## October 31, 2016

### The final implosion of MMT

Comment on Senexx on ‘Budget surpluses are not national saving’

Blog-Reference

Senexx writes: “As a matter of accounting between the government and non-government sectors, a government budget deficit adds net financial assets ... available to the private sector and a budget surplus has the opposite effect.” and “While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity — the government deficit (surplus) equals the non-government surplus (deficit).”#1

Accounting is an elementary form of mathematics. The curious fact is that economists get it habitually wrong and the MMTers are no exception.

The fatal accounting error/mistake is obfuscated by the fact that government and non-government are juxtaposed. Thus, the crucial differentiation between the business sector and the household sector gets lost. This, in turn, has the effect that the most important magnitude of economics — profit — gets also lost. In order to see this one has to go back to the most elementary configuration, that is, the pure consumption economy which consists only of the household and business sector.#2

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

In case (i) the monetary saving of the household sector SmYw−C is zero and the monetary profit of the business sector QmC−Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds (a) Qm−Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition QmC−Yw and the definition of household sector saving SmYw−C.#3

When the government is added then it holds under the condition of zero saving of the household sector QmG−T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus. As always, the sector balances add up to zero, i.e. (b) Qm+Sm+(T−G)=0, and THIS is the correct accounting identity. It says that budget deficits (Cg greater T) and household sector dissaving (−Sm) are the two sources of overall monetary profit in a closed economy.

The defective accounting equations of the MMT approach are replaced by the correct accounting equations (a) and (b). With this, the whole analytical superstructure of MMT implodes.

Egmont Kakarot-Handtke

#1 Budget surpluses are not national saving
#2 The tiny little problem with economics
#3 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach

Related 'Modern Moronomic Theory' and 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists' and 'Economists’ perennial trouble with accounting' and 'Where MMT got macro wrong' and 'Q: How are you going to pay for it? MMT: By stealth taxation!'. For the full-spectrum refutation of MMT see cross-references MMT.

***
REPLIES on Nov 1

Bob
You ask ‘What is the profit theory?’ For the comprehensive answer see The profit theory is false since Adam Smith.

This means in concrete terms: Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionalists, nor Monetary Economists, nor MMTers, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they fail to capture the essence of the market economy.

It should be obvious: who cannot tell what profit is, has NO idea how the actual economy works. And from this follows that all economic policy advice from these folks is something between worthless and lethal.

The profit theory is the pivot of all of economics and it is false for more than 200 years. As every economist knows from the Palgrave “A satisfactory theory of profits is still elusive.” (Desai, 2008)

Accordingly, the rectification of profit theory affects not only MMT but the four major approaches Walrasianism, Keynesianism, Marxianism, and Austrianism.#1

Ralph Musgrave
You say “Next thing Egmont Kakarot-Handtke will be telling us that grass is green and water is wet.”

Not quite. What I tell you is that grass is green and economists are scientifically incompetent. Your post readily provides confirmation.

Matt Franko
Profit distribution has been dealt with in the paper mentioned above (see eq. 1) and elsewhere.#2

#1 For details of the big picture see cross-references Profit/Distribution
#2 See working papers on SSRN

***
REPLIES on Nov 2

I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point. Until now, nobody has attempted to refute the elementary accounting equations, there has only been confused and irrelevant blah blah.

Bob
You are parroting Econ 101 micro stuff. Take notice that the micro definition is subject to the Fallacy of Composition and it tells nothing about overall profit for the economy as a whole. Overall profit is given by the Profit Law.

Matt Franko
Stick to the well-defined proof and refute it if you can. All else comes later.

Brian Romanchuk
Which part of Qm−Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).

Matthew Franko
It should be obvious that the usual national accounting conventions are used. No difference to MMT here.

MRW
Take notice that Keynes has been refuted. See How Keynes got macro wrong and Allais got it right
Take also notice that Davidson has been refuted. See Why Post Keynesianism Is Not Yet a Science
Take finally notice that Samuelson has been refuted. See Samuelson or Who is the smartest smartie?

Economists got profit wrong and because of this economics is a failed science. MMT is no exception.

***
COMMENT on Jamie on Nov 2

You say: “The epicentre of this confusion is the identity: I = S”

That is correct. The I=S mess can be traced back to Keynes and has its ultimate cause in Keynes’s scientific incompetence: “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, p. 12)

MMT shares the profit blunder with Keynes. For details of the big picture see cross-references Refutation of I=S.

***
COMMENT on Nov 2

No fun, only ignorance
Comment on Brian Romanchuk on ‘Fun With Accounting Identities’

You quote my derivation of the elementary accounting equation and conclude: “The root of the problem is that he has confused cash flow for profits. In a two-sector economy, if one sector has a financial surplus, the other sector has to have a corresponding deficit, since the sum of financial flows has to equal zero. ... However, a financial flow is not the same thing as profits. For an economy divided between a household sector and a business sector ... there are two main cash flows out of businesses that are not expenses, and which create a wedge between cash flow and profits. 1. Dividend payments ... 2. Capital expenditures.”

If you had followed the references that back up my argument you would have realized:
(i) That I do NOT confuse cash flows with profits. In fact, there are two types of profit in the axiom set, viz. monetary Qm and nonmonetary Qn (2011a).
(ii) That dividends are in the axiom set (2014).
(iii) That investment expenditures and depreciation have been dealt with elsewhere (2011b).

In case you sincerely want to get out from behind the curve study the working papers on SSRN.

References
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. 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 Brian Romanchuk on Nov 2

Jamie summarized her post: “Nevertheless, the lack of clarity on the definitions in these identities gives an outsider the impression of an entire profession lost in a confusion of its own making.” This is not only an impression but an incontrovertible fact (2013).

Economists are scientifically incompetent blatherers. Their very first error is to think that they are free to define whatever pleases them. This is the Humpty Dumpty delusion.#1 The first thing to understand in science is that foundational concepts have to be consistently defined.

It is a remarkable fact that physicists have defined their foundational concepts mass, force, energy, velocity, acceleration etcetera very carefully (see Newton’s axioms) and economists can until this day not even tell the difference between the measurable variables profit and income. Does it come as a surprise that economists have not figured out how the monetary economy works and that they have not achieved anything of scientific value in the past 200 years? In methodological terms, the failure of economics is ultimately caused by inconsistent axiomatic foundations. This applies to Walrasianism, Keynesianism, Marxianism, Austrianism, and, of course, MMT.

