Economics: No method to the madness

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

Blog-Reference

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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AXEC121f

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 150+ 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, that 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) Y_w=WL wage income Y_w 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=Y_w 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 Q_m≡C−Y_w and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m, 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 the dependent variable. The changes from period to period are formally given by

• W_t=W_t-1(1+w_t) The wage rate in period W_t is given by the wage rate in the previous period W_t-1 and the rate of change for the current period w_t.
• R_t=R_t-1(1+r_t) Analogous for the productivity.
• L_t=L_t-1(1+l_t) Analogous for labor input.

The rates of change for future periods w_t, r_t, l_t 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.

For this equation, Computational Irreducibility in the sense of Stephen Wolfram, A New Kind of Science, Wolfram Media, 1959, pp. 737 ff. holds.

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. For this reason alone, 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 Q_m monetary profit/loss, S_m monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Y_d distributed profit

• Q_m≡−S_m in the elementary production-consumption economy,
• Q_m≡I−S_m in the elementary investment economy (note I is NEVER equal S_m),
• Q_m≡(G−T)+(I−S_m) in the investment economy with government deficit/surplus,
• Q_m≡Y_d+(X−M)+(G−T)+(I−S_m) 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 garbage.

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 AXEC25 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'.

Joan Robinson and the early death of Behavioral Economics

Comment on Lars Syll on ‘Joan Robinson and the inadequacies of revealed preference theory’

Blog-Reference and Blog-Reference on Oct 22

“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)

How do scientists eventually arrive at the true theory? “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)

Neither orthodox nor heterodox economists have developed anything that remotely resembles the true (= materially/formally consistent) theory.

Samuelson, to his credit, at least realized that utility is a NONENTITY and that, by consequence, marginalism had no sound scientific foundations: “The very raison d’être for developing revealed preference theory in the 1930s and 1940s was to be able to ascertain people’s preferences by observation of their actual behaviour on markets and not having to make unobservable psychological assumptions or rely on any utility concepts.” (Lars Syll, Intro)

What Samuelson did realize was that economics cannot be based on a behavioral axiom like constrained optimization but he did not realize that it cannot, as a matter of principle, be based on any other behavioral assumption whatsoever. The economy is a system and economics has to be based on objective-systemic macrofoundations and not on subjective-behavioral microfoundations.

The significance of the failure of revealed preference theory lies in the fact that economics is not a science of behavior and that microfoundations are the methodologically wrong approach.#1

It was Joan Robinson who drew the correct conclusion: “Scrap the lot and start again.”

However, Keynes’ attempt to move from microfoundations to macrofoundations failed.#2 Thus, the propagation of silly orthodox and heterodox economics goes on and on. The scrapping of the false micro-behavioral paradigm did not happen. What indeed happened was the pseudo-progress from the entirely vacuous behavioral assumption of utility maximization to more ‘realistic’ assumptions under the label of Behavioral Economics.

For Behavioral Economics, though, holds what held already for the microfoundations of Jevons, Walras, Menger: Scrap the lot and start again. In other words, if it isn’t macro-axiomatized, it isn’t economics.

To award in 2017 the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” for Behavioral Economics is the point where the abysmal scientific incompetence of orthodox and heterodox economists for 150+ years turns into a deception of the general public. Economics is not a science but what Feynman called a cargo cult science.

Egmont Kakarot-Handtke


#1 A social science is NOT a science but a sitcom
#2 From false micro to true macro: the new economic paradigm

Related 'The father of modern economics and his imbecile kids' and 'What makes economics a failed science?' and 'Hunting down the economics body snatchers' and 'You are fired!' and 'Joan Robinson and the ‘throng of superfluous economists’' and 'Why don’t you do what Joan Robinson told you to do?' and 'Yes, economics is a bogus science' and '10 steps to leave cargo cult economics behind for good'. For details of the big picture see cross-references Not a science of behavior and cross-references New Economic Thinking

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Wikimedia AXEC121i

Why economists have not been effective in economics

Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’

Blog-Reference and Blog-Reference and Blog-Reference on Jul 31

Mathematics has not been effective in economics because economics is a cargo cult science. Feynman defined it as follows: “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 a proper understanding of what science is all about. Aristotle gave a working definition 2300+ years ago: “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.”

Economists apparently followed this methodology. Walrasian economics is axiomatized, the hardcore premises are verbally given as follows: “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)

It should be pretty obvious that the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. And this is why economics is a cargo cult science. Economists do all the things scientists are supposed to do but it does not work.

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this, the Walrasian axioms are methodological madness, to begin with.

Economics suffers from the fact that the subject matter is ill-defined. Economists think that they are doing economics while they bungle amateurishly in sociology and psychology. What economists overlook is that their subject matter is the structure and behavior of the economic system and that all questions about Human Nature/motives/behavior/action are NOT their business.

