#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) September 1, 2025
Vincent Geloso seems to be the last economist who has yet to realize that the Cobb-Douglas production function is a methodological blunder of the first order. This construct is not derived from real-world production conditions, but rather was plucked…
Showing posts with label Production. Show all posts
Showing posts with label Production. Show all posts
September 1, 2025
Occasional Tweets: The futile attempt to recycle the production function (III)
March 16, 2024
Occasional Xs: How Solow messed up growth theory and why economists don't get it right to this day (III)
#Economics#FailedFakeScience
— E.K-H (@AXECorg) March 16, 2024
The history of economic thought is the history of scientific failure. The major approaches are mutually contradictory & axiomatically false & materially/formally inconsistent & ALL got #Profit wrong. When the foundational concepts of the subject…
September 3, 2023
Occasional Tweets: The futile attempt to recycle the production function (II)
June 26, 2022
Occasional Tweets: The futile attempt to recycle the production function (I)
#Economics#FailedScience#FakeScience#Economists#StupidOrCorruptOrBoth.
— E.K-H (@AXECorg) June 26, 2022
The history of economic thought is the history of scientific failure. And the #ProductionFunction is an essential part of it.
Putting the production function back on its feethttps://t.co/kscjK6JNQQ
June 30, 2019
Opportunity cost ― another case of poor economic logic
Comment on John Quiggin on ‘Opportunity cost, MMT and public spending’*
Blog-Reference and Blog-Reference (Link)
Wikipedia says: “In microeconomic theory, the opportunity cost, or alternative cost, of making a particular choice is the value of the most valuable choice out of those that were not taken. In other words, opportunity that will require sacrifices. When an option is chosen from two mutually exclusive alternatives, the opportunity cost is the ‘cost’ incurred by not enjoying the benefit associated with the alternative choice. The New Oxford American Dictionary defines it as ‘the loss of potential gain from other alternatives when one alternative is chosen’. Opportunity cost is a key concept in economics, and has been described as expressing ‘the basic relationship between scarcity and choice’.” and “Thus opportunity cost requires sacrifices. If there is no sacrifice involved in a decision, there will be no opportunity cost. In this regard the opportunity costs not involving cash flows are not recorded in the books of accounts, but they are important considerations in business decisions.” and “The term was first used in 1894 by David L. Green in an article in the Quarterly Journal of Economics entitled ‘Pain Cost and Opportunity-Cost’.#1
It is pretty obvious from the sacrifice and pain verbiage that opportunity cost is a concept from and for mentally retarded masochists. So, let us get rid of folk psychology and rethink the objective economics of social choice. Because economics is NOT psychology what is needed first is a description of the monetary economy as a whole.
The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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 as the dependent variable is given by P=W/R. This is the macroeconomic Law of Supply and Demand. For the graphical representation see Wikimedia.#2
So, to begin with, there is not much choice. The elementary production-consumption economy produces one consumption good which is fully consumed in the period under consideration. Total labor input L is given. Macroeconomic profit is zero.
The price P is objectively determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The macroeconomic Law of Supply and Demand contains NO subjective element at all.
What about the subjective side? The workers would not spend their wage income C=Yw on the firm’s output if the product had no “utility” for them. Let us assume the economy consists of 1000 workers, then each one has a positive “utility” but since subjective “utility” is neither measurable nor comparable we are already here at the end of the road.
It is necessary that the workers translate their subjective “utility” into an objective reservation price P'. The subjective condition for buying the output of the firm is that the reservation price is higher than or at least equal to the market price, i.e. P'≥P. Choice is binary: buy if P'≥P otherwise do not buy. From the fact that all 1000 workers have bought the output, i.e. X=O, one can then conclude that their subjective reservation prices have at least been equal to the market price. The difference between the subjective reservation price and the objective market price, i.e. P'−P, is the subjective consumer rent per unit of output.
As a result, the elementary production-consumption economy is objectively and subjectively reproducible for the time being. Needless to emphasize that reservation prices can change quickly, after all, they are only in the head.
Now, the business sector invents a second product that is minimally different from the first. Say, product 1 has lemon taste and 2 has orange taste, otherwise, they are identical. Let us assume the business sector makes market research and finds out that 500 workers prefer the new product the others stay with lemon taste. The business sector adapts production accordingly.
