July 9, 2018

The Theory of Value and the worthlessness of economics

Comment on Peter Dorman on ‘The Value of Life and the Metaphor of Choice’


Peter Dorman summarizes what economics is all about: “Here’s what I think it comes down to: the metaphor of choice. This metaphor is so deeply ingrained in economic analysis most economists can’t think beyond it, but the moment it is invoked the very notion of what it means to be alive rather than dead is rendered irrelevant.”

The curious thing, to begin with, is that choice is NOT AT ALL an issue for economics but for psychology and sociology. To build economics on behavioral concepts like utility/choice/optimization was the foundational blunder of Orthodoxy. Economists, though, either have not realized it to this day or did not find the way out of the proto-scientific PsySoc swamp. Human behavior is NOT the subject matter of economics ― the behavior of the economic system is.

Methodologically, economics is a systems science but economists wasted 200+ years with second-guessing Human Nature/motives/behavior/action.

To this day, economists have been unable to give a consistent description of how the monetary economy works. Economists do not even know what profit is. Because Profit Theory is false Value Theory is false. This is like medieval physics before the concept of energy was consistently defined and fully understood. Economic policy guidance has NO sound scientific foundations since Adam Smith/Karl Marx.

For this compelling methodological reason, a paradigm shift is necessary which means practically that Walrasianism, Keynesianism, Marxianism, Austrianism, has to be buried at the Flat-Earth-Cemetery.

These are the correct systemic foundations of economics.#1, #2 The elementary production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C). From this follows Qm≡−Sm, that is, macroeconomic profit comes in the most elementary case from the growth of household sector debt.#3 Macroeconomic profit has NOTHING to do with exploitation or innovation or value creation or optimization or the choice between strawberry and raspberry yogurt.#4

Capitalists don’t know this. Workers don’t know this. Orthodox economists don’t know this. Heterodox economists don’t know this. And Peter Dorman, too, does NOT know the most elementary fact about the economic system.

Egmont Kakarot-Handtke

#1 Do first your macroeconomic homework!
#2 Wikimedia, New Foundations of Economics
#3 Wikimedia, AXEC Profit Law and Balances Equation
#4 For details of the big picture see cross-references Profit


REPLY to Barkley Rosser on Jul 11

You say: “Egmont dismisses studying optimization.”

Not exactly. Egmont dismisses microfoundations and advances in a genuine paradigm shift to macrofoundations (see preceding post).

The microfoundations approach has been methodologically defined as follows: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: 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. By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. ‘Taken to be true’ means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, Joan Robinson’s Critique of Equilibrium: An Appraisal, p. 147)

In order to be applicable, HC2 requires a lot of auxiliary assumptions, most prominently a well-behaved/differentiable production function.

HC2 introduces marginalism which is the all-pervasive principle of Orthodoxy. HC2, though, and HC4 and HC5 are plain NONENTITIES, that is, they have not more reality content than the Easter Bunny, dancing angels on a pinpoint, the Tooth Fairy, or Pegasus.

The methodological fact of the matter is that ALL models that take just one NONENTITY into the premises are a priori false. And methodology tells us that if the premises are false the whole analytical superstructure is false. Therefore, the standard microfoundations approach with all its variants and derivatives from Jevons/Walras/Menger up to DSGE is methodologically false.

To put NONENTITIES into the premises is the defining characteristic of fairy tales, science fiction, theology, Hollywood movies, politics, journalism, PR, propaganda, cargo cult science, and microfounded economics.

Not only constrained optimization, i.e. HC2, has to be dismissed but the whole set of behavioral axioms. Microfoundations have to be fully replaced by objective-systemic macrofoundations.#1, #2, #3

Studying behavioral optimization, just like studying epicycles, is a thing of the proto-scientific past.

#1 If it isn’t macro-axiomatized, it isn’t economics
#2 How to restart economics
#3 New Economic Thinking: The 10 crucial points


REPLY to Barkley Rosser on Jul 11

You say: “It [behavioral economics] studies how people behave and does not assume people optimize or are rational. It is clear that regarding many things they are not, and there are well known ways in some matters how they tend to deviate in actual behavior.”

Oh dear, this was already known 150+ years ago when Jevons/Walras/Menger started blathering about rational choice/constrained optimization.

Note that there is NO way that leads from the understanding of Human Nature/motives/ behavior/action 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.

So, microfoundations are the lethal methodological blunder and it does NOT help to replace constrained optimization by behavioral economics. This dead-pig cosmetics does not alter the fact that economics is a failed/fake science.

The microfoundations approach in ALL conceivable variants is bound to fail. Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.

By the way, while you are occupied with folk psychology/sociology your academic colleagues from the MMT camp are pulling off a political fraud by pushing deficit spending/money creation and hiding the macroeconomic fact that Public Deficit = Private Profit.#1

Too bad for the American worker that you are of no help because as a micro-behavior guy, cheerleader of cargo-cult economics, and political storyteller you never had any idea what profit is and how the profit-mechanism works.

#1 The Kelton-Fraud


REPLY to Barkley Rosser on Jul 16

With regard to the Theory of Value you complain: “But you are uninterested in such matters, only your vacuous macro tautology based on your idiosyncratic definition of profit.”

Fact is that I have rectified the ridiculous behavioral Paradox of Value long ago. See The Value of Water and Diamonds: Back to Square One.

Time for you to do some scientific homework.


REPLY to Barkley Rosser on Jul 18

This is the behavioral theory of value: “In other words, how is it that water, which is essential to life, has little value, while diamonds, which are generally used for conspicuous consumption, command an exalted price? Although it troubled Adam Smith 200 years ago, we can resolve this paradox as follows: ‘The supply and demand curves for water intersect at a very low price, while supply and demand for diamonds are such that their equilibrium price is very high.’” (Samuelson et al., 1998, p. 90)

Note that a consumption good, which vanishes in the act of consumption, is juxtaposed to a durable=not-to-be-consumed store of value. This is imbecilic, to begin with, and the rest of the pseudo-explanation consists of vacuous supply-demand-equilibrium blather.

The axiomatically correct objective-systemic Law of Value for produced consumption goods reads P1/P2=R2/R1.#1

Because you do not understand anything there is no need to elaborate on this fundamental economic relationship in any detail here.

#1 Wikimedia AXEC89 Law of Value