The task of economics is to figure out how the economy works. Economics is a systems science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1

What we have at the moment are Walrasianism, Keynesianism, Marxianism, and Austrianism. Neither of these approaches satisfies the scientific criteria of formal and material consistency. Economists are provably false with regard to the two most important features of the market economy: (a) the profit mechanism, and (b), the price mechanism. Let this sink in: the profit theory is false since Adam Smith. Instead of having clarified their foundational concepts of profit and income, economists have wasted their time fooling around with NONENTITIES.

Economics needs a Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations. Economics is NOT a social science but a systems science. A system can be objectively and precisely defined. This is the very condition for the application of mathematics.

When the premises are not correctly defined mathematics cannot work its magic and as collateral damage econometrics becomes a senseless exercise.#3 When utility maximization is put into the premises no testable proposition ever results. Scientifically incompetent economists do not understand this elementary methodological fact for 150+ years. And this is why mathematics has not been effective in economics.

Egmont Kakarot-Handtke


#1 New Economic Thinking: the 10 crucial points
#2 Profit theory in less than 5 minutes
#3 Morons on math

For details of the big picture see cross-references Math/Mathiness.

Immediately following Economists: just too stupid for counting.

Economics is not science, not religion, but proto-scientific garbage

Comment on John Rapley, TheGuardian, on ‘How economics became a religion’

Article-Reference and Blog-Reference on Jul 12 and Blog-Reference and Blog-Reference on Jul 13 and Blog-Reference on Jul 19

Economists tell the world each year in no uncertain terms that economics is science by awarding this prize “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The claim is provably false. So, is it true that economics is some kind of worldly religion with economists as a priesthood, as John Rapley claims? No, economics is neither a science nor a religion but a cargo cult science. Failed scientists are something different from priests. What they have in common, though, is that they are both storytellers in the political Circus Maximus.

Since Adam Smith/Karl Marx economists are in a state of incorrigible self-deception: “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.” (Feynman)#1

The fact is, there is no such thing as economics. There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, and 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 have to be strictly adhered to.

Theoretical economics consists of the main approaches Walrasianism, Keynesianism, Marxianism, and Austrianism which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept of profit wrong. What we actually have is the pluralism of provably false theories. This means that economic policy guidance since the iconic storytellers Adam Smith/Karl Marx has never had valid scientific foundations.

Theoretical economics is scientifically worthless. But this does not matter much as long as it is politically useful. And this is always the case because economics is a rummage table of opinions.

The fact is that economists simply do not know how the economy works. This is not a big issue as long as the economy keeps random-walking on the broad green carpet of acceptable or tolerable performance. It becomes an issue once the economy has landed in the ditch.

This, then, is the favorable moment to reposition economics. The claim to be a science goes down the drain: “The hubris in economics came not from a moral failing among economists, but from a false conviction: the belief that theirs was a science. It neither is nor can be one, and has always operated more like a church. You just have to look at its history to realise that.” (Rapley)

Suddenly, after 150+ years, everybody becomes aware that the whole analytical superstructure of economics had been built upon false premises: “For starters, it rests on a set of premises about the world, not as it is, but as economists would like it to be. Just as any religious service includes a profession of faith, membership in the priesthood of economics entails certain core convictions about human nature.” (Rapley)

What, then, are these premises? Orthodox economics is based upon the Walrasian axiom set = microfoundations: “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)

Obviously, this axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. However, this is the authoritative definition of economics: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, …” (Arrow)

The first thing to notice is that economics is ill-defined. Economics is not at all about Human Nature/motives/behavior/action ― this is the subject matter of psychology, sociology, anthropology, and so on ― but about the nature/behavior of the economic system.#2 Methodologically, behavioral economics is the wrong approach because NO way leads from understanding human behavior to understanding how the actual economy works.

The major approaches are axiomatically false and materially/formally inconsistent. What we actually have is the pluralism of false theories/models. Needless to emphasize that the pluralism of provably false theories is scientifically unacceptable.

Economics is NOT a science and neither orthodox nor heterodox economists are scientists. They have never been anything else than substandard thinkers, storytellers, and agenda pushers. Because the axiomatic foundations of both microeconomics and macroeconomics are false, all modern economics textbooks are false. This has nothing to do with religion or an economics priesthood but with manifest scientific incompetence.

Egmont Kakarot-Handtke


#1 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 If it isn’t macro-axiomatized, it isn’t economics

Related 'All models are false because all economists are stupid' and 'Economics between science and magic' and 'Economics between physics and psychiatry' and 'Economists and the destructive power of stupidity' and 'If religion is opium of the people, economics is crack of the people' and 'Fake religion, fake science, fake news, and false complaints'. For details of the big picture see cross-references Incompetence and cross-references Paradigm Shift.