The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.

The current state of economics is that national accounting is provably false (2012) and that economic theory is axiomatically defective and that the ‘throng of superfluous economists’ (including Brian Romanchuk) has no clue and cannot rise above brain-dead blathering.

References
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
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

#1 Humpty Dumpty is back again

***
REPLIES on Nov 2

Matt Franko
For the proper handling of profit, distributed profit, and retained profit see (2015a).

André
Accounting and economic theory are like hands and gloves. The accounting equations are of overriding importance because national accounting is the central precondition for empirical testing. As a matter of principle, every model has to be first of all checked against the national accounting numbers. National accounting is like CERN in physics. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in accounting and in theory.

It is a big mistake to play accounting against theory/model. At a deeper level, they have a common formal core. For the basic model see (2015b).

Calgacus
You say: “I am curious. How does one prove ‘the formal foundations of MMT are inconsistent’ ― when nobody, including yourself, has formally axiomatized the theory?”

You are behind the curve, see From Orthodoxy to Heterodoxy to Sysdoxy.

Bob
You are parroting a widely-held misunderstanding about predictions. See Science does NOT predict the future.

Brian Romanchuk
You say: “He is free to make up whatever definition of ‘profit’ he wants.” This is the Humpty Dumpty delusion. The foundational concepts have to be CONSISTENTLY defined. For details see my comment on your blog.

Tom Hickey
The Wikipedia definition is micro, we are talking here about the economy as a whole. The MOST ELEMENTARY macro profit definition is Qm=C−Yw. This equation gets longer when government and foreign trade and investment expenditures are included. From macroeconomics, one arrives at microeconomics by successive DIFFERENTIATION. Differentiation is top-down, and aggregation is bottom-up. The methodologically correct way is to start with macrofoundations and then differentiate. Because of this, the Profit Law is the SAME in national accounting and theory. It cannot be otherwise! Monetary profit is an objective and measurable variable and as hard as any variable in physics. It is only economists’ brains that are mushy.

References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Kakarot-Handtke, E. (2015b). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL

***

You say: “I believe he’s got stocks and flows horribly confused.”

It is only you who is horribly confused. Needless to emphasize that the relationship between stocks, flows and national accounting has been consistently defined. See Figure 1 in (2011) for the stock of products and the stock of money.

The semantic problems exist only in some economists’ goldfish brains. The variables total wage income and monetary profit are measurable with the precision of two decimal places. The big problem in economics is not semantics but scientific incompetence, see Feeble minds, shaky assumptions, and the inevitable failure of economics.

References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL

***
REPLY to Tom Hickey on Nov 2

Referring to the elementary macro profit definition Qm=C−Yw you say “Sounds like Marx’s surplus value = capitalists’ profit”. As a matter of fact, Marx’s profit theory, too, is provably false, see (2014). To be more specific, economists do not know what profit is from Adam Smith onward to MMT. This includes Walrasianism, Keynesianism, Marxianism, and Austrianism. And this makes economics one of the worst scientific embarrassments since the ancient Greeks.

References
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL

***
REPLY to Bob on Nov 2

The scientific criteria are true/false, with truth defined as material and formal consistency. Utility is NOT a scientific criterion. The acceptance of a scientific theory does not depend on whether parroting Bob finds it useful.

This said, the elementary Profit Law indeed makes a ‘prediction’ (in the same sense as E=mc2 makes a ‘prediction’), viz. that the market economy eventually breaks down, see (2014).

References
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL

***
REPLY to André on Nov 2

You say “Also, it is not clear how your variables (Qm, C, and Yw) relate to national accounting.” Simply follow the references, see (2012).

You say also “But, for me, the most relevant aspect is that you do not talk about currency.” Again, simply follow the references (2015) or (2011).

You say finally “You just assume away currency, and don’t give a reason for it”. I do NOT assume anything away. It should be obvious to anybody that economic theory cannot be compressed into one blog post. This is why references are given. If you follow the references you will find for example ‘Clueless about money and profit’ and when you enter money in the search field you will find much, much more.#1

Do not tell me I assume something away when you are too stupid to look things up.

References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. 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
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL

#1 Google gives you 8300 hits for [“Egmont Kakarot-Handtke” money]

***
REPLY to Calgacus on Nov 3

It is pretty obvious that you do not understand the difference between science and a sitcom. This sad fate you share with 99 percent of people who call themselves economists.

When the ancient Greeks invented science more than 2300 years ago they made the distinction between doxa (= opinion) and episteme (= knowledge). Opinion, storytelling, and rhetoric belong to the sitcom world, knowledge and proof belong to the scientific world. Knowledge is established by research: “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, 1994).

That is the point: scientific knowledge is what satisfies the conditions of material and formal consistency. The rest of human communication is sitcom stuff.

And this brings us back to the core issue of this thread. The core issue consists in the proof that the formal foundations of MMT are inconsistent. This is sufficient for the refutation of the WHOLE analytical superstructure of an approach. When the premises are false all the rest is scientifically worthless. So, the inconsistency proof saves an enormous amount of time because it is unnecessary to occupy oneself with a gigantic heap of rubbish. This is the beauty of the axiomatic-deductive method: it is efficient, economical, and eco-friendly.

The representative economist has not realized the essential point of the scientific method and this is why economics is a failed science or what Feynman famously called a cargo cult science. Let this sink in: after more than 200 years economists have still no consistent set of the foundational concepts of their subject matter and hallucinate that supply-demand-equilibrium is an explanation of how the market system works. Economic debates are cargo-cultish sitcoms and economic policy advice is not different from poultry entrails reading.

As Popper said, science is conjecture and refutation. MMT has been logically refuted, therefore MMT is outside of science. End of the sitcom.

It is time now for the ‘throng of superfluous economists’ (Joan Robinson) to leave the scientific community. Calgacus set a good example.

***
REPLY to Tom Hickey on Nov 4

You say: “There are no absolute universal criteria when it comes to meaning. A definition can be made absolute (unchangeable) in a domain through stipulation but only in that domain.”

