Scientific ignorance is political strength

Comment on Lars Syll on ‘Radical uncertainty ― a question of economic methodology’

Blog-Reference and Blog-Reference and Blog-Reference on Apr 14

Economics is a scientific failure for 200+ years. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the foundational concept of the subject matter ― profit ― wrong. Methodologically, economics can be described as pluralism of provably false theories.

Economists have many explanations/excuses about why they have not achieved much of real scientific value. Here is the classical answer: “Years ago I heard Mr. Cobden say at a League Meeting that ‘Political Economy was the highest study of the human mind, for that the physical sciences required by no means so hard an effort’.” (Bagehot, 1885)

In Lars Syll’s modern parlance, the chief difficulty is: “Radical uncertainty is feature of a complex adaptive system a chief characteristic of which is emergence. Emergence is at the heart of evolution theory. Emergence in this context means that there is no way to predict what will emerge from a complex adaptive system based on investigation of the past and present state of the system.” and “It’s long past time to admit that Keynes and Knight were correct …”

The fact of the matter is that it is sheer scientific incompetence that explains the persistent failure of economists. Uncertainty and complexity are, of course, real, but economists abuse them as excuses. It is particularly painful when cargo cult scientists, who have not managed in 200+ years to get their foundational concepts right, blather about methodology.

But lack of knowledge about how the economy works is not seen as a disgrace among economists; just the opposite, it is taken as proof that laissez-faire is the best economic policy. After all, who knows nothing cannot do anything.

For details see
► Failed economics: The losers’ long list of lame excuses
► How Keynes got macro wrong and Allais got it right
► To this day, economists have produced NOT ONE textbook that satisfies scientific standards
► Ontological uncertainty is NOT the problem but economists’ ontological stupidity
► What is dead certain in an uncertain world: economists’ abysmal incompetence
► Uncertainty: ‘Whereof one cannot speak, thereof one must be silent’
► Economists: Either stupid or corrupt or both
► Opinion, conversation, interpretation, blather: the economist’s major immunizing stratagems
► Economics as storytelling and entertainment for the masses
► Still beyond the reach of economists: The Holy Grail of Science
► Econogenics in action

Egmont Kakarot-Handtke

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LINKS on Lars Syll’s ‘John Maynard Keynes — an introduction’ on Apr 12

► How Keynes got macro wrong and Allais got it right
► Macroeconomics ― dead since Keynes
► From Keynes’ fatal blunder to the true economic model
► The general theory of scientific incompetence
► Dear idiots, time to get saving and investment straight (II)
► From Keynes’ fatal blunder to the true economic model

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#PointOfProof

Apr 11

before

after

Ontological uncertainty is NOT the problem but economists’ ontological stupidity

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

Blog-Reference

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

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

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

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

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

Let us give one example.

As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price is given by P=W/R. The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R.

What is needed for a start is two things: (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii) a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Yw per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Yw. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income. For the case of a balanced budget, the idealized transaction sequence of deposits/overdrafts at the central bank over the course of one period is shown under the label of Graphic AXEC98

The household sector’s deposits/overdrafts are ZERO at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and simply supports the autonomous market transactions between the household and the business sector. The economy NEVER runs out of money. If employment L is doubled, the average stock of transaction money doubles. In a fiat money economy, growth is not hampered by a lack of a transaction medium.

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

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

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

Egmont Kakarot-Handtke


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

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

What is dead certain in an uncertain world: economists’ abysmal incompetence

Comment on Lars Syll on ‘Paul Krugman vs. Mervyn King on Keynes’

Blog-Reference and Blog-Reference on Jul 11

Paul Krugman summarizes: “It’s not entirely clear ... why radical uncertainty, not quantifiable risk, is the essence of economic life. Yes, economic forecasts are often grossly wrong; yes, even smart people often have far too much confidence in their ability to assess risks. Every serious economist knows this, yet most don’t consider it sufficient reason to abandon conventional tools of analysis.” (See intro)

This evasive waffling shows one thing: the representative economist has no idea of what economics is and of what science is. First of all, science does NOT ‘predict the future’ simply because, as a genuine scientist said, “The future is unpredictable.” (Feynman, 1992)

What is called prediction in science is categorically different from the commonsensical meaning of ‘predicting the future’. The sole criterion of science is true/false and not predicting the next crash or any other extraordinary event. This is the occupation of prophets, fearmongers, astrologers, gold bugs, and other freaks/swindlers. In marked contrast, science is about invariants or ‘eternal’ laws.

