February 28, 2018

Paul Krugman and economic poultry entrails reading

Comment on Brad DeLong on ‘Paul Krugman Looks Back at the Last Twenty Years of the Macroeconomic Policy Debate’

Blog-Reference and Blog-Reference and Blog-Reference on Mar 1

A theory must satisfy TWO criteria ― 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. This is known since 2000+ years: “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, Wikipedia)

Paul Krugman, for one, is quite explicit about how he has solved the Starting Problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Paul Krugman has not realized since his student days that neoclassical economics has already been dead in the cradle 140+ years ago. In other words, the neoclassical premises are NOT certain, true, and primary. In still other words, neoclassical economics is axiomatically false. And when the axiomatic foundations are false the whole analytical superstructure is false.#1 As a result, the microfoundations approach from Jevons/Walras/ Menger onward to DSGE is scientifically worthless.

But Paul Krugman is also a Keynesian, sorta-kinda. Keynes built macro on these premises: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

Unfortunately, Keynes got macroeconomic profit wrong: “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.)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular all I=S/IS-LM models.#2 *

Paul Krugman, of course, realized nothing and used and praised IS-LM as superior tool for macroeconomic analysis.#3

Needless to emphasize that Walrasian microfoundations and Keynesian macrofoundations do not fit together. Therefore, a synthesis of the two is methodological madness since Samuelson’s 1948 textbook.

To this day, Paul Krugman’s economic policy guidance has NO sound scientific foundations but is plucked out of the thin air of political populism. Because both Walrasianism and Keynesianism is axiomatically false, economic policy advice is to this day no different from the poultry entrails reading of the old Roman haruspex.

Egmont Kakarot-Handtke


#1 For details of the big picture see cross-references Axiomatization
#2 For details of the big picture see cross-references Keynesianism
#3 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

Related 'Krugman and the scientific implosion of economics' and 'The Krugman curse' and 'Paul the Menace'. For details of the big picture see cross-references Failed/Fake Scientists.


*

Economics: When the scientifically unfit blather about science

Comment on Alan Y. Wang on ‘No, Economics Is Not a Science’

Blog-Reference and Blog-Reference

It is absurd in the extreme when proto-scientific morons who have not gotten the foundational concepts of their own discipline right and fail at the elementary mathematics of accounting waffle about advanced physics and mathematics.#1

Fact is that the four main economic approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. This is the actual state: provably false
• profit theory, for 200+ years,
• Walrasian microfoundations (including equilibrium), for 140+ years,
• Keynesian macrofoundations (including I=S/IS-LM), for 80+ years.

Economics is a science without scientists. Feynman called this phenomenon 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 among economists is an understanding of what science is all about. Allyn Wang is no exception. He is just repeating all the silly excuses that have already been refuted one-by-one.#2

And exactly this is the modus operandi of economics as Morgenstern observed back in 1942: “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.”

Economics is the senseless repetition of false and refuted theories/models/arguments. Economics is still at the proto-scientific level because:
• The whole subject matter is ill-defined. Economics is NOT a so-called social science but a system science.#3
• The foundational concepts of the subject matter are ill-defined. There is no proper axiomatization. The representative economist cannot tell the difference between profit and income. This is like medieval physics before the concept of energy was properly defined and fully understood.
• Theories/models contain blatant nonentities, e.g. utility, equilibrium, rational expectations. This results in pointless dancing-angels-on-a-pinpoint debates.#4
• Economists violate scientific standards on a daily basis.

Economics claims to be a science since Adam Smith/Karl Marx. The economics Nobel bears the title: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. Fact is that economics is the worst fraud in the history of modern science.

Egmont Kakarot-Handtke


#1 For details of the big picture see cross-references Failed/Fake Scientists
#2 Failed economics: The losers’ long list of lame excuses
#3 For details of the big picture see cross-references Not a Science of Behavior
#4 Economics: communication without content

Related 'Yes, economics is a bogus science' and 'Economists still don’t get Econ 101 right'. For details of the big picture see cross-references Proto-Science/Cargo Cult Science/Science.

***
REPLY to Tom Hickey on Mar 1

You say: “The trick in science is getting the measurements right, as well as clarifying the concepts involved. Samuelson and Solow were better mathematicians than Sraffa and Robinson but they lost in the Cambridge capital controversy. Robinson and Sraffa were very good at economic philosophy, a key aspect of which is clarifying concepts.”

The fact of the matter is that neither Samuelson, nor Solow, nor Sraffa, nor Robinson got the foundational concepts right and ever rose above the level of proto-scientific blather. They had the blunder fresh before their eyes but realized nothing.

Keynes wrote in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This is utter conceptual crap but Post- and After- and Anti-Keynesians up to MMT and the philosopher Tom Hickey swallowed it without turning an eyelid.

Here comes the strictly formal proof of the scientific incompetence of the representative economist.

In the elementary production-consumption economy, which consists of the household and the business sector,#1 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 Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e. X=O.
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 Qm+Sm=0 or Qm=−Sm. The business sector makes a profit only if consumption expenditures C are greater than wage income Yw, that is, if the household sector dissaves, that is, if household sector debt increases. In this case, the value of output is greater than income and this CONTRADICTS Keynes’ premise Income = value of output.

So, the premise of macro is false and the whole bunch of intellectually challenged economists from Keynes onward did not spot the blunder until this day.#2 The point to grasp is that economics is still at the proto-scientific level because economists lack the most elementary logical capacities.

That these Trump University scientists are awarded faux Nobel Prizes completes the picture of progressive delirium harmoniously.


#1 The elementary production-consumption economy is given by three macro axioms: (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. For a start holds X=O.
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

Related 'Economics: communication without content'. For details of the big picture see cross-references Scientific Incompetence.

February 27, 2018

Economists: political trolls since 200+ years

Comment on Kaivey on ‘Steve Keen ― Debunking Mainstream economics: equilibrium barter models for a far-from-equilibrium monetary economy’

Blog-Reference

When an economist talks in these days about barter models and equilibrium you know immediately that he is not right in his head. This is the actual state of economics: provably false
• profit theory, for 200+ years,
• Walrasian microfoundations (including equilibrium), for 140+ years,
• Keynesian macrofoundations (including I=S/IS-LM), for 80+ years.