How Arrow pushed economics over the cliff

Comment on Lars Syll on ‘Kenneth Arrow (1921-2017)’

Blog-Reference and Blog-Reference on Apr 8 adapted to context

The inevitable failure of economics started with Jevons/Walras/Menger but Arrow gave the final push with this fundamental methodological specification: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994)

The definition of the subject matter translates into the following hardcore propositions, a.k.a. axioms: “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, 1985)

Obviously, this axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a NONENTITY is a priori false. As a consequence, the General Equilibrium Theory of the Arrow-Debreu type and its offspring down to DSGE/RBC/New Keynesianism is scientifically worthless.

Egmont Kakarot-Handtke


Related 'Where economics went wrong' and 'Economics is NOT a misunderstanding but cargo cultic crap' and 'Modern macro moronism' and 'There is no scientific elite in economics' and 'Note on Lars Syll on Axiomatization' and 'Economists ― medics or barber-surgeons?' and 'Microfoundations have been for 150+ years: high time t.o move on' and 'Show first your economic axioms or get out of the discussion' and 'The Logical Interface Between Objective Macrofoundations and Subjective Valuations' and cross-references Axiomatization and cross-references Paradigm Shift

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REPLY to Norman L. Roth on Mar 15

You say: “You appear to be unaware of the great John Stuart Mill’s wisdom about the nature of axioms.”

What John Stuart Mill said about methodology is this: “In the definition which we have attempted to frame of the science of Political Economy, we have characterized it as essentially an abstract science, and its method as the method à priori.”

The foundational question for the application of what today is called the axiomatic-deductive method is what the axioms are: “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.” (Mill)

It was pretty obvious to Mill that the axiomatic-deductive method is NOT a formal exercise that is detached from reality, just the contrary: “The ground of confidence in any concrete deductive science is not the à priori reasoning itself, but the accordance between its results and those of observation à posteriori.”

Mill’s understanding of methodology is identical with that of modern physics: “He [Dirac] identified three revolutions in modern physics ― relativity, quantum mechanics, and cosmology ― and hinted that he expected them one day to be understood within a unified framework. Although he did not mention John Stuart Mill, Dirac was seeking to answer the same question posed in A System of Logic: ‘What are the fewest general propositions from which all the uniformities existing in nature could be deduced?’” (Farmelo)

The inexcusable scientific blunder of Arrow consists of messing up the axiomatic foundations of economics. More precisely, methodological individualism and the neo-Walrasian axiom set HC1/HC5 (above) are one of the greatest embarrassments in the history of the sciences.#1

Only scientific imbeciles like the representative economist accept green cheese behavioral assumptions like constrained optimization, rational expectations, and equilibrium as axiomatic foundations of economics.#2 General Equilibrium Theory is what Feynman called cargo cult science and Arrow was a fake scientist. All this follows from the methodological wisdom of John Stuart Mill.


#1 Economics is NOT a misunderstanding but cargo cultic crap and Where economics went wrong
#2 If it isn’t macro-axiomatized, it isn’t economics

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REPLY to mulp on Apr 9

To put equilibrium (HC5) into the premises/axioms is a methodological blunder that is known since antiquity as petitio principii.#1

Your argument: “Zero-sum is … one of the truest axioms in nature. Thus economics must be zero-sum.” is beside the point because zero-sum and equilibrium are two entirely different things.#2

To be axiomatically false is the death sentence for a Paradigm. Therefore it holds: (i) because of material/formal inconsistency General Equilibrium Theory can never be admitted to the corpus of science; GET is cargo cult science, (ii) Arrow can never be admitted to the scientific community, (iii) because the representative economist does not understand what science is all about he has not realized (i)/(ii) until this very day.

GET and its acceptance by economists is one of the greatest embarrassments in the history of sciences.


#1 For details see here.
#2 The zero-sum requirement is satisfied i.e. Q_m+S_m=0, see also here.

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Wikimedia AXEC121i

NAIRU ― letting one more NONENTITY go

Comment on Lars Syll on ‘More NAIRU bashing’

Blog-Reference and Blog-Reference

NAIRU is an inept analytical construct just like supply-demand-equilibrium. Nothing real corresponds to it. This, though, does not stop economists from discussing the issue with the same fervor as medieval theologians discussed the question of whether Adam had a navel or not.

The common methodological blunder of theologians and economists consists of the inability to recognize that they are dealing with NONENTITIES. As John Stuart Mill observed long ago: “Mankind in all ages have had a strong propensity to conclude that wherever there is a name, there must be a distinguishable separate entity corresponding to the name; ...”. It is one of the great achievements of science to identify nonentities and put them to rest (e.g. epicycles, ether, phlogiston, perpetual motion machines, absolute space). Scientists have still a lot of nonentity-busting to do in economics but the NAIRU issue has now been settled, see NAIRU and economists’ lethal swampiness.

For details see

• NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy
• Modern macro moronism
• NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
• NAIRU does not exist because equilibrium does not exist
• Why you should NEVER use supply-demand-equilibrium
• Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster.

