July 20, 2016

Making the economy the focus of the economists’ dialogue

Comment on Robert Locke on ‘Making firm governance part of the economists’ dialogue’


One way to explain the actual state of the world is the historico-genetic (K. Mannheim) approach. And this is how Robert Locke explains the differences between firm governance in different countries (US, Germany, Japan). I have no problem with this account except that it is not economics.

Let us make a thought experiment and imagine we have a country with direct democracy. So, the question who rules is already solved. Now comes the very practical question of how to organize the economy. Clearly, it is in the POLITICAL sphere where this question has to be addressed and decided. In the given framework of direct democracy one can expect that the majority decides that the firms should organize themselves. So, the dominant legal form of the firm would probably be something like a cooperative.

The crucial point is that the question who rules the firm is ultimately a political question and not an economic question. The two spheres should be strictly kept apart. Of course, everybody knows that in real life they are intimately entangled. Real life is muddle and confusion and compromise. The history of economic thought shows that economists have never properly separated the political and the economic sphere, neither in theory nor in practice.

Economics started as Political Economy. Political Economy is agenda pushing and economists from Smith, Ricardo, Marx, Keynes, Hayek, Friedman to the present were agenda pushers first and scientists second. As a matter of fact, they were lousy scientists because they never figured out how the actual monetary economy works. How do we know this? We know this for sure because the profit theory is provable false and without the correct profit theory the economist cannot rise above the level of proto-scientific storytelling.

Their scientific incompetence, though, could not stop economists from giving economic policy advice and telling people how to organize the economy and how to organize firms. The history of who pushed which agenda with what arguments is nicely summarized in Robert Locke’s intro.

As a matter of principle, though, political questions have to be answered in the political sphere and are the subject matter of political science and sociology. The economist has a voice in the political sphere like every other voter. But he is not allowed to bring his political preferences into economics and to make it the guiding principle of his scientific work. Science neither serves the one-percenters nor the ninety-nine-percenters. Science is strictly committed to true/false and NOTHING else. The primary task of the economist as scientist is to figure out how the monetary economy works. It is not his task to dabble in politics. J. S. Mill was very clear about this.

“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)

It is the mixture of politics and science that is the root cause of the manifest scientific failure of economics. Political economics has not produced much, if anything, of scientific value in more than 200 years. What is first of all needed is a strict separation of politics and science. This means that economists have to leave all question about who rules whom to political science/sociology for analysis and to the legitimate sovereign for decision.

Heterodoxy has criticized Friedman that his theory of the firm is politically biased. Asad Zaman would call it a 1%er economic theory. Now, to put a 99%er theory of the firm against Friedman is a natural reaction but to correct one political bias with the opposite political bias is still politics. It is definitively not science. Science asks: is the mental construct called economic theory true or false, and NOT does it fit the agenda of the one-percenters or the ninety-nine-percenters.

Science tells us that the conflicting theories of the firm are based on a false premise. Since Ricardo and Marx, both orthodox and heterodox economist believe that there is a fundamental antagonism between the firm’s owners (= capitalists) and the employees/workers. Accordingly, firms should be regarded as battlefields of class war.

The idea that antagonism between classes is built into the economic system, though, rests on an optical illusion. And this optical illusion ultimately derives from the theory of the firm. It is obviously true that an individual firm can increase profit by lowering the wage rate. But this is NOT true for the (world-) economy as a whole. To generalize what is true for an isolated part of a system is known as Fallacy of Composition.

In the most elementary case, the interdependencies of the economic system have the unintended effect that if firm A makes a profit by lowering the wage rate, firm B (= the rest of the economy) makes a loss under the initial macroeconomic condition that total consumption expenditure is equal to total wage income (2014; 2015). And, by the same token, the real wage of the workers of firm A decreases and that of the workers of firm B increases. So, what happens is that a redistribution of profit between firms and a redistribution of output between households takes place. In political terms, this means that there are no classes with a common interest. Put differently, what appears as exploitation of the workers of firm A is only part of the complete picture of a REDISTRIBUTION of profits WITHIN the business sector and a REDISTRIBUTION of output WITHIN the household sector. In political terms: the exploitation of workers in firm A benefits the workers in firm B. And the profit increase of firm A’s capitalists comes from firm B’s capitalists. Taken all capitalists together their profit does not change. Taken all workers together their real share of output does not change.

Economists are supposed to be experts on the economy. So it is quite natural to think that they know how the profit mechanism works; after all, this is the pivotal phenomenon of their subject matter. Yet, this is definitely not the case. So economists have nothing to contribute to the discussion about how the economy or about how firms should be organized. This holds for Walrasians, Keynesians, Marxians, and Austrians.