So, the only interesting question for every economist is how to get out of the self-created proto-scientific black hole. Obviously, economists have done a bad job. More specifically, both orthodox and heterodox economists have messed up science because they were too much occupied with political agenda pushing.

Imagine, 150 years ago some physicists and engineers were given the task to build a machine that can fly. But instead of figuring out the laws of aerodynamics and thermodynamics and to find suitable materials they discuss whether it is better to fly eastwards or westwards and whether tomato juice or coffee should be served during the flight. No question, these folks would not have gotten anything off the ground to this day.

Just the same with economists. They have not figured out the laws that govern the monetary economy but they had a lot to say about political issues like liberty, democracy, capitalism, and communism. To this day, they have no clue how the price- and profit-mechanism works. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong.

And Steve Keen is still debunking barter and equilibrium models ― how sick is this?#1

Note that politics and science are spheres that run on entirely different principles and have therefore to be kept strictly apart. Political issues are discussed in the political sphere and are ultimately decided by the legitimate sovereign. The economist qua scientist has not more to say in the political sphere than any other citizen. All the more so, as he has not done is scientific homework and figured out how the economy works. To this day, economic policy guidance has NO sound scientific foundations but is plucked out of the thin air of political populism.

What is called political economics is a flagrant abuse of the prestige and authority of science for agenda pushing. Make no mistake, anybody is entitled to push any agenda. But to push a political agenda in the bluff package of science is the worst fraud of all.

You ask “What do you think of Sweden’s failure of privatising schools. It seems that Milton Friedman hadn’t factored into his theories that schools would cheat, or that policing privatized schools would make them two to three times more expensive.”

I think that this is alone the business of the Swedish people to discuss and to decide. And if the Swedish people are smart the last thing they would do is to follow incompetent scientists and brain-dead agenda pushers like Milton Friedman.#2

Needless to emphasize that Steve Keen and you have also to be counted among the trolls.

Egmont Kakarot-Handtke


#1 Economics: communication without content
#2 For details of the big picture see cross-references Failed/Fake Scientists


***
Preceding

ICYMI on Feb 26
#Economics #FailedScience #FakeScience #CargoCultScience #BogusScience #ScientificIncompetence #Economists #MicroFoundations #MacroEconomics #OrthodoxEconomics #HeterodoxEconomics #Pluralism #PoliticalEconomics #NewEconomicThinking #ParadigmShift #Science #Macrofoundations #Axiomatization

***
Kaivey on Feb 26

You say “So you’re saying, Egmont, that your economic system would also work in socialist economies where the government supplies the health care and the National Insurance schemes.”

No, I am saying that Steve Keen’s approach is faulty and therefore NO alternative to orthodox economics. The essential point is that Steve Keen’s profit theory is false. See Debunking Squared.

It should be obvious that an economist who does not know the Profit Law is a laughing stock just like somebody who calls himself an engineer and does not know the Law of the Lever.
***
Kaivey on Feb 26

Steve Keen is busy with “Debunking Mainstream economics: equilibrium barter models for a far-from-equilibrium monetary economy.”

Mainstream economics needs NO repetitive debunking. It is dead since 140+ years and everyone with two brain cells got it by now. The point is to move on: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

Heterodoxy in general, and Steve Keen, in particular, have failed on this score.#1, #2


#1 The stupidity of Heterodoxy is the life insurance of Orthodoxy
#2 Economics: communication without content

February 26, 2018

Forget Keynes

Comment on Asad Zaman on ‘Understanding Macro: The Great Depression’

Blog-Reference and Blog-Reference on Feb 28 and Blog-Reference on Mar 5 adapted to context

There is political economics 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, the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. This is the track record: provably false
• profit theory, for 200+ years,
• Walrasian microfoundations (in particular equilibrium), for 140+ years,
• Keynesian macrofoundations (in particular I=S/IS-LM), for 80+ years.

Heterodoxy claims that Orthodoxy from Walras/Marshall to DSGE is false. This, of course, is true. However, Heterodoxy claims also that Keynesian economics is a valid replacement for Orthodoxy. This is provably false. Keynesianism, too, is proto-scientific junk.#1

Asad Zaman argues: “Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then.”

Keynes, too, was an incompetent scientist and if there ever was a political agenda pusher then he. Keynes saw the necessity of a paradigm shift but he messed up the move from microfoundations to macrofoundations.

Fact is: Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory, axiomatically false, materially/formally inconsistent and ALL approaches got profit theory, employment theory, and the theory of money wrong.

Asad Zaman argues: “It should be immediately obvious that active government involvement in creating full employment helps the bottom 90%. It is slightly less obvious that monetary expansion, which may create inflation, is also helpful to the poorer segment of society. This is because the poor are generally borrowers of money, so the value of their debt in real terms becomes reduced. Similarly, easy money makes it easier for them to borrow. At the same time, Keynesian policies hurt the top 1%.”

The claim that Keynes fought for the cause of ninety-nine-percenters and against the one-percenters is false. In effect, the opposite is true.#2

Heterodoxy’s repetitive critique of Orthodoxy has run into a dead end. Heterodoxy, too, is scientifically worthless political economics.#3 It is time to forget the whole proto-scientific blather and to move on: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

Time to bury failed/fake scientists for good and to leave the creepy intellectual graveyard of orthodox and heterodox economics behind.

Egmont Kakarot-Handtke


#1 For details see
Keynes’ intellectual nonexistence
How Keynes got macro wrong and Allais got it right
Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 For details see
Who or what exactly did Keynes save?
Keynes, Lerner, MMT, Trump and exploding profit
Fiscal policy and the Humpty Dumpty Fallacy
#3 Economics: communication without content

Related 'How Keynes messed macro up' and 'Keynesianism: The triumph of blathering over thinking' and  'Refutation of Asad Zaman’s heterodox methodology: all arguments you ever need'. For details of the big picture see cross-references Keynesianism and cross-references Constructive Heterodoxy.

