April 28, 2018

The brouhaha about prediction: which Feynman is right?

Comment on David Orrell on ‘The Economics Debate: The Problem isn’t Bad Economics, It’s Bad Science

Blog-Reference

Feynman said:
(i) “The test of science is its ability to predict.”
(ii) “The future is unpredictable.”#1

Which Feynman is relevant for economics? Both, of course, but economists in their confusion took (i) and ran away with it. The bottom line of the prediction brouhaha is: scientists do not predict the future, only charlatans do, and only morons take them seriously.#2

As a matter of principle, a theory cannot be dismissed because it does not predict the future. Therefore, economics from Jevons/Walras/Menger to DSGE cannot be dismissed because it has not predicted crises. The criterion of science is logical and empirical consistency: “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) So, economics ― Walrasianism, Keynesianism, Marxianism, Austrianism ― has to be dismissed because of material/formal inconsistency and nothing else.#3

The point is that scientists use the word prediction in a quite different sense from everyday usage. For example, Einstein deduced gravity waves from his theory in 1916 and in our days, 100 years later, they are observed. Only in the very specific sense of ‘testable hypothesis’ scientists make ‘predictions’.

Science proceeds from the known to the unknown: “The object of reasoning is to find out, from the consideration of what we already know, something else which we do not know.” (Peirce) Only in this sense science makes ‘predictions’.

All this is well-known among methodologists: “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire.” (Popper)#4

The problem of economics is NOT failed predictions but that it is a failed science or, in Feynman’s famous term, a cargo cult science.#5

Egmont Kakarot-Handtke


#1 For the full quotes see Scientists do not predict
#2 Scientists do NOT predict the future
#3 What is dead certain in an uncertain world: economists’ abysmal incompetence
#4 Uncertainty: ‘Whereof one cannot speak, thereof one must be silent’
#5 What is so great about cargo cult science? or, How economists learned to stop worrying about failure

Related 'Why is economics a total scientific failure?'. For details of the big picture see cross-references Paradigm Shift.

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REPLY to Tom Hickey on Apr 30

The topic is prediction in economics and you landed at causality. And what you as the distinguished MMT philosopher and opinion leader have to tell the audience is: “There are many theories of causality.” So what?

The point is that if there are many theories the field is in the state of utter confusion because, as a matter of principle, only one theory can be true. Science is the quest for the true theory as philosophers know since Plato.

In economics, there are folks who claim that they saw the financial crisis of 2008 coming and that Orthodoxy badly failed on this account. What these folks try to bring across is that they have the true theory because, as everybody knows: “The test of science is its ability to predict.”

Fact is that prediction is ill-understood in economics. There are basically two types of prediction: the pre-scientific and the scientific:
(i) The shaman says that in his state of superhuman awareness it has been communicated to him that in the near future the great dragon will swallow the sun.
(ii) The scientist says, according to my calculations, which are based on the Theory of Gravity and given initial conditions, I conclude that the people in Togo will observe a total solar eclipse on March 29, 2006.

Let us assume that the event happens as ‘predicted’ then follows from (i) that the shaman has extraordinary/inexplicable abilities, and from (ii) that the theory is true, with the qualification that in the future perhaps somebody will come up with an even better theory.

Because in economics we do not have the true theory ― Walrasianism, DSGE, Keynesianism, Post Keynesianism, MMT, Marxianism, Austrianism are provably false ― a prediction that comes true is not more than a lucky guess at the betting shop.

The crisis prediction brouhaha is just another distraction from the fact that economics is a failed/fake science. This applies also to MMT which is just another political fraud.#2


#1 The futility of testing economics blather
#2 For the full-spectrum refutation see cross-references MMT

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REPLY to Noah Way on May 2

You say: “I've got a couple of theories about Franko, …”

NO. You have, at the very best, got a couple of HYPOTHESES about Franko. Your blather does not deserve the designation theory. A theory is the humanly best mental representation of reality and satisfies the criteria of material/formal consistency.

Profit: after 200+ years still elusive

Comment on Tom Hickey on ‘Lessons from Nick Hanauer and Dee Hock’

Blog-Reference

Tom Hickey cites from an article of Nick Hanauer: “It is appealing to believe that the parasite economy will eventually correct itself. Or that a few high-road employers will set an example that will eliminate it. But trust me when I tell you: This is wishful thinking. I know because I am one of those employers. People, like me, when faced with brutal competitive dynamics, will not pay workers a living wage unless all of our competitors do the same. And the only way that will happen is if citizens like you require employers like us to do it. Until then, corporate America will continue to build its record profits on the backs of cheap labor.”#1

The argument is built on the age-old cliche that depicts wages and profits as fierce antagonists. This meme is not only nourished by widespread personal experience, the testimonial of entrepreneurs/trade unionists, the rhetoric of politicians, but has the authority of the founding fathers Smith,#2 Mill, Ricardo,#3, #4 Marx,#5 et al. behind it.

This cliche is nonetheless false and it is scientifically incompetent economists who are to blame that it is still alive and substantially affects economic policy. Right policy depends on 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)

Economists do NOT have the true theory. As the Palgrave Dictionary puts it: “A satisfactory theory of profits is still elusive.” (Desai) Because the foundational concept of economics is false the whole of economics is false.

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. The worst blunder is profit theory.

The problem with the antagonism meme is that it has common sense on its side, just like Geo-centrism had the the-sun-goes-up common sense on its side. Science goes beyond common sense. What one has to, first of all, understand in economics is profit and cross-over exploitation.#6

In order to see this, the business sector is split into two identical firms and firm 1 is supposed to cut the wage rate W 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 wage income falls and with it consumption expenditures 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, Marx et al. have seen before, to wit, wages down ― profit up.

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.

For the economy as a whole, the antagonism of wages and profits is an optical illusion. This has obvious consequences for employment theory and the discussion about the minimum wage.#7 To this day, neither right-wing nor left-wing economic policy guidance has sound scientific foundations.

Egmont Kakarot-Handtke


#1 Confronting the Parasite Economy
#2 The profit theory is false since Adam Smith
#3 Ricardo, too, got profit theory wrong. Sad!
#4 Ricardo and the invention of class war
#5 Profit for Marxists
#6 Capitalism, poverty, exploitation, and cross-over exploitation
#7 The minimum wage debate: a showpiece of economists’ hereditary idiocy

Related 'Profit and the Private-Property-Irrelevance Theorem'. For details of the big picture see cross-references Profit.

