January 20, 2019

Ontological uncertainty is NOT the problem but economists’ ontological stupidity

Comment on Lars Syll on ‘Paul Krugman ― a methodological critique’


When economists are asked why they have achieved little or nothing of scientific value in the last 200+ years, they answer that their subject matter is characterized by idiosyncratic difficulties, i.e. uncertainty and complexity. Here is the classical answer: “Years ago I heard Mr. Cobden say at a League Meeting that ‘Political Economy was the highest study of the human mind, for that the physical sciences required by no means so hard an effort’.” (Bagehot, 1885)#1

The simple fact of the matter, though, is that economists are scientifically incompetent. One good example is Keynes.#2, #3 Keynes is known as the discoverer of economic uncertainty and its disastrous implications for the sheer possibility of economic theory.

What is uncertainty? “In his 1937 article entitled ‘The General Theory of Employment,’ Keynes, responding to critics of the general theory, offered the following definition of uncertainty: By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty. . . . Or . . . the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence. . . . About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (Ferrari-Filho et al.)

Trivially true, indeed, except for the fact that ontological uncertainty is taken as a methodological excuse for the overall failure of economics: “One thing that’s missing from Krugman’s treatment of economics is the explicit recognition of what Keynes and before him Frank Knight, emphasized: the persistent presence of enormous uncertainty in the economy … Why is uncertainty so important? Because the more of it there is in the economy the less scope for successful maximizing and the more unstable are the equilibria the economy exhibits, if it exhibits any at all …” (Rosenberg, see Intro)

What economists overlook is that most of economic uncertainty is produced by the historically evolved bad design of the economy. Since Adam Smith, the economy is supposed to be a self-regulating system which produces optimal outcomes if not interfered with. Fact is, though, that the opposite is provably true.#4 As a result, it can be said that ontological economic uncertainty is in most cases the direct product of economists’ ontological stupidity.

Let us give one example.

As the 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. The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.

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 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. For the case of a balanced budget, the idealized transaction sequence of deposits/overdrafts at the central bank over the course of one period is shown on Wikimedia.

The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money 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. The economy NEVER runs out of money. If employment L is doubled, the average stock of transaction money doubles. In a fiat money economy, growth is not hampered by a lack of the transaction medium.

The price is determined by the wage rate and productivity. Both vary over time unpredictably. Now, if one wants absolute price stability in the elementary production-consumption economy from beginning to eternity one has to apply the simple rule: change of wage rate = change of productivity. That’s all. Productivity may be influenced by unpredictable weather conditions or external shocks, this uncertainty is compensated for by changes in the wage rate so that the market price P remains absolutely constant. Needless to emphasize that this eliminates also the problem of destabilizing price expectations.

The task of economists is NOT to senselessly repeat Keynes’ silly mantra ‘We simply do not know’, but to figure out how uncertainty can be eliminated from the economic system.

Do not expect that proven imbeciles like Paul Krugman or Lars Syll will ever figure out anything.

Egmont Kakarot-Handtke

#1 Failed economics: The losers’ long list of lame excuses
#2 Forget Keynes
#3 Cross-references Failed/Fake Scientists
#4 Proof of the inherent instability of the market economy

Related 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It' and 'Trust in economics as a science?' and 'Is Lars Syll’s stupidity really infinite?' and 'Cryptoeconomics ― the best of Lars Syll’s spam folder' and 'What is dead certain in an uncertain world: economists’ abysmal incompetence' and 'Uncertainty: ‘Whereof one cannot speak, thereof one must be silent’' and 'The scientific self-elimination of Heterodoxy' and 'Econogenics: economists pose a hazard to their fellow citizens'.