This is a widespread misunderstanding among economists.#1 And the confusion is busily kept alive by political economists. Therefore, it is important, first of all, to keep in mind that there is political economics (= agenda-pushing) and theoretical economics (= science).

Political economics is scientifically worthless confused blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” [Dennis, 1982, p. 698]#2

In marked contrast to rhetorical wish-wash, science is digital=binary=true/false and NOTHING in between. There is NO such thing in science as roughly right or roughly wrong, there is only materially/formally true/false.

Vague blather, untestable wish-wash, inconclusive either-or, and storytelling have always been the hallmark of what Feynman famously called cargo cult science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (1992). To immunize a theory/model against refutation and thereby save their jobs has always been the apex of the smartness of scientifically incompetent political economists.

So, there are the hard rocks of true and false, and the bottomless swamp between them. The swamp is the natural habitat of blathering economists, of which there are four sects: Walrasians, Keynesians, Marxians, and Austrians.#3

It is very easy to distinguish between agenda pushers and scientists. The former live in the swamp where “nothing is clear and everything is possible” (Keynes), defend it, praise it as pluralistic, and will not get out of it before they die.

Scientists have found ways and means to get out of the swamp: “We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion.” (Schmiechen)

All this is known for 2300+ years: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) Or, as Aristotle put it: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”

Economists are either too stupid to understand this or they are intentionally ignorant. Either way, the failure to properly axiomatize economics explains why economists have produced nothing of scientific value for more than 200 years. MMT is no exception.

Make no mistake, the representative economist feels safe and happy in the swamp because what he likes most of all is that wish-wash cannot be refuted and this guarantees eternal inconclusive waffling. My impression is that you, too, are a swampie.

In sum: There ARE absolute universal criteria of scientific truth and they tell you that MMT is false.

#1 Humpty Dumpty is back again
#2 Marshall and the Cambridge school of plain economic gibberish
#3 Economic recommendations out of the swamp between true and false

***
REPLY to MRW on Nov 6

You say: “Fercrissake, E.K-H, MMT is about accounting, double-entry accounting. That’s what the government uses.”

Exactly so. As I said above on Nov 1: “I have given a straightforward formal derivation of the elementary accounting equations. These equations prove that the formal foundations of MMT are inconsistent. Because of this, the whole analytical superstructure of MMT falls apart. The formal proof is the main point.” So, we now come full circle.

Accounting is elementary mathematics and the history of economics shows that economists habitually mess it up. For the sake of absolute clarity, here is the refutation of MMT’s accounting equations once more in the version for morons.

In the elementary production-consumption economy,#1 three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.

In case (i) wage income is assumed to be Yw=100 monetary units (e.g. trillion dollars, euros, yen, etc.) and consumption expenditures are assumed to be C=100 monetary units per year. Then, the monetary saving of the household sector Sm≡Yw−C is zero, and the monetary profit of the business sector Qm≡C−Yw, too, is zero.

In case (ii) wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=−10. The whole output is sold, i.e. O=X, and the market-clearing price P is now lower than in case (i).

In case (iii) wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=−10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market-clearing price P is now higher than in case (i).

It always holds (a)  Qm−Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the MOST ELEMENTARY form of the PROFIT LAW for the economy as a WHOLE.

When the government is added, then the accounting equation (a) changes to (b) Qm+Sm+(T−G)=0 or Qm≡−Sm+(G−T) or Qm+Sm=(G−T), that is, the red ink of the government sector (G−T) corresponds to the black ink of the business sector, i.e. profit Qm, plus the black ink of the household sector, i.e. saving Sm. Note, that in the last few years total household sector saving has been negative (−Sm), i.e. household sector debt has gone up steeply. This reality is best expressed by Qm≡−Sm+(G−T), that is, both deficit spenders are on the right side of the accounting equation.

Let us assume for a moment that household sector saving is zero Sm=0, then it is pretty obvious that the government sector’s deficit (G−T) is equal to the business sector’s monetary profit Qm, in other words, the government’s red ink is the business sector’s black ink. Clearly, the MMT program of government deficit spending is the biggest profit booster of all time. So, nobody should be surprised and complain about a perversely skewed income distribution.

I do not think that it is the political program of MMT to enrich the one-percenters. I do indeed think that this is an UNINTENDED effect of a well-meant employment program. And I am quite sure that this unintended effect is due to the fact that economists in general and MMTers, in particular, are too stupid for the elementary mathematics of national accounting.#2

#1 The correct macrofoundations are given with three systemic equations: (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.
#2 For more details see
► Accounting basics
► A new episode of one of the worst blunders of economics
► Macrofoundations, too, are defective
► Economists’ perennial trouble with accounting
► End of confusion
► Accounting for dummies

***
REPLY to Tom Hickey on Nov 6

You say: “Actually, we have been aware of that for some time here at MNE (as implied by the Kalecki profit equation).”

Take notice that Kalecki is wrong. See the paper What is Wrong with Heterodox Economics? Kalecki’s Profit Theory as an Example.

You say: “I have argued that this is not either an accident or a necessary result of capitalism, but a result of economics rent and rent-seeking behavior (as explored by Michael Hudson, for example).”

Take notice that the concept of rent is false. See the paper When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism.

***
REPLY to Calgacus on Nov 9

You quote me “These equations prove that the formal foundations of MMT are inconsistent.” and then you ask “What ‘formal foundations of MMT’? You just use the phrase. Again, I do not believe you understand MMT well enough to discuss foundations, let alone formalize them.”

False. I refer in my posts to the formal foundations that have been presented at many places and that are COMMON knowledge. Either you do not follow the references or you are not familiar with the MMT accounting equations.

For proof see my post on Bill Mitchell’s blog titled ‘Modern Moronomic Theory

“The fundamental flaw of your argument is to take national accounting at face value. With this, you, unfortunately, share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income and profit but of wage income and distributed profit (2013). The conceptual error carries over to national accounting (2012).

Already your first equation GDP=C+I+G+(X−M) is logically defective and as a consequence the rest of your argument. This holds in particular for (I−S)+(G−T)+(X−M)=0 which boils for the most elementary case down to Keynes' I=S (Keynes, 1973, p. 63).
...
There is no need to include net government spending and the trade balance. It suffices to prove that already the elementary accounting equations are defective.