Poor Wicksell — abused as a testimonial for MMT

Comment on Lars Syll on ‘MMT — the Wicksell connection’

Blog-Reference and Blog-Reference

Lars Syll summarizes “In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover and taxing and borrowing is degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not the major problem since fiat money means that governments can always make more of them.”

That much is, of course, true: Wicksell envisaged a pure fiat money system run by the central bank (= Giro system). This does not mean, though, that he was in any way a promoter of MMT’s claims or policies.

Wicksell certainly did not subscribe to patently false MMT propositions as:
  • the value of money depends on taxation,#2
  • the central bank is the state’s department for arbitrary money creation,
  • deficit spending is the cure for all economic and social problems,#3
  • public debt does not matter.#4
With regard to the theory of money, Wicksell, Keynes, and MMT are superior to DSGE/RBC/ New Keynesianism. However, all three approaches failed to integrate the theory of money into a consistent macroeconomic framework or what Keynes called the ‘monetary theory of production’.#5

Egmont Kakarot-Handtke


#1 Going beyond Wicksell, Keynes, and MMT
#2 The creation and value of money and near-monies
#3 MMT is ALWAYS a bad deal for the 99-percenters
#4 Deficits matter for distribution
#5 Reconstructing the Quantity Theory

Related 'How Wicksell and the rest got inflation/deflation wrong' and 'Wicksell’s misplaced critique of mathematics'. For the full-spectrum refutation of MMT see cross-references MMT.

April 27, 2018

Neoclassical growth theory: modeling gone nuts

Comment on Lars Syll on ‘Solow’s Nobel Prize lecture’

Blog-Reference

Solow summarizes: “The end result is a construction in which the whole economy is assumed to be solving a Ramsey optimal-growth problem through time, disturbed only by stationary stochastic shocks to tastes and technology. To these, the economy adapts optimally. Inseparable from this habit of thought is the automatic presumption that observed paths are equilibrium paths. So we are asked to regard the construction I have just described as a model of the actual capitalist world.”

Standard economics is based on this verbalized set of hardcore propositions a.k.a. axioms
  • HC1 There exist economic agents.
  • HC2 Agents have preferences over outcomes.
  • HC3 Agents independently optimize subject to constraints.
  • HC4 Choices are made in interrelated markets.
  • HC5 Agents have full relevant knowledge.
  • HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub)
What has to be realized, in addition, is that these premises require a pigtail of auxiliary assumptions. So, in order to be applicable, constrained optimization HC3 requires the auxiliary assumption of a well-behaved production function.

What economists in their bottomless scientific incompetence have not realized in 140+ years is that HC3, HC5, and HC6 are plain NONENTITIES. The methodological point is this: every model that contains just one NONENTITY is a priori false. Methodologically it holds, if the set of premises is false the whole analytical superstructure is false.

Neoclassical growth theory applies a barrage of NONENTITIES. Among others:#1
  • The representative consumer is supposed to solve an infinite-time utility-maximization problem. This is a priori false because utility and HC3 are NONENTITIES.
  • Neoclassical growth models consist alone of real variables. This is false because the economy constitutes itself through the interaction of real AND nominal variables. There is no such thing as a ‘real’ economy, in other words, ALL ‘real’ models are a priori false.
  • There is no such thing as an equilibrium or disequilibrium. In other words, ALL equilibrium models are a priori false.#2
  • Profit is a nominal variable and cannot appear in a real model. The neoclassical profit theory is false.
  • Economics has to be macrofounded because no way leads from behavioral microfoundations to an understanding of how the economic system 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, 300 BC) The neo-Walrasian axioms, aka microfoundations, are NOT “certain, true, and primary”. Because of this, neoclassical growth models are scientifically worthless.

Economics has to move from microfoundations to macrofoundations.#3

Here is the correct starter set: (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 behavior-free premises are certain, true, and primary, or, stated in comparative terms, superior to the neo-Walrasian microfoundations and Keynes’ defective macrofoundations.#4

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.

Monetary profit for the economy as a whole 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 surplus = profit is equal to the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.

Under the condition of market clearing and budget balancing, the elementary economy reduces to three independent variables, i.e. W, R, L, and the price P as dependent variable. The changes from period to period are formally given by
  • Wt=Wt-1(1+wt) The wage rate in period Wt is given by the wage rate in the previous period Wt-1 and the rate of change for the current period wt.
  • Rt=Rt-1(1+rt) Analogous for the productivity.
  • Lt=Lt-1(1+lt) Analogous for labor input.
The rates of change for future periods wt, rt, lt are random variables with an a priori unknown distribution function. Given the enumerated premises and conditions, the market clearing price performs a random walk which is determined in turn by the random paths of wage rate and productivity. The general formula for the evolving elementary production-consumption economy is given on Wikimedia.#5 This path equation replaces all neoclassical growth models.


In the next step, the condition of budget balancing has to be lifted. This brings saving/dissaving and profit/loss into existence. Note that in the Wikipedia article#1 the word profit does not appear once. Alone for this reason, neoclassical growth models are NO representation of the “actual capitalist world”.#6 There is NO such thing as a capitalist world without profit/loss. Economists should know this.

To make matters short, the axiomatically correct macroeconomic Profit Law for an evolving economy is given here without further explanation. It holds, with Qm monetary profit/loss, Sm monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Yd distributed profit
  • Qm=−Sm in the elementary production-consumption economy,
  • Qm=I−Sm in the elementary investment economy (note I is NEVER equal Sm),
  • Qm=(G−T)+(I−Sm) in the investment economy with government deficit/surplus,
  • Qm=Yd+(X−M)+(G−T)+(I−Sm) in the open economy with distributed profit.
Neoclassical growth models do not contain macroeconomic profit. They are nothing more than a bad modeling joke.#7 Economists award themselves fake Nobel Prizes for this proto-scientific junk.

Egmont Kakarot-Handtke


#1 Wikipedia, Ramsey–Cass–Koopmans model
#2 Equilirium
#3 True macrofoundations: the reset of economics
#4 How Keynes got macro wrong and Allais got it right
#5 Wikimedia, Time evolution of the elementary production-consumption economy including profit distribution
#6 Profit and the collective failure of economists
#7 Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?

