April 3, 2016

The zombie wars are over

Comment on Scott Sumner on ‘Fiscal multiplier studies far worse than I thought’


Economics is a failed science. In more detail, this means that the major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — have not produced much scientific value, if anything, in more than 200 years.

Economists have not risen above supply-demand-equilibrium and have still not realized that this is poor science. Schumpeter already came close to a thumbs-down but then made this concession: “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), see also (2013)

Lacking sound scientific foundations (= episteme), economic debate up to the present consists of an inconclusive exchange of opinions (= doxa) between the four approaches. In other words, economics hitherto took place at the proto-scientific level, yet: “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 obviously lack the true theory; Walrasianism, Keynesianism, Marxianism, Austrianism are provably false. So, what is needed is a termination of the senseless cross-talk among the four zombie approaches, because “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., 1990, p. 362)

At the moment, economists produce mindlessly inconsistent models according to accustomed templates: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). No penny-drop, no realization that maximization and equilibrium are NONENTITIES.

In methodological terms, a Paradigm Shift means to completely replace the obsolete axiom sets of the four failed approaches with an entirely new set. To make this concrete, here is the axiom set of Walrasianism:
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 is just another expression of methodological individualism. Except for HC6, which is a petitio principii, all axioms are subjective-behavioral, which is to say, much too swampy.

Because the subjective-behavioral approaches have been a detour from the very start (as more than 150 years of blather since Jevons/Walras/Menger prove) they have now to be replaced by the objective-structural approach.

The 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 and is given by these three objective structural axioms:
(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.

From this minimal set, which is composed of measurable real and nominal variables, follow propositions that are testable. The nonentities of methodological individualism are gone.

Methodologically correct economics starts with the SYSTEMIC axioms of the monetary economy. This yields objective systemic laws, expressed, for example, as Profit Law or Employment Law. Systemic laws are readily testable and this is the ONLY way to settle questions according to scientific standards.

Useful input to the continuing discussion of the new paradigm is not to be expected from Walrasianism, Keynesianism, Marxianism, and Austrianism. So, let these scientific zombies go: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work ...” (McCauley, 2006, p. 17)

Egmont Kakarot-Handtke

Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.

Immediately preceding Austrian blather

REPLY to Major.Freedom on Apr 3

(i) von Mises says: “The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply.” (2007, p. 293)

This is a vacuous Austrian waffle.

Profit is ultimately determined by the Profit Law which states for the investment economy Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. This equation is testable with the precision of two decimal places.

(ii) von Mises says: “Economics is not about goods and services, it is about the action of living men.” (2007, p. 357)

This is how Austrians missed the subject matter of economics altogether and got lost in the woods of psychologism, thought-reading, second-guessing other peoples’ actions, and silly gossiping and storytelling. Because of this: Austrianism = gossip economics.

Correct definition: “Economics is the science that studies how the monetary economy works.”

(iii) von Mises says: “In the imaginary construction of a stationary economy the total sum of all entrepreneurs’ profit equals the total sum of all entrepreneurs’ losses. (2007, p. 294)

This is provably false. In the stationary economy holds Qm≡Yd.#1

von Mises, L. (2007). Human Action. A Treatise on Economics, volume II. Indianapolis: Liberty Fund.

#1 The proofs are to be found in the working papers on SSRN

REPLY to Major.Freedom on Apr 4

(i) You ask “What are you trying to accomplish by your continual evasions?” For someone who has an irrefutable theory of human action, this is a stupid question. It is well known: “... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung.” (Morgenstern, 1941, p. 381)

So you certainly can interpret my behavior until you are blue in the face. Obviously, you are missing the subject matter: economics is NOT about economists but about the economy.

Economists try to figure out the objective systemic laws of the monetary economy. Speculation about other people’s behavior/actions and ad hominem argumentation is a moronic pursuit. Austrians are no economists.#1

(ii) You ask “Did you know that the GDP equation, Y = G + I + C + (X−M), can be “predicted” to 14 million decimal places, provided that people trade goods at prices to within that accuracy?”

Did you know that the GDP equation is false? For the proof see (2012). Austrians have not figured out this to this day but swallowed the underlying logical defect hook, line, and sinker. The GDP equation is an intelligence test for economists and Austrians flunked it.

(iii) You say: “All Mises is saying is that entrepreneurial profit, not profit per se as in your childish equation above, exists because of uncertainty.”

Uncertainty is a psychological state and it does not produce profit just like wishful thinking or greed does not produce a profit. Mises’ explanation is at the level of voodoo thinking. For the correct explanation of profit see (2011).

(iv) Imagine for a moment an aircraft flying from, say, New York to Paris. Now we can ask why? One way to answer the question is to speculate about the motives and reasons of the passengers, the pilot, the crew, the flight controllers, and the managers and stockholders of the airline. The other way to look at flight is to think about the laws of aerodynamics, thermodynamics, and so forth.

The first way of explanation is the Austrian way and it yields the same trivial psychologistic crap over and over again. Notice: Whatever the subjective motives and actions of passengers are, they do — as a matter of principle — NOT explain the phenomenon of flight.

The second way is the scientific method. Thinking people, this excludes Austrians, know that there is no such thing as an irrefutable law of human action that could explain flying.