Egmont Kakarot-Handtke

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REPLY to Ralph Musgrave on Mar 6

You confound TWO issues. The question is: Is the labor market theory as embodied in the NAIRU-Phillips curve true or false? The well-defined criteria for a true theory are material and formal consistency.

The fact of the matter is that the NAIRU-Phillips curve is provable false, that is, it does not satisfy the criteria of material and formal consistency.

It is an entirely DIFFERENT matter what the Bank of England did around five years ago. If they in fact applied the NAIRU-Phillips curve this does NOT prove that the underlying labor market theory is true. It shows only that the BoE believed in a provable false theory.

The two issues of true or false theory and right or wrong policy have to be strictly kept apart. Incompetent economists constantly mix them up, see Schizonomics.

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REPLY to Tom Hickey, Ralph Musgrave on Mar 6

There are MULTIPLE interlocking methodological blunders in New Keynesian models. For example, Roger Farmer’s version consists of THREE components each of which is false.

― The Walrasian framework is given with this 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 representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every model that contains a NONENTITY is A PRIORI false.

― “… an investment equals saving equilibrium condition (IS curve) describing the optimal consumption/savings decision of the representative individual …”. Every I=S/IS-LM model since Keynes and Hicks is false.

― “… a short-run Phillips Curve that expresses actual inflation as a function of expected future inflation and the output gap.”. Every Phillips Curve since Phillips’s original is false.

For details and references see Modern macro moronism.

It holds as a GENERAL rule for every model: If it isn’t macro-axiomatized, it isn’t economics.

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Wikimedia AXEC36b Structural-axiomatic Phillips Curve

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Wikimedia AXEC121i

The IS-LM macro imbeciles

Comment on Lars Syll on ‘The non-existence of Paul Krugman’s Keynes/Hicks macroeconomic theory’

Blog-Reference and Blog-Reference and Blog-Reference on Dec 21

Economists think they can solve any problem by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool totem of the micro/totem of the macro. What economists do not understand is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions.#1 The totem of micro/macro is a NONENTITY. And this means that the history of IS-LM from Keynes to Hicks to Davidson to Krugman and beyond is a perfect example of economists’ absolutely vacuous model bricolage.#2

Keynesianism in general, and IS-LM, in particular, has always been methodologically unacceptable and its proper place for 80+ years is the wastebasket.#3

What economists’ in their innate scientific incompetence fail to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE interrelationships as its hardcore. This is an imperative methodological necessity.

The false Walrasian microfoundations and the false Keynesian macrofoundations have to be replaced with the true macrofoundations. This is achieved as follows
(A0) The objectively given and most elementary 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.

The graphical representation of this absolute formal minimum is given on Wikimedia AXEC31:

This chart replaces the hare-brained totem of SS-function―DD-function―equilibrium. A detailed description of the elementary macro relationships has been given elsewhere.#4

The systemic macro axiom set (A1) to (A3) is the one stone that kills, for a start, the Keynesian multiplier, ALL IS-LM models from Hicks onward, the stickiness argument, and the (bastard-) Phillips Curve including the natural rate hypothesis.#5

This, though, is forever beyond the horizon of the representative economist who flunked the intelligence test already by accepting the totems of micro and macro.

Egmont Kakarot-Handtke


#1 Ground Control to David Glasner
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 Keynesianism is broken: Get over it!
#4 Getting out of IS-LM = Getting out of despair
#5 The final smackdown of blahblah-Keynesianism

For details of the big picture see cross-references Refutation of I=S.

Equilibrium is a nonentity like dancing angels on a pinpoint

Comment on David Glasner on ‘A Primer on Equilibrium’

Blog-Reference and Blog-Reference and Blog-Reference

Economics is a failed science and this is the current state in Hume’s apt metaphor: “... 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.”

What has led economists astray is the concept of equilibrium. Methodology 101 tells us: every economist who accepts supply-demand-equilibrium as an explanation of how markets work disqualifies himself as a scientist.

The state of imbecility is documented by the acceptance of TWO nonentities, viz. equilibrium, and rational expectations.

Egmont Kakarot-Handtke


Related ‘Methodology 101, economic filibuster, and the mother of all excuses’ and ‘The road that turned out to be a blind alley’ and 'Forget equilibrium' and 'Equilibrium is stone dead — and now?' and 'The market economy is inherently unstable and economists never grasped it' and 'Axiomatized nonentities and the failure of methodologists' and 'Economics between Angelology and Nonentitylogy' and 'Could we, please, all focus on the key question of economics?'

Immediately following The prime primer on equilibrium

From false micro to true macro: the new economic Paradigm

Comment on Lars Syll on ‘Why should economics demand what harder sciences do not?’

Blog-Reference

The inevitable failure of economics started with this fundamental methodological blunder: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994)

The definition of the subject matter translates into the following hardcore propositions, a.k.a. axioms: “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, 1985)

From these premises follows what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium. For 150+ years, this construct is the analytical workhorse of economics.