The production alternatives follow with fixed total employment, i.e. L=L1+L2, directly from the axioms and are given by O1=R1L−R1/R2 O2. For the graphical representation see Wikimedia.#2
In the initial period with only one product, the economy was at the position A. After the introduction of the second product the economy is at position B. The economy disappears at A and reappears in the next period at B, it does NOT move from A to B. Total employment, wage rate, total wage income, productivities, etc. remain unchanged, the only thing that is different is the composition of output. The respective prices are Pl=W/R1 and Po=W/R2 with R1 and R2 equal for simplicity.
The subjective valuation of the lemon-taste group remains unchanged, all individual reference prices Pl' with Pl'≥Pl (= buy) from 1 to 500 stay put and the reference price for the new product is Po'<Po (= don’t buy).
The subjective valuation of the orange-taste group is accordingly Po'≥Po (= buy) from 501 to 1000 and Pl'<Pl (= don’t buy) for the lemon taste product which was in the initial period valued with Pl'≥Pl.
So, the new output combination has a higher total subjective value than the old because the orange-taste group attaches a higher subjective value to the new product while the lemon-taste group stays put. Total labor input remains the same. It can be said that the additional option increases subjective value for the economy as a whole under the condition that both the firm and the workers are indifferent about whether lemon-taste or orange-taste output is produced.
The crucial point is that the orange-taste group sacrifices NOTHING because the old product is simply replaced by a new product with a higher subjective value. The economy as a whole jumps from a lower subjective valuation of total output to a higher subjective valuation of the new composition of total output. The switch from A to B involves NO sacrifice but increases total subjective value because the new product suits part of workers/consumers better.
Where, then, does the sacrifice thinking come from and why is it so plausible? Imagine a boy is sent to the supermarket with one dollar to buy a pot of yogurt for himself. The boy is confronted with the choice between strawberry and raspberry yogurt but cannot decide. So, he takes both, that is he enriches himself temporarily. The store manager makes it clear to him that with one dollar he can have only one pot and that he has to give back the other. This makes the boy think that choice involves a sacrifice. This sacrifice, though, is only imaginary. Generally speaking, sacrifice thinking comes from people who erroneously think that the best solution to the choice problem is to have both alternatives. For children this is natural, for grown-ups it is sociopathic.
Society can choose between A and B but with the choice of the subjectively better alternative, NO sacrifice is involved. The choice of B makes A impossible and the subjective value of A is, therefore, uno actu zero. What has no value cannot be sacrificed.
Egmont Kakarot-Handtke
* Crooked Timber
#1 Wikipedia Opportunity cost
#2 Wikimedia AXEC31 Elementary production-consumption economy
#3 Wikimedia AXEC154a Production alternatives
Related 'For MMT = For the Oligarchy' and 'No MMT illusions! YOU are going to pay for it' and 'MMT and the Green New Deal: Where is the snag? (I)' and 'The half-truths and half-falsehoods of MMT'.
Blog-Reference and Blog-Reference (Link)
Wikipedia says: “In microeconomic theory, the opportunity cost, or alternative cost, of making a particular choice is the value of the most valuable choice out of those that were not taken. In other words, opportunity that will require sacrifices. When an option is chosen from two mutually exclusive alternatives, the opportunity cost is the ‘cost’ incurred by not enjoying the benefit associated with the alternative choice. The New Oxford American Dictionary defines it as ‘the loss of potential gain from other alternatives when one alternative is chosen’. Opportunity cost is a key concept in economics, and has been described as expressing ‘the basic relationship between scarcity and choice’.” and “Thus opportunity cost requires sacrifices. If there is no sacrifice involved in a decision, there will be no opportunity cost. In this regard the opportunity costs not involving cash flows are not recorded in the books of accounts, but they are important considerations in business decisions.” and “The term was first used in 1894 by David L. Green in an article in the Quarterly Journal of Economics entitled ‘Pain Cost and Opportunity-Cost’.#1
It is pretty obvious from the sacrifice and pain verbiage that opportunity cost is a concept from and for mentally retarded masochists. So, let us get rid of folk psychology and rethink the objective economics of social choice. Because economics is NOT psychology what is needed first is a description of the monetary economy as a whole.
