December 19, 2016

Economic policy advice has never had sound scientific foundations

Comment on Mark Thoma on ‘What Economics Can Tell Us About Trump’s Policy Proposals’

[The comment section on TheFiscalTimes is access-restricted by Disqus see Blog-Reference]

Brad DeLong wrote elsewhere: “Back in 2007, we thought we understood the macroeconomic world, at least in its broad outlines and essentials. It has become very clear to us since 2007 that that is not the case.”#1

Mark Thoma echoes: “Faith in macroeconomic models plummeted after the Great Recession, and for good reason. The models failed to foresee the economic problems that were coming, the severity of the recession was misjudged, and the models provided little guidance on how policymakers should respond to the economic crisis. Macroeconomists have since overcome many of these problems.”#2

Not at all! What economists still fail to notice is that they themselves are the biggest problem of economics.

The fact of the matter is that economists still have not spotted the fundamental error in macroeconomics. In order to see this, one has to go back to Keynes.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a Paradigm Shift, except for the fact that Keynes messed up his macrofoundations.#3 This is why Keynesianism, too, is a failure.

What neither Orthodoxy nor Keynes ever understood was 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)

It is pretty obvious that an economist who cannot tell the difference between the fundamental economic magnitudes of profit and income is a laughing stock. This applies to Walrasians, Keynesians, Marxians, Austrians, MMTers. The profit theory is false since Adam Smith or, as the Palgrave Dictionary puts it, “A satisfactory theory of profits is still elusive.” (Desai, 2008). Economists have NO idea of the foundational concept of their subject matter and because of this, ALL models are false. Economists are too stupid for the elementary algebra that underlies macroeconomics.

The provable falsity of both microeconomics and macroeconomics should be enough reason to keep a low profile in the political arena.

But economists suffer under severe self-delusion: “One of the things we tell students who are just beginning to learn about economics is that it will teach them a way of thinking that applies very generally, a way of thinking that will be valuable in almost all areas of life, including making business decisions, evaluating government policy, and making choices in one’s personal life.”

What Thoma overlooks is that the opportunity cost principle and the marginal principle are (i) vacuous in economics, and (ii), not applicable in the political realm in the first place. Here, the Legitimate Sovereign makes the decision according to agreed-upon procedures. The Legitimate Sovereign is WeThePeople directly or a legitimate delegate. And that’s it for the economist. He has simply to take notice of the consolidated valuations of benefits and costs of the Legitimate Sovereign that are implicit in any political decision.

The economist as a scientist has NO mandate to interfere with political decisions. This is known since 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.”

In the same vein “Senior … said indeed that the economist’s conclusions ‘do not authorize him in adding a single syllable of advice.” (Schumpeter)

There are three reasons for economists to keep a low profile in the political arena: (i) they have NO political mandate (except that of a voter like anybody else), and (ii), they have nothing of scientific value to contribute. Economics is a failed science, and current macro is proto-scientific garbage.#4 Last, but not least, economists risk that the general public realizes that what they thought are experts are in fact a bunch of blatherers and agenda pushers.#5

Egmont Kakarot-Handtke

#1 Has Academic Thinking About Countercyclical Fiscal Policy Changed?
#2 When It Comes to Trumponomics, Economists Are on High Alert
#3 How Keynes got macro wrong and Allais got it right
#4 Macro for dummies
#5 There is NO such thing as an economic expert

Related 'Why don’t economists simply shut up for a while?' and 'Economists: the Trumps of science' and 'All models are false because all economists are stupid' and 'The final smackdown of blahblah-Keynesianism' and 'Scientific suicide in the revolving door' and 'Profit and the collective failure of economists' and 'The miracle cure of economists’ micro-macro schizo' and 'Hooray! The formalization issue is finally settled' and 'Economists cannot do the simple math of profit — better keep them out of politics' and 'Economics, methodology, morals ― a creepy freak-show' and 'The demise of phony experts: macroeconomics is provably false' and 'Economics: The greatest scientific hoax in modern times' and 'One entirely sufficient reason for the shutdown of economics'. For details of the big picture see cross-references Political Economics/Stupidity/Corruption.