For every person with keen scientific instincts, this construct is immediately and forever unacceptable. Economists, to their disgrace, have no scientific instincts at all. They simply swallow every piece of garbage. Obviously, the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5. Every theory/model that contains a NONENTITY is a priori false. As a consequence, the economics from Jevons/Walras/Menger to DSGE/RBC is false.

The microfoundations speak about human behavior. Now, human behavior is the subject matter of psychology, sociology, anthropology etcetera, and NOT of economics (Hudík, 2011). What is worse, NO way leads from the understanding of human behavior to the understanding of how the monetary economy works.

So, the definition of the subject matter has to be changed from Arrow’s methodological individualism to Economics is the science that studies how the monetary economy works. Or, as Victor Beker puts it: “Economics deals with the study of the economic system. Why not starting by studying the economy as a system?” (See intro)#1

So, first of all, the behavioral axioms HC1/HC5 have to be replaced by objective systemic axioms (2014). (A0) The 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 and is given by these three objective-structural-systemic-macroeconomic axioms: (A1) Y_w=WL wage income Y_w 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) Ec=PX consumption expenditure Ec is equal to price P times quantity bought/sold X.#2

(A1) to (A3) define the elementary production-consumption economy. Note that the set of foundational equations is FREE of green cheese behavioral assumptions, i.e. the axiom set is purely systemic. A detailed description is given in this post ‘The future of economics: why you will probably not be admitted to it, and why this is a good thing’#3 and in this short paper (2015). In both places, the solution to the perennial profit conundrum is to be found.

From macroeconomics, one arrives at microeconomics by successive DIFFERENTIATION. Differentiation is top-down, and aggregation is bottom-up. The methodologically correct way is to start with macrofoundations and then differentiate.

The true macrofoundations (A1)/(A3) replace the false Walrasian microfoundations HC1/HC5 and Keynes' false macrofoundations.#4

To paraphrase a summary of Blaug: ‘At long last, it can be said that the history of general theory from Walras to Arrow-Debreu and on to DSGE has been a journey down a blind alley, and it is the set (A1)/(A3) to have finally hammered down the nails in the coffin.’

Egmont Kakarot-Handtke


References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2015). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL

#1 From microfoundations to macrofoundations
#2 Finalizing the Keynesian Revolution
#3 The future of economics: why you will probably not be admitted to it, and why this is a good thing
#4 How Keynes got macroeconomics wrong and Allais got it right

For details of the big picture see cross-references Paradigm Shift

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Wikimedia AXEC137b True macrofoundations

New Economic Thinking ― false promises and hopes

Comment on Haynes Goddard on ‘David Sloan Wilson’s econ critique’

Blog-Reference

You say: “For years I debated with a close relative, a prominent political scientist at a major university, whether the economist’s utility maximization hypothesis was empty or not ― specifically, a tautology. Tautology because economists take as axiomatic that we seek to maximize utility. The framework readily yields downward sloping demand curves or an inverse relationship between price and quantity, a relationship widely confirmed empirically.”

Take notice that the statement: “The framework readily yields downward sloping demand curves ...” is provably false. You could know this from Mas-Colell et al., 1995, Sec. 4C or from Wikipedia#1.

The first section of your post is proto-scientific garbage and this continues until the end. Proof:
(i) You refer to the axioms of Orthodoxy. They are given with this 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, 1985, p. 147)

These premises are forever unacceptable. It should be pretty obvious that the neo-Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).

Every model that contains a NONENTITY is a priori false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the wastebasket. The same holds for utility maximization and all other nonentities.

Take note that economics from Jevons/Walras/Menger to DSGE contains HC1/HC5 and therefore is proto-scientific garbage.

(ii) You refer to the “mathematical economist Roy Weintraub”. Take notice that mathematical economists misapplied mathematics because of a lack of real understanding.#2 By implication, the arguments of mathematical economists in defense of the orthodox research program are worthless. (Make no mistake, from this MISapplication does NOT follow that mathematics is inapplicable or useless in economics. The mathiness critique is beside the point.)

(iii) You argue: “Further, this utility assessing capability is an evolutionary result, and it would seem to fit squarely into Prof. Wilson’s favorite framework.”

Take note that from the fact that BOTH neoclassical microeconomics and evolutionary economics are degenerate research programs follows that it means NOTHING that they fit together and that neuroscience “confirms” utility maximization.

Neither neuroeconomics, behavioral economics, biology, complexity theory, chaos theory, common sense, nor more empirical work can save economics. All this is lipstick on the dead pig. Walrasianism, Keynesianism, Marxianism, and Austrianism are axiomatically false, that is, beyond repair. Nothing less than a Paradigm Shift will do.

Egmont Kakarot-Handtke


#1 Wikipedia Aggregate consumer demand curve
#2 For proof see Barzilai

Preceding The bigots of common sense and Evolutionary economics: Just another degenerate research program.