The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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 as the dependent variable is given by P=W/R. This is the macroeconomic Law of Supply and Demand. For the graphical representation see Wikimedia.#2
So, to begin with, there is not much choice. The elementary production-consumption economy produces one consumption good which is fully consumed in the period under consideration. Total labor input L is given. Macroeconomic profit is zero.
The price P is objectively determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The macroeconomic Law of Supply and Demand contains NO subjective element at all.
What about the subjective side? The workers would not spend their wage income C=Yw on the firm’s output if the product had no “utility” for them. Let us assume the economy consists of 1000 workers, then each one has a positive “utility” but since subjective “utility” is neither measurable nor comparable we are already here at the end of the road.
It is necessary that the workers translate their subjective “utility” into an objective reservation price P'. The subjective condition for buying the output of the firm is that the reservation price is higher than or at least equal to the market price, i.e. P'≥P. Choice is binary: buy if P'≥P otherwise do not buy. From the fact that all 1000 workers have bought the output, i.e. X=O, one can then conclude that their subjective reservation prices have at least been equal to the market price. The difference between the subjective reservation price and the objective market price, i.e. P'−P, is the subjective consumer rent per unit of output.
As a result, the elementary production-consumption economy is objectively and subjectively reproducible for the time being. Needless to emphasize that reservation prices can change quickly, after all, they are only in the head.
Now, the business sector invents a second product that is minimally different from the first. Say, product 1 has lemon taste and 2 has orange taste, otherwise, they are identical. Let us assume the business sector makes market research and finds out that 500 workers prefer the new product the others stay with lemon taste. The business sector adapts production accordingly.
The production alternatives follow with fixed total employment, i.e. L=L1+L2, directly from the axioms and are given by O1=R1L−R1/R2 O2. For the graphical representation see Wikimedia.#2
The subjective valuation of the lemon-taste group remains unchanged, all individual reference prices Pl' with Pl'≥Pl (= buy) from 1 to 500 stay put and the reference price for the new product is Po'<Po (= don’t buy).
The subjective valuation of the orange-taste group is accordingly Po'≥Po (= buy) from 501 to 1000 and Pl'<Pl (= don’t buy) for the lemon taste product which was in the initial period valued with Pl'≥Pl.
So, the new output combination has a higher total subjective value than the old because the orange-taste group attaches a higher subjective value to the new product while the lemon-taste group stays put. Total labor input remains the same. It can be said that the additional option increases subjective value for the economy as a whole under the condition that both the firm and the workers are indifferent about whether lemon-taste or orange-taste output is produced.
The crucial point is that the orange-taste group sacrifices NOTHING because the old product is simply replaced by a new product with a higher subjective value. The economy as a whole jumps from a lower subjective valuation of total output to a higher subjective valuation of the new composition of total output. The switch from A to B involves NO sacrifice but increases total subjective value because the new product suits part of workers/consumers better.
Where, then, does the sacrifice thinking come from and why is it so plausible? Imagine a boy is sent to the supermarket with one dollar to buy a pot of yogurt for himself. The boy is confronted with the choice between strawberry and raspberry yogurt but cannot decide. So, he takes both, that is he enriches himself temporarily. The store manager makes it clear to him that with one dollar he can have only one pot and that he has to give back the other. This makes the boy think that choice involves a sacrifice. This sacrifice, though, is only imaginary. Generally speaking, sacrifice thinking comes from people who erroneously think that the best solution to the choice problem is to have both alternatives. For children this is natural, for grown-ups it is sociopathic.
Society can choose between A and B but with the choice of the subjectively better alternative, NO sacrifice is involved. The choice of B makes A impossible and the subjective value of A is, therefore, uno actu zero. What has no value cannot be sacrificed.
Egmont Kakarot-Handtke
* Crooked Timber
#1 Wikipedia Opportunity cost
#2 Wikimedia AXEC31 Elementary production-consumption economy
#3 Wikimedia AXEC154a Production alternatives
Related 'For MMT = For the Oligarchy' and 'No MMT illusions! YOU are going to pay for it' and 'MMT and the Green New Deal: Where is the snag? (I)' and 'The half-truths and half-falsehoods of MMT'.
February 3, 2017
Paul the Menace
Comment on Paul Krugman on ‘Donald the Menace’
Blog-Reference
Paul Krugman presents himself as an economist, however, his main occupation is not economics but politics. In his capacity as a political commentator, he points out that the institution of the presidency has been hijacked by an incompetent and dangerous person.