Because your profit theory is false your monetary theory, too, is false (2015, Sec. 7).”

One more time: The formal foundations of MMT are defective and because of this the whole analytical superstructure falls apart. There is NO NEED to waste time with Mosler, Wray, Mitchell, Fullwiler, Kelton, Forstater and other people who are (i) utterly confused about the fundamental concepts of economics, (ii) are scientifically incompetent, and (iii) cannot understand the elementary mathematics of national accounting even when it is presented in a way that is readily understood in every kindergarten.

Related 'Economists cannot do the simple math of profit — better keep them out of politics'

***
REPLY to Calgacus on Nov 20

You complained: “What ‘formal foundations of MMT’? You just use the phrase.”

You can find the formal foundations also on Wikipedia. See my comment: Wikipedia and the promotion of economists’ idiotism.

***

Wikimedia AXEC143d

### How the mainstream vanished in the gutter

Comment on Lars Syll on ‘What is mainstream economics?’

Blog-Reference and Blog-Reference on Nov 3

Krugman succinctly explained what mainstream economics is: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

More explicitly, the starting point has been defined by the following 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)

From these premises follows what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium. This construct is the analytical workhorse of economics and it is used by both orthodox and heterodox economists.

It should be pretty obvious that the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5.

Every model that contains a nonentity is A PRIORI false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the wastebasket. The same holds for utility maximization and all other nonentities.

Economics from Jevons/Walras/Menger to DSGE contains HC1/HC5 and therefore is proto-scientific junk. Each textbook that applies the supply-demand-equilibrium explanation is proto-scientific junk. In sum, what Krugman “and many others do” is cartoon science.

Scientific standards are 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, 1994, p. 31)

Because two criteria must be satisfied at any time it suffices for a refutation to prove that a theory/model is either formally inconsistent or materially inconsistent. So, there is no need to empirically refute a theory that has been proven to be formally defective.

Mainstream economics is formally defective because it is built upon an axiom set that contains three NONENTITIES. From the fact that mainstream economics is axiomatically false, it follows that the whole analytical superstructure of marginalism is false from market theory to distribution theory to growth theory. There is no need to refute these theories individually.

The scientific incompetence of economists lies (i) in the acceptance of HC1/HC5 and supply-demand-equilibrium, (ii) in the inability to replace the false Walrasian axiom set by the true axiom set and to reconstruct economics without ever using the concepts constrained optimization, rational expectations, and equilibrium again.

At the moment, about 90 percent of peer-reviewed papers in mainstream journals contain NONENTITIES, which is to say that they are scientifically worthless.

To rise above the proto-scientific level requires a Paradigm Shift from Walrasian microfoundations and Keynes’ flawed macrofoundations to true macrofoundations.#1 Needless to emphasize that this is entirely beyond the means of the representative economist. The proven fact is that neither orthodox nor heterodox economists got the foundational concepts of economics right since Adam Smith.#2

Egmont Kakarot-Handtke

#1 From microfoundations to macrofoundations
#2 Economics for Economists

## October 29, 2016

### Not big news: political economics is a failure

Comment on Lars Syll and Joseph Stiglitz on ‘Economics — the triumph of ideology over science’

Blog-Reference

The founding fathers called themselves Political Economists. Now, take Smith and Newton as reference points. How much knowledge did science produce and how much did political economics produce in  200+ years? The plain fact is that neither orthodox nor heterodox economists have produced much, if anything, of scientific value.

Jevons renamed Political Economy to Economics. But economists never institutionalized the proper separation of politics and science and never really got out of politics. There is still political economics (= agenda-pushing) and theoretical economics (= science) and the former dominates the latter.

What Stiglitz calls the ‘triumph of ideology over science’ is not big news. What he implies, though, is that Keynes and other heterodox economists are real scientists, and this is NOT the case. Keynes, too, was more a political economist than a scientist and he never rose above the proto-scientific level.#1

It does not matter whether an economist’s agenda is more rightist or more leftist. Agenda pushing AS SUCH is incompatible with science, no matter how the agenda pusher defines his political mission. Stiglitz could know this from J. S. Mill: “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.”

The fact of the matter is that Stiglitz is not a better scientist than his fellow economists but just another agenda pusher.

Egmont Kakarot-Handtke

#1 What Keynes really meant but could not really prove

### Does economics matter?

Comment on Adam Levitin on ‘Does Behavioral Economics Matter?’

Blog-Reference and Blog-Reference on Oct 29

You say: “Indeed, we’ve been seeing the academic pushback or skepticism, not just from the adherents of neoclassical economics, but also from those who are more open to behavioral approaches.”

What you are overlooking is that economics defines itself as a behavioral science and this explains why it is an utter failure.

“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)

The fundamental methodological blunder resides in the idea that economics is about human behavior. It is pretty obvious that the foundational assumption of standard economics ― constrained optimization ― is patently false, and behavioral economics tried to replace it with something ‘more realistic’.

So far, so good, but economists doggedly overlook that human behavior is the subject matter of psychology, sociology, anthropology, political science etcetera. The subject matter of economics is the economic system.

Economics is a failed science because it cannot explain how the actual monetary economy works. The fact of the matter is that the very definition of economics as a social science is false.*

Economic policy guidance has no sound scientific foundation since about 200 years. So, it does not matter whether the administration turns to a behavioral, neoclassical or Keynesian economist because they are ALL scientifically incompetent.

Egmont Kakarot-Handtke

* For details see ‘Feeble minds, shaky assumptions, and the inevitable failure of economics

## October 28, 2016

### The truth about truth in economics

Comment on Lars Syll on ‘What is truth in economics?’

Blog-Reference

“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 are aware that they do not have the true theory and because of this they play the issue down by advancing new definitions or, as Blaug put it, by ‘playing tennis with the net down’.

One example is Aumann who simply abolishes the guiding principle of science: “In my view, scientific theories are not to be considered ‘true’ or ‘false.’” (See intro) Relativism and anything goes is and has always been the methodological tenet of political economists ― for obvious reasons.

Scientific truth is well defined for more than 2300 years but economists still have troubles getting their heads around it: “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, 1994).

