July 3, 2016

What is dead certain in an uncertain world: economists’ abysmal incompetence

Comment on Lars Syll on ‘Paul Krugman vs. Mervyn King on Keynes’

Blog-Reference and Blog-Reference on Jul 11

Paul Krugman summarizes: “It’s not entirely clear ... why radical uncertainty, not quantifiable risk, is the essence of economic life. Yes, economic forecasts are often grossly wrong; yes, even smart people often have far too much confidence in their ability to assess risks. Every serious economist knows this, yet most don’t consider it sufficient reason to abandon conventional tools of analysis.” (See intro)

This evasive waffling shows one thing: the representative economist has no idea of what economics is and of what science is. First of all, science does NOT ‘predict the future’ simply because, as a genuine scientist said, “The future is unpredictable.” (Feynman, 1992)

What is called prediction in science is categorically different from the commonsensical meaning of ‘predicting the future’. The sole criterion of science is true/false and not predicting the next crash or any other extraordinary event. This is the occupation of prophets, fear mongers, astrologers, gold bugs, and other freaks/swindlers. In marked contrast, science is about invariants or ‘eternal’ laws.

So, scientists do NOT predict when the next apple will fall from the tree. What they indeed predict exactly is position and velocity at any point in time once the apple has started to fall. The commonsenser’s view of reality is entirely DIFFERENT from the scientist’s view. The commonsenser’s view is practical, trivial, and false but utterly convincing for other commonsensers. This is why false worldviews/theories that have no immediate grave negative practical consequences for commonsensers can survive for an indefinite time.

Each falling apple is a unique historical event. There are arbitrary many causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. In almost all cases the singular event is uncertain and unpredictable. That is so OBVIOUS that no physicist ever lost many words about the historicity and uncertainty of falling apples.

Accordingly, when the apple fell on Newton’s head* he did NOT discover uncertainty but the common principle that underlies the motion of the apple and the moon, i.e. the Law of Gravity.

Science is NOT AT ALL interested in singular historical events as such but in the underlying invariances (Nozick) or ‘eternal’ laws. Uncertainty refers to historical events, certainty refers to laws. The uncertainty of when and why an apple falls is perfectly reconcilable with the certainty of the Law of Falling Bodies.

Because of this, Keynes’ famous dictum ‘We simply do not know’ is NOT a great revelation for any scientist but proof that Keynes had NO idea of what science is all about. This, of course, holds for all After-Keynesians including Mervyn King and Lars Syll.

The real problem with economics is not commonsensical prediction but that it is NOT a science yet pretends to be one. It is of utmost importance to clearly distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully 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. The history of political economics from Adam Smith to Keynes and beyond can be summarized as an utter scientific failure. This includes Krugman but also the whole bunch of heterodox political economists.

Krugman’s manifest scientific incompetence is condensed in his methodological tenet: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” This means in more detail that he subscribes to 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. The failure of methodological individualism and all other psycho/socio approaches can be stated as an impossibility theorem: NO way leads from the explanation of human nature/behavior/action to the explanation of how the economic system works.

There is NO such thing as a behavioral axiom because there is no such thing as a certain, true, and primary (Aristotle) behavioral proposition. The simple fact of the matter is that behavior is not only influenced by uncertainty but is itself the source of uncertainty: “we might say that the human factor is the ultimately uncertain and wayward element in social life and in all social institutions.” (Popper, 1960)

Because of this, it is methodological idiocy to take behavioral assumptions into the set of axioms. HC1 to HC5 is inadmissible. All models based on this set are worthless.

But things become even worse. Krugman is also a sorta-kinda Keynesian. Unfortunately, Keynesianism too is based on false axioms. Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.”

This two-liner is defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010)

Let this sink in, Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of macroeconomics is false, in particular, ALL I=S/IS-LM models including, of course, Krugman’s.#1

Krugman has not realized during a long career that (i) the neoclassical axioms are false, and (ii), that Keynes’ axioms are false, and (iii), that the two axiom sets are formally incompatible ― no ― he senselessly cobbles all this garbage together and derives his policy advice from it. Needless to say that all these gross logical inconsistencies sail smoothly through all peer-reviews into quality journals and textbooks.

Krugman is provably false, Keynes is provably false, Orthodoxy is provably false, Heterodoxy is provably false, and last but not least the profit theory is false since Adam Smith. After more than 200 years of poor performance, there is no hope at all that economists will ever say anything worthwhile about uncertainty. Methodologically retarded economists let the world know ‘We simply do not know’ and this, indeed, is an unintended true summary of current economics. One thing, at least, is certain: economics is a failed science.

Egmont Kakarot-Handtke

#1 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

* It does not matter in the present context that the apple-on-the-head story is, of course, a historical myth.