This comment is the unintended proof that the institution of academic economics has been hijacked by agenda pushers and incompetent scientists.
Krugman defines himself as follows: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” What he completely overlooks is that maximization-and-equilibrium is not a scientifically acceptable starting point, that is, the acceptance of maximization-and-equilibrium is disqualifying for an economist.
Economists are not very smart. History shows that they swallow every logical blunder hook, line and sinker provided it is presented in the form of an easy-to-grasp narrative. The most prominent example in the history of economic thought is the diamond-water paradox. It goes as follows: “The paradox of value (also known as the diamond-water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.”#1
The paradox is solved by ‘thinking at the margin’ which is advertised as the outstanding characteristic of an economist. Accordingly, the price of diamonds is high relative to water because the marginal utility of diamonds is high relative to the marginal utility of water which in turn is normally more abundant than diamonds.
The idiotism of the answer is obvious, except for an economist. Water and diamonds cannot be compared in this way because water is consumed, i.e. it vanishes, and the very characteristic of diamonds is that they are NOT consumed but, just the opposite, they are the proverbial eternal store of value. Because of this, the determination of the prices of perishable and durable goods follows entirely DIFFERENT principles. The first thing to notice is that there is NO such thing as “the” market but that there are at least TWO entirely different types of markets.#2 This alone makes it clear, that the economist’s one-size-fits-all supply-demand-equilibrium explanation must be false.
By consequence, what in the first analytical step has to be done is to determine the relative prices of two perishable goods within the framework of what Keynes called the ‘monetary theory of production’. Barter models are out from the outset. The correct starting point is a pure hand-to-mouth economy where, for example, bread and wine are produced in two firms and fully consumed by the households in one and the same period. The stock of goods is zero at the beginning and at the end of the period. The total number of working hours is given and the wage rate is, for a start, equal in the bread and wine production. The wage income is fully spent. Because total consumption expenditures are equal to total wage income total profit of the business sector is zero.#3
For this elementary two-goods hand-to-mouth economy we get with a little algebra for the relative price of bread and wine Pb/Pw=Rw/Rb, that is, the relative price is inverse to the productivities, that is, the relative price or the exchange ratio is OBJECTIVELY given and INDEPENDENT of marginal utility. In other words, the production conditions determine relative prices. This amounts to a refutation of marginalism which is a subjective concept.
To see this more clearly, let us assume that the preferences of the households change from one period to the next. In order to cut out the details of the adaptation process, it is assumed that the household sector tells the business sector that it wants more wine and less bread. Accordingly, the business sector shifts labor from bread production to wine production. Because the wage rate is equal to total wage income and total consumption expenditures do not change. Only the partitioning of total expenditures changes according to the new preferences, that is, expenditures for wine go up and expenditures for bread go down. With a little algebra we arrive under the condition of market clearing and zero profit in both firms again at Pb/Pw=Rw/Rb, that is, a change of preferences or marginal utilities has NO effect on relative prices. In other words, demand is NOT a determinant of price. Changes in the partitioning of demand lead to a change of quantities and NOT to price changes.
This result plainly refutes marginalism. This gives a pause to recall where marginalism came from. Ultimately, marginalism can be traced back to the importation of calculus into economics and the translation of formalism into the BEHAVIORAL assumption of utility maximization under constraints. This assumption is part of the Walrasian axiom set which is given by: “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 upshot is that not only constrained optimization (HC2) is forever unacceptable as an axiom but rational expectations (HC4) and equilibrium (HC5), too. Therefore, marginalism or, more precisely, the microfoundations approach has already been dead in the cradle 140+ years ago. The representative economist and Paul Krugman have not realized this until this very day. The water-diamond story is still told as exemplary for how economists think ‘at the margin’ and every student generation since Walras/Jevons/Menger swallows this methodological crap without turning an eyelid.