Related 'Squaring the Investment Cycle'.

April 25, 2018

Economics between misguided and lethal critique

Comment on Noah Smith on ‘Econ Critics Are Stuck in the Past’

Blog-Reference

Misguided critique is characterized by a lack of understanding of what science is all about. Relevant examples include:
  • predictive failure ⇒ scientists do not predict (only charlatans do)#1,
  • politically biased ⇒ false if applied by left-wingers against right-wingers and vice versa but appropriate if applied to ALL political agenda pushers/useful idiots.#2
  • mathiness ⇒ false if application comes first and mathematical tool is tailored to application but appropriate if tool comes first and application is trimmed to fit the tool,
  • deductive enterprise ⇒ false if premises are true but appropriate if NONENTITIES are put into the premises.
“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, 300 BC)#3

“For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations. (Hutchison)

Lethal critique:
  • Walrasian microfoundations (in particular equilibrium), are false since 140+ years,
  • Keynesian macrofoundations (in particular I=S/IS-LM), are false since 80+ years,
  • Walrasianism, Keynesianism, Marxianism, Austrianism and all variations/ derivatives thereof are axiomatically false and materially/formally inconsistent,
  • economists are scientifically incompetent,
  • economics is a cargo cult science,
  • because profit theory is false since Adam Smith, economic policy guidance has no sound scientific foundations since 200+ years.*
From the lethal critique follows that economics needs a Paradigm Shift from microfoundations to macrofoundations. For methodological reasons, more empirical partial analysis does NOT lead to a better understanding of the monetary economy as a whole.#4

Egmont Kakarot-Handtke


#1 Scientists do not predict
#2 Time to retire political economists
#3 Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?
#4 Overreach: Economists have their fingers in every pie except real economics

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Macroeconomics: self-delusion and empty promises

Comment on Simon Wren-Lewis on ‘Did macroeconomics give up on explaining recent economic history?’

Blog-Reference

Simon Wren-Lewis summarizes: “… John Williams … calls here for the next generation of DSGE models to focus on three areas. First they need to have a greater focus on modelling the labour market and the degree of slack, which I think amounts to the same thing as how the NAIRU changes over time. Second, he talks about a greater focus on medium- or long- run developments to both the ‘supply’ and ‘demand’ sides of the economy. The third of course involves incorporating the financial sector. Perhaps one day DSGE models will do all this, although I suspect the macroeconomy is so complex that there will always be important gaps in what can be microfounded. But if it does happen, it will not come anytime soon.”

It will NEVER come, for the simple reason that the microfoundations approach is methodologically dead. The problem is that the present generation of economists is in the state of manifest self-delusion. The point to grasp is that economics has to be macrofounded.*

For more details see
Because the axiomatic foundations of economics are false the whole of economics is false. Economic policy guidance has no sound scientific foundations since Adam Smith/Karl Marx.

Egmont Kakarot-Handtke


Related 'Full employment, the Phillips Curve, and the end of Gaganomics' and 'End of the Lump of Labor sitcom' and 'Full employment through the price mechanism'.

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April 24, 2018

Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?

Comment on Brian Romanchuk on ‘Forecastability And Economic Modelling

Blog-Reference and Blog-Reference

“The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future . . .” (Schumpeter, 1946)

The future is now and economists still do NOT have the paradigmatic simple core model but a heap of incommensurable and contradicting constructions. Pluralism may have its merits elsewhere but is the worst thing that can happen in science. As the ancient Greeks already observed: “There are always many different opinions and conventions concerning any one problem or subject-matter…. This shows that they are not all true. For if they conflict, then at best only one of them can be true.” (Popper)

Fact is that, in economics, ALL models are axiomatically false. It holds: “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, 300 BC) Fact is that the premises of current models are neither certain, true, nor primary.

Brian Romanchuk’s SIM model is a case in point. He enumerates his key premises as follows.
  • The model is a straightforward three sector model, with a household sector, business sector, and government. 
  • The household consumption function is defined in terms of a pair of propensity to consume parameters (out of income, out of wealth). …
  • The business sector is constrained to break even, …
  • Government policy is specified in terms of government consumption and a fixed tax rate.
Brian Romanchuk starts with macrofoundations, which is correct. But then he assumes a consumption function, which is a NONENTITY, and break even for the business sector, which kills the model already at this early stage because a zero profit economy is the most idiotic NONENTITY of them all.

Let us contrast this with the standard microfoundations approach. The whole analytical superstructure of Orthodoxy is based upon this set of hardcore propositions a.k.a. axioms:
  • HC1 There exist economic agents.
  • HC2 Agents have preferences over outcomes.
  • HC3 Agents independently optimize subject to constraints.
  • HC4 Choices are made in interrelated markets.
  • HC5 Agents have full relevant knowledge.
  • HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub)
HC3 introduces marginalism which is the all-pervasive principle of Orthodoxy. HC3, though, and HC5 and HC6 are plain NONENTITIES.#1

In order to be applicable HC3, requires a lot of auxiliary assumptions, most prominently a well-behaved/differentiable production function.#2 Taken together, all axioms and auxiliary assumptions then crystallize to supply-function/demand-function/equilibrium or what Leijonhufvud famously called the Totem of Micro.#3

The methodological fact of the matter is that ALL models that take just one NONENTITY into the premises are a priori false.#4

So, because these premises are NOT “certain, true, and primary” they cannot be used for model building: expected utility, rationality/bounded rationality/animal spirits, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, equilibrium, first/second derivatives, total income=value of output, I=S, real-number quantities/prices, ergodicity. Every theory/model that contains just one NONENTITY goes straight into the wastebasket.

The standard microfoundations approach with all its variants and derivatives up to DSGE is methodologically false. The same holds for Keynes’ macrofoundations and all After-Keynesian variants.

To put NONENTITIES into the premises is the defining characteristic of fairy tales, science fiction, theology, Hollywood movies, politics, proto-science, and the senseless model bricolage of scientifically incompetent economists.#5 *

Egmont Kakarot-Handtke


#1 The solemn burial of marginalism
#2 Putting the production function back on its feet
#3 Equilibrium and the violation of a fundamental principle of science
#4 The future of economics: why you will probably not be admitted to it, and why this is a good thing
#5 How to restart economics

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April 23, 2018

Note on Marx Today

Blog-Reference

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.