February 24, 2018

Economics: communication without content

Comment on Lars Syll on ‘Science and the quest for truth’

Blog-Reference

Economics always claimed to be a science. It never was. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. What we actually have is the pluralism of provably false theories.#1

There is political economics 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, the scientific standards of material and formal consistency are observed.

Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years.

And this means, in turn, that economic policy guidance NEVER had sound scientific foundations. Economic policy advice never rose above the level of educated common sense and supply-demand-equilibrium rhetoric. Economists have NO scientifically valid knowledge about how the price- and profit-mechanism works.#2 There is a total logical DISCONNECT between economic policy arguments and economic theory.

Economic theory has not become qualitatively better since the founding fathers. What can be observed is stagnation at the proto-scientific level. The scientific content of economics proper is close to 0 percent, the blather/gossip content is close to 100 percent.

Scientific discourse is guided by the distinction true/false. Political rhetoric is guided by the distinction effective/ineffective. Truth is not an issue in politics, only winning the present debate. While economics has no scientific truth value, it has political use value. This, and not scientific merit, lets economics thrive.

Science and politics are mutually exclusive. Science tries to get out of the initially given swamp where ‘nothing is clear and everything is possible’. (Keynes) Political economics in effect perpetuates ― intentionally or unintentionally does not matter ― the swampy status quo with confused/confusing storytelling: “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)

Clarity, consistency, rigorousness, precision are the main threats for those who are, for whatever reasons, happy with the swampy status quo. The main immunizing stratagem of political economists is vagueness because “... you cannot prove a vague theory wrong.” (Feynman)

Accordingly, the key arguments of the confused confusers of economics are:
  • There is no such thing as objective truth. Truth is just a social construct.
  • Because of ontological uncertainty and Heisenberg and Gödel, there can, in principle, be no certain knowledge.
  • There are no economic laws/invariants only some unreliable correlations.
  • Economics is not a hard science, to begin with. Economics is a social science with its own pluralist methodology. Comparison, imitation, physics envy, and benchmarking are misplaced.
  • There is not the one true theory/model but there are various models and the point is to pick the “right” one for the situation.
  • Economics has not to be judged by applying the well-defined scientific criteria of material/formal consistency but by its positive/negative impact on society.

This amounts to a phasing out of scientific standards. As a consequence, the representative economist is insensitive to or even happy with methodological pathologies:
  • The whole subject matter of economics is ill-defined. Economics is NOT a so-called social science but a system science. Partial sociological research is NOT economics.
  • The foundational concepts of the subject matter are-ill defined. There is no proper axiomatization. The representative economist cannot tell the difference between profit and income.
  • Theories/models contain blatant nonentities, e.g. utility, equilibrium, rational expectations.
  • Debates/discussions are almost always inconclusive. There is not much ambition for definitive falsification/final refutation. Debunked theories/models are not abandoned but recycled with a new make-up. The indefensible pluralism of false theories is thus maintained.
  • Debates/discussions drift almost immediately away from the subject matter, i.e. the functioning of the economic system as a whole, to the meta-level of second-guessing human motives/behavior, and storytelling about persons/events, and moralizing, and reinterpretation of what other economists have said and really meant, and attention/perception/reputation management.
  • The function/malfunction of the economic system is the subject matter of economics. The function/malfunction of firms and individuals is the subject matter of consultancies, the police, and the press.

Political economics is meta-communication, that is, not theoretical clarification of what economic reality is (= episteme) but a closed circle of communication about opinions/ beliefs/guesses/hearsay (= doxa).#3 At some point in history, economics left science behind and became disinfotainment.

The economy is a rather abstract entity and its working is not visible to the naked eyes. What is needed to get reality into focus is the third eye of theory. Scientific abstraction, though, is not exactly the business of political economists ― storytelling, and agenda pushing, and populism is. Theory is replaced by a popular narrative.

It is not such a rare occurrence that institutions mutate into something else which has not much to do with their original mission. So, in the political realm Democracy may turn into Idiocracy, and in the scientific realm, the careful growth of knowledge may turn into a breathtaking expansion of stupidity. This happened to economics after political economists (= agenda pushers) gained the majority over theoretical economists (= scientists).#4

Egmont Kakarot-Handtke


#1 The real problem with the economics Nobel
#2 Mass unemployment: The joint failure of orthodox and heterodox economics
#3 See summary graphics on Wikimedia


#4 For details of the big picture see cross-references Scientific Incompetence and cross-references Failed/Fake Scientists.

Related 'Balderdash or discourse?' and 'Narrative economics and the imperatives of the sitcom' and 'Economics: ‘a tale told by an idiot ... signifying nothing’' and 'Again and again: economists are incompetent scientists' and 'New Economic Thinking = old scientific garbage' and 'Getting out of mumbonomics' and 'Stop knowing nothing, start knowing something' and 'Lousy scientists' and 'Economists: scientists or political clowns?' and 'Economists, stupid or corrupt or both?' and 'The economist as amateur journalist' and 'Fact of life: your econ prof is scientifically incompetent' and 'Economics: a science without scientists' and 'Economics: When the scientifically unfit blather about science'.

February 23, 2018

Fiscal policy and the Humpty Dumpty Fallacy

Comment on ProGrowthLiberal on ‘A Kennedy-Reagan-Trump Fiscal Policy?’

Blog-Reference

Economists think since the Classicals that saving and investment are two sides of the same coin. And since investment is good for growth, saving here and now makes us richer in the future. According to Adam Smith, the saver/capitalist is the true hero of wealth creation.

Brad deLong updates the story as follows: “The economy’s savings-investment effort rate, s, has two parts: private and government saving: s=sp+sgs=sp+sg. The private savings rate spsp is very hard to move by changes in economic policy. Policy changes that raise rates of return on capital ― interest and profit rates ― both make it more profitable to save and invest more but also make us richer in the future, and so diminish the need to save and invest more.”

Note that the saving-investment link is hardwired in the economist’s brain. Keynes put it thus: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

With regard to the currently increasing government deficit this makes the representative economist wonder: “We have been asking the same question since 1981 ― how can anyone argue that a fall in national savings is good for long-term growth? We still have not received a coherent answer.”