Stuck with the economics prisoner’s dilemma

Comment on Peter Radford on ‘Blind leading the blind’

Blog-Reference

“The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.” (Feynman)

Heterodoxy has always argued that something might be wrong with Orthodoxy. In the discussion about a new curriculum, Peter Radford reiterates: “Micro, if anything, is worse than macro. It is so utterly disconnected from reality that it is incapable of anything other than talking about itself.” (See intro)

Heterodoxy’s rejection of Orthodoxy is right. In 2016 no thinking being can defend orthodox economics any longer. The disturbing fact, though, is (i) that traditional Heterodoxy is right but for the wrong reasons, and (ii), that what traditional Heterodoxy has produced as an alternative so far is also proto-scientific garbage.

Traditional Heterodoxy is caught in the same blind alley as Orthodoxy by naively believing that economics is about the behavior of agents and that economics is a social science. Because of this common foundational error, Heterodoxy has been unable to overthrow the orthodox paradigm and to “replace it by something”, which, indeed, “is not so easy”. The critique of unrealism or mathiness is easy but does not go to the root of the problem.

A paradigm is defined by its axioms. Orthodox economics is built upon this set of foundational hardcore 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.” (Weintraub, 1985)

The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the Walrasian hardcore contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).

Nowadays, all scientists agree that angels, phlogiston, epicycles, superman, and the Easter Bunny are nonentities. As far as economics is concerned we can agree that utility, constrained optimization, intertemporal optimization, rational expectation, well-behaved production functions or supply-demand-equilibrium are nonentities just like the Easter Bunny. Every model that contains a nonentity is A PRIORI false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the wastebasket. The same holds for all other nonentities.

Keynes had the right intuition: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” The orthodox premises are given with HC1/HC5.

The fact of the matter is that Keynes’s premises, too, are provably false.#1 As Feynman said, replacing a false paradigm is not so easy. What we have as a result is not only the orthodox ‘blind leading the blind’ but in addition, the heterodox blind running after the orthodox blind with the superficial critique of unrealism.

The most ridiculous economist is a Post-New-After-Keynesian who explains the functioning of the economy with SS-curve―DD-curve―equilibrium as, for example, with IS-LM.#2

Rethinking economics means discarding the failed paradigms and fully replacing Walrasian microfoundations and Keynes’s flawed macrofoundations with something new which has to be entirely FREE of nonentities and of behavioral assumptions. What BOTH Orthodoxy and Heterodoxy have to realize is that economics is a systems science.#3

The economics prisoner’s dilemma is: Orthodoxy has to be thrown out of science but traditional Heterodoxy cannot be admitted to science. The problem is how to get rid of all this hopeless ‘throng of superfluous economists’ (Joan Robinson).

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#3 From Orthodoxy to Heterodoxy to Metadoxy

The road that turned out to be a blind alley

Comment on David Glasner on ‘Rational Expectations, or, The Road to Incoherence’

Blog-Reference

A paradigm is defined by its axioms. Orthodox economics is built upon this set of foundational hardcore 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.” (Weintraub, 1985)

The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the neo-Walrasian hardcore contains THREE NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, and (iii) equilibrium HC5.

Nowadays, all scientists agree that angels, phlogiston, epicycles, Superman, and the Easter Bunny are NONENTITIES. As far as economics is concerned we can agree that utility, constrained optimization, intertemporal optimization, rational expectation, well-behaved production functions or supply-demand-equilibrium are NONENTITIES just like the Easter Bunny. Every model that contains a NONENTITY is a priory false. In practical terms: as soon as the word equilibrium/disequilibrium appears in an economic paper it can be thrown into the wastebasket. The same holds for all other NONENTITIES.

The discussion of models that contain NONENTITIES is vacuous. Nick Rowe, J. W. Mason, and David Glasner resemble medieval witch hunters who exchange their opinions about the difference between incubus and succubus.

Rethinking economics means discarding the failed paradigms and fully replacing Walrasian microfoundations and Keynes’ flawed macrofoundations with something better which has to be entirely free of NONENTITIES. As Romer has recognized, with DSGE, economics has hit the wall at the end of the blind alley.

Egmont Kakarot-Handtke


For details of the big picture see cross-references Failed/Fake Scientists and cross-references Paradigm Shift.

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REPLY to Anonymous on Oct 14

I have proven#1 that:
― Walrasian microfoundations are materially/formally inconsistent for 150+ years,
― Keynesian macrofoundations are materially/formally inconsistent for 80+ years.

From this follows:
― economics is a failed science,
― economists are incompetent scientists.

Refute it or retire.

#1 For details see the blog

Feeble thinkers, feeble rethinkers: The perennial misery of economics

Comment on David Ruccio on ‘Crash and learn?’