So, scientists do NOT predict when the next apple will fall from the tree. What they indeed predict exactly is position and velocity at any point in time once the apple has started to fall. The commonsenser’s view of reality is entirely DIFFERENT from the scientist’s view. The commonsenser’s view is practical, trivial, and false but utterly convincing for other commonsensers. This is why false worldviews/theories that have no immediate grave negative practical consequences for commonsensers can survive for an indefinite time.

Each falling apple is a unique historical event. There are many causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. In almost all cases the singular event is uncertain and unpredictable. That is so OBVIOUS that no physicist ever lost many words about the historicity and uncertainty of falling apples.

Accordingly, when the apple fell on Newton’s head* he did NOT discover uncertainty but the common principle that underlies the motion of the apple and the moon, i.e. the Law of Gravity.

Science is NOT AT ALL interested in singular historical events as such but in the underlying invariances (Nozick) or ‘eternal’ laws. Uncertainty refers to historical events, certainty refers to laws. The uncertainty of when and why an apple falls is perfectly reconcilable with the certainty of the Law of Falling Bodies.

Because of this, Keynes’ famous dictum ‘We simply do not know’ is NOT a great revelation for any scientist but proof that Keynes had NO idea of what science is all about. This, of course, holds for all After-Keynesians including Mervyn King and Lars Syll.

The real problem with economics is not commonsensical prediction but that it is NOT a science yet pretends to be one. It is of utmost importance to clearly distinguish between political 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, scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith to Keynes and beyond can be summarized as an utter scientific failure. This includes Krugman but also the whole bunch of heterodox political economists.

Krugman’s manifest scientific incompetence is condensed in his methodological tenet: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” This means in more detail that he subscribes to 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 but economists swallowed them hook, line, and sinker from Jevons/Walras/Menger onward. The failure of methodological individualism and all other psycho/socio approaches can be stated as an impossibility theorem: NO way leads from the explanation of human nature/behavior/action to the explanation of how the economic system works.

There is NO such thing as a behavioral axiom because there is no such thing as a certain, true, and primary (Aristotle) behavioral proposition. The simple fact of the matter is that behavior is not only influenced by uncertainty but is itself the source of uncertainty: “… we might say that the human factor is the ultimately uncertain and wayward element in social life and in all social institutions.” (Popper, 1960)

Because of this, it is methodological idiocy to take behavioral assumptions into the set of axioms. HC1 to HC5 is inadmissible. All models based on this set are worthless.

But things become even worse. Krugman is also a sorta-kinda Keynesian. Unfortunately, Keynesianism too is based on false axioms. Keynes defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.”

This two-liner is defective because Keynes never came to grips with profit: “His 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., 2010)

Let this sink in, Keynes had NO idea of the fundamental concepts of economics, viz. profit, and income. Because profit is ill-defined the whole theoretical superstructure of macroeconomics is false, in particular, ALL I=S/IS-LM models including, of course, Krugman’s.#1

Krugman has not realized during a long career that (i) the neoclassical axioms are false, (ii), that Keynes’ axioms are false, and (iii), that the two axiom sets are formally incompatible ― no ― he senselessly cobbles all this garbage together and derives his policy advice from it. Needless to say, all these gross logical inconsistencies sail smoothly through all peer-reviews into quality journals and textbooks.