The coherent answer is that economists get the relationship between saving and investment wrong since Adam Smith.

To make matters short, the axiomatically correct relationships are given here without further explanation.#1 It holds, with Qmonetary profit/loss, Sm monetary saving/dissaving, I investment expenditures, G government spending, T taxes:
(i) Qm=−Sm in the elementary production-consumption economy,
(ii) Qm=I−Sm in the elementary investment economy,
(iii) Qm=(G−T)+I−Sm in the investment economy with government deficit/surplus.

The point to grasp is that there is NO such thing as an equality/identity/equilibrium of household/government sector saving and business sector investment, and NEVER was, and NEVER will be.

According to (i) household sector saving produces a loss in the business sector and according to (iii) a government sector deficit produces a profit in the business sector. Investment I is a variable that moves INDEPENDENTLY from both private and public saving/dissaving.

Where, then, does the notorious identity/equality of saving/investment come from?

Let us take equation (ii) and play a semantic shell game. Enter Humpty Dumpty who introduces a redundant definition by saying that profit may be called “saving of the business sector” and that this “saving” can be added up with saving of the household sector to “total saving” Σ thus
(a) Σ≡Qm+Sm and now (ii) is rewritten
(b) Qm+Sm=I and then, hey presto,
(c) Σ≡I that is, “total saving” is “by definition” identical to investment or in the usual sloppy parlance “saving equals investment” which obviously contradicts (ii) and ― strangely enough ― makes profit invisible.

This methodological idiocy is at the bottom of all I=S/IS-LM models and Post Keynesian economics in general.#2

So, the coherent answer to the question why a fall in national savings could be good for long-term growth is that it boosts profit. The representative economist never got this because the profit theory is false since Smith/Ricardo.#3 This means that economic policy guidance in general, and fiscal policy in particular, NEVER had sound scientific foundations.

Egmont Kakarot-Handtke


#1 For details of the big picture see cross-references Refutation of I=S
#2 Why Post Keynesianism Is Not Yet a Science
#3 Ricardo, too, got profit theory wrong. Sad!

Related 'I is never equal S and even Nick Rowe will eventually grasp it' and 'Getting out of IS-LM = Getting out of despair' and 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It'.

February 22, 2018

The perennial conundrum: profit and distribution

Comment on Chris Dillow on ‘Stable Exploitation’

Blog-Reference and Blog-References

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive” and this is the most damning verdict about economics. After 200+ years economists cannot tell the difference between profit and income. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. Because the profit theory is false distribution theory, too, is false.#1, #2

One of the most crippling blunders since Ricardo is to equate profit with exploitation.#3

The very first thing to do is to get the profit theory right.#4 The axiomatically correct macroeconomic Profit Law is given with Qm=Yd+(I−Sm)+(G−T)+(X−M); Legend: Qm total monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving, G government expenditures, T taxes, X exports, M imports.

The nominal labor share λ is given as quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, λ=Yw/(Yw+Qm).

This gives one the determinants of λ. Monetary profit Qm for the world economy as a whole is determined by growth expressed as investment expenditures I, monetary saving/ dissaving Sm, and government deficit/surplus (G−T). This is a testable proposition because all variables are measurable. Roughly speaking, the growth of private and public debt explains the decline of λ in the US. This share has NOTHING to do with the usual suspects (mark-ups, relative productivity, monopoly, monopsony, etc.) which determine only the distribution of overall profit Qm between firms. To generalize phenomena that can be observed at the microeconomic level is known as Fallacy of Composition.

Egmont Kakarot-Handtke


#1 Profit and distribution: a primer
#2 Profit and the decline of labor’s nominal share
#3 Ricardo and the invention of class war
#4 Ricardo, too, got profit theory wrong. Sad!

Related 'The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?'

MMT: academic snake oil for the people

Comment on Bill Mitchell on ‘The ‘tax the rich’ call bestows unwarranted importance on them’

Blog-Reference and Blog-Reference

MMT is a selection of trite slogans that have NO scientific support of any sort.

MMT’s key message for the people is: “A consequence of the fiat system is that governments that issue their own currencies no longer have to ‘fund’ their spending.” (Mitchell)

True, government can replace taxation and in addition increase spending at any time for any purpose by deficit spending/money creation. This has two effects:
  • The household sector = ninety-nine-percenters is taxed in real terms by an almost imperceptible price hike (NOT inflation). Open taxation turns into stealth taxation, and in real terms NOTHING changes.
  • Because Public Deficit = Private Profit, the one-percenters enjoy an immediate profit boost. In addition, part or all of the increased public debt can become a long-term source of interest income depending on whether and how the public debt is consolidated.
The replacement of taxation by deficit spending clearly benefits the one-percenters. The benefit is proportionally greater if the income tax is progressive. To replace progressive taxation by deficit spending is the non-plus-ultra of inverse redistribution.

So, from the standpoint of simple self-interest, the one-percenters and their useful academic/journalistic spokespersons should consistently argue FOR deficit spending and the ninety-nine-percenters and their academic/journalistic spokespersons should consistently argue AGAINST it. This, of course, does not happen in the political realm.

MMTers as champions of deficit spending for the people are in effect agenda pusher for the one-percenters, no matter what they are saying or what they are thinking of themselves.

Bill Mitchell, for example, argues elsewhere: “A rising fiscal deficit is neither good nor bad. It all depends on the saving and spending desires of the non-government sector and the state of capacity utilisation. A rising deficit associated with a growing economy and full employment with stable prices is to be desired.”#1

Bill Mitchell’s mistake/error/fraud lies in the word “non-government sector”. There is NO such thing as the “non-government sector”, there are TWO sectors, the business and the household sector. And the business sector does NOT save. Saving/dissaving is the balance of the household sector, profit/loss is the balance of the business sector. The word profit, though, does not appear once in Bill Mitchell’s analysis. That is too bad because the macroeconomic Profit Law says Public Deficit = Private Profit which means that Bill Mitchell and his academic colleagues ― wittingly or unwittingly does not matter ― argue on behalf of the one-percenters.#2

Whether MMTers are in a state of self-delusion or know full well what they are doing is at anybody’s guess. Objectively, all of MMT is provably false proto-scientific junk.#3

Bill Mitchell is politically consistent. He not only promotes deficit spending but also downplays the idea of taxing the rich and closing their tax havens: “Do we need the rich’s money?” "No".

