November 11, 2017

From false microfoundations to true macrofoundations (I)

Comment on Lars Syll on ‘Big — and not so big — ideas in macroeconomics’

Blog-Reference and Blog-Reference

John Quiggin summarizes his book review: “In Athreya’s world, and that of a large part of the academic macroeconomics profession, macroeconomics does indeed begin with Walras, and the first modern development in the field was the formalization of Walras’ model by the economic theorists Arrow, Debreu and MacKenzie in the 1950s.” and concludes ”Athreya’s version of macro excludes everything in which I am interested.”

Obviously, John Quiggin is a proto-scientific moron of the sort that overpopulates economics. Science takes the form of a theory that has to satisfy the criteria of material and formal consistency. So the only question with regard to orthodox macroeconomics is Is it true or false? and NOT whether it is after John Quiggin’s fancy.

It holds: “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)

Neither orthodox nor heterodox economists have the true theory. Fact is:
  • Economics is a failed science. It consists actually of political and theoretical economics. Political economics is scientifically worthless, and theoretical economics is materially and formally inconsistent.#1
  • The subject matter of economics is the economic system as a whole. Psychology, Sociology, Behaviorism, Political Science, Geopolitics, History, Anthropology, Biology/Darwinism, Institutionalism, Law, Ethics, Philosophy are NOT economics. The valid results of these independent disciplines are taken into economics by way of multidisciplinary cooperation if needed.
  • Economics is NOT about Human Nature/motives/behavior/action. NO way leads from second-guessing individual/social behavior to the understanding of how the economic system works. The microfoundations approach had been doomed to failure from the very beginning.
  • Partial analysis is of extremely limited value and invariably runs into the Fallacy of Composition.
  • The indispensable paradigm shift consists in replacing microfoundations by macrofoundations.
  • Keynes messed up the paradigm shift because his macrofoundations lack the correct definition of macroeconomic profit.#2
  • This is the core of the correct macrofoundations: (A0) The objectively given and most elementary systemic configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (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.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. All variables are measurable in principle. The set of premises is minimalistic, that is, Occam’s Razor has been applied and the set cannot be reduced further, only expanded. The set contains no nonentities like constrained maximization or equilibrium and no normative assertions.

Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke


#1 Microfoundations are given with these verbalized 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) Every economic model that applies just one of these axioms is false.
#2 How Keynes got macro wrong and Allais got it right