Maximization-and-equilibrium economists like Krugman are groping in the dark with regard to the two most important features of the market economy: the profit mechanism and the price mechanism. And this means that their economic policy advice lacks a sound scientific foundation. And this, in turn, means that they are a hazard to their fellow citizens roughly on a par with ‘Donald the Menace’.#4
Egmont Kakarot-Handtke
#1 Wikipedia
#2 Primary and Secondary Markets
#3 The Logic of Value and the Value of Logic and The Value of Water and Diamonds: Back to Square One and The Pure Logic of Value, Profit, Interest
#4 Economists and the destructive power of stupidity
Related 'Scientific suicide in the revolving door' and 'Krugman is not an economist'
Blog-Reference
Paul Krugman presents himself as an economist, however, his main occupation is not economics but politics. In his capacity as a political commentator, he points out that the institution of the presidency has been hijacked by an incompetent and dangerous person.
This comment is the unintended proof that the institution of academic economics has been hijacked by agenda pushers and incompetent scientists.
Krugman defines himself as follows: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” What he completely overlooks is that maximization-and-equilibrium is not a scientifically acceptable starting point, that is, the acceptance of maximization-and-equilibrium is disqualifying for an economist.
Economists are not very smart. History shows that they swallow every logical blunder hook, line and sinker provided it is presented in the form of an easy-to-grasp narrative. The most prominent example in the history of economic thought is the diamond-water paradox. It goes as follows: “The paradox of value (also known as the diamond-water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.”#1
The paradox is solved by ‘thinking at the margin’ which is advertised as the outstanding characteristic of an economist. Accordingly, the price of diamonds is high relative to water because the marginal utility of diamonds is high relative to the marginal utility of water which in turn is normally more abundant than diamonds.
The idiotism of the answer is obvious, except for an economist. Water and diamonds cannot be compared in this way because water is consumed, i.e. it vanishes, and the very characteristic of diamonds is that they are NOT consumed but, just the opposite, they are the proverbial eternal store of value. Because of this, the determination of the prices of perishable and durable goods follows entirely DIFFERENT principles. The first thing to notice is that there is NO such thing as “the” market but that there are at least TWO entirely different types of markets.#2 This alone makes it clear, that the economist’s one-size-fits-all supply-demand-equilibrium explanation must be false.
By consequence, what in the first analytical step has to be done is to determine the relative prices of two perishable goods within the framework of what Keynes called the ‘monetary theory of production’. Barter models are out from the outset. The correct starting point is a pure hand-to-mouth economy where, for example, bread and wine are produced in two firms and fully consumed by the households in one and the same period. The stock of goods is zero at the beginning and at the end of the period. The total number of working hours is given and the wage rate is, for a start, equal in the bread and wine production. The wage income is fully spent. Because total consumption expenditures are equal to total wage income total profit of the business sector is zero.#3
For this elementary two-goods hand-to-mouth economy we get with a little algebra for the relative price of bread and wine Pb/Pw=Rw/Rb, that is, the relative price is inverse to the productivities, that is, the relative price or the exchange ratio is OBJECTIVELY given and INDEPENDENT of marginal utility. In other words, the production conditions determine relative prices. This amounts to a refutation of marginalism which is a subjective concept.
To see this more clearly, let us assume that the preferences of the households change from one period to the next. In order to cut out the details of the adaptation process, it is assumed that the household sector tells the business sector that it wants more wine and less bread. Accordingly, the business sector shifts labor from bread production to wine production. Because the wage rate is equal to total wage income and total consumption expenditures do not change. Only the partitioning of total expenditures changes according to the new preferences, that is, expenditures for wine go up and expenditures for bread go down. With a little algebra we arrive under the condition of market clearing and zero profit in both firms again at Pb/Pw=Rw/Rb, that is, a change of preferences or marginal utilities has NO effect on relative prices. In other words, demand is NOT a determinant of price. Changes in the partitioning of demand lead to a change of quantities and NOT to price changes.
This result plainly refutes marginalism. This gives a pause to recall where marginalism came from. Ultimately, marginalism can be traced back to the importation of calculus into economics and the translation of formalism into the BEHAVIORAL assumption of utility maximization under constraints. This assumption is part of the Walrasian axiom set which is given by: “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 upshot is that not only constrained optimization (HC2) is forever unacceptable as an axiom but rational expectations (HC4) and equilibrium (HC5), too. Therefore, marginalism or, more precisely, the microfoundations approach has already been dead in the cradle 140+ years ago. The representative economist and Paul Krugman have not realized this until this very day. The water-diamond story is still told as exemplary for how economists think ‘at the margin’ and every student generation since Walras/Jevons/Menger swallows this methodological crap without turning an eyelid.