Krugman is provably false, Keynes is provably false, Orthodoxy is provably false, Heterodoxy is provably false, and last but not least the profit theory has been false since Adam Smith. After more than 200 years of poor performance, there is no hope at all that economists will ever say anything worthwhile about uncertainty. Methodologically retarded economists let the world know ‘We simply do not know’ and this, indeed, is an unintended true summary of current economics. One thing, at least, is certain: economics is a failed science.

Egmont Kakarot-Handtke


#1 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

* It does not matter in the present context that the apple-on-the-head story is, of course, a historical myth.

Uncertainty: ‘Whereof one cannot speak, thereof one must be silent’

Comment on Lars Syll on ‘Uncertainty — the crucial question’

Blog-Reference and Blog-Reference on Apr 15

Imagine somebody throwing three golf balls amidst a cyclone over his shoulder into a very large sandbox. Clearly, the three balls form a triangle but no one can predict its form and size. Yet, the mathematician can ‘predict’ with certainty that the sum of angles is 180 degrees (if the sandbox is Euclidean).

Analogously, while the future is ‘unpredictable’ certain aspects may be ‘predictable’ with high precision. Science is about invariants, that is, properties or relationships which remain unchanged over time. A famous example is E=mc² which predicts not a single historical event but something that is the case always and everywhere. This is the scientific meaning of prediction.

A scientist simply ignores phenomena like flying down feathers because he knows that their trajectories are uncertain and that he will not arrive at anything like the Law of Falling Bodies by observing thousands of down feathers. Because of this, a scientist does not waste much time with uncertainty. Not because he does not know that it is a property of the real world but because there is not more to say about it than: “The future is unpredictable” (Feynman).

From the acceptance of ‘Keynesian uncertainty’ three conclusions follow: (i) uncertainty does NOT exclude invariants (= economic laws), and (ii), history gives no clue about the future evolution of the economic system, and (iii), Wittgenstein’s time-saver applies, i.e. ‘Whereof one cannot speak, thereof one must be silent’.

So, uncertainty is NOT a worthwhile issue or a noteworthy discovery of Keynes, just the contrary, it is a truism since the invention of oracles. Science is about certainty.

Egmont Kakarot-Handtke

Complementary time preferences and interest

Comment David Glasner on ‘Thinking about Interest and Irving Fisher’

Blog-Reference

The first rule of economic analysis says that all real models are fundamentally flawed because the economy constitutes itself through the interaction of real and nominal variables, and therefore the proper analytical framework is given by — what Keynes called — the ‘monetary theory of production’.

The most elementary economy is the production-consumption economy, and it consists of the business and the household sector. For a start, the consolidated business sector produces and sells one consumption good. #1

First period: the business sector pays 100 monetary units (€, $, etc. *10exp) as wage income to the household sector, and the household sector spends exactly this amount on the consumption good. There is no saving of the household sector. The business sector’s profit is zero, and the price of the consumption good is equal to unit wage costs. This configuration reproduces itself without any change of the real variables labor input L, productivity R, and output O for an indefinite number of periods.

Second period: one household saves 10 units (S=10) and intends to spend it after 20 periods, i.e., in t+20. If this happens without any dissaving from another household, the business sector makes a loss (Q=−10). The market-clearing price is, in this case, lower than constant unit wage costs.

Since we focus here on pure time preference, we have to make sure that the consumption expenditures of the household sector as a whole do not change. Hence, we need a second household that wants to dissave 10 units (=take up a loan) in this period and to pay it back after 20 periods. What is needed, then, is two households with exactly complementary time preferences.

In real terms, the saver household buys and consumes 10/P real units of the consumption good less in period t and exactly the same quantity more in period t+20. The dissaver household is complementary in real terms. Together, the two households execute a perfectly synchronous nominal and real-time transfer without affecting the rest of the economy. All possible but distracting side effects have been excluded.

The real exchange over time presupposes complementary time preferences. Complementarity is what constitutes the market in the first place. If all households unanimously prefer real consumption now over real consumption in t+x, there is no market for borrowing/lending, to begin with.