No, because “we”, the ninety-nine percenters, pay for the social goodies that MMTers promise “us” through stealth taxation and transfer the newly printed money, which we do not need, via deficit spending and increased profits directly into “their” tax havens.

No, “we” do not need the rich’s money. The rich need it and Bill Mitchell and the MMTers are pushing their agenda in academia, in the econoblogosphere, and in the social media.#4

Egmont Kakarot-Handtke


#1 billy blog “Oh poor Britain …
#2 Down with idiocy!
#3 For the full-spectrum refutation see cross-references MMT
#4 Are MMTers stupid or corrupt or both?

Related 'Deficits matter for distribution' 'MMT, money printing, stealth taxation, and redistribution' and 'Full employment through the price mechanism' and 'MMT: miscommunication, mistakes, misdirection' and 'Forget Keynes' and 'Cryptoeconomics ― the best of Bill Mitchell’s spam folder'.

February 19, 2018

Deficits matter for distribution

Comment on Simon Wren-Lewis on ‘Do Trump’s deficits matter?’

Blog-Reference and Blog-Reference on Feb 21

The essential point about deficit spending/public debt is this: the axiomatically correct macroeconomic Profit Law is given as Q=Yd+(I−S)+(G−T)+(X−M) which reduces to Q=G−T for Yd, I, S, X, M=0. The simplified equation says that the profit of the business sector Q is equal to the deficit G−T of the public sector. It holds Public Deficit = Private Profit.

So, from the standpoint of simple self-interest, the one-percenters and their useful academic/journalistic spokespersons should consistently argue FOR deficit spending#1 and the ninety-nine-percenters and their academic/journalistic spokespersons should consistently argue AGAINST it. Curiously, just the OPPOSITE happens. So, either economists are stupid and do not know how the economy works or they are complicit in a communicative charade.

The main argument against the MMT championship of deficit spending ― inflation ― is beside the point because it rests on a false inflation theory.#2

The correct argument against deficit spending is that it is NOT in the interest of the ninety-nine-percenters and that it produces the distribution of income/wealth that everybody considers now as a real danger for society/democracy.#3

The fact of the matter is that ― because Public Deficit = Private Profit ― the one-percenters have achieved their goal hands down by simply letting scientifically incompetent spokespersons of the ninety-nine-percenters like Paul Krugman or Stephanie Kelton brilliantly perform their roles as useful idiots by busily convincing people of Warren Mosler’s joyful message Public-Deficits-Are-Good-For-You.

Egmont Kakarot-Handtke


#1 Keynes, Lerner, MMT, Trump and exploding profit
#2 MMT was right all along: Gov-Deficits do NOT cause inflation
# 3 MMT is ALWAYS a bad deal for the 99-percenters

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REPLY to Dominic Johnson on Feb 22

MMT policy guidance has no sound scientific foundations.

Bill Mitchell, for example, argues “A rising fiscal deficit is neither good nor bad. It all depends on the saving and spending desires of the non-government sector and the state of capacity utilisation. A rising deficit associated with a growing economy and full employment with stable prices is to be desired.”#1

The MMT mistake/error/fraud lies in the word “non-government sector”. There is NO such thing as the “non-government sector”, there are TWO sectors, the business and the household sector. And the business sector does NOT save. Saving/dissaving is the balance of the household sector, profit/loss is the balance of the business sector. The word profit, though, does not appear once in Bill Mitchell’s analysis. Why? Because it holds Public Deficit = Private Profit which means that Bill Mitchell does not really care about poor Britain but about the wellness of the one-percenters.#2


#1 billy blog  Oh poor Britain …
#2 For the full-spectrum refutation of MMT see cross-references MMT

February 17, 2018

Heterodoxy ― an axiomatic failure just like Orthodoxy

Comment on Christian Arnsperger/Yanis Varoufakis on ‘The first axiom of neoclassical economics: methodological individualism’

Blog-Reference and Blog-Reference

After 200+ years, economists still do not have the true theory/model. The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science and later on with this very specific guideline: “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)

This translates into the neo-Walrasian axiom set: “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)

Of course, economists did not stick slavishly to HC1/HC5 but varied the one or the other axiom. This, though, never to the point of abandoning the neoclassical paradigm completely. Arrow’s definition, therefore, covers General Equilibrium Theory, Marshallian partial analysis, Behavioral Economics, DSGE, RBC, New Keynesianism, Agent-Based Models, and a whole grab bag of verbalized/common sense/ad hoc/special purpose models. In effect, everybody starts from his own do-it-yourself set of premises and the inevitable result is a heap of inconsistent and incoherent models with a lost common core.

While the failure of economics is beyond reasonable doubt, the representative economist still suffers from the delusion that what he does is science. It is nothing but cargo cult science which Feynman described as: “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.”

Christian Arnsperger/Yanis Varoufakis see the crucial methodological blunder in methodological individualism: “So, the first feature of the ‘body of theory’ we think of as neoclassical is its methodological individualism: the idea that socio-economic explanation must be sought at the level of the individual agent.”

This is accurate but a bit shallow. While methodological individualism is indeed false in all dimensions, the problem goes deeper. And here is where Heterodoxy’s own failure comes into view.

The common understanding of neoclassical models is that they are behavioral. The representative economist traditionally takes Human Nature/motives/behavior/action, i.e. a mixture of folk psychology and folk sociology, as a starting point and then tries to explain the behavior of the economy as a whole. The crucial methodological defect of the behavioral approach is that NO way leads from the explanation of Human Nature/motives/ behavior/action to the explanation of how the economic system works. All behavioral/ microfounded approaches crash against the methodological wall that is known as Fallacy of Composition.