Maximization-and-equilibrium economists like Krugman are groping in the dark with regard to the two most important features of the market economy: the profit mechanism and the price mechanism. And this means that their economic policy advice lacks a sound scientific foundation. And this, in turn, means that they are a hazard to their fellow citizens roughly on a par with ‘Donald the Menace’.#4
Egmont Kakarot-Handtke
#1 Wikipedia
#2 Primary and Secondary Markets
#3 The Logic of Value and the Value of Logic and The Value of Water and Diamonds: Back to Square One and The Pure Logic of Value, Profit, Interest
#4 Economists and the destructive power of stupidity
Related 'Scientific suicide in the revolving door' and 'Krugman is not an economist'
September 25, 2016
Solow and the ludicrousness of economics
Comment on Lars Syll on ‘Solow on post-real Chicago economics’
Blog-Reference
From the fact that DSGE/RBC is a failed research program does not follow that the available alternatives can be taken more seriously.
Solow’s critique of Orthodoxy is spot on: “Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous ― that is, by laughing at it ― so as not to fall into the trap of taking it seriously and passing on to matters of technique.” (See intro)
But Solow, too, has been moving in the wrong direction for the last three decades. He promoted the utterly silly and post-real concept of a production function, which is part and parcel of failed Orthodoxy’s fundamental framework.#1
The ludicrousness of economics begins already with supply-demand-equilibrium and Solow has always been a member of this broad church of scientific retards.
Egmont Kakarot-Handtke
#1 Putting the production function back on its feet
Related 'Sending Solow’s growth model to the dump of proto-scientific history' and 'Robert Solow and Lars Syll, fake scientists' and 'The moral of the story' and 'No future for the representative economist' and 'All economists together now: Solow’s Swan Song' and 'When substandard thinkers dabble in science it is called economics' and 'High profits and low economics' and 'Scrap the EconNobel'. For details of the big picture see cross-references Failed/Fake Scientists.
For more on Solow see AXECquery.
ADDENDUM Jun 6, 2020
For detailed proof of Solow's utter scientific incompetence see The State of Macroeconomics, Journal of Economic Perspectives—Volume 22, Number 1—Winter 2008—pp. 243–249
Blog-Reference
From the fact that DSGE/RBC is a failed research program does not follow that the available alternatives can be taken more seriously.
Solow’s critique of Orthodoxy is spot on: “Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous ― that is, by laughing at it ― so as not to fall into the trap of taking it seriously and passing on to matters of technique.” (See intro)
But Solow, too, has been moving in the wrong direction for the last three decades. He promoted the utterly silly and post-real concept of a production function, which is part and parcel of failed Orthodoxy’s fundamental framework.#1
The ludicrousness of economics begins already with supply-demand-equilibrium and Solow has always been a member of this broad church of scientific retards.
Egmont Kakarot-Handtke
#1 Putting the production function back on its feet
Related 'Sending Solow’s growth model to the dump of proto-scientific history' and 'Robert Solow and Lars Syll, fake scientists' and 'The moral of the story' and 'No future for the representative economist' and 'All economists together now: Solow’s Swan Song' and 'When substandard thinkers dabble in science it is called economics' and 'High profits and low economics' and 'Scrap the EconNobel'. For details of the big picture see cross-references Failed/Fake Scientists.
For more on Solow see AXECquery.
***
For detailed proof of Solow's utter scientific incompetence see The State of Macroeconomics, Journal of Economic Perspectives—Volume 22, Number 1—Winter 2008—pp. 243–249
September 8, 2016
Putting the production function back on its feet
Comment on Steve Keen on ‘Incorporating energy into production functions’
Blog-Reference
Orthodox economics messed up the theory of production but Heterodoxy never developed a viable replacement despite the fact that with Georgescu-Roegen’s approach it had already been on the right track (1970; 1971). Georgescu-Roegen was quite clear about “... the completely faulty form by which standard economics represents a production process” (1979, p. 318) but he failed to see that it was not enough to rectify the theory of production. What had to be replaced then and still has to be done is to scrap standard economics as a WHOLE. Partial improvements are as pointless as adding just another epicycle to the geocentric model. Nothing less than a Paradigm Shift will do.