In order to focus on time preference alone, risk is excluded. Then, the situation for the saver is this: he may hide the 10 monetary units for 20 periods under his mattress or lend it to the complementary household. On the other side, the dissaver/borrower household needs the 10 units now in order to carry out its plan.

Obviously, the decision of the saver to hand the money over to the borrower has nothing to do with time preference. The saver has to make a second decision between keeping the money under the mattress or lending it (risk-free) to the potential dissaver.

It is this asymmetry that gives rise to the phenomenon of interest and not time preference as such. Time preference relates to the act of saving but not to the act of lending. Both are disconnected in time. And this means that — in principle — Keynes’ liquidity preference is a better explanation for the emergence of consumer interest than Fisher’s time preference (2013). Consumer interest, in turn, is disconnected from the rate of interest that the business sector pays for financing capital investment. Because of this, there is no relationship at all between the households’ time preferences and the so-called marginal productivity of capital (2011).

Methodologically correct thinking leads inescapably to the conclusion that thinking about interest and Irving Fisher is a pointless exercise.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL

#1 The elementary interrelation of real and nominal variables in the elementary production-consumption economy is shown with Graphic AXEC31

Related 'How economic thinkers think they think about interest'.

How economic thinkers think they think about interest

Comment on David Glasner on ‘Thinking about Interest and Irving Fisher’

Blog-Reference

“Everything can be ‘explained’ if we place no restrictions on what we mean by ‘explanation’.” (Blaug, 1994, p. 123)

David Glasner renders an exhaustive exegesis of the current state of the theory of interest. These are the highlights.

■ Keynes: “Unfortunately, Keynes imagined that by identifying and explaining the liquidity premium on cash, he had thereby explained the real yield on holding physical capital assets; he did nothing of the kind, ...” (See intro)

■ Marshall: “the... classical theory of interest, ... in which the rate of interest is supposed to be the rate that equilibrates saving and investment.”

■ Fisher: “I [Glasner] doubt that ... he ever asserted that the rate of interest is determined by equilibrating savings and investment.”

■ Wicksell: “Maybe it was Knut Wicksell who in his discussions of the determination of the rate of interest argued that the rate of interest is responsible for equalizing savings and investment, but that was not how Fisher understood what the rate of interest is all about.”

■ Robertson: “This mistaken doctrine was formalized as the loanable-funds theory of interest ... in which savings is represented as the supply of loanable funds and investment is represented as the demand for loanable funds, with the rate of interest serving as a sort of price that is determined in Marshallian fashion by the intersection of the two schedules.”

■ Glasner: “Why do I say that the loanable-funds theory is mistaken and incoherent? Simply because it is fundamentally inconsistent with the essential properties of general-equilibrium analysis. In general-equilibrium analysis, interest rates emerge not as a separate subset of prices determined in a corresponding subset of markets; they emerge from the intertemporal relationships between and across all asset markets and asset prices.”

■ Rowe: “... there is no single market in which the exchange value of money (medium of account) is determined because money is exchanged for goods in all markets, there can be no single market in which the rate of interest is determined because the value of every asset depends on the rate of interest at which the expected income or service-flow derived from the asset is discounted.”

Conclusion: “The determination of the rate of interest can’t be confined to a single market.” (See intro) In other words, everything depends on everything else, in fact, no price is determined in a single market, the economy is very complex and consists of stocks and flows, the future is uncertain, and, as Keynes always said: “We simply do not know.”

However, the determination of the many nominal and real interest rates can be referred to as General Equilibrium Theory because “my cousin Abraham Wald and subsequently ... Arrow, Debreu and McKenzie showed that Fisher’s claim could, under some more or less plausible assumptions, be proved in a mathematically rigorous way.”

It seems that the news got lost on David Glasner that General Equilibrium Theory is dead and buried since Sonnenschein/Mantel/Debreu (Ackerman et al., 2004).