The theory of the firm presupposes the correct macroeconomic theory. Heterodox economists are supposed to develop this objectively true theory and to replace false and scientifically worthless orthodox economics by true heterodox economics. This is a scientific task and has nothing in common with incompetent political agenda pushing.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
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, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

REPLY to robert locke on Jul 21

You ask: “Whoever said economics is a science?”

Economics is even multiple sciences and it is in the news every year: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

REPLY  to robert locke on Jul 21

You say: “... everybody knows that this prize is not a Nobel Prize.” That is not the point. The key word is NOT Nobel but science(s). And this claim has ALWAYS been a constitutive element of the definition of economics.

“The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.” (Mill, 1874, V.39)

“That Political Economy is a science which teaches, or professes to teach, in what manner a nation may be made rich. This notion of what constitutes the science, is in some degree countenanced by the title and arrangement which Adam Smith gave to his invaluable work. A systematic treatise on Political Economy, he chose to call an Inquiry into the Nature and Causes of the Wealth of Nations; and the topics are introduced in an order suitable to that view of the purpose of his book.” (J. S. Mill, 1874, V.7)

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16)

Needless to add that the psycho-social-behavioral definition of economics has been false from the very beginning because economics is a systems science.

Like all so-called social scientists, you are far, far behind the curve.

Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Robbins, L. (1935). An Essay on the Nature and Significance of Economic Science. London, Bombay, etc.: Macmillan, 2nd edition.

REPLY to robert locke on Jul 22

You say: “I could cite many critics of economics that say it is not a science, ...” and then you quote von Neumann.

I agree with the quote, but not with your conclusion. Note what conclusion von Neumann drew from his diagnosis: “... von Neumann developed the conviction over time that economics stood badly in need of revision and reconceptualization; what changed over the course of his writings was the intended shape and contours of this revision.” (Mirowski, 2002, p. 97)

von Neumann urged what is called a paradigm shift. He saw clearly that the fundamental concepts of economics were hopelessly muddled and inadequate: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)

But note also that von Neumann accepted the claim that economics is a science. What he diagnosed was that economics was still at the proto-scientific level: “Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (quoted in Ingrao et al. 1990, p. 197)

So, von Neumann and I are on the same page: (i) economics is incoherent gibberish because its fundamental concepts (= axiomatic foundations) are defective (2013), (ii) economics does not live up to its claim to be a science (2011), (iii) economics is in need of a paradigm shift (2014).

From this follows, firstly, that the word ‘sciences’ has to be eliminated from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The general public has to be informed that the 200 year old claim and the actual state of economics still do not match. It follows, secondly, that incompetent scientists have to be thrown out of economics regardless of their affiliation to either Walrasianism, Keynesianism, Marxianism, Austrianism or any other failed approach. It follows, thirdly, that it is the very task of Heterodoxy to carry out the paradigm shift and to make economics a science.

What economics needs least is the skepticism of historians, the realism of engineers, the toolism of physicists, the Verstehen of psychologists, the anything-goes of methodologists, the nothing-goes of intellectual sclerotics, the machinations of agenda pushers, and the quick-and-dirty fixes of commonsensers and practical men. From all this economics had more than enough in the last 200 years.

Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.

REPLY to robert locke on Jul 23

With regard to von Neumann, there are two things to be kept apart: diagnosis and therapy. His diagnosis was correct. The project of the proper formalization of economics, though, had one fatal drawback: von Neumann left the underlying theory untouched: “But this [establishing the analytic mother-structure] required one very crucial maneuver that was nowhere stated explicitly: namely, that the model of Walrasian general equilibrium was the root structure from which all further work in economics would eventuate.” (Weintraub, 2002)

This is the REAL mathiness problem. Formalization does not help if the conceptual root structure, a.k.a. axiom set, is defective.

REPLY to Skiadas Stefanos on Jul 23

To say “the sun goes up” is a simple and immediately convincing statement. To explain this optical illusion with the Helio-centric theory is a bit complicated and abstract. Because of this, common sense beats science in a normal discussion hands down. Science is always counter-intuitive.

Likewise, the commonsensical theory of exploitation is simple and convincing and it is as old as Ricardo. What IN FACT happens is cross-over exploitation and this is a bit more involved than the seemingly obvious wage-profit antagonism that comes to mind immediately. Cross-over exploitation explodes the sociological/political concept of class.

The commonsensical profit and distribution theory is false. First of all, because the concepts profit, distributed profit, and income have been permanently confused. The conceptual confusion of economists with regard to the foundational concepts of their subject matter is unique in the history of scientific thought and it disqualifies economists from Adam Smith onward.#1

In my post I have dealt with the most elementary case. For the complete distribution theory see the working papers (2015; 2014b; 2014a; 2012). In a counter-intuitive and common sense defying soundbite: total monetary profit does not affect the workers’ share of total output.