Economics does not conform to Aristotle’s general definition of science: “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.” The neoclassical premises = microfoundations have NEVER been certain/true/primary. This is why orthodox economics is an axiomatic failure.

The only reason why Orthodoxy is still around is that Heterodoxy has failed to develop a suitable alternative: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)#1

Heterodoxy habitually criticizes/rejects methodological individualism but shares the underlying methodological tenet that economics is a social science. It is not. Economics is a systems science. The subject matter of economics is not human behavior but the behavior of the economic system.#2

So, there is NO use to change the one or the other neo-Walrasian axiom and to keep the rest. A paradigm shift is indispensable, and this means that the neoclassical approach has to go out of the window for good. Economics has to move from behavioral axioms/ microfoundations to systemic axioms/macrofoundations. Keynes tried but failed.#3

The state of economics is as follows: (i) all neoclassical/microfoundations approaches are axiomatically dead, (ii) all Keynesian approaches are defective with regard to the definition of macroeconomic profit/income, (iii) neither Orthodoxy nor Heterodoxy has consistent axiomatic foundations, (iv) if it isn’t macro-axiomatized it isn’t economics#4, (v) in the scientifically strict sense, economics is still at the level of a proto-science.

Heterodoxy has exhausted itself with repetitive critique of detail but never got to the point of wholesale and definitive refutation which is the hallmark of a paradigm shift: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug) and “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

In fact, this has always been too hard for traditional Heterodoxy and this is why it has to be buried in the same scientific graveyard as neoclassical economics and the Flat-Earth-Theory. *

Egmont Kakarot-Handtke


#1 The stupidity of Heterodoxy is the life insurance of Orthodoxy
#2 For details of the big picture see cross-references NOT a Science of Behavior
#3 For details of the big picture see cross-references Keynesianism
#4 The core of macroeconomic premises reads: (A0) The objectively given and most elementary systemic configuration of the 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.

* See Wikimedia


Related 'From false microfoundations to true macrofoundations' and 'Dilettantes at the end of the coal-pit' and 'Economics ― a doctor worse than the disease' and 'From Orthodoxy to Heterodoxy to Sysdoxy' and 'The miracle cure of economists’ micro-macro schizo'. For details of the big picture see cross-references Axiomatization and cross-references Heterodoxy.

February 16, 2018

Ricardo and the invention of class war

Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’

Blog-Reference and Blog-Reference on Feb 17

Ricardo asserted the seemingly obvious “There is no other way of keeping profits up, but by keeping wages down.” This assertion is pure common sense, plain and immediately convincing as “the sun goes up”. Needless to emphasize that both assertions are scientifically false.#1

By asserting an antagonism between wages and profits, Ricardo provided the economic underpinning for Marx’s sociological/political concept of class struggle or class war. In the following the proof is given that there is NO antagonism between wages and profits and that classes are an optical illusion.

The elementary production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the 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.#2

Under the conditions of market clearing X=O and budget balancing C=Yw in each period the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R (2), i.e. the real wage is equal to the productivity. For the graphical representation see Wikimedia.#3

Monetary profit is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0 or Qm=−Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). 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 says that profit/loss has NOTHING to do with labor time, wages, productivity, greed, monopoly, power etcetera but with the change of private and public debt.

In the elementary production-consumption economy, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because C=Yw. All changes in the system are reflected by the market clearing price. As a matter of principle, the elementary production-consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined alone by the productivity.

Obviously, there is NO such thing as an antagonism of wages and profits in the elementary production-consumption economy. If the wage rate W goes up the market clearing price goes up according to (1) and the real wage remains unchanged according to (2).

This means, first of all, that Ricardo’s theory of profit and rent is proto-scientific garbage. This is fatal for Marx who built on Ricardo.

The business sector is now split into two identical firms and firm 1 is supposed to cut the wage rate W1 arbitrarily by half. From this follows that the market clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market clearing price P.

The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down ― profit up. This fits the time-honored stereotype of wages and profits as antagonists.

The error/mistake/blunder of Ricardo et al. was to generalize what is true for a single firm and this is known as Fallacy of Composition.

If profit has been zero in the initial period because of budget balancing C=Yw then firm 2 makes a loss which is exactly equal to firm 1’s profit. Hence, the arbitrary wage rate cut of firm 1 does NOT increase the profit of the business sector as a whole but only REDISTRIBUTES profit/loss between the firms that constitute the business sector.

Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers. A global wage rate change leads under the condition of budget balancing and market clearing only to a price hike.

For the economy as a whole, the Ricardian antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. Because Ricardo’s profit theory is false Marx’s theory of class war is false. What looks like exploitation is, in fact, cross-over exploitation WITHIN the Marxian classes.

The myopic agents, workers and capitalists alike, are blind to these interdependencies and therefore prone to the Fallacy of Composition. This is excusable. But that economists suffer from the same delusions is inexcusable.

As One of the Old School put it in 1829 “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”#5

Egmont Kakarot-Handtke


#1 Ricardo, too, got profit theory wrong. Sad!
#2 For details see ‘Profit for Marxists
#3 Wikimedia, Elementary Production-Consumption Economy


#4 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#5 The real problem with the economics Nobel

Related 'Profit and stupidity' and 'The abject failure of orthodox and heterodox distribution theory' and 'No exploitation, no classes' and 'Marx, the moron' and 'Your profit theory is false' and 'If we only had classes'. For details of the big picture see cross-references Profit.

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REPLY to Sandwichman on Feb 16

You say “Well, Egmont, you forget that if the owners of capital BELIEVE that profits are a subtraction from wages (and/or vice versa) and act accordingly it becomes a self-fulfilling prophecy.”

Obviously, you have never heard of the Invisible Hand. It does not matter what people believe they are doing. They think they follow their own interest but, in fact, promote the overall optimum optimorum. Self-delusion is the whole point of the free market system and the ultimate justification since Mandeville’s Private Vices = Public Benefits. Of course, this is economic storytelling and proto-scientific garbage.