The whole analytical superstructure of Orthodoxy is based upon this 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, 1985, p. 109)
HC3 introduces marginalism which is the all-pervasive principle of Orthodoxy. Needless to emphasize that marginalism is proto-scientific garbage.
In order to be applicable, marginalism requires some auxiliary assumptions. One of them is the concept of a well-behaved production function. This concept implicitly excludes increasing returns (2011a). As every economist knows from Adam Smith’s pin factory, though, the beauty and triumph of capitalism consist exactly of increasing returns due to the division of labor and the mechanization of a growing number of sub-processes.
Thus, the green-cheese behavioral assumption HC3 ultimately determines the analytical representation of the physically objective production process: “Indeed, here we find the neoclassical economist dictating the laws of physics to the physicist!” (Mirowski, 1995, p. 328). It is impossible to surpass the scientific incompetence of economists.
Steve Keen is perfectly right: “Arguably, therefore, the production functions used in economic theory — whether spouted by mainstream Neoclassical or non-orthodox Post Keynesians — deserve to ‘collapse in deepest humiliation.’" In very practical terms this means that NO economic journal can accept papers that contain a Cobb-Douglas or any other well-behaved production function without violating scientific standards.
All these half measures, though, do not cut much ice. The very task of constructive Heterodoxy is to fully replace Orthodoxy as defined by HC1/HC6 and by implication the obsolete production function. For the correct approach and the correct sequential production function, see (2011b, Sec. 4).
Egmont Kakarot-Handtke
References
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge: Cambridge University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic
Issues, 13(2): 317–328. URL
Kakarot-Handtke, E. (2011a). Increasing Returns and Stability. SSRN Working Paper Series, 1921267: 1–19. URL
Kakarot-Handtke, E. (2011b). Matter Matters: Productivity, Resources, and Prices. SSRN Working Paper Series, 1946874: 1–21. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.
Blog-Reference
Orthodox economics messed up the theory of production but Heterodoxy never developed a viable replacement despite the fact that with Georgescu-Roegen’s approach it had already been on the right track (1970; 1971). Georgescu-Roegen was quite clear about “... the completely faulty form by which standard economics represents a production process” (1979, p. 318) but he failed to see that it was not enough to rectify the theory of production. What had to be replaced then and still has to be done is to scrap standard economics as a WHOLE. Partial improvements are as pointless as adding just another epicycle to the geocentric model. Nothing less than a Paradigm Shift will do.
The whole analytical superstructure of Orthodoxy is based upon this 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, 1985, p. 109)
HC3 introduces marginalism which is the all-pervasive principle of Orthodoxy. Needless to emphasize that marginalism is proto-scientific garbage.
In order to be applicable, marginalism requires some auxiliary assumptions. One of them is the concept of a well-behaved production function. This concept implicitly excludes increasing returns (2011a). As every economist knows from Adam Smith’s pin factory, though, the beauty and triumph of capitalism consist exactly of increasing returns due to the division of labor and the mechanization of a growing number of sub-processes.
Thus, the green-cheese behavioral assumption HC3 ultimately determines the analytical representation of the physically objective production process: “Indeed, here we find the neoclassical economist dictating the laws of physics to the physicist!” (Mirowski, 1995, p. 328). It is impossible to surpass the scientific incompetence of economists.
Steve Keen is perfectly right: “Arguably, therefore, the production functions used in economic theory — whether spouted by mainstream Neoclassical or non-orthodox Post Keynesians — deserve to ‘collapse in deepest humiliation.’" In very practical terms this means that NO economic journal can accept papers that contain a Cobb-Douglas or any other well-behaved production function without violating scientific standards.
All these half measures, though, do not cut much ice. The very task of constructive Heterodoxy is to fully replace Orthodoxy as defined by HC1/HC6 and by implication the obsolete production function. For the correct approach and the correct sequential production function, see (2011b, Sec. 4).
Egmont Kakarot-Handtke
References
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge: Cambridge University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic
Issues, 13(2): 317–328. URL
Kakarot-Handtke, E. (2011a). Increasing Returns and Stability. SSRN Working Paper Series, 1921267: 1–19. URL
Kakarot-Handtke, E. (2011b). Matter Matters: Productivity, Resources, and Prices. SSRN Working Paper Series, 1946874: 1–21. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.
Subscribe to:
Posts (Atom)