Because both — Walrasian and Keynesian — approaches are fundamentally (=axiomatically) flawed the theory of interest is flawed by logical implication. In order to develop the theory of interest from scratch (2011), one has, first of all, to refer Marshall, Keynes, Wicksell, Sraffa, Robertson, Fisher, Rowe, Glasner, and some others from the set of scientific thinkers to the complementary set of confused confusers (2013).

Egmont Kakarot-Handtke


References
Ackerman, F., and Nadal, A. (Eds.) (2004). Still Dead After All These Years: Interpreting the Failure of General Equilibrium Theory. London, New York: Routledge.
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepentant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 109–136. London, New York: Routledge.
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL

Immediately following Complementary time preferences and interest.

We simply do not know — so let us move on

Comment on Lars Syll on ‘The Keynes-Ramsey-Savage debate on probability’

Blog-Reference

Science restricts itself to things that can be known. In marked contrast, non-scientists prefer to spend their lifetime on questions that cannot be answered. Let us face the fact, it is not primarily solutions that most people are really interested in, but rather the perpetual inconclusive talk about beliefs. Solutions only spoil the fun.

Economists are traditionally fond of talking about NONENTITIES like equilibrium, utility, or rational expectations. It seems that this bad habit also has a debilitating effect on mathematicians. Our actual question is not whether statistical mechanics is good enough for physics, and there is absolutely no need to discuss the finer points of quantum mechanics. Why? Because quantum mechanics and locality and all the rest are irrelevant to economics. All that is relevant about uncertainty and unpredictability is known at least since J. S. Mill and has been stated unmistakably by other well-known people.

• “The phenomena with which this science [of human nature] is conversant being the thoughts, feelings, and actions of human beings, it would have attained the ideal perfection of a science if it enabled us to foretell how an individual would think, feel, or act, throughout life, with the same certainty with which astronomy enables us to predict the places and the occultations of the heavenly bodies. It needs scarcely be stated that nothing approaching to this can be done.” (Mill, 2006, p. 846)
• “The future is unpredictable.” (Feynman, 1992, p. 147)
• “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire.” (Popper, 1960, p. 139)
• “... it has even been argued that economic explanations involving rational choice are a species of ‘folk psychology’, explaining actions in terms of beliefs and desires, variables that cannot be measured independently of the actual choices we want to predict, so that they are no genuine predictions at all.” (Blaug, 1994, p. 113)

Keynes only used more words to restate the obvious: “The sense in which I am using the term [uncertainty] is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention … About these matters, there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (1937, p. 214)

It is remarkable that the representative economist simply does not accept the obvious even when politely told by one of the greatest mathematicians: “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)

What Walras’ neoclassical heirs can either not see or not accept is that they are in the wrong research program: “The failure to find such a law [between desire, belief and action] or any approximation to it that actually improves our ability to predict consumer behaviour any better than Adam Smith could have resulted on the one hand in a reinterpretation of the aims of economic theory away from explaining individual human action, ...” (Rosenberg, 1994, p. 224)

And this is the spoilsport. “... if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362)

Because economics is definitely ‘not a science of behavior’ (Hudík, 2011), the subject matter of economic theory has to be changed.

• Old definition, subjective-behavioral: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
• New definition, objective-structural: “Economics is the science which studies how the monetary economy works.”

Why tell the world ad nauseam ‘We simply do not know’ when scientific knowledge about the actual monetary economy is possible? #1, #2

Egmont Kakarot-Handtke


References
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepentant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 109–136. London, New York: Routledge.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.
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.
Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 216–235. London, New York: Routledge.

#1 If it isn’t macro-axiomatized, it isn’t economics
#2 For details, see cross-references New Curriculum

Related 'Opinion, conversation, interpretation, blather: the economist’s major immunizing stratagems' and 'Lars Syll, fake scientist'.

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Graphic AXEC121e

Mental messies and loose losers

Reply to comments on E.K-H's ‘Keenonomics, aggregate demand/change of debt, and some misleading critique’

Blog-Reference

I=S is the epitome of economists' scientific incompetence. If this were as plain as a meteorite hitting the earth the problem would have been fixed long ago; it is, though, just the contrary: subtle, unspectacular, counter-intuitive, subterranean, and rather involved.