Overall net-profits do NOT come into existence because people dream or hallucinate about them but ultimately because of the increase of private/public debt. This is the Invisible Hand. If the budget is balanced C=Yw there is NO overall profit, NO matter what capitalists believe or how they act. With regard to profit, there is NO self-fulfilling prophecy only the Iron-Objective-Eternal-Testable Profit Law.

My proof shows how the Invisible Hand works. What people believe is NOT AT ALL a matter of economics but of psychology and sociology.

Take notice that economics is NOT a science of Human Nature/motives/beliefs/ expectations/behavior/action but a system science. Economics has since 200+ years been on the wrong track and has produced nothing but folk psychology and folk sociology. Economics is a failed science because economists are incompetent scientists who suffer from the social science delusion.#1

The Profit Law consists of measurable variables. It is testable and it will be corroborated without exception in all countries with a scientific infrastructure without bothering one second about people’s silly beliefs.

#1 For details of the big picture see cross-references Failed/Fake scientists

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REPLY Sandwichman on Feb 16

You say “The ‘invisible hand’ is a lump of labor”

Obviously, you have not realized that your lump-of-labor (EXPLETIVE DELETED) has already been refuted. See Unemployment is the outcome of political economics.

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REPLY to Barkley Rosser on Feb 17

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)

Because a theory must satisfy TWO criteria ― material AND formal consistency ― it is sufficient for a refutation to prove that it is EITHER materially OR formally inconsistent.

I have proven that Ricardo’s profit/distribution theory is formally inconsistent. More specifically, that Ricardo committed the Fallacy of Composition and the Humpty Dumpty Fallacy by defining total income as sum of wage income and profit.#1, #2 More specifically, the macroeconomic definition of total income as Y=W+P translates algebraically into 1=1/(1+P/W)+1/(1+W/P) and this translates verbally into Ricardo’s pivotal claim “… profits would be high or low in proportion as wages were low or high.” (Principles, p. 110) but because the premise is false Ricardo’s assertion is false.

By consequence, Ricardian economics is refuted. Now, the ball is in your field. If you do not agree with me ― and you obviously don’t ― you have to demonstrate where my logical error/mistake/blunder lies. Blah blah is NOT sufficient.

What you could alternatively do is to demonstrate that I am empirically wrong because from the axiomatically correct profit theory follows the general balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 while from Ricardo’s false profit theory follows the Post Keynesian balances equation (I−S)+(G−T)+(X−M)=0.

The experimentum crucis ― which of the two equations is empirically true? ― has never been performed for the simple reason that macroeconomics runs since Keynes blindly on the false profit theory and the false Post Keynesian balances equation.#3 MMT is the Smoking Gun proof.

But again, the ball is in your field. If you know in your profound academic erudition that there is an empirical study which has corroborated the Post Keynesian balances equation or refuted my balances equation it is your scientific duty to present it in the current discussion. Again, blah blah is NOT sufficient.

As One of the Old School said in 1829: “If it [economics] be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”


#1 Ricardo, too, got profit theory wrong. Sad!
#2 Profit, income, and the Humpty Dumpty Fallacy *
#3 How Keynes got macro wrong and Allais got it right

*

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REPLY to vertegaa@vcn.bc.ca on Feb 18

A theory must satisfy TWO criteria ― 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. This is known since 2000+ years: “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)

So, the first problem to solve is the Starting Problem. J. S. Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

Krugman, for one, is quite explicit about how he has solved the Starting Problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Krugman, of course, is an idiot. Maximization and equilibrium cannot serve as axioms because they are NOT certain, true, and primary. For various methodological reasons, given elsewhere#1, I propose to start with this core of macroeconomic and behavior-free axioms: (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 utility, constrained maximization, equilibrium, and no normative assertions.

You can NOT refute these axioms by doubting and nagging, only by replacing them with a superior set. Or, in Feynman’s words: “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

I am sure that you cannot do it, and nobody else, for that matter because you cannot have an axiom set for the most elementary production-consumption economy with less than three axioms. The set (A1)/(A3) replaces the neo-Walrasian set and the Keynesian set of foundational propositions.

You say: “because the ‘axioms’ you come up with are inherently insufficient to glean a systematic meaning, or purpose, from.” Yes, but the idea that some purpose must be put into the axioms indicates that you do not yet fully understand what axiomatization is all about.

You say: “You ‘axiomatically’ split total profit Q into Qm (monetary profit) and Qn (non-monetary profit). If the system allows the latter to become part of the former and/or vice-versa, however, then not only are these not ‘entirely different kinds of profits’ as you claim but you’ll have to show a common numeraire as well, or the premise and hence your theory of profit is false, …”

Perhaps the terminology is a bit unfamiliar. Both monetary Qm and nonmonetary profit Qn are nominal magnitudes, e.g. Dollar, Yen, Euro etc., but monetary profit can be read off a bank account or touched in the cash box, non-monetary profit is the not-yet-realized increase of an asset’s value or what is commonly called a paper profit.#2

You say “Come to think of it, what is your theory of money? Every factor/element in your identities numerated in the latter needs it!”

True, accordingly, money has already been treated extensively elsewhere.#3

You say “what makes you now think that such a static depiction has merit in a known to be dynamically operating economy.”

The ‘general balances equation’ is not static and has nothing to do with equilibrium. It is more like reading a speedometer in a moving car.#4


#1 For details of the big picture see cross-references Axiomatization

*

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REPLY to Sandwichman on Feb 19

You ask: “What is your motivation for expending what must be considerable time, effort and frustration in promulgating your ‘science’?”

Moot question as you could know from Schumpeter: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

More clues for the clueless are to be found in ‘A heap of scientific rubbish’.

Yous ask: “Do you ever experience self-doubt or are you 100% certain that your discovery is 100% foolproof?”

No, yes. More clues for the clueless are to be found in ‘John Hicks, fake scientist’.

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REPLY to vertegaa@vcn.bc.ca on Feb 19

Roughly speaking, the distinction between science and non-science corresponds to the ancient Greek’s distinction between episteme (= knowledge) and doxa (= opinion). Aristotle relates to episteme while the Sophists relate to doxa: “Sophistry is a productive art, human, of the imitation kind, copy-making, of the appearance-making kind, uninformed and insincere in the form of contrary-speech-producing art.” (Wikipedia) Economics has never risen above sophistry.

