August 21, 2019

Economics: No method to the madness

Comment on Lars Syll/Tom Hickey on ‘Econometrics and the problem of unjustified assumptions’


Neither Lars Syll nor Tom Hickey is known for having contributed anything of substance to the scientific progress of economics yet they cannot stop waffling about methodology.

Lars Syll tells us: “Econometrics is basically a deductive method. Given the assumptions, it delivers deductive inferences. The problem, of course, is that we almost never know when the assumptions are right. Conclusions can only be as certain as their premises ― and that also applies to econometrics.”

Wake up, Lars Syll, this is a truism for about 2300 years: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)

J. S. Mill was well aware of the pivotal question of methodology: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are is the opus magnum of the more recondite mental philosophy.”

Now, what are the foundational propositions of mainstream economics? The verbalized Walrasian axiom set reads: “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)

Because these foundational propositions are shock-full of NONENTITIES all mainstream models that are based upon them are methodological garbage and therefore econometric testing cannot possibly work. This does NOT mean that econometrics has to be thrown on the muck heap. Lars Syll’s conclusion “Econometrics doesn’t establish the truth value of facts. Never has. Never will.” is plain methodological nonsense. What is called for is a Paradigm Shift, i.e. the replacement of the Walrasian axiom set.#1

Keynes understood that microfoundations are false but he messed up macrofoundations. The historical fact is that Keynes was too stupid for the elementary math that underlies macroeconomics. To this day, Keynesians, Post-Keynesians, and MMTers use the sectoral balances equation (I−S)+(G−T)+(X−M)=0 which is provably false because it lacks the balance of the business sector, i.e. macroeconomic profit.

Macroeconomic profit is determined by macroeconomic accounting which is nothing but elementary math. The philosopher Tom Hickey maintains: “Accounting is a formal method that is proto-scientific in the sense that double entry it is made up of tautologies. But the entries can be checked for substance against journals and inventories. … When accounting tautologies (identities) are interpreted causally, then causal explanation demands empirical corroboration through data, e.g., measurable changes in stocks and flows.”

The point is that economists are too stupid to get macroeconomic accounting right and to determine macroeconomic profit: “His [Keynes’] 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.)#2, #3

To this day, economists do not get the pivotal economic magnitude profit right. Econometric testing cannot work when applied to misspecified models by folks who fail already at the level of the elementary mathematics of macroeconomic accounting.

There is no point in expecting from Lars Syll/Tom Hickey or any other orthodox/heterodox methodological loser to ever produce the true macrofoundations or even to see them when they are just before their eyes.#4

Egmont Kakarot-Handtke

#1 For details of the big picture see cross-references Methodology
#2 For details of the big picture see cross-references Accounting
#3 For details of the big picture see cross-references Profit
#4 The axiomatically correct balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0 with Q as macroeconomic profit. See also Wikipedia and the promotion of economists’ idiotism (II)

Related 'Economics ― not science, not ideology, just useful idiocy' and 'How to get out of the swamp of ignorance' and 'Warning: Einstein can be hazardous to heterodox methodology' and 'Heterodoxy, you have a problem' and 'The inexorable Paradigm Shift in economics' and 'True macrofoundations: the reset of economics' and 'Show first your economic axioms or get out of the discussion'.

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