory is to generalize the effects of partial analysis. And this is why you cannot explain the OVERALL relation of profit and wage income and why the measured profit share has risen in the US.

The problem, though, is not that you and anne don’t get the point, the problem is that Solow reiterates a distribution theory that has been false since Ricardo.

The economic Sisyphus: Forever kicking the can down the wrong road

Comment on Arjun Jayadev on ‘ The Road not Taken’

Blog-Reference and Blog-Reference on Apr 23

Arjun Jayadev summarizes: “He [Axel Leijonhufvud] forcefully argued that the free movement of wages and prices can sometimes be destabilizing and could move the economy away from full employment. That helped understand the Great Depression. At that period, wages were highly flexible and all that seemed to occur as they fell was further devastating unemployment.”

Leijonhufvud asked himself: “Had the whole discipline catastrophically misunderstood Keynes’ deeply revolutionary ideas?”

The answer is yes. What is more: “But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281). What is even more, After-Keynesians including Leijonhufvud have not gotten the point to this day.

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

This elementary two-liner is conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

Keynes's original blunder kicked off a chain reaction of errors/mistakes with these results:
• All I=S/IS-LM models are false since Keynes and Hicks (2011; 2014).
• Keynes’ profit conundrum has not been solved by After-Keynesians. The correct Profit Law for the investment economy reads Qm≡Yd+I−Sm (2014, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving.
• Keynes got the Employment Law wrong (2012). The correct macroeconomic Employment Law/ Phillips Curve is shown on Wikimedia AXEC62:

The structural employment multiplier is different from Keynes’ behavioral multiplier. The main difference consists of the ratio ρ_F≡W/PR. This variable embodies the macroeconomic price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. Or vice versa: the downward flexibility of wages INCREASES unemployment. And this is EXACTLY what happened in the Great Depression as Leijonhufvud correctly observed.

The crucial point to note is that the price mechanism does NOT work as standard economics hallucinates. So economists are groping in the dark with regard to the two most important features of the economy: (1) the profit mechanism, and (2), the price mechanism. No surprise, then, that economics is a failed science.

Keynes missed the right road. But so did After-Keynesians including Leijonhufvud. Of course, it is correct of Leijonhufvud to emphasize that the road Neo-Walrasians have taken is even more beyond hope.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

Related 'The unfinished Keynes (I)' and 'Finalizing the Keynesian Revolution' and 'The general theory of scientific incompetence'. For details of the big picture see cross-references Refutation of I=S.

The solemn burial of Marginalism

Comment on Chris Dillow on ‘Limits of marginal productivity theory’

Blog-Reference

In order to tackle the problem of wages, profits, and employment economics has to switch from microfoundations to macrofoundations. The Paradigm Shift is achieved as follows.

(A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(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.

These premises are certain, true, and primary, and therefore satisfy ALL methodological requirements. The macro axiom set contains NO NONENTITIES like utility, maximization, equilibrium, or a well-behaved production function. For the graphical representation of the absolute formal minimum set, see Wikimedia#1.

At any given level of employment L, the wage income Y_w that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of (i) budget balancing, i.e. C=Y_w, and (ii) market-clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that the wage rate W is an AVERAGE if the individual wage rates are different among the employees, which is normally the case. These details are not needed at the beginning but come later with DIFFERENTIATION.

Under the conditions of (i) market-clearing and (ii) budget-balancing in each period the price is derived as P=W/R (1), i.e. the market-clearing price is in the most elementary case equal to unit wage costs. This is the elementary form of the macroeconomic Law of Supply and Demand which, in a later step, has to be generalized for an arbitrary number of markets.

The first thing to notice is that the real wage W/P is invariably equal to the productivity R according to (1). So, for the economy as a WHOLE, the marginal principle does NOT hold. The real wage is NOT equal to marginal productivity — because there is NO marginal productivity — because there is NO such thing as a well-behaved production function. The real wage is equal to productivity in the most elementary case (see Wikimedia#2).

Marginalism MUST ASSUME a well-behaved production function in order to make the green cheese assumption of constrained optimization work. This is methodologically ILLEGITIMATE and known since antiquity as petitio principii. To fool around with assumed NONENTITIES is like kindergarten kids playing with Spiderman, Tooth Fairy, and Easter Bunny.

For the economy as a WHOLE holds: If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price P rises. If productivity increases the price falls. In any case, labor gets the whole product, and profit for the business sector as a whole is invariably zero. So, the next question is where does profit come from? This question has NEVER been answered by standard economics. So economists have NO idea of the most important phenomenon of their subject matter.

All changes in the system are reflected by the market-clearing price. The most elementary economy is REPRODUCIBLE for an indefinite number of periods under the interim condition of no external limitations. With further DIFFERENTIATION one eventually arrives at the axiomatically correct Employment Law #3 and eventually at a single firm, that is, at micro.

What is standard economics? Krugman put it thus: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

And this is why Krugman and the rest of standard economics are a failure. If the premises are false the whole theoretical superstructure implodes with karmic necessity. It is as simple as that: garbage in, garbage out. This methodological truism, though, is forever beyond the ant horizon of marginalist losers.

Egmont Kakarot-Handtke


#1 Wikimedia AXEC31 Elementary production-consumption economy with market-clearing and budget-balancing
#2 The formula for the general case is given on Wikimedia AXEC28.
#3 Wikimedia AXEC62 The structural-systemic Employment Law

Related 'Putting the production function back on its feet' and 'Mathiness and the Ur-Blunder' and 'Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?' and 'Sending Solow’s growth model to the dump of proto-scientific history'.

Immediately preceding Marginalism is the landmark of scientific incompetence.

How Keynes messed up macroeconomics

Comment on Lars Syll/James Meade on ‘The real tail wagging’

Blog-Reference

Meade summarized the Keynesian Revolution: “Keynes’s intellectual revolution was to shift economists from thinking normally in terms of a model of reality in which a dog called savings wagged his tail labeled investment to thinking in terms of a model in which a dog called investment wagged his tail labeled savings.”

The fact is that Keynes, too, did not realize that household saving and business investment develop independently. There is no tail-wagging at all.

The formal basis of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

This syllogism is conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

As a result, all I=S/IS-LM models are false since Keynes and Hicks (2011; 2014). After-Keynesians did not get the point until this very day.

Keynes’ foundational propositions have to be replaced. The most elementary economic configuration is the pure production-consumption economy which is given as follows:
(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.

For the graphical representation see Wikimedia AXEC31

At any given level of employment L, the wage income Y_w that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e. C=Y_w, and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that W is the AVERAGE wage rate if the individual wage rates are different among the employees, which is normally the case. Under the INITIAL conditions of budget balancing and market clearing holds P=W/R.

If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price rises. If productivity increases the price falls. In any case, labor gets the whole product, the real wage is invariably equal to productivity, and profit for the business sector as a whole is zero. All changes in the system are reflected by the market-clearing price. The elementary production-consumption economy is reproducible for an indefinite number of periods at any level of employment.

In the next period, the households save. The result is shown on Wikimedia AXEC33

Consumption expenditure C falls below Y_w and with it the market-clearing price P. With perfect price flexibility, there are NO unsold quantities and NO change of inventory. The product market is always cleared and there is no such thing as an inventory investment. So we have household sector saving but no business sector investment, that is, monetary saving which is given by S_m≡Y_w−C is NOT equal to investment I=0 as in Keynes’ formal foundations.

The crucial result is that the business sector makes a monetary loss that is exactly equal to the household sector’s saving, i.e. Q_m≡−S_m. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact 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. The sectoral balances always add up to zero, i.e. Q_m+S_m=0.

The axiomatically correct profit equation for the investment economy with profit distribution reads Q_m≡Y_d+I−S_m (2014, p. 8, eq. (18)). Legend: Q_m monetary profit, Y_d distributed profit, I investment expenditures, S_m monetary saving.

The crucial point is that business investment and household sector saving develop independently (2013). Their difference I−S_m co-determines the monetary profit of the business sector Q_m.

The Keynesian Revolution did not really happen. Keynes merely replaced one false causality with another false causality.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.  London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

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Wikimedia AXEC143d What Keynes never understood ― macroeconomic profit