So, just as flying is explained by the objective laws of physics, the economy is explained by the objective laws of economics.

Needless to say that Austrians never got the point: “Mises’ contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do.” (Foreword, von Mises, 2007, p. v)

This is as extremely profound as ‘the sun goes up’.

(v) You already two times declared that you have won the debate. Do you realize that 'to win every debate' has been the selling proposition of the ancient Sophists, whom Plato famously criticized? Plato made it clear that a SCIENTIFIC debate is about episteme=knowledge and NOT about doxa=opinion and to twist an audience, or what Popper characterized as demonstration of ‘the bad taste of a finicky scholasticism’.

(vi) I agree that the action axiom is just as irrefutable as ‘Zeus threw the thunderbolt because he was angry’. What I say is that with your behavior/action approach you will never come up with something helpful like the lightning conductor. And that is rather bad because you have won the debate but Zeus hit you with the thunderbolt. Rest in peace, Austrians.

Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. 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
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. I. Indianapolis: Liberty Fund.

#1 Hayek was not an economist.

COMMENT on Don Geddis on Apr 5

(i) Any discussion about the character of interlocutors leads away from the point at issue: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false. (Schumpeter, 1994, p. 11)

The question at issue is whether Austrianism is true or false and not whether Major.Freedom is a tape recorder or a broken record.

(ii) Refutation is necessary but insufficient. Effective refutation consists of developing the new paradigm: “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)

And, by the way, it is not only Austrianism that is obsolete. Walrasianism, Keynesianism, and Marxianism have to be left behind the curve, too. From the huge heap of scientific garbage called economics Austrianism is only an insignificant part. It goes down the drain with the whole of methodological individualism.

Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

REPLY to Major.Freedom on Apr 6

(i) Physicists long ago proved that, given the laws of physics, a perpetual motion machine is impossible. This did not stop some people to submit patent applications for perpetual motion machines to this very day.

It is the same thing with Austrians and other pseudo-scientific economists. “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, pp. 369-370)

Austrians are ignoring/violating scientific standards.

(ii) Austrianism subscribes to methodological individualism which claims: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

Methodological individualism is (i) unacceptable for cogent methodological reasons, and (ii), has failed for everyone to see. General equilibrium theory in all variants (RBC, DSGE, etc) is indefensible and the same holds for Austrianism as a fellow traveler of methodological individualism.

(iii) The major claim of Austrianism is that it solved the mind-body problem. Clearly, Austrians are in the wrong movie. Philosophy/psychology/metaphysics is NOT economics. The first problem to solve for an economist is the profit-income problem and NOT the mind-body problem.

(iv) NO way leads from the subjective action axiom to the objective Profit Law. It is irrelevant whether the action axiom is irrefutable or not. Austrians do not know what profit is and by consequence, they have no idea how the economy works. The profit theory is the pivot of all of economics.

(v) The profit theory must be testable. This brings us back to the starting point of this thread. Vacuous theories like Austrianism are not testable and therefore not of interest for the point at issue.

(vi) You say “I will declare for a third time that you lost the debate.” Did it ever occur to you, that as a party to the debate you have nothing to declare?

(vii) Austrianism is a zombie approach for more than 150 years just like Walrasianism and everything else that subscribes to methodological individualism.

(viii) Economics needs a Paradigm Shift.

Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

COMMENT on Don Geddis on Apr 7

Science was there before economics was there. Economists either conform to scientific standards or are outside of science: they are in NO position to redefine scientific criteria.

Because economics — as represented by the four failed sects Walrasians, Keynesians, Marxians, Austrians — 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 summersault backward: ‘Economics is not a Science with a capital S’ (Solow).

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)

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

Economics fails on both counts: the axiomatic foundations are provably false and testing is regularly inconclusive. So, economics has happily established itself in the swamp between true and false where ‘nothing is clear and everything is possible’ (Keynes).

The swamp between the hard rocks of true and false is the natural habitat of blathering frogs, of which there are four species, which are clearly identifiable by their respective axiom sets. The funniest species is the Austrian which is in the possession of an irrefutable magic axiom but never managed to produce a testable proposition. So, there is NO WAY to get an Austrian frog ever out of the swamp. And of this, they are very proud.

No problem with this, of course. What has to be made crystal clear is that Austrians have never produced anything of scientific value. For the proof re-read Major.Freedom’s posts. With this stuff, the poor souls in scientific hell are tortured.

Time to become constructive now: let’s proceed with the paradigm shift.

FAREWELL to Major.Freedom on Apr 8

Science was there before economics was there, that is, Newton was there before Adam Smith was there. Newton is famous for his ‘hypotheses non fingo’, which means, I do not waffle but prove.

“But he [A. Smith] had no such ambitions; in fact 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)

While physics has evolved exponentially, economics is stuck at the proto-scientific level of storytelling. The key narrative is supply-demand-equilibrium and it has been false already in Smith’s days. After 200+ years, compare the entirely vacuous General Equilibrium Theory with General Relativity Theory — is there any doubt that economics is a failed science?

It seems, that the irrefutable magic action axiom somehow did not work.

Economists are confused confusers and Austrians are the worst of them. See Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist.

Followed by From microfoundations to macrofoundations

For more about von Mises see AXECquery.