April 28, 2016

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

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.