Already von Neumann spotted the peculiar methodological defect of economics: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)

This, however, has never been a point of great concern for the representative economist. In particular, for the Cambridge School of Loose Verbal Reasoning sharpness, precision, uniqueness, rigor, bivalent logic, etcetera always amounted rather to a violation of the human right to mental messiness. This stance has habitually been defended with a false but suggestive alternative: “Marshall followed the maxim: Better to be ambiguous and relevant than precise and irrelevant.” (Colander, 1995, p. 283)

Then, Keynes occupied the realm of vagueness, ambivalence, indeterminism, fogginess, wish-wash, casual conversation, inconclusiveness, complexity, twilight, uncertainty — the realm where nothing is clear and everything is possible — as the ecological niche of Keynesianism: “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates, 2007, p. 87)

This problem avoidance strategy was soon summed up in a catchy pseudo-choice: “For Keynes, as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’" (Davidson, 1984, p. 574)

With this cavalier mentality, Keynesians, and eventually the majority of other schools, have occupied the habitat between true and false where the scientific procedure of ‘conjecture and refutation’ runs into the bottomless swamp: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158)

So, economics is no longer about the true economic theory; all one has to do is avoid a crystal-clear refutation. This can be achieved by persevering in fuzzy filibustering and by maintaining that a crystal-clear refutation is impossible in the first place. If, against all defensive complacency, a refutation plainly succeeds, ignorance and business-as-usual help. This has become standard operating procedure in economics, as already Morgenstern complained: “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.” (1941, pp. 369-370)

With these two stratagems, economists entrenched themselves in the swamp of anything-goes and subsequently turned to defend their scientific no-man's-land in the main with rhetorical soap bubbles. All this is — as economists always readily admit — second-best; however, “... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

What made this deadlock possible is a tacit quid-pro-quo agreement among different camps on the legitimacy of Humpty Dumpty methodology: "When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master — that's all." (Carroll, Through the Looking-Glass)

This quasi-feudal Freedom-of-Definition Privilege constitutes the different schools and has been sanctioned by the likes of Schumpeter. “For, on principle, we may call things what we please.” (1994, p. 598)

Of course, freedom of definition is a methodological illusion. It applies only to the FIRST definition. Subsequently, one has to make sure that every additional definition is consistent with the preceding ones. Overall consistency cannot be achieved in the economist's cavalier fashion: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen, 2009, p. 344)

Institutionalized economics never seriously aimed at, and therefore never arrived at, a coherent language, not to speak of an axiomatic framework of foundational concepts. Thus, debates/conversations between schools resemble nothing so much as ‘Babylonian incoherent babble’ (cf. Dow, 2005, p. 385). Without a common frame of reference, perpetual cross-talk is guaranteed. Economics fits the format of a sitcom.

The lack of a minimal common ground explains the secular stagnation of economics: “We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114)

What, then, is the — minimal, objective, consistent, testable — common conceptual ground of all of the economics?

Total period income in an elementary production-consumption economy with only one giant firm is given by the sum of wage income and distributed profit, i.e., (1) Y=Y_w+Y_d. Total consumption expenditures are equal to the product of price and quantity sold, i.e., (2) C=PX. That's all for a start.

The monetary profit of the business sector as a whole is then defined as the difference between consumption expenditures and wage costs, i.e., Q_m≡C−Y_w. Monetary saving of the household sector is then defined as the difference between total income and consumption expenditure S_m≡Y−C. Hence, S_m≡−Q_m if, for a start, Y_d=0. In simple words: saving S_m is equal to loss −Q_m, or, dissaving −S_m is equal to profit Q_m. From this follows immediately that all I=S or IS-LM models from Keynes, to Hicks, to Krugman, and all the busy blogging rest are false — irrevocably in all eternity.