Neither Walrasianism, nor Keynesianism, nor Marxianism, nor Austrianism fits the criteria of material/formal consistency and because of this economics is a failed science. More specifically, the scientific embarrassment is this: Orthodoxy is provable false but traditional Heterodoxy has failed to develop a superior alternative.

One possible reaction to this embarrassment is to give up the idea of scientific truth in economics and to resort to anything-goes or to theoryless empiricism. This attitude is rather popular among 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.”

The truth of the matter is: economists give economic policy advice without having a scientifically true theory. If, by some extraterrestrial intervention, all Walrasians, Keynesians, Marxians, Austrians just vanish tomorrow science suffers no loss and there is a greatly improved chance of finally overcoming unemployment, depression, deflation, and stagnation.

Egmont Kakarot-Handtke

### Orthodoxy vs Heterodoxy: the squabbling of quacks

Comment on Lars Syll on ‘Mainstream economists dissing people that want to rethink economics’

Blog-Reference and Blog-Reference on Oct 29

Pontus Rendahl argued: “... it would be wrong to teach heterodox theories as though they had equal validity. ‘In the same way, I don’t think heterodox engineering or alternative medicine should be taught’.”

Pontus Rendahl hit the nerve. Traditional Heterodoxy has one big point, viz. that orthodox economics has failed, but until now it has not replaced proto-scientific garbage with science but produced just another variant of proto-scientific garbage.

Science 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, 1994). It is pretty obvious that Heterodoxy does NOT satisfy the criteria of material/formal consistency. In its current state, it cannot be admitted to science.#1

Pontus Rendahl’s critique of traditional Heterodoxy as snake oil is accurate except for the fact that Orthodoxy is nothing else but snake oil. Orthodoxy does NOT satisfy scientific criteria either, but the representative economist has not realized it to this day. It is a remarkable fact that each student generation has swallowed the utterly silly supply-demand-equilibrium core model without turning an eyelid for 150+ years.#2

So, while Heterodoxy cannot be admitted to science, Orthodoxy has to be thrown out of it. This is the situation: there is NO such thing as scientifically valid economics. Both, orthodox and heterodox economists are selling snake oil.#3 That they are dissing each other has no scientific relevance at all.

Egmont Kakarot-Handtke

#1 When proto-scientific Heterodoxy calls Orthodoxy pseudo-scientific
#2 How to Get Rid of Supply-Demand-Equilibrium
#3 Nothing to choose between Orthodoxy and traditional Heterodoxy

Related 'Economics: 200+ years of scientific incompetence and fraud' and 'Economists: “a bevy of camp-following whores”'. For details of the big picture see cross-references  Proto-Science/Cargo Cult Science/Science and cross-references Heterodoxy.

## October 27, 2016

### Economics pedagogy: a un- and anti-scientific exercise

Comment on Asad Zaman on ‘Michel Foucault: Power/Knowledge’

Blog-Reference

One can certainly agree with Asad Zaman: “We cannot understand the world around us without a sophisticated understanding of the complex but intimate relationship between knowledge and power.”

When the ancient Greeks invented science more than 2000 years ago they made the distinction between doxa (= opinion) and episteme (= knowledge). Opinion, storytelling and rhetoric belong to the political realm, knowledge and proof belong to the scientific realm. Knowledge is established by research: “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, 1994).

Scientific knowledge is what satisfies the conditions of material and formal consistency. Needless to emphasize that politics always tried to interfere with science and that science had often a hard time to keep up the strict separation of both spheres. The fact of the matter is that (i) power cannot establish scientific knowledge, (ii) power is based on belief and therefore denies the existence of objective scientific truth: “As some one has said, it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another. (Fisher, 1911, PF. 6)

Philosophers are not scientists. Foucault, “One of the most influential philosophers of the twentieth century” (Zaman), has not produced a single piece of scientific knowledge. Like all philosophers, he was a storyteller and political agenda pusher.

Foucault’s and Zaman’s assertion that there is no objective truth is, firstly, logically self-contradictory (see Epimenides Paradox). It is, secondly, practically self-contradictory. When challenged with the choice to board an aircraft that has been designed/constructed by influential philosophers/powerful politicians and one that has been designed/constructed by scientists/engineers can there be any doubt about the outcome?

The founding fathers called themselves Political Economists. Now, take Smith and Newton as reference points. How much knowledge did science produce and how much did political economics produce in roughly 200 years? The plain fact is (i) that neither orthodox nor heterodox political economists have produced anything of scientific value, and (ii), that the scientific content of both the orthodox and the WEA curriculum is zero.*

Egmont Kakarot-Handtke

Related 'Economics: a science without scientists' and 'Orthodoxy vs. Heterodoxy: the squabbling of quacks'

## October 26, 2016

### Economics: A science without scientists

Comment on Lars Syll on ‘What it takes to make economics a real science’

Blog-Reference

There is the political realm and there is the scientific realm. Roughly speaking, the issue in the political realm is about the realization of the Good Society and the issue in the scientific realm is to gain knowledge about how the universe or one of its numerous subdomains works. Knowledge takes the form of a theory that fits the criteria of material/formal consistency. The true theory is the best humanly possible mental representation of reality.

In politics, open questions are decided by the Legitimate Sovereign, in science they are decided by proof/disproof. Who the Legitimate Sovereign is, is taken here as historically given as ‘We, the People’.

In the ideal case, the Legitimate Sovereign decides all political questions, that is, how society is organized and how the economy as a subsystem is organized/institutionalized. In the ideal case, the Legitimate Sovereign keeps entirely outside of science because science works according to its own principles. Science is about the True Theory and not about the Good Society. These are two entirely different things. Therefore, the Legitimate Sovereign decides about war/peace or the size and composition of the national budget but has NO voice in deciding whether E=mc2 or the Law of Supply and Demand#1 is true or false. Vice versa, scientists do not dabble in politics.

It is obvious that what is historically given at the moment is far from the ideal state of a neat separation of politics and science. Economics is a case in point. There is political economics (= agenda-pushing) and theoretical economics (= science). Political economics has hijacked theoretical economics since the founding fathers and has produced nothing of scientific value since then.