Blog-Reference and Blog-Reference on Oct 9 adapted to context

Economists have asserted since Adam Smith/Karl Marx that economics is a science. If this is the case then Pontus Rendahl is right: “... it would be wrong to teach heterodox theories as though they had equal validity. ‘In the same way, I don’t think heterodox engineering or alternative medicine should be taught’.”

Indeed, science is well-defined: “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, 1994). Heterodoxy does not satisfy the criteria of material/formal consistency. In its current state, it cannot be admitted to science.#1

Pontus Rendahl’s conclusion is right, except for the fact that his tacit premise is false. His tacit premise is that orthodox economics is science. This is NOT the case. Orthodoxy does not satisfy scientific criteria either but the representative economist simply has not realized it. It is a remarkable fact that each student generation has swallowed the utterly silly supply-demand-equilibrium core model without turning an eyelid for 150+ years.

So, while Heterodoxy cannot be admitted to science, Orthodoxy has to be thrown out of it. This is the situation: there is NO such thing as an economic curriculum that satisfies scientific standards. Economics is still at the proto-scientific level.

When confronted with critique orthodox economists readily admit some undeniable peripheral weakness with the assertion that the core of economics is sound: “... Diane Coyle also defends the basic methodology of economics. She says there is confusion among critics between microeconomics, the study of the behaviour of individuals and firms, and macroeconomics, the study of whole economies. Macroeconomics, she admits, ‘is broken’.” (See intro)

This is a manifest self-delusion.#2 Microeconomics is built upon this hardcore set of axioms: “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, 1985)

Methodologically, these premises are forever unacceptable. The microeconomic axiom set contains three indefensible NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5. Every model that contains only one NONENTITY is a priori false. The discussion of models that contain NONENTITIES is not different from a medieval angels-on-a-pinpoint discussion. And this scientific garbage is the content of peer-reviewed quality journals, textbooks, and, of course, the economics curriculum.

Economics is a failed science and economists are incompetent scientists. There is NOTHING to choose between Orthodoxy and traditional Heterodoxy. Rethinking economics means rising above the proto-scientific level and fully replacing Walrasian microfoundations and Keynes’ flawed macrofoundations with true macrofoundations.#3

Egmont Kakarot-Handtke


#1 When proto-scientific Heterodoxy calls Orthodoxy pseudo-scientific and more details
#2 Just for the record: economics is dead
#3 For details of the big picture see cross-references Paradigm Shift and cross-references New Curriculum

Related 'Modern macro moronism' and 'Macroeconomics: Drain the scientific swamp' and 'Funny folks in the big omnibus' and 'Macroeconomics and the fake History of Economic Thought' and 'From false microfoundations to true macrofoundations (II)' and 'The canonical macroeconomic model' and 'The Cambridge crap curriculum'.

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Wikimedia AXEC121g

It’s in the hardcore, stupid

Comment on Noah Smith on ‘Hunting the Rational Expectations whale’

Blog-Reference and Blog-Reference on Oct 7 adapted to context

It is long known that economists violate well-defined scientific standards: “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.” (Morgenstern, 1941, p. 369)

A case in point is rational expectations. Strictly speaking, the concept is already dead since Walras: “Walras approached Poincaré for his approval. ... But Poincaré was devoutly committed to applied mathematics and did not fail to notice that utility is a nonmeasurable magnitude. ... He also wondered about the premises of Walras’s mathematics: It might be reasonable, as a first approximation, to regard men as completely self-interested, but the assumption of perfect foreknowledge ‘perhaps requires a certain reserve’.” (Porter, 1994, p. 154)

This was a polite thumb down but Walras did not get the point and neither did those who came after him. Not only this: “So RE survives. In Lakatos’ jargon, it’s part of the ‘hard core’ of modern macro.” (See intro)

And this proves the utter scientific incompetence of economists. While it is, of course, legitimate to fool around with hypotheses in the analytical superstructure, it is NOT legitimate for the adherents of a research program to change the hardcore. Methodology tells us that it is the hardcore that DEFINES the Paradigm. A change of the hardcore amounts to the abolition of the Paradigm. This is allowed, of course, but for the proponents of a Paradigm, it is equivalent to unintended suicide.

Orthodox economics is built upon this hardcore set of axioms: “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, 1985, p. 147)

Methodologically, these premises are forever unacceptable. It is pretty obvious that the neo-Walrasian axiom set contains three NONENTITIES (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every model that contains only one NONENTITY is a priori false. The discussion of models that contain NONENTITIES is not different from an angels-on-a-pinpoint discussion. And this is essentially what happens in the quality journals and on this blog.

It is pointless to try to repair RE and keep the rest. The WHOLE thing goes down the scientific drain. The microfoundations approach has already been dead in the cradle 150 years ago. Putting new lipstick on long-defunct RE will not work. Face the fact: economics is a failed science and economists are incompetent scientists. The issue has been decided!

Egmont Kakarot-Handtke


References
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, 128–170. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

Immediately following Cheerleading the cargo cult.

