July 9, 2017

We are not yet out of the wood; in fact, we are not yet in it

Comment on Peter Turchin on ‘What Economics Models Really Say: A Review of Economics Rules’

Blog-Reference and Blog-Reference on Jul 10 and Blog-Reference

It is known for 2300+ years how science works: “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.” (Aristotle)

We know after 200+ years that economics is a failed science or what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing is the true theory: “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)#1

The true theory is defined by material and formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

Now, every economist knows:
(i) The major approaches Walrasianism, Keynesianism, Marxianism, Austrianism are materially/formally inconsistent. What we actually have is the pluralism of false theories/models.
(ii) The foundational concept of profit is ill-defined (see Desai, Palgrave Dictionary). By implication income, too, is ill-defined.#2
(iii) The concept of capital is ill-defined (see Cambridge Capital Controversy CCC)
(iv) The concept of equilibrium is ill-defined: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin.” (Blaug) see also (Ingrao et al.), (Ackerman et al.)

Therefore, ALL theories/models that apply the traditional concepts of profit, income, capital, equilibrium are A PRIORI false. The mathiness discussion misses the crucial point altogether.#3 It is not at all the question whether the axiomatic-deductive method is productively applicable in economics, the problem is (i) that the method works only if the premises are “certain, true, and primary”, and (ii), that the axiomatic foundations of economics are provably false.#4 Economists do not even apply the elementary mathematics of macro accounting correctly.#5

What we have is Walrasian microfoundations and Keynesian macrofoundations and both are cobbled together for 70+ years in something called synthesis. Needless to emphasize that both halves do not logically fit. Because the axiomatic foundations of both microeconomics and macroeconomics are false, ALL modern economics textbooks from Samuelson to Mankiw and Rodrik are false.#6 This has nothing to do with mathiness but much with scientific incompetence.

Egmont Kakarot-Handtke

* Title taken from Schumpeter
#1 Economics: 200+ years of scientific incompetence and fraud
#2 Economists: scientists or political clowns?
#3 Morons on math
#4 First Lecture in New Economic Thinking
#5 A crash course in macro accounting
#6 The father of modern economics and his imbecile kids