What it takes to make economics a real science is first and foremost the strict separation of politics and science. In practical terms, this means that political economists have to be expelled from economics. Note well that it does not matter at all what the political agenda is. More precisely, it does not matter whether the agenda is more rightist or more leftist. Agenda pushing AS SUCH is incompatible with science, no matter how the agenda pusher defines the Good Society. This definition has to be discussed and decided in the POLITICAL realm.

The goal of economics is the true theory about how the actual economy works. Not less, not more. Scientific truth 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, 1994). Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-art testing.

Science requires always both, formal AND material consistency. There is NO such thing as a trade-off between rigor and relevance. The current state of economics is that neither Walrasianism, Keynesianism, Marxianism, Austrianism satisfies the criteria of formal/ material consistency. These approaches are provably false.

And at this point, scientific ethics kicks in. A scientist is supposed to abandon a falsified theory. Morgenstern reminded his fellow economists long ago: “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.” (1941, p. 369)

Walrasianism, Keynesianism, Marxianism, Austrianism are provably false but they are still around. This, in turn, means that in economics scientific standards are violated on a daily basis. The essential ethical self-regulation of the scientific community is inoperative in economics.

So, it is pretty obvious what it takes to make economics a real science. It takes (i) competent scientists, (ii) a strict commitment to well-defined scientific standards, (iii) a Paradigm Shift, that is, the full replacement of scientifically indefensible Walrasianism, Keynesianism, Marxianism, Austrianism. There is no place in science for the proto-scientific garbage that has hitherto been called economics.

Egmont Kakarot-Handtke

#1 Wikimedia AXEC64 Macroeconomic Law of Supply and Demand

Related 'Economics and corruption' and 'FakeNews, FakeScience: economics in the information age' and 'There is NO such thing as an economic expert' and 'There is no scientific elite in economics' and 'The economist as stand-up comedian' and 'The real problem with the economics Nobel'. For details of the big picture see cross-references Incompetence and cross-references Failed/Fake Scientists.

## October 25, 2016

### Hobson got full employment policy almost right

Comment on Bill Mitchell on ‘Rising inequality and underconsumption’

Blog-Reference

There is the surface level of economic policy and there is the underlying level of economic theory. The problem of economics is that there is a total DISCONNECT of the two levels. Thus, as a general rule, economic policy proposals have no sound theoretical foundation.

“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. This applies to Orthodoxy and Heterodoxy, to Walrasians and Keynesians, and also to John Atkinson Hobson. His sensible policy proposals lacked a consistent theoretical foundation. What is fateful in the current situation is that economists lack the true employment and profit theory for more than 200 years.

To make a comprehensive analysis short (2012; 2014), the basic version of the objective structural Employment Law is shown on Wikimedia AXEC62:
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment (the letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates credit expansion, a ratio rρE less than 1 indicates credit contraction.
(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 ρF≡W/PR leads to higher employment.

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

Items (i) and (ii) cover Keynes’ arguments about the role of aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provably false (2012). The factor cost ratio ρF as defined in (iii) embodies the price mechanism which works very differently from what the representative economist hallucinates. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (expenditure ratio, investment expenditures, etc.) or by INCREASING the average wage rate or by a combination of the two. The expenditure ratio is an average and depends in turn on the income distribution.

Now, economists have always argued that the wage rate must and will fall as long as there is unemployment and that one can rely upon that the price mechanism ― if unhindered ― clears the market. This depiction of the labor market price mechanism is simply a Fallacy of Composition. For the economy as a WHOLE holds the exact OPPOSITE. In other words, the market economy is UNSTABLE, that is, the fundamental tenet of Orthodoxy is provably false.

The structural Employment Law vindicates John Atkinson Hobson with regard to the relationship between average wage rate and overall employment and gives it a scientifically sound foundation. Other parts of Hobson’s argument do not hold up as well. The economic policy bottom line, though, is in the affirmative: In the current situation, the best policy is to forget both monetary and fiscal policy and to increase the average wage rate faster than productivity and price.

Egmont Kakarot-Handtke

References
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 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, MA: MIT Press.

### Economists have no brains

Comment on Editor on ‘Economists have no ears’

Blog-Reference

You say: “Most introductory economics textbooks present a sanitised, uncritical rendition of conventional economic theory, and the courses in which these textbooks are used do little to counter this mendacious presentation.”

Economics textbooks explain the functioning of the economy using what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium. To this, the hint is added that general equilibrium theory has proven that an overall equilibrium for an arbitrary number of markets exists. The supply-demand-equilibrium explanation is, in fact, a test, albeit an unintended and unnoticed one. Those who accept supply-demand-equilibrium flunk the entry-level intelligence test of science.

It can be taken as a rule that no genuine scientist will ever accept this ridiculous construct as an explanation: “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: were it engineering, the bridge would collapse.” (McCauley, 2006)

The proven fact of the matter is that the worst scientific garbage can be presented to economists and it is swallowed hook, line, and sinker. This works reliably with every new generation of students for 150+ years. The proof is in the textbooks. Just take Samuelson’s classic as an example.

There is Orthodoxy with microfoundations and it has been nicely defined by Krugman: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”#1

Methodologically, these premises are forever unacceptable.#2 A smart person realizes this at first glance. Textbook writers from Samuelson to Mankiw did not realize anything.

There is Keynesianism with macrofoundations.#3 These formal foundations are conceptually and logically defective because Keynes never came to grips with profit. Methodologically, Keynes’s premises are forever unacceptable. A smart person realizes this at first glance. From Samuelson onward textbook writers did not realize anything.

In Samuelson’s synthesis, the defective Walrasian microeconomic axioms and Keynes’ defective macroeconomic axioms were cobbled together. His textbook consists of two well-balanced halves: micro and macro. Needless to emphasize that both halves do not logically fit together.

Science is committed to material and formal consistency. Samuelson’s textbook had ― with a probability close to 1 ― the lowermost scientific content of all textbooks ever written. And nothing has improved in the last 69+ years. Supply-demand-equilibrium will forever stand out as the silliest model in the history of sciences and it is still at the core of economics teaching.#4

Let us face it: the disqualifying fault of modern-day economics students is NOT that they are insufficiently literate and insufficiently numerate. The fault is that they are scientifically incompetent. Unfortunately, this holds also for students with a heterodox bent. And this is why Heterodoxy trails Orthodoxy for more than 200 years but cannot overthrow and replace it.#5

Egmont Kakarot-Handtke

#1 More detailed, the starting point is given with these 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)
#2 For details and proofs see blog and working papers
#3 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.” (p. 63)
#4 How to Get Rid of Supply-Demand-Equilibrium
#5 Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn

## October 24, 2016

### Heterodoxy ― a new Paradigm or just another political sect?

Comment on Ken Zimmerman and Dean Baker on ‘The old debt and entitlement charade’

Blog-Reference

There is the political realm and there is the scientific realm. Roughly speaking, the issue in the political realm is the realization of the Good Society and the issue in the scientific realm is to gain knowledge about how the universe or one of its numerous subdomains works. Knowledge takes the form of a theory that fits the criteria of material/formal consistency. In politics, open questions are decided by the Legitimate Sovereign, in science they are decided by proof/disproof. Who the Legitimate Sovereign is, is taken here as historically given as ‘We, the people’.

In the ideal case, the Legitimate Sovereign decides all political questions, that is, how society is organized and how the economy as a subsystem is organized/institutionalized. In the ideal case, the Legitimate Sovereign keeps entirely outside of science because science works according to its own principles. Therefore, the Legitimate Sovereign decides about war/peace or the size/composition of the national budget but has NO voice in deciding whether E=mc2 or a2+b2=c2 is true or false.

It is obvious that what is historically given at the moment is far from the ideal state of a neat separation of politics and science. Economics is a case in point. Hence it is of overriding importance to always clearly 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.
(iii) Political economics is about opinion/rhetoric; theoretical economics is about knowledge/proof. Opinion is subjective, knowledge is objective. Opinion is scientifically worthless.

The fact of the matter is that theoretical economics has from the very beginning been dominated by the agenda pushers of political economics. Smith and Ricardo fought against the pre-capitalistic order, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

Note well that it does not matter at all what the agenda is. More precisely, it does not matter whether the agenda is more rightist or more leftist. Agenda pushing AS SUCH is incompatible with science, no matter how the agenda pusher defines the Good Society. This definition has to be discussed and decided in the political realm.

Political economics is scientifically worthless. Both, orthodox and heterodox economics has achieved not much if anything, of scientific value in the last 200+ years. Walrasianism, Keynesianism, Marxianism, Austrianism are provably false. This is the actual problem of economics and not which party wins the next election.

From the standpoint of science, Heterodoxy means to refute the actual paradigm and to replace it with a superior paradigm. This is also called a scientific revolution. Obviously, a scientific revolution is something quite different from a political revolution.

But, just as Orthodoxy has been hijacked by readily to identify political agenda pushers like Hayek, Friedman, Krugman, et al. Heterodoxy, too, is currently in danger of being defined in political terms as movement/party.

Agenda-pushers/non-scientists/anti-scientists of all stripes are easily recognizable by:
― appeal to emotion and common sense,
― storytelling and ad hominem argumentation,
― replacement of material/formal consistency as guiding principle by anything goes,
― non-acceptance of scientific standards, yet posing as science,
― populism, i.e., appeal to the majority of scientific retards,
― putting unprovable beliefs or mere speculations on the same level as proven/testable theories.

With Ken Zimmerman, Assad Zaman, Robert Locke et al. as methodological loudspeakers, RWER-Heterodoxy is going down the political drain instead of climbing higher on the scientific ladder.

Egmont Kakarot-Handtke

Related 'Go, Heterodoxy, move on!' and 'Stuck with the economics prisoner’s dilemma' and 'The Cambridge crap curriculum'

## October 23, 2016

### Economics between science and magic

Comment on Anonymous on Noah Smith on ‘Do economists have physics envy?  Pt2’

Blog-Reference and Blog-Reference on Oct 26

You say: “Yes, magic is orders of magnitude more abundant in physics than in economics. But Economists make more money...uhmm, ...”.

The emotionally powerful common core of magic, physics, alchemy, biology, and economics is the idea of the creatio ex nihilo, the creation out of nothing, the making of gold out of dreck, life out of dead matter, the perpetual motion machine, the free lunch, something for nothing.

So, you are plainly wrong. In fact, magic and magical thinking are more abundant in economics than anywhere else. Actually, economists are occupied with nothing else. And, let us face it, it seems that economists have made the gold makers' dream come true. They have uncovered the magic formula and it spells market economy.

The classical economists advertised themselves as gold makers: “... in the introduction to Book IV we read that Political Economy ‘proposes to enrich both the people and the sovereign,’ and it is this definition which expresses both what Smith wanted above everything and what interested his readers more than anything else.” (Schumpeter, 1994, p. 186)

Marx was a real spoilsport. He, too, was occupied with the magic formula M-C-M+, that is, how it is possible to make more money (= M+) out of money (= M). His answer is known as surplus theory or in simple pejorative terms exploitation. C in his formula stands for capital/capitalism.

Nowadays, the focus has moved from the sphere of production to the monetary sphere and more and more people get crazy about the fact that the Fed can create money out of nothing and that bankers can charge interest for this feat.

Ordinary people have discovered that home-sweet-home, too, creates wealth over time seemingly out of nothing and can, therefore, be turned into an ATM.

The magical phenomenon of the market economy is profit. And the true magician knows how to make it. However, there is a nagging problem. Physicists have shown that because of the law of energy conservation something like value creation, i.e. something out of nothing, is impossible in principle. Only energy transformation is possible. Physical reality is a zero-sum game (with entropy ignored).

This idea occurred also to economists: “... since it is impossible to have an economy where everyone is making profits. Aggregate profit for an entire (closed) economy must be zero, hence if any firm is making profits, some other firm must be making losses.” (Boland, 1992, p. 80)

On the other hand, one can point to the indisputable fact that the market economy is NOT a zero-sum game. In the last 200+ years, overall profit in the market economies has been greater than zero. Something is very strange and magical here: profit seems to prove that something can come out of nothing. This, though, is against the iron rule of all of economics: “There is no such thing as a free lunch.”

What is even more strange: economics claims to be a science but cannot explain profit, or as Mirowski put it: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

According to scientific criteria, economics is a failure. Neither Walrasians, Keynesians, Marxians, nor Austrians have figured out what profit is or can tell the difference between profit and income.#1 Economics is a proto-science and still stands where physics stood in the Middle ages before the elementary concepts of force, mass, energy were properly defined and clearly understood.

Compared to physicists, economists have achieved virtually nothing of scientific value in the last 200+ years. How, then, does it come that they make more money than physicists, as Noah Smith gleefully points out in order to debunk the old cliche of physics envy?

Quite simple, economists are magicians and have found the formula of how to transmute scientific dreck into gold.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith

Related 'Gold-making, wine from water, M-C-M+, perpetuum mobile, free lunch, beating the stock market, and the perennial human dream' and 'Mathematical Proof of the Breakdown of Capitalism'.

Related 'Economics between physics and psychiatry'

## October 22, 2016

### Economics between physics and psychiatry

Comment on Noah Smith on ‘Do economists have physics envy Pt2?’

Blog-Reference

Mirowski messed up his methodological critique of Neoclassics with the now-famous meme of ‘physics envy’. Physics envy derives from Freud’s penis envy and this immediately frames the whole discourse as an exercise in psychologism.

Psychologism is proto-scientific garbage, as Popper made clear long ago with his methodological debunking of Psychoanalysis, but people stick to it because it gives them an easy-to-apply explanation template. There are three psycho-sociological templates: myth/religion, psychologism, conspiracy ‘theory’. The strength of these thought patterns is that they are emotionally effective and virtually irrefutable. This makes them dear to all sitcom storytellers but forever unacceptable to scientists.

The underlying thought pattern consists of three elements: there is a powerful but unknown entity A (e.g. god, subconscious, illuminati, communists, extraterrestrials, etc) which brings forth the phenomenon/event under discussion B (e.g. crisis, accident, windfall, strange behavior) because of an emotional cause/motive C (e.g. anger, vindictiveness, jealousy, greed, malevolence, benevolence, envy). In economics, this one-size-fits-all template is known as the Invisible Hand explanation.

Science is fundamentally different from ABC-storytelling as it is laser-guided by the criterion true/false which in turn is well-defined as material and formal consistency.

Accordingly, the scientific critique of Neoclassics consists of proof that it is materially/formally inconsistent which is followed by the full replacement of the obsolete paradigm through a superior paradigm. Mirowski’s critique, though, consists of the detailed demonstration that Neoclassicals (i) do not understand their underlying physical metaphor, (ii) do not follow its implications to their logical end, and (iii), misapply the mathematics that comes with the metaphor.

All this is true, of course, but the whole psychologism about physics envy is entirely beside the point. The founding fathers were Political Economists but realized that after Newton’s Principia agenda-pushing, too, had to take a scientific form. Simple soapbox rhetoric was no longer acceptable: “The backward state of the Moral Sciences can only be remedied by applying to them the methods of Physical Science, duly extended and generalized.” (Mill, 2006, p. 833)

After more than 200 years it is pretty obvious that the representative economist never really grasped what science is all about and this is why economics is what Feynman famously called a cargo cult science. Neoclassical economics in its actual incarnation as DSGE/RBC is an outstanding example of proto-scientific garbage. No genuine scientist will ever accept it. But, as it happens, economists have emancipated themselves and do no longer care about the approval of genuine scientists.

Mirowski’s summary assessment of neoclassical economics as a scientific failure is accurate. Unfortunately, he steered the whole discussion into the psycho-social cul-de-sac. Accordingly, the discussion is not about how to get out of the bottomless neoclassical swamp and to get rid of incompetent scientists but more about Mirowski’s sputtering disdain, his patronizing tone, his literary extravagances.

The unsurpassable apex of brain-dead psychologism is this intro of Hoover#1: “Mirowski’s hatred of neoclassical economics borders on the pathological: one sometimes wonders if his mother didn’t run off with a neoclassical economist, leaving little Phil bereft in the cradle.” Oedipus has finally arrived at the economics sitcom. You cannot make this stuff up.

Egmont Kakarot-Handtke

#1 Book Review

Immediately following Economics between science and magic

## October 21, 2016

### Wicksell’s misplaced critique of mathematics

Comment on Lars Syll on ‘On the proper use of mathematics in economics’

Blog-Reference

Wicksell had no qualms to apply: (i) marginalism, (ii) the supply-demand-equilibrium cross, (iii) the equalization of saving and investment.

All these concepts are provable false#1 and from this follows that Wicksell was one of the many incompetent scientists who tried their luck in economics but only piled up the heap of rubbish.

Wicksell argued: “It is, by the way, evident that the economic aspects must be the determining ones everywhere: economic truth must never be sacrificed to the desire for mathematical elegance.”

This is trivially true. Nonetheless, as it is framed, the argument is misleading because it suggests that economists already had the true theory and mathematicians gave it away for elegance. Clearly, this never happened. Economists in general and Wicksell in particular never had the true theory. What the mathematical economists in fact did was to formalize false theories with unsuitable mathemathics.

It is a bit surreal to observe that Wicksell, who applied all his life the logically defective concepts (i)/(iii), is nowadays presented as a forerunner of the mathiness critique which identifies math as the ultimate cause of all that is wrong with economics.

What exactly went wrong with the fusion of economics and mathematics? The mathiness blunder occurred because economists realized the analytical power of calculus and its pivotal role in physics and translated it into a behavioral axiom, i.e. “Agents independently optimize subject to constraints.” (HC2 in Weintraub, 1985). This, indeed, is the WRONG sequence.

“The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein, in Schmiechen, 2009, p. 368)

In other words, economics has to develop its own mathematical tools and not to grab them from other disciplines. The scientific incompetence of economists consists of the MISapplication of mathematics. More specifically, both Walrasian microfoundations and Keynesian macrofoundations are conceptually defective#2 and because of this mathematics cannot unfold its ‘unreasonable effectiveness’.

There is NO such thing as a Wicksellian trade-off between factual truth and mathematical elegance or, more generally, between relevance and rigor.

Egmont Kakarot-Handtke

#1 See ‘How Wicksell and the rest got inflation/deflation wrong
#2 For details see ‘From Orthodoxy to Heterodoxy to Sysdoxy