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COMMENT on Tom Grey on Oct 15

You say: “Without prediction there is no ‘science’.” This is a popular misunderstanding among economists who have never grasped what science is all about. Take notice that Feynman, a genuine scientist, clearly stated: “The future is unpredictable”.

Note also that ― since the ancient Greeks invented science more than 2300 years ago ― the purpose of science has never been to enable traders to make money. Traders know this well, and, being rational, they rely less on science and more on time-tested rip-them-off.

Note finally that your prediction “enough folk are rational enough often enough to insure that no other paradigm allows traders to make money with the alternate explanations” is absolutely hallucinatory and as unscientific as can be.


Related 'Science does NOT predict the future' and 'ICYMI Prediction/Forecasting'.

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Twitter Sep 25, 2021 The Fed ― five years late

A brief rectification of employment theory

Comment on kaleberg on ‘Price Stickiness Is a Symptom not a Cause’

Blog-Reference

You say: “We actually have been doing an experiment with lowering wages to eliminate unemployment starting back in the early 1980s.” This natural experiment has already happened on a larger scale during the Great Depression. These natural empirical tests amount to a clear REFUTATION of commonplace Employment Theory.

In order to rectify Employment Theory, first of all, the premises of both Walrasianism and Keynesianism have to be replaced. In methodological terms, what is needed is a Paradigm Shift.

The new analytical starting point is this: (A0) The 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 and is defined by these three OBJECTIVE axioms:
(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.

The investment good sector comes in with the second step. So, what we have with (A1) to (A3) is the pure consumption economy as the most elementary economic configuration.

From these elementary, objective, and absolutely transparent premises follows the BASIC version of the Employment Law which is shown on Wikimedia AXEC62:

 From this equation, in turn, follows: (i) An increase in the expenditure ratio ρ_E leads to higher employment (the letter ρ stands for ratio). (ii) Increasing investment expenditures I exert a positive influence on employment, (iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment. The complete and testable Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Items (i) and (ii) cover Keynes’ arguments about the role of aggregate demand. The factor cost ratio ρ_F as defined in (iii) embodies the price mechanism which works very differently from what is usually assumed. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

What natural empirical tests and the rectified Employment Theory UNANIMOUSLY tell us is: unemployment is never the result of downward sticky wages but of upward sticky wages. This means that standard economic policy advice has regularly AGGRAVATED depression/ unemployment.

Egmont Kakarot-Handtke


For details of the big picture see cross-references Employment/Phillips Curve.

Immediately preceding Sticky prices or sticky brains?.

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Economics as an incantation of NONENTITIES. COMMENT on Jason Smith on Oct 2

It is long known that economists violate well-defined scientific standards on a daily basis: “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.” (Morgenstern, 1941)

The issue that has been decided is that standard economics is formally and materially inconsistent. Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “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, 1985)

Methodologically, these premises are forever unacceptable. The ultimate reason can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works.

It is pretty obvious that the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).#1 Every model that contains only one NONENTITY is A PRIORI false. The discussion of models that contain NONENTITIES is not different from a medieval angels-on-a-pinpoint discussion.

The microfoundations approach has already been dead in the cradle 140 years ago. Joan Robinson’s advice “Scrap the lot and start again” becomes more urgent by the day.

It is NO LONGER possible to apply constrained optimization/rational expectations/ equilibrium. Journals that accept papers that contain NONENTITIES violate scientific standards. The issue has been decided and economists better get their heads around it. Romer is right: “There is trouble ahead for ALL of economics.”


#1 Auxiliary NONENTITIES are for example utility, expected utility, rationality/bounded rationality/animal spirits, well-behaved production functions, supply/demand functions, simultaneous adaptation, total income=value of output, I=S, real-number quantities/prices, ergodicity.

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Keynes, too, got Employment Theory wrong. COMMENT on Blissex on Oct 3

The microfounded Employment Theory is axiomatically false because it employs the NONENTITIES constrained optimization/rational expectations/equilibrium or as Krugman put it “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” So, most of what Krugman and many others do is provably false.

Methodologically, the Keynesian Revolution consisted of the move to macrofoundations “there is no remedy except to ... work out a non-Euclidean” economics. (1973, p. 16)

Keynes defined the formal foundations of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

This two-liner is conceptually and logically defective.#1 Allais clearly identified Keynes’ major fault: “... mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70). In other words, Keynes stumbled upon the problems but could not solve them because of his logical insufficiency.

Because Keynes’ approach, too, is axiomatically false his macrofounded Employment Theory is no better than the microfounded Employment Theory of the DSGE/RBC/New Keynesian type.

With correct macrofoundations, one arrives at the TESTABLE result that ― for objective systemic reasons ― OVERALL employment INCREASES if the average wage rate INCREASES relative to average price and productivity (2012). Because of this, the sticky-wage argumentation of both Walrasians and Keynesians is entirely beside the point.


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.

#1 How Keynes got macro wrong and Allais got it right.