You say: “All your axioms involve accounts; “ False. The 2nd axiom, i.e. O=RL, involves NO accounts. Only the subset of nominal variables Yw, C reappears in macro accounting. The axioms involve elementary algebra, and accounting is only part of the story.

Thank you for the link to your preface. I have read your three axioms and, as you let me know “I don’t think you are capable of teaching me much”, you dispense me from the obligation to comment on them.

Here some minor points for general clarification.

You say: “You’re not saying much about objectivity, i.e. your quasi-subjective approach,” I have clearly stated that economics is not a social science but a system science. Accordingly, it has to be based on objective axioms. My approach is objective-structural-systemic and this is exactly what makes it superior.

You say: “Or do you perhaps also hold that the economy is meaninglessly meandering through time?” Meaning is a religious/philosophical/psychological category which is NOT axiomatizable, to begin with. You are still lost in the social science delusion.

You mention Koopmans’ monetary theory and ask: “The dissertation was written in German, did you investigate it in your quest to destroy conventional economics?”

No. Koopmans was one of the founding fathers of General Equilibrium Theory. If he had a superior theory of money it did not reappear in GT, see Hahn: ‘On some problems of proving the existence of an equilibrium in a monetary economy.’ Anyway, Koopmans has not realized in time that Walrasian equilibrium is a dead end and therefore he failed the scientific competence test.

“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, 1997)

The GT folks have put equilibrium in the axioms and this is a rather ordinary petitio principii.#1

By the way, I just stumbled across a quote of Hahn which makes my point: “It is pretty clear that usable economics will have to be of some sort of macro character. But what sort?” This dovetails with my meme: “If it isn’t macro-axiomatized it isn’t economics.”

With regard to the balances equation, I retract the metaphor with the speedometer. The balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 relates to a period of given length and shows the accounting balances = residuals of the four sectors (business, household, government, RoW). It has NOTHING to do with equilibrium. The beauty of the axiomatically correct balances equation is that it is testable against the After-Keynesian balances equation.

With regard to empirical testing, things do not end with the balances equation. From the objective systemic axioms follows the rather complex Employment Law which is ideally suited for a test against the Phillips curve.#2

I do not see that anything comparable follows from your axioms which resemble more a declaration of human rights.



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REPLY to Barkley Rosser on Feb 20

The Humpty Dumpty Fallacy ― one of the worst idiocies of economics

In the elementary investment economy, macroeconomic profit Q is defined as the sum of profit in the consumption goods industry, i.e. Qc≡C−Ywc, and the investment goods industry, i.e. Qi≡I−Ywi, that is, Q≡(C−Ywc)+(I−Ywi) or Q≡C+I−Yw (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Yw.

Now, Humpty Dumpty introduces a redundant definition by saying that profit may be called “income of the business sector” and that this “income” can be added up with the wage income of the household sector to “total income” Ψ thus
(a) Ψ≡Q+Yw  and now (i) is rewritten
(b) Q+Yw ≡C+I and then, hey presto,
(c) Ψ≡C+I that is, “total income” is “by definition” identical to “value of output” or in the usual sloppy parlance “income = value of output” which obviously contradicts (i) and ― strangely enough ― makes profit disappear.

This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63) 

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REPLY to vertegaa@vcn.bc.ca on Feb 20

The first sentence of your preface reads: “The methodology used in our quest to establish how the economy of ours functions, involves persuasion by logical reasoning that existing theories either got it all wrong, or are at least lacking in consistency to be able to explain how an economy in a human-central world works.”

Feynman said: “Perhaps it is because their horizons are limited in this way that some people are able to imagine that the centre of the universe is man.”

Persons with a limited horizon invariably end up in the so-called social sciences where they are doing cargo cult science. Cargo cult science comes in the format of the sitcom with much storytelling, second-guessing other people’s motives, plain common sense arguments of the type ‘the sun goes up’, moralizing, and appeal to emotions. People like explanations in the form X happened because A did Y to B because she is a good/bad person and good/bad persons are supposed to act in this way as we know since Adam and Eve. The emotionally charged narrative is the only form non-scientists can connect the dots and make sense of reality.

The scientists’ certain knowledge of reality is incorporated in a theory. A theory satisfies the criteria of material and formal consistency. The true theory is the humanly best mental representation of reality.

The truth value of a theory does not in any way depend on the understanding of non-scientists or whether they like/dislike it. Populism is non-existent in science.

Populism is the dominant form of communication in the political realm where the appearance of majority assent is needed because legitimacy is defined in this way.

In the preface you appeal directly to the populace: “The purpose of this book is to explain what an economy is and how it works; and it will set out to do so in a way that aspires to make it understandable for just about everyone moderately educated.”

This tells everyone that you are in the business of political agenda pushing and by implication entirely out of science.

Your three axioms bear this out: “1. our economy is an all human-made systematic construct of accounts, having boundaries that are open to a natural existence into which we are born and live as aspiring to better ourselves beings, and whose price to do so all the economy's accounts are made-up from; 2. it exists for the sole purpose of adding an extensive variety of use-values to humanity, that couldn’t as commonly be obtained in the absence of a formal economic structure, whereby the exogenously existent living standards of human beings are to be enhanced in perpetuity; and 3. no one can be denied the opportunity to participate in it on the supply side. Short of criminal behaviour towards the stated second axiom, there are no exceptions to the third one; since there are no longer opportunities for human beings to make a living outside of an economy, it is a human right’s issue.”

This axiom set does not contain the words profit or income nor does from it ever logically follow what profit is, and this is sufficient to prove that it relates to society but not to the economy. So what you are defining with your three axioms is the subject matter of sociology but not economics. You make the same economics-is-a-social-science mistake as Orthodoxy and traditional Heterodoxy.

Note that there is NO way that leads from the understanding of human behavior to the understanding of the behavior of the economic system. All human-centered approaches invariably crash against the methodological wall of the Fallacy of Composition. In other words: If it isn’t macro-axiomatized, it isn’t economics.