The worst blunder is profit theory. Marx, too, never came to grips with profit. For an overview see
Because the pivotal economic concept profit is false the whole of economics is false. Economic policy guidance has no sound scientific foundations since Adam Smith/Karl Marx.

Egmont Kakarot-Handtke


#Economics #FailedScience #FakeScience #CargoCultScience #ScientificIncompetence #Economists  #ProfitTheory #DeleteEconomics #ParadigmShift #NewParadigm

April 21, 2018

Overreach: Economists have their fingers in every pie except real economics

Comment on Barkley Rosser on ‘Can Nudging Become A New Road To Serfdom?’

Blog-Reference

To this day, economists have no clue of what their subject matter is. While the sciences have specialized, economists follow the Renaissance ideal of the homo universalis.#1 Accordingly, they dabble in Psychology, Sociology, Political Sciences, Geopolitics, Law, History, Anthropology, Social Philosophy, Philosophy, Theology, Pedagogic, Biology/ Evolution, Climatology, and what not.

People become progressively aware that in all these disciplines economists have not contributed anything of scientific value: “While he [Todd Zywicki] overdid it a bit he argued with some good reason that most legal decisions in the US relying on claimed behavioral economics foundations, especially on matters involving credit and consumer finance issues, have been seriously flawed. They have either relied on misinterpretations or else mere assertions that have not been empirically demonstrated. He raised a point of more general interest in charging that there has been a problem of ‘citation cascades,’ where a string of decisions have been based on people citing people citing other people in a cascade that eventually boils down to an initial claim that has no clear basis.”

This is not correct. Economics has a clear basis and it is given with the set of neo-Walrasian axioms: “HC1 There exist economic agents. HC2 Agents have preferences over outcomes. HC3 Agents independently optimize subject to constraints. HC4 Choices are made in interrelated markets. HC5 Agents have full relevant knowledge. HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub)

Economists simply apply this set of behavioral assumptions or slight variants thereof or the subset of optimization-and-equilibrium to any question they come across. The tragicomedy is that this methodology has crushingly failed in their own field. Economists can to this day not tell how the price- and profit-mechanism works or what profit is.#2, #3

The methodological blunder of economists and the ultimate reason why economics is one of the worst scientific failures of all times consists in defining economics as a social science.#4, #5

So, the definition of the subject matter has to be changed:*
  • Old (behavioral): Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
  • New (systemic): Economics is the science which studies how the monetary economy works.
Orthodoxy and traditional Heterodoxy is lost for science. Economists cannot be taken seriously ― not when they speak about the economy and still less so when they blather about nudging as the new road to serfdom.

Egmont Kakarot-Handtke


#1 Wikipedia, Polymath
#2 Economists’ three-layered scientific incompetence
#3 Mental messies and loose losers
#4 Economics is NOT a social science
#5 For details of the big picture see cross-references Not a Science of Behavior

Related 'Dear philosophers, economics is a system science'.

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REPLY to Barkley Rosser on Apr 22

Alone the titles of your posts ‘Can Nudging Become A New Road To Serfdom?’ or ‘Anniversary of Yeshua bin Yusuf dying on a cross’ tell everybody that you never understood what science is all about.

The dabbling of economists in Psychology, Sociology, Political Sciences, Geopolitics, Law, History, Anthropology, Social Philosophy, Philosophy, Theology, Pedagogic, Biology/ Evolution, Climatology, etcetera has never been anything else than dilettantish overreach, nuisance, and nerviness. All the more so, because economists messed up their own field in all dimensions and never rose above the proto-scientific level.

The lethal blunder of the microfoundations approach does NOT lie in any specific behavioral assumption like constrained optimization or bounded rationality but in the methodological incompetence of economists to realize that NO way leads from the second-guessing of Human Nature/motives/behavior/action to the understanding of how the economic system works.#1, #2

ALL human-centered/behavioral approaches invariably crash against the methodological wall of the Fallacy of Composition. NO way leads from the assumption of profit maximization to the macroeconomic Profit Law.#3 And this explains why the microfoundations approach has been doomed to failure from the very beginning in the 1870s.

Behavioral economics or Vernon Smith’s market experiments is partial analysis and the results of partial analysis cannot, as a matter of methodological principle, be generalized. From Vernon Smith’s market experiments cannot be concluded that the market economy is a self-adjusting system.

The fact of the matter is that correct macrofoundational analysis proves that the market economy is unstable and that it will eventually break down.#4 You can do behavioral experiments until you are blue in the face but this will not yield any results as to how the market system works.

Microeconomics has always been the playground of microbrains.#5*



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REPLY to Barkley Rosser on Apr 23

You are off track. The point at issue is NOT the market experiments of Vernon Smith and others but that the subject matter of economics is ill-defined.

Imagine a physicist is asked to figure out how the universe works and after some time he comes back and says: The universe is much too large, not of direct relevance to our daily lives, and ultimately incomprehensible, so I have analyzed the molehills in my front garden — with surprising results.

If you want to understand the universe it is of no use to thoroughly examine molehills and if you want to understand the economy it is of no use to second-guess Human Nature/ motives/behavior/actions.

Macro is about the economic universe and micro is about mole-psychology-sociology. Behavioral economists are unable to look beyond their molehill horizon. But the methodological fact of the matter is that NO amount of molehill research ever leads to the understanding of how the universe works and NO way leads from the understanding of human behavior to the understanding of how the market economy works.#1, #2

This explains why the microfoundations approach has failed. However, from textbook to peer review to the fake Nobel, economists still cling to their false methodology: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

After 140+ years of methodological blunder, it is time for the paradigm shift from bottom-up to top-down.#3 Hitherto accepted economists are no longer accepted.



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REPLY to Barkley Rosser on Apr 25

Akerlof’s AEA address is a fine compilation of the multiple idiocies of microfounded macroeconomics. Just take the microfounded = behavioral Phillips curve and the macrofounded = structural Phillips curve.#1

The microfoundations = behavioral approach is a scientific lemon since Jevons/Walras/ Menger but you have not realized it to this day. Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.

Behavioral economics has never been more than rather trivial folk psychology/sociology, i.e. an overreach of incompetent economists who do not understand since 200+ years the very basics of their own subject matter.#2, #3


April 20, 2018

Stop beating mainstream economics ― it is long dead

Comment on Lars Syll on ‘The tractability hoax in modern economics’

Blog-Reference and Blog-Reference

Lars Syll describes how economists proceed: “The theories and models that mainstream economists construct describe imaginary worlds using a combination of formal sign systems such as mathematics and ordinary language. The descriptions made are extremely thin and to a large degree disconnected to the specific contexts of the targeted system than one (usually) wants to (partially) represent. This is not by chance. These closed formalistic-mathematical theories and models are constructed for the purpose of being able to deliver purportedly rigorous deductions that may somehow by be exportable to the target system.” And he concludes: “What is wrong with mainstream economics is not that it employs models per se, but that it employs poor models. They are poor because they do not bridge to the real world target system in which we live.”

All this is true. The curious thing is, it is true since 140+ years. So, the real question is how can this be?

Standard economics is well-articulated and it is built upon this verbalized neo-Walrasian axiom set:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub)

It is all in the open, everyone with one milligram of scientific competence can see that these premises are absurd. HC3, HC5, and HC6 are plain NONENTITIES. Every theory/model that contains just one NONENTITY is a priori false and scientifically worthless. Methodology tells us that when the axioms are false the whole analytical superstructure is false.

So, what has to be done is to simply throw the neo-Walrasian axiom set out of the window and start anew. This act is called a Paradigm Shift. But nothing of the sort happens. The journalistic loudspeaker of the profession proudly declares: “… 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).

There is no use to apply any of the propositions of the set HC1/HC6 and there is no use to accuse standard economics of unrealism and mathiness. However, this is what happens day in day out. Economists play this silly game since 140+ years.

Orthodoxy simply recycles long refuted stuff as already Morgenstern criticized: “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.”

Heterodoxy, on the other side, tirelessly repeats its trivial criticism. And that’s it. No conclusion is drawn, no consequences follow, no methodologist steps in, nobody resigns, nobody is fired, all ends in a draw and the status quo goes on.#1

Heterodoxy, clearly, never tried in earnest to overthrow Orthodoxy: “… 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’s ambition never went beyond the pluralism of false theories and a bigger share of the academic curriculum. That is human-all-too-human, but it is not science.#2*

What is economic debate these days? A wrestling show of useful political idiots with zero scientific content and no result that ever disturbs the pluralism of provably false proto-scientific theories/models.

Egmont Kakarot-Handtke


#1 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 New Economic Thinking: The 10 crucial points

Related 'The stupidity of Heterodoxy is the life insurance of Orthodoxy' and 'Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?' and 'Economics between misguided and lethal critique' and 'Both orthodox and heterodox economists are cargo cult scientists'. For details of the big picture see cross-references Incompetence.

*

April 19, 2018

Equilirium

Comment on David Glasner’s ‘On Equilibrium in Economic Theory’

Blog-Reference and Blog-Reference on Apr 20

David Glasner explains the evolution of the equilibrium concept: “Equilibrium is an essential concept in economics. While equilibrium is an essential concept in other sciences as well, and was probably imported into economics from physics, its meaning in economics cannot be straightforwardly transferred from physics into economics. The dissonance between the physical meaning of equilibrium and its economic interpretation required a lengthy process of explication and clarification, before the concept and its essential, though limited, role in economic theory could be coherently explained.”

What David Glasner overlooks is that equilibrium is one of the worst methodological blunders of the failed science economics. Hence, the history of equilibrium economics from demand-supply-equilibrium to DSGE is in essence not different from the history of the Flat Earth Theory. It can only be told as a cautionary example of utter scientific incompetence.

The lethal methodological blunder of standard economics consists of putting equilibrium into the premises. This is the verbalized neo-Walrasian axiom set:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, 1985)

Obviously, since we do not know at the beginning of the analysis whether something like an equilibrium exists in the monetary economy, it is illegitimate to put it into the premises. This idiocy/fraud is known since antiquity as petitio principii.#1, #2, #3, #4

At the beginning of economic analysis stands Keynes’ question: “... is the existing economic system in any significant sense self-adjusting.” Keynes started with the right question but he could not answer it in a scientifically correct manner.#5, #6, #7

Because equilibrium (and by implication disequilibrium) does not exist, all theories/models that contain the concept are a priori false and scientifically worthless. The history of equilibrium economics cannot be told as a story of progressive insight and growth of scientific knowledge but as a delirious march into the woods towards the inescapable end: “... when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.” (Hume)#8, #9

David Glasner, though, lacks even this little judgment.

Egmont Kakarot-Handtke


#1 Equilibrium and the violation of a fundamental principle of science
#2 There is NO such thing as supply-demand-equilibrium
#3 Forget equilibrium
#4 Equilibrium is stone dead — and now?
#5 Could we, please, all focus on the key question of economics?
#6 What Keynes really meant but could not really prove
#7 Proof of the inherent instability of the market economy
#8 Economists: Standing on the Shoulders of Gnomes
#9 New insight from Meta-Learning: delete economics

Knowledge is attainable ― even in economics

Comment on Lars Syll on ‘Sometimes we do not know because we cannot know’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference on Apr 21

Lars Syll maintains: “To Keynes, the source of uncertainty was in the nature of the real ― nonergodic ― world. It had to do, not only ― or primarily ― with the epistemological fact of us not knowing the things that today are unknown, but rather with the much deeper and far-reaching ontological fact that there often is no firm basis on which we can form quantifiable probabilities and expectations at all. Sometimes we do not know because we cannot know.”

Yes, this is a well-known fact of life since the Stone-Age. There are three ways to deal with the annoying human condition: (i) to repeat the mantra, I know that I know nothing, ad nauseam, (ii) to senselessly speculate about the unknowable which is the business of mysticism/religion/philosophy/journalism, (iii) to put the gray matter between the ears to work which is the business of science: “The object of reasoning is to find out, from the consideration of what we already know, something else which we do not know.” (Peirce)

So, the growth of knowledge in economics has to start with what we know for sure:
  • the profit theory, false since 200+ years,#1
  • Walrasian microfoundations (in particular equilibrium), are false since 140+ years,#2
  • Keynesian macrofoundations (in particular I=S/IS-LM), are false since 80+ years,
  • Walrasianism, Keynesianism, Marxianism, Austrianism and all variations/ derivatives thereof are axiomatically false and materially/formally inconsistent,
  • economists are scientifically incompetent,
  • economics is a cargo cult science,
  • the Bank of Sweden Prize in Economic Sciences is a fraud,
  • economic policy guidance has no sound scientific foundations since 200+ years,
  • economists are a hazard to their fellow citizens,
  • economics needs a Paradigm Shift,#3
  • Heterodoxy is incapable of performing the Paradigm Shift because heterodox and pluralist economists are just as stupid and corrupt as orthodox economists.#4
So, yes, economists know nothing. But it is false to maintain, as Lars Syll does, that this is an ontological fact.#5, #6 No, it is sheer scientific incompetence. To recall, for science holds: “We must not believe those, who today, with philosophical bearing and deliberative tone, prophesy the fall of culture and accept the ignorabimus. For us, there is no ignorabimus, and in my opinion none whatever in natural science. In opposition to the foolish ignorabimus, our slogan shall be: We must know — we will know!” (Hilbert)*

Egmont Kakarot-Handtke


# 1 The profit theory is false since Adam Smith
# 2 New insight from Meta-Learning: delete economics
# 3 How to get rid of an obsolete theory
#4 Economics: 200+ years of scientific incompetence and fraud
#5 Lars Syll, fake scientist
#6 Cryptoeconomics ― the best of Lars Syll’s spam folder

Related 'Overreach: Economists have their fingers in every pie except real economics' and 'Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?'. For details of the big picture see cross-references Econ 101/Old Curriculum.

*

April 17, 2018

MMT: Just another political fraud

Comment on Bill Mitchell on ‘On the path to MMT becoming mainstream’

Blog-Reference and Blog-Reference

MMT consists of a political part and a theoretical part. The political part, in turn, consists of the progressive message for the ninety-nine percenters that the sovereign government can solve most, if not all, social and economic problems by deficit spending/money creation.

MMT policy proposals have no sound scientific foundation, that is, MMT theory is provably false. This means that MMT is soapbox economics/political fraud.

Of course, Bill Mitchell, one of the chief proponents of MMT, does not realize this and is mainly occupied with auto-hypnosis: “Clearly, some new interventions never receive acceptance because they are proven to be flawed in one way or another. But I doubt the body of work that is now known as MMT will be discarded quite so easily given my assessment that it is coherent, logically consistent and grounded in a strong evidence base.”

Fact is that MMT is refuted on all counts.#1 MMTers do NOT understand to this day how the price- and profit-mechanism works. Because of this, their policy guidance is, contrary to their progressive claim, inimical to the ninety-nine-percenters.

To prove this, macroeconomics has to be reconstructed from scratch. As the correct analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic 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.

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. For the graphical representation see Figure 1.#2

The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.

Monetary profit for the economy as a whole 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 surplus = profit equals the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.

What is needed for a start is two things (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii), a legal system which declares the central bank’s deposits as legal tender.

Deposit money, which is a generalized IOU, is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e. if C=Yw.

Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. This time sequence is no problem for the central bank because the temporary overdrafts vanish with wage payments.

For the case of a balanced budget C=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown in Figure 2.#3


The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank, is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector.

From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money.

The transaction equation reads M=κYw=κPX=κPRL (2) in the case of budget balancing and market clearing and this yields the commonplace correlation between the average stock of money M and price P for a given employment level L, except for the fact that M is the DEPENDENT variable. If employment is doubled the average stock of transaction money M doubles. Because the central bank plays an accommodative role there is, as a matter of principle, NO MONETARY obstacle to full employment in the elementary production-consumption economy.

As long as the central bank finances a growing wage bill Yw=WL with money creation out of thin air and wage rate W and productivity R remain fixed, the price P does NOT move one iota according to (1). As a matter of principle, the average quantity of money M increases/ decreases according to (2) but there is NO inflation/deflation.

Let us now introduce government deficit spending. Total expenditures consist now of household sector spending Ch, with Ch=Yw, and government sector spending Cg. The money for government spending is created out of nothing by the central bank.

The market clearing price is according to the macroeconomic Law of Supply and Demand P1=(Ch+Cg)/X0=P+Cg/X0, that is, there is a hike of the market clearing price which depends on the amount of additional nominal government demand Cg. Employment, productivity, and output are kept constant, i.e. O1=O0=X1=X0. The one-shot price increase has NOTHING to do with inflation. The price increase effects the redistribution of real output between the household and the government sector in the period under consideration. In other words, the households are taxed in real terms without realizing it. The tax collector comes in the disguise of the market price mechanism.

The profit of the business sector was zero in the initial period and is now positive, i.e. Qm=Cg, i.e. equal to the budget deficit. It always holds Public Deficit = Private Profit. This configuration can go on for an indefinite time with public debt vis-a-vis the central bank rising continuously and with the business sector’s pile of cash rising continuously. As MMT claims, there is no operational limit to coordinated government/central bank deficit spending/money creation.

Summary:
• MMT policy is NOT progressive, that is, in the interest of the ninety-nine-percenters.
• MMT policy amounts to an abuse of the fiat money system with massive and virtually unlimited redistributive effects in the interest of the one-percenters.
• The abuse of the fiat money order consists in the collusion of the central bank and the government and the creation of money for consumptive purposes.
• With money creation and deficit spending, the household sector = ninety-nine-percenters is taxed in real terms by an almost imperceptible price hike (NOT inflation).
• 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 for the one-percenters depending on whether and how the public debt is consolidated.
• The effects of MMT policy reinforces the transformation from democracy to oligarchy which is a latent feature of the laissez-faire market order.#4
• Public debt can accumulate indefinitely and is thereby pushed beyond the time-horizon of the general public. However, this does NOT mean that public debt vanishes. Public debt is nothing but accumulated deferred taxation.
• Because technically the sovereign government cannot go bankrupt, at some point in the future there will be either a debt jubilee, i.e. financial assets including money will be declared non-valeur, or there will be taxation/redemption. Whether the monetary economy survives these operations is doubtful.

Only those who live according to the slogan of the dying Ancien Régime, Après Nous le Déluge, will subscribe to MMT policy. Nobody with more than two brain cells will accept MMT theory or agree with Bill Mitchell’s ridiculous selling proposition “that it is coherent, logically consistent and grounded in a strong evidence base.” Politically, MMT is a fraud and scientifically it is garbage.

Egmont Kakarot-Handtke


#1 For the full-spectrum refutation see cross-references MMT
#2 Wikimedia, Elementary production-consumption economy
#3 Wikimedia, Idealized transaction pattern, household sector, balanced budget
#4 MMT: So-called progressives as trailblazers for Trumponomics

Related 'MMT is dead: An unfriendly critique of Bill Mitchell' and 'New insight from Meta-Learning: delete economics' and 'Economists: Standing on the Shoulders of Gnomes' and 'Economics has arrived at the bottom of the proto-scientific shithole' and 'How MMT enlightens Washington'.

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REPLY to Konrad on Apr 18

You say: “If you cannot explain economics in a way that a child can understand, then you do not understand economics. Everything you say will be meaningless gibberish.”

This, of course, is correct. So, here is the Disney version of monetary economics.

Once upon a time, there was one giant firm. The workers were promised 10 $ per hour. They agreed to work 1 million hours and accordingly their annual income was 10 million $. But at this point, the firm’s boss had an obvious problem, how should he pay the workers? In those old days, there was no money only barter, you know, cigarettes against bread and so on.

Being innovative and cooperative the boss and the workers wrecked their brains and discussed the matter. But then a smart child stood up and said, hey, why don’t we pay the wage bill with IOUs and these, in turn, are accepted by the firm’s store, so the workers can buy the consumption good they have produced?

This they did and money was created out of nothing. All went fine. The price was set equal to unit wage costs and fluctuated freely with productivity. The boss issued the IOUs and the workers returned them in full by buying the output.

All lived happily thereafter but then something strange happened. The folks from the mafia saw the weak spot of the scheme and they started to produce counterfeit IOU’s. They stuffed the pockets of their buddies and wives and kids full with newly created money who, in turn, spent it at the firm’s store.

Lo and behold, this worked just fine. The price went up a little but nobody took much notice. The firm’s boss was happy because he got more IOU’s back than he had issued. Everybody called him a genius because he had made a profit.

The mafia was very much puzzled that they had found a way to make everyone happy without any obvious casualties and they called their friends from academia ― Warren, Stephanie, and Bill ― and told them in great operative detail how the monetary system really works. The question was now how to scale up the scheme.

This is how MMT ― the Modern Mafia Theory of money ― developed. The IOU’s were replaced by fiat money, the mafia was replaced by central bank/government and the new scheme was sold by respectable academics as a beneficial social program. Stephanie Kelton got standing ovations from the media when she promised a pony for every American.#1

Needless to emphasize that the idea caught fire in all political quarters and this is how public debt went off like a rocket into the blue sky and out of sight. Warren, Stephanie, and Bill simply told the public not to worry and that debt does not matter. They pointed to Japan as empirical proof and this finally convinced everybody.

This, dear children, is how the modern money system and MMT developed. And, bear in mind, this is also a fine example of how the hidden hand of the market system miraculously turns the evil deeds of bad guys into a big time benefit for all people. Economists have proven this wonderful property with the so-called welfare theorems. One day, when you are grown up you will understand and appreciate this and become POTUS and make the deficit great again.#2


#1 MMT: Money-making for the one-percenters
#2 MMT: So-called progressives as trailblazers for Trumponomics

April 16, 2018

New insight from Meta-Learning: delete economics

Comment on Peter Dorman on ‘A Teachable Moment: The Importance of Meta-Learning’

Blog-Reference

Peter Dorman summarizes his insights: “There are many reasons for doing this. One is frankly political: a lot of the political babble in this country is framed by erroneous economic thinking, … Another is pedagogical: if you don’t put effort into deconstructing pre-existing beliefs as well as developing new knowledge, what you will see on papers and exams is a weird mishmash of the two. It took me too many years to figure this out.”#1

Current economics fits the description of a weird mishmash. 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.

So, the first thing to do is to deconstruct pre-existing beliefs. Standard economics is given with this set of neo-Walrasian hardcore propositions a.k.a. axioms:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, 1985)

The methodological blunder that suffices to make this axiom set unacceptable is that HC3, HC5, and HC6 are NONENTITIES like angels, unicorns, the Easter Bunny, or Superman.

First insight from Meta-Learning: all theories/models that contain just one NONENTITY are a priori false. Never ever apply any of the propositions of the set HC1/HC6.

Krugman once introduced himself as follows: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point ...”. From Meta-Learning we know by now that Krugman has always been an idiot.

Of course, there are not only scientifically incompetent Neoclassicals but also Keynesians. Keynes defined the set of foundational macroeconomic propositions as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

Unfortunately, exactly at this point, the lethal error slipped in because Keynes never came to grips with 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.)

Because Keynes got profit wrong the whole of Keynesianism and Post Keynesianism and New Keynesianism is scientifically worthless.

Second insight from Meta-Learning: all theories/models that contain Income = value of output or I=S are a priori false.

Now we could go on with Meta-Learning and deconstruct Marxianism and Austrianism but the Meta-Learner doubtlessly got the point. Deconstructing pre-existing beliefs means to flush both microeconomics and macroeconomics and the textbooks from Samuelson’s sorry effort to Mankiw and Rodrik down the drain. Or, as Joan Robinson put it: “Scrap the lot and start again.”#2 *

Egmont Kakarot-Handtke


#1 How to get rid of an obsolete theory
#2 How to restart economics

*

April 15, 2018

Economists: Standing on the Shoulders of Gnomes

Comment on Roger Farmer on ‘Standing on the Shoulders of Giants’

Blog-Reference and Blog-Reference on Apr 17

Roger Farmer maintains: “There is much that is wrong with existing economics. But to contribute to our subject, you must first understand how we got here. Neoclassical Economics was constructed by young, idealistic, smart, dedicated people, just like you, who built on the ideas of those who came before. Take a page from the book of those who preceded you. We are all standing on the shoulders of giants.”

This passage is sufficient proof of Roger Farmer’s utter confusion.#1, #2 Fact is that economics is one of the worst failures in the history of modern science. This is the actual state of economics: provably false
• profit theory, since 200+ years,
• Walrasian microfoundations (in particular equilibrium), since 140+ years,
• Keynesian macrofoundations (in particular I=S/IS-LM), since 80+ years.

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. With the pluralism of provably false theories economics sits squarely at the proto-scientific level.

Economics is a science without scientists.#3 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. Roger Farmer is no exception. What he has not understood is that economics is NOT a so-called social science but a system science.

To recommend neoclassical economics as a worthwhile study for the aspiring economist is much like a deranged physicist recommending some pre-Copernican Flat-Earther.#4, #5

There were never “young, idealistic, smart, dedicated people” in economics, only useful political idiots. Economics started 200+ years ago with the agenda pushers, fake scientists, and intellectual gnomes of Political Economy and has never produced more than proto-scientific garbage.

Roger Farmer’s attempt to somehow associate the gnomes of economics with the giants of science is not merely a bad joke but a deception of the general public.#6

Egmont Kakarot-Handtke


#1 Economics: When the scientifically unfit blather about science
#2 When substandard thinkers dabble in science it is called economics
#3 Economics: communication without content
#4 Futile beatification and canonization of an economics Flat-Earther
#5 Economics: 200+ years of scientific incompetence and fraud
#6 The real problem with the economics Nobel

April 13, 2018

MMT: So-called Progressives as trailblazers for Trumponomics

Comment on Bill Mitchell on ‘The distinguished economists just embarrass themselves’

Blog-Reference and Blog-Reference

There is microfounded standard economics, the Keynesian macro opposition, and MMT. Standard economics in its actual incarnation as DSGE is at the lowest possible proto-scientific level. Supply-demand-equilibrium is scientifically not more than a 140+ years old running gag. Keynesianism is methodologically not superior but simply replaces the most glaring idiocies of the neoclassical optimization-and-equilibrium world with plain common sense. Politically, Keynesianism relaxes the maxim of public budget balancing and extends it over the business cycle. MMT carries this one step further to permanent deficit spending, albeit with a progressive agenda. Progressive means that MMTers see themselves as trailblazers for the cause of the ninety-nine-percenters.

Accordingly, Bill Mitchell summarizes his critique of his academic peers as follows: “While I would not support the increased US fiscal deficits under current policy proposals from Donald Trump, I would welcome increased deficits if the policy mix was skewed towards introducing a Job Guarantee, improving public infrastructure, expanding the welfare support and improving schools and hospitals.”

MMTers have lobotomized the public for years with the twin slogans deficits are good for you and debt does not matter but now, as they have got what they argued for, they seem to be not so happy about the distributional consequences of the huge deficit blow-up.

This is a political farce. Macroeconomics, more specifically, the axiomatically correct sectoral balances equation tells everyone that Public Deficit = Private Profit and that it does not matter at all whether the deficit is produced by social or military spending or by tax reductions for the one-percenters. MMT claims that its economic policy agenda benefits the ninety-nine-percenters which is simply not the case.#1, #2

The only question is whether MMTers are so stupid that they do not understand how the monetary economy works or whether they deliberately deceive the public.

In his post, Bill Mitchell reproduces the familiar MMT sectoral balances chart#3, #4 and then goes on to explain: “The following graph shows the annual sectoral balances from 1960 to 2017. I then used the CBO’s projections from 2018 to 2028 to extrapolate the balances out to 2028:
1. Blue line – Government fiscal balance as a percent of GDP.
2. Green line – External balance as a percent of GDP.
3. Grey line – Private domestic balance as a percent of GDP.

The facts are obvious.

1. The US has a persistent and fairly stable current account deficit of around 2.5 to 3 per cent. CBO does not expect that to change very much.

2. The fiscal retreat in the recent years saw the private domestic balance shrink to nearly zero.

3. The projected movement in the fiscal state allows the private domestic sector to save overall and provides the conditions for that sector to start reducing its massive debt exposure, which, after all, was the cause of the GFC.

4. If the fiscal deficit falls below the current account deficit then the private domestic sector starts to dissave overall – spend more than it earns and starts accumulating increased debt.

5. From the graph, there is not much leeway before that private domestic sector overall leveraging starts to occur, given the size of the external balance.

6. The on-going fiscal deficit is thus not only underpinning growth but also allowing the private domestic sector to deleverage its financial position (save overall).”

Note that the “private domestic sector” is the pivotal MMT construct. Its function/effect is to lump the household and the business sector together which makes profit invisible.#5 The business sector’s profit and the household sector’s saving is lumped together under “overall saving of the private domestic sector”. This methodologically inadmissible operation is called the Humpty Dumpty Fallacy.

Fact is that the Trump budget will explode private profit according to the axiomatically correct macroeconomic Profit Law Qm=Yd+(I−Sm)+(G−T)+(X−M). Whether this profit boost for the one-percenters is really in accordance with their progressive agenda is a question for the MMTers to answer.

What Bill Mitchell seems not to know is this: because Public Deficit = Private Profit the one-percenters and their useful academic/journalistic spokespersons should consistently argue FOR deficit spending and the ninety-nine-percenters and their progressive academic/ journalistic spokespersons should consistently argue AGAINST it. Only fake progressives blaze the trail for Mr. Trump’s Make The Deficit Great Again.#6

Egmont Kakarot-Handtke


#1 MMT, money printing, stealth taxation, and redistribution
#2 MMT is ALWAYS a bad deal for the 99-percenters
#3 US Sectoral Balances

Source: billy blog

#4 Down with idiocy!
#5 MMT and the magical profit disappearance
#6 Keynes, Lerner, MMT, Trump and exploding profit

Related 'MMT and grassroots movements' and 'Political economics: Who hijacks British Labour?' and 'How MMT fools the ninety-nine-percenters' and 'Selling public debt with Ricardo’s tear gland rhetoric' and 'MMT: The one deadly error/fraud of Warren Mosler'.

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REPLY to Matt Franko, Tom Hickey, Andrew Anderson on Apr 15

Your small-talk about non-performing loans cannot distract from the great MMT-embarrassment.

• Bill Mitchell deceives the public about the negative distributional effects of MMT policy for the ninety-nine-percenters.
• MMT is scientifically worthless because it is based on the Humpty Dumpty Fallacy which is a disqualifying methodological blunder.
• The self-stylisation of MMT academics, Wall Street sponsors, and blogosphere sales-trolls as progressives is a plain political fraud.