Blog-Reference and Blog-Reference on Jul 3 and Blog-Reference Link EV
“Could it be that there is something deeply wrong with mainstream economics … ?” (Blaug, 1984) Sooner or later, the intelligent student of economics arrives at this critical juncture. Starting with Samuelson’s prototype of 1948, economics textbooks consist of micro and macro and it is obvious that the two parts do not fit together.#1 The cognitive dissonance is usually dispelled as follows: “Micro is a solid, cogent set of ideas that was carefully developed over several centuries. Macro was a desperate and doomed attempt to explain the Depression. Bad theories, inconsistent with micro and not even internally consistent, spouting nonsense like Y=C+I+G, AS/AD, IS/LM, and MV=PY.” (Sproul)
This is one of the many delusions of the representative economist. The fact is that microeconomics is proto-scientific garbage and macroeconomics is proto-scientific garbage and the synthesis of the two is proto-scientific garbage squared. This is state-of-art economics and teachers teach it and students swallow it.#2 Economics is for 200+ years now what Feynman called a cargo cult science.
This is the methodological core problem: “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)
Clearly, economists lack the true theory. It is pretty obvious that these cargo cult scientists never understood what methodology is all about. Aristotle put it thusly: “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.”
Here are the premises for everyone to evaluate. The (Walrasian) microfoundations approach is defined by this verbalized 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) The (Keynesian) macrofoundations approach is defined by this set of foundational propositions: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)
Because both the microfoundations approach and the macrofoundations approach are axiomatically false a Paradigm Shift is imperative. Who accepts Walrasian micro or Keynesian macro is forever out of science.
The microfoundations approach is bottom-up and runs with necessity into the Fallacy of Composition. The macrofoundations approach is top-down and proceeds by successive differentiation until one arrives at the individual agent. Differentiation is the opposite of bottom-up or aggregation. Keynes was right in moving from microfoundations to macrofoundations but due to his scientific incompetence he ultimately messed the Paradigm Shift up.#3
This is the starter set of the correct macrofoundations approach. (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.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimalistic, that is, it cannot be reduced further, only expanded. The graphical representation of the elementary production-consumption economy is given on Wikimedia.#4, #5, #6
Under the condition of market-clearing X=O and budget-balancing C=Yw follows the macroeconomic Law of Supply and Demand P=W/R.
From the definition of monetary saving/dissaving Sm≡Yw−C and of monetary profit/loss Qm≡C−Yw follows Qm≡−Sm, i.e. the most elementary form of the macroeconomic Profit Law.
The average stock of transaction money is M=κYw under the condition of budget balancing.
Given the minimalist core propositions (A1) to (A3), one has now to proceed top-down by successive differentiation, i.e. two firms ― one market, two firms ― two markets, and so on to n firms ― m markets.
It is important to realize that macroeconomic axioms are composed of measurable variables. This is the precondition for testing the derived complex relationships, i.e. the systemic economic laws, and this, in turn, is the precondition of final corroboration or refutation as the case may be.
The behavior-free objective-systemic macrofoundations fully replace the false Walrasian microfoundations and the false Keynesian macrofoundations. Economics leaves the proto-scientific stage and becomes ― what it falsely has claimed for more than two centuries ― a science.
#1 The father of modern economics and his imbecile kids
#2 Fact of life: your econ prof is scientifically incompetent
#3 How Keynes got macro wrong and Allais got it right
#4 Wikimedia AXEC31 Elementary production-consumption economy
#5 Geometrical Exposition of Structural Axiomatic Economics
#6 Economics for Economists
Related 'Cryptoeconomics ― the best of Nick Rowe’s spam folder' and 'Is Nick Rowe stupid or corrupt or both?' and 'It has been said before but economists still don’t get it' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist' and 'Yes, economics is a bogus science' and 'Schizonomics' and 'Your economics is refuted on all counts: here is the real thing'. For details of the big picture see cross-references Axiomatization.