Kakarot-Handtke, E. (2012). Income Distribution, Profit, and Real Shares. SSRN Working Paper Series, 2012793: 1–13. URL
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL

#1 How the intelligent non-economist can refute every economist hands down.

REPLY to robert locke on Jul 26

You ask me: “... how can you have a systems science that leaves morality out of the system?”

The Is/Ought difference is reasonably clear since Hume but, beginning with Adam Smith, it has been mostly ignored by economists. It is important to realize that Smith wrote The Theory of Moral Sentiments before The Wealth of Nations.

Science voluntarily restricts itself to the Is and leaves the Ought to philosophers/priests/ mythologists/politicians/storytellers. Why? Because Is-questions have a general objective answer (= true/false) while Ought-questions are in the last instance arbitrarily/politically/ historically decided within a space/time-restricted society. Good/bad were very different things in Athens and Sparta.

The voluntary self-restriction of science is not something to be criticized as deficiency and juxtaposed against the richness of philosophical/mythical/religious/historical storytelling. The tight focusing on questions that have an answer which satisfies the conditions of formal/material consistency is the very prerequisite of the growth of knowledge.

You say: “Any economic system that thrives must be rooted in some moral order. Conservative thinkers, great religious teachers, and philosophic thinkers recognize this when they talk about sustaining economic communities.” Yes, the great teachers have taught awesome things to their stupid pupils. On closer inspection, the greatness of the teachings consists of enormously inflated social trivialities (do not kill, steal, lie), vacuous talk about an almost infinite multitude of nonentities (= Pantheon), emotionally charged and neuroticizing dietary/behavioral rules, ridiculous claims of a truth monopoly, threat in the form of prophecy, and of the explanation of the principle of positive/negative feedback, that is, of self-caused reward/punishment in this and the other world.

Yes, indeed, every society has a moral order. This order, though, is NOT the subject matter of economics. The moral order is the subject matter of sociology and other so-called social sciences.

The trouble with the founding fathers is that they started off at the wrong foot. The subject matter of Political Economy has been society and not the economy. As enlightened moralist, Adam Smith began to replace the religion-based regulation of society by the principle of enlightened self-interest (which is NOT the same thing as greed or egoism) and mutually beneficial exchange. With Smith, the moral carrot/stick morphed into profit/loss.

The drawback of Smith’s approach is obvious by hindsight: he was so occupied with moral sentiment that he never figured out how the economy works. And neither did his successors until this day. Economics is a failed science, but NOT because it has nothing to say about the moral social order, just the contrary, economists messed up economics BECAUSE OF permanent pointless waffling about good/bad human nature/behavior/action.

Science keeps out of the Ought-issues and focuses on the Is-issues. Its very strength lies in focusing on tiny and seemingly insignificant segments of reality (lever, pendulum, falling apples, etcetera) and in leaving the infinite x-dimensional whole to the thinkers/ storytellers/agenda pushers of philosophy/religion/politics. What these folks have produced so far is provable false. Science does not explain everything, but non-science explains nothing.

Economics has to explain how the monetary economy works. The economist as scientist has NOTHING to say/blog about the moral order of society. This holds for Orthodoxy AND Heterodoxy. Economists have to fix economics. It is deeply immoral to maintain, defend, and disseminate theories that are known to be false (2014; 2011).

Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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

REPLY to Ken Zimmerman on Jul 27

Economist are privileged because one of their founding fathers was a noteworthy methodologist. Therefore, every economist knows that science is about Is and NOT about Ought: “Science is a collection of truths; art, a body of rules, or directions for conduct. The language of science is, This is, or, This is not; This does, or does not, happen. The language of art is, Do this; Avoid that. Science takes cognizance of a phenomenon, and endeavours to discover its law; art proposes to itself an end, and looks out for means to effect it.” (Mill, 1874, V.8)

Science is NOT about the biographies of scientists or how they arrived at the solution of a problem. Only the solution itself matters. The story of Archimedes jumping out of the bathtub and running naked through the streets shouting Eureka is stuff for the retarded audience of the History Channel. The same holds for your story about how scientists work and what goes on in their heads and how they make decisions. That is more or less entertaining mind-reading of a hobby psychologist who has never produced a single proposition that satisfies scientific criteria.

The problem of economics 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)

Every moron has an opinion. But, as a matter of plain historical fact, economists do not have the true theory of how the monetary economy works (2013). Neither have you. So neither your nor Robert Locke’s nor anybody else’s psycho-sociological storytelling can be made part of the economists’ dialogue. Economics is a systems science and what is welcome are testable propositions about how the economy works. Psychologists, historians, sociologists, and all other cargo cult scientists are requested to dump their rubbish elsewhere.

Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.