Generally speaking, it holds for the production-consumption economy that Q_re≡−S_m, i.e., retained profit Q_re is equal to dissaving −S. And for the investment economy holds Q_re≡I−S_m, i.e., retained profit is equal to the difference between investment and saving (for details see 2014). No accounting trick, no ex-ante/ ex-post filibuster, and no expected/unexpected stock changes, no equilibrium verbiage, and no natural rate of interest will ever make the household sector's saving equal to the business sector's investment expenditures. Never ever! No way! Forget it!

Saving-equals-investment is the epitome of conceptual and logical incompetence of economists of all schools. In science, there is no ecological niche between true/false and no pluralism of false theories. Humpty Dumpty’s methodological no-man’s-land is an uninhabitable swamp for every thinking human being.

The root cause of the IS error/mistake is a complete lack of understanding of what profit is. Total income is not the sum of wage income and profit but of wage income and distributed profit (2013). The profit theory is false since Adam Smith. This, in turn, means that economists have failed to capture the essence of the market system. Neither attack nor defense of the market economy ever had a sound theoretical foundation (2015). Political economics has been a complete waste of time.

The economics of the last 200 years is the most embarrassing failure in the history of modern science.

Egmont Kakarot-Handtke


References
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Dow, S. C. (2005). Axioms and Babylonian Thought: A Reply. Journal of Post Keynesian Economics, 27(3): 385–391. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, Vol. 1. Norderstedt: Books on Demand BoD, 2nd edition. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

Related 'Economists: Jacks of all trades ― except economics' and 'Economics ― a doctor worse than the disease' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist' and 'Knowledge is attainable ― even in economics'. For details of the big picture see cross-references Failed/Fake Scientists and cross-references Not a Science of Behavior and cross-references Profit (i.e., the foundational concept of economics).

For more about the Humpty Dumpty Fallacy, see AXECquery.

For more about inconclusiveness, see AXECquery.

***

Graphic AXEC172

Lost between pure fiction and parochial realism

Comment on Lars Syll on ‘Why economic models constantly crash’

Blog-Reference

Think for a second of an apple tree. Each falling apple is a unique historical event. There are arbitrary many causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. In almost all cases the singular event is uncertain and unpredictable. That is so obvious that no physicist ever lost much thought about the historicity and uncertainty of falling apples.

What scientists figured out instead was the Law of gravity. This Law does not predict when a concrete apple falls but is rather abstract and predicts the exact position and velocity of any mass m at some time t and applies also admirably to apples.

It is obvious that the scientist and the layperson have different modes of looking at reality. The layperson never gets above parochial realism, historicity, uncertainty, and storytelling about this or that apple.

Economists are different from both the scientist and the layperson. They ask the wrong questions, formulate the wrong hypotheses, and build the wrong models.

Orthodox economists simply hypothesize uncertainty away: “The hypothesis that all markets for all future times exist today is, of course, unrealistic, but is equivalent to the assumption that all individuals correctly anticipate all future prices, the so-called rational-expectation hypothesis.” (Arrow, 1988, p. 276)

Heterodox economists are glued to the historical surface and endlessly reiterate the obvious.
“The sense in which I am using the term [uncertainty] is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention … About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (Keynes, 1937, p. 214)

It was J. S. Mill who drew the right methodological conclusion: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (Mill, 1874, V.55)

Curiously, it was physicists and not economists who successfully applied Mill's methodology.

There is uncertainty, but there are also economic laws. Economic laws relate to the economic system and they have the same methodological status as physical laws (see for example the Profit Law: 2015, eq. (29)). Because of the reasons given by J. S. Mill they are not immediately recognizable. Traditionally, economists have not looked for them because both orthodox and heterodox economists have a distorted view of reality. This is the ultimate reason why their models crash.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1988). Workshop on the Economy as an Evolving Complex System: Summary. In P. W. Anderson, K. J. Arrow, and D. Pines (Eds.), The Economy as an Evolving Complex System, pp. 275–281. Redwood City, Menlo Park, etc.: Addison-Wesley.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL