Key Issues: Nature and causes of profit

The individual firm is blind to the structural relationships as defined by the macroeconomic axiom set. On the firm’s level, profit is therefore subjectively interpreted as a reward for innovation or superior management skills or higher efficiency or toughness on wages or for risk taking or capitalizing on market imperfections or as the result of monopolistic practices or whatever else. These factors can play a role when it comes to the distribution of profits between firms, and these phenomena become visible when similar firms in an industry are compared. Firms do not create profit; they redistribute it.

The enterprise which has better management, better luck, superior resources, a better product, no competitors, and so on, is likely to make more profit than the enterprise without these advantages. Not much more can be said about the sources of particular profit without elaborating the obvious. (Murad, 1953, pp. 6-7)

All this is true of particular profit but irrelevant for overall profit. The explanation of particular profit is indeed utterly trivial, hence its popularity.

 

The case is perfectly clear when there is only one firm in the elementary production-consumption economy. It is a matter of indifference whether the firm’s management thinks that it needs profit to cover risks or to finance growth, or whether it realizes the profit maximum or not. If consumption expenditures are, in the most elementary case, equal to wage income, monetary profit Qm≡C−WL will invariably be zero, no matter what agents want or plan or optimize or expect. Hence, there is no need to second-guess much about it. Profit for the business sector as a whole is a systemic property. Psychologism, as ever, explains nothing. Whether profit-making is considered good or bad does not matter either. Moralizing, as ever, explains nothing. Profit is not determined by folk psychology but by the structural axiomatic Profit Law.

 

From the analysis of the elementary production-consumption economy follows:

• The business sector's revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• So that profit comes into existence for the first time in the elementary consumption economy, the household sector must run a deficit at least in one period.
• Profit is, in the simplest case, determined by the increase and decrease of the household sector's debt.
• Wage income is the factor remuneration of labor input L. Profit is not a factor income, nor is loss. Since capital is nonexistent in the elementary production-consumption economy, profit is not functionally attributable to capital.
• Profit has no real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart.
• The existence and magnitude of overall profit do not depend on the profit-maximizing behavior of the business sector but solely on the relation of consumption expenditure to wage income.
• The value of output is, in the general case, different from the sum of factor incomes. This is the defining property of the monetary economy.

The fundamental error of value theory is to start from the premise that the value of the output of goods and services is always equal to the sum of factor incomes. This error can be traced back to Adam Smith (2008, pp. 50, 155).

Under the condition C=Y, profit Qm≡C−Y+DN is numerically equal to the distributed profit DN. The fundamental difference between the two variables does not catch the eye in this limiting case. The equality of profit and distributed profit is an implicit feature of equilibrium models. These have no counterpart in reality. In the real world holds C ≠ Y, hence profit and distributed profit are never equal.

All models that are based on the common-sense definition of total income ≡ wages+profits, are flawed because profit and distributed profit are not the same thing.

None of the foregoing conclusions could ever be derived from the behavioral assumptions of utility or profit maximization. These assumptions are the wrong starting point of economic analysis, even if they were true.

Objective/structural/systemic axiomatization is palpably superior. The Profit Law is testable with an accuracy of two decimal places and is evidently of immediate practical relevance. Serious alternatives are not available. Conventional economics fails already at the first axiom. This is an immutable logical fact.


References

Murad, A. (1953). Questions for Profit Theory. American Journal of Economics and Sociology, 13(1): 1–14. URL
Smith, A. (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press.

 

Related 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist, Sec. 3 URL' and 'Profit for Marxists URL'. For the graphical representation, see Debunking squared.


© 2013 EKH, except original quotes, original notation adapted to HTML code here

***

Graphic AXEC186b

Key issues: Debunking squared

What enabled me to break away from that delusional analysis was what the Australians call ‘a good bullshit detector.’ (Keen, 2011, p. 268)

Steve Keen has, with the help of his fabulous detector, divined a lot of analytical blunders and debunked a good part of standard economics. Rightly so, because to clear the heads is the indispensable preparatory task of heterodox economics. However, Keen has left standing the theory of profit. This is unfortunate because the theory of profit is the pivot of all of theoretical economics. What deserves the first and foremost attention is, in any case, the factual relation of profit and income.

Steve Keen has stated the definition of income in two prominent places as: “Total income = Wages plus Profits” (2011, p. 366) and “... national income resolves
itself into wages and profits” (2010, p. 12). This, of course, is what we have heard often from middle-of-the-road economists but also from Keynes (1973, p. 23).

This definition seems to be plain common sense, yet, like most common sense since Aristotle, it is demonstrably false (2012). Therefore, what is required for the advancement of Heterodoxy is to debunk the naive definition of total income.

This is done in the following, with a straightforward graphical demonstration. For the rigorous formal underpinning and the full implications, see (2013b, 2011). Figure 1 shows the simplest possible configuration of the elementary production-consumption economy.

Figure 1: The price in period t=1 is objectively determined by the conditions of market clearing and budget balancing. Legend: P price, L employment, W wage rate, YW wage income, C consumption expenditure, R productivity, O output, X quantity bought

At any given level of employment L, the wage income YW that is generated in the consolidated business sector is obtained by multiplying the wage rate W. On the real side, output follows by multiplication with the productivity. Finally, the price follows as the dependent variable under the conditions of budget balancing, i.e., C=YW, and market clearing, i.e., X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. The same holds for the distribution of wage incomes in the southwestern quadrant. All these details are not needed at the moment.

It can be directly read off from the 4-quadrant scheme that the real wage W/P is always equal to the productivity R, that is, labor gets the whole product, no matter what. If the wage rate is lowered, the market-clearing price falls. If the number of working hours is increased, the price remains constant, provided productivity does not change. If productivity decreases, the price rises. In any case, labor gets the whole product and profit is zero, or in Walras’s terms, there is ‘ni bénéfice ni perte’, neither profit nor loss. So far, all agree:

The consensus to date has been that it is mathematically impossible for capitalists in the aggregate to make profits. (Keen, 2010, p. 2)

There is also explicit assent from economics methodology.

... since it is impossible to have an economy where everyone is making profits. Aggregate profit for an entire (closed) economy must be zero, hence if any firm is making profits, some other firm must be making losses. (Boland, 1992, p. 80)

The weak spot in the otherwise impeccable zero-profit argument is that aggregate profit has been greater than zero for most of the time in most of the known market economies up to the present. Hence, Figure 1 is the first but not the last word in the theory of profit.

The crucial point is this: there exists no such thing as an immutable law of budget balancing in the same period. Just the contrary. Logically, we have three possible cases in the next period: C2<YW2, C2=YW2, C2>YW2. The first case means loss, the second zero profit, and the third profit. Figure 2 shows an example of the third case, which has, compared to the others, the best evolutionary prospects in the real world.

Figure 2: Monetary profit in period t=2 is objectively determined by the difference between consumption expenditure and wage income under the condition of market clearing, irrespective of what the agents optimize

In the elementary production-consumption economy, profit can at first only be greater than zero if consumption expenditures are greater than wage income. This configuration has historically been realized in various ways; the ordinary way is that the household sector takes up credit from the banking industry (for details, see 2013, Sec. 18). One pertinent example is the purchase of long-lived consumption goods like cars or homes on credit. The relation between credit expansion of the household sector as a whole and profit for the business sector as a whole is measurable in principle (Keen, 2011, pp. 337-353). The only open question is how long Figure 2 can be reproduced. After all, credit has to be redeemed someday. This eventuality is not at issue here (see 2013a).

In the case of Figure 2, monetary profit is given as Q2≡C2−YW2 in the northeastern quadrant. Profit takes the form of money in the bank and remains in the business sector in the period under consideration, i.e. profit is retained (this incidentally answers the old chestnut M―C―M' or M―C―M+, see Keen, 2011, p. 217). Due to the higher market-clearing price, the real wage is now lower than the productivity.

In the next period, profit is distributed, and the household sector’s total income is accordingly: Y3=YW3+YD3. If profit is fully distributed, we have YD3=Q2, i.e., distributed profit in period t=3 is equal to profit in period t=2. Profit in period t=3 is in the general case: Q3≡C3−YW3+YD3. This solves the long-standing profit puzzle. The Profit Law is the first of the far-reaching implications of Figure 2. Note that profit and distributed profit are not the same thing, and that both are never equal in reality. Note also that the Profit Law, when augmented with investment, foreign trade, and government, is directly testable.

Resume: Total income is the sum of wage income and distributed profit, and not of wage income and profit. This distinction makes all the difference between good and bad economics. Steve Keen has debunked a large part of Orthodoxy, yet with regard to the foundational concepts of income and profit, Heterodoxy still subscribes to the conventional error.


References
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–23. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415:
1–23. URL
Kakarot-Handtke, E. (2013a). Redemption and Depression. SSRN Working Paper Series, 2343561: 1–28. URL
Kakarot-Handtke, E. (2013b). Understanding Profit and the Markets: The Canonical Model. SSRN Working Paper Series, 2298974: 1–55. URL
Keen, S. (2010). Solving the Paradox of Monetary Profits. Economics E-Journal, 4(2010-31). URL
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.


Related 'Objective Principles of Economics'.


© 2013_11 EKH, except original quotes

Key Issues: Methodology ― from anything-goes to rien-ne-va-plus

Economics is a perplexing subject. Though I have spent the better part of my academic career thinking about its aims and methods, I have never been confident that I or anyone else for that matter really understand its cognitive status. ... Without assurance about the cognitive status of the theory, there is no basis of confidence in it. (Rosenberg, 1994, pp. 216-217)

***

Now, the doubts about the explanatory relevance of general equilibrium theory suggest that it cannot explain choice within constraints. That is, so to speak, how the problem of justifying general equilibrium theory starts. (Rosenberg, 1994, p. 221)

The great contradiction revealed is as follows: one of the theory's greatest strength – its claim to deduce significant results from very general hypotheses about the behavior of economic agents – turns out to be its greatest weakness. (Ingrao and Israel, 1990, p. 364)

To the extent that they [alternative theories] trade in the preferences and expectations of individuals, they will do no better than neoclassical economics. (Rosenberg, 1994, p. 233)

By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can't be defined so precisely’. Yes, but then you cannot claim to know anything about it. (Feynman, 1992, p. 159)

If we ask, ‘What is the most adequate model of behaviour for economics?’ we implicitly assume that economics actually needs a model of behaviour; hence, we already assume psychologism of a kind. (Hudík, 2011, p. 147)

***

In fact, it has not been such a good idea to organize economic theory around a model of behavior.

 The scientific method has rather narrow limits, especially in dealing with human behavior and social phenomena. (Knight, 1921, p. 144)

...  there has been no progress in developing laws of human behavior for the last twenty-five hundred years. (Hausman, 1992, p. 320), (Rosenberg, 1980, pp. 2-3)

... theorists all over the world have become aware that anything based on this mock-up [GET] is unlikely to fly, ...  (Hahn, 1981, p. 1036)

The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory. (Blaug, 1998, p. 703)

***

What particular reality is described by a given theory can be ascertained only from that theory's axiomatic foundation. (Georgescu-Roegen, 1966, p. 361)

The process of axiomatic thought is then a method both for accreting and warranting knowledge claims, for those claims, if developed from independent and consistent axioms, themselves make strong claims on our attention and reason. (Weintraub, 2002, p. 87)

Axiomatization is indispensable because the methodological anything-goes mentality among economists is the proximate reason for the proto-scientific condition of conventional economics. Because of conceptual sloppiness, neither Orthodoxy nor Heterodoxy has a clear idea of the fundamental economic concepts of income and profit. Doing economics without a clear idea of income and profit is like doing physics without a clear idea of force and mass — it cannot possibly yield practical results, it has not, and it will not.

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. (von Neumann, quoted in Mirowski, 2002, p. 146 fn. 49)

***

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, 2004, pp. 113-114)

Abstract speculation starts with clearly stated foundational propositions.

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. (Mill, 2006, p. 746)

These propositions must relate to economic facts and not to human behavior.

The attempt is made to collect all the assumptions, which are needed, but no more, to form the apex of the system. They are usually called the ‘axioms’ (or ‘postulates’, or ‘primitive propositions’; no claim of truth is implied in the term ‘axiom’ as here used). The axioms are chosen in such a way that all the other statements belonging to the theoretical system can be derived from the axioms by purely logical or mathematical transformations. (Popper, 1980, p. 71)

***

His [Adam Smith’s] method is always the method of Newton, which we have already seen applied to psychology and morals: to attain, by generalization, certain simple truths, from which it will be possible to reconstruct, synthetically, the world of experience. (Halévy, 1960, p. 100)

By sketchily copying Newton and by applying the axiomatic method to psychology and morals, Adam Smith set economics on the wrong track. There is nothing wrong with Newton or the axiomatic method, only with Smith's shallow scientific understanding, which still prevails among economists.

If one takes seriously what Popper says about falsifiability and the critical attitude, then the methodological practice of economics is not only mistaken, it is stupid and intellectually reprehensible. (Hausman, 1992, p. 275)

One hopes that the economics profession will not spend the whole twenty-first century waiting for a new Newton or Einstein of formal economics to emerge to shed a more powerful light in the current darkness. (Nelson, 2006, p. 227)

As a matter of fact, it is not a question of hope and waiting: As long as the darkness persists, economists have no mandate to speak in the name of science. At present, economic policy advice is, at bottom, the personal opinion of someone who cannot tell the difference between income and profit.

References

Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.

Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.

Georgescu-Roegen, N. (1966). Analytical Economics, chapter Economic Theory and Agrarian Economics, 359–397. Cambridge: Harvard University Press.

Hahn, F. H. (1981). Review: A Neoclassical Analysis of Macroeconomic Policy. Economic Journal, 91(364): 1036–1039.

Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston: Beacon Press.

Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.

Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.

Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.

Knight, F. H. (1921). Traditional Economic Theory ― Discussion. American Economic Review, Papers and Proceedings, 11(1): 143–147.

Mill, J. S. (2004). Essays on Some Unsettled Questions of Political Economy, chapter On the Definition of Political Economy; and the Method of Investigation Proper to It., 93–125. Electronic Classic Series PA 18202: Pennsylvania State University.

Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Vol. 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.

Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.

Nelson, R. H. (2006). Economics as Religion: From Samuelson to Chicago and Beyond. Pennsylvania: Pennsylvania State University Press.

Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchinson, 10th edition.

Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.

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.

Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, London: Duke University Press.

Related to Newton and Euclid

© 2013 EKH, except original quotes 

Key Issues: Logic and platitude

Deductive logic is one pattern of rationality in reasoning, but it is not the only one; good reasoning in science typically yields conclusions that go beyond the logical entailments of deductive logic. (Suppe, 1977, p. 657)

The economists of the twentieth century, by pushing the neoclassical model to its logical conclusions, and thereby illuminating the absurdities of the world which they had created, have made an invaluable contribution to the economics of the coming century: they have set the agenda, work on which has already begun. (Stiglitz, 1991, p. 136)

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. (Keynes, 1973, p. xxi)

***

For Keynes as for Post Keynesians the guiding motto is "it is better to be roughly right than precisely wrong!" (Davidson, 1984, p. 574)

Marshall followed the maxim: Better to be ambigous and relevant than precise and irrelevant. (Colander, 1995, p. 283)

It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent. (Valentino, 1988, p. 239)

... a remorseless logician can end up in Bedlam. (Keynes, quoted in Moggridge, 1976, p. 36)

But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system. (Laidler, 1999, p. 281)

Toutes ses [Keynes’s] deductions, à notre avis, manquent absolument de rigeur. ... L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir. (Allais, 1993, p. 70)

***

Even if we cannot prove a theory or model is true, at the very minimum to be true it must be logically consistent. (Boland, 2003, p. 24)

... each chief step in science has been a lesson in logic. (Peirce, 1992, p. 111)

When we define the ambition of science as getting it precisely right, then the guiding motto of Post Keynesianism amounts to an invitation to ‘Babylonian incoherent babble’ and leads, predictably, to a loss of theoretical coherence. Confronted with the phony alternative relevance vs. rigor or truth vs. precision, the non-Keynesians opted for rigor: "Mathematical economics, it seems, had the great virtue of demonstrable irrelevance, which was morally preferable to spurious relevance." (Porter, 1994, p. 155)

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, p. 31)

Economists today do not wish to discuss the ‘truth’ of economic theories but only examine their logical validity. (Boland, 1992, p. 36)

Logical validity is indispensable. However, if the premises are false, the logical validity of the conclusions is pointless. Truth resides in the axioms, not in the deductive process. Because of a logical blind spot — the place one stands on is, for the moment, invisible — economists today cannot see that they operate with inadmissible axioms. Logical validity is indispensable but not sufficient.

And so — faithful to the theory's conceptual cornerstones and hoping against all hope that the unthinkable may still be achieved (i.e., a satisfactory theory of the price mechanism) — the tormented upholders of the validity of the paradigmatic core of economic equilibrium theory appear singularly reluctant to face the problem of comparing expectations and results and assessing the consistency of the theory. (Ingrao and Israel, 1990, p. 346)

Formal consistency does not count for much if the axioms lack material consistency. Realism does not count for much if it cannot be properly formalized.

***

Walrasians are comparatively stronger on the formal leg, Keynesians on the material leg; inseparable because of the micro-macro yoke, they limp along together. There is nothing to choose between vacuous logic and platitudinous realism. Both approaches are beyond repair. It is not surprising that the respective proponents cannot, given their idiosyncratic premises, figure this out for themselves. This, though, is a matter of indifference because paradigm shifts have, in any case, a very special modus operandi.

We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion. (Schmiechen, 2009, p. 11)

Logical bootstrapping is what axiomatization is all about. Therefore, one has to jump to new premises to see the defects of the previous premises. There is no path between them. Axiom Sets are incommensurable; there is no synthesis and no continuity; the previous set is simply abandoned. In practical terms, this means that both Walrasians and Keynesians are left behind the curve for good. Both approaches can still fulfill a useful role as practical examples of how not to do science.

References
Allais, M. (1993). Les Fondements Comptables de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
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
Hudson, M. (2010). The Use and Abuse of Mathematical Economics. real-world economics review, (55): 2–22. URL
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Peirce, C. S. (1992). The Fixation of Belief. In N. Houser and C. Kloesel (Eds.), The Essential Peirce. Selected Philosophical Writings, Vol. 1,109–123. Bloomington: Indiana University Press.
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.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
Stiglitz, J. E. (1991). Another Century of Economic Science. Economic Journal, 101(404): 134–141. URL
Suppe, F. (1977). Afterword. In F. Suppe (Ed.), The Structure of Scientific Theories, 615–730. Urbana, Chicago: University of Illinois Press.
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, 238–249. Cambridge, New York, etc.: Cambridge University Press.

Related 'Why Post Keynesianism is Not Yet a Science URL' and 'Crisis and Methodology, Sec. 3 URL' and 'Objective Principles of Economics URL'.
 

© 2013 EKH, except original quotes

Key Issues: Profit

Neither orthodox nor heterodox economists have a clear idea of the fundamental concepts of income and profit. What is known with certainty from the elementary macro-axiomatic analysis is that the conventional approaches are logically deficient.



Dear representative economist, if you apply a conception of total monetary profit that is, in the elementary case, different from Qm≡EC−Y+DN ⇓, your theory is demonstrably false and therefore inappropriate for the solution of real-world problems. The definition of profit is not a matter of personal taste but of logical and material consistency. Ultimately, the selection of axioms determines analytical success or failure.

If you are a businessman, you know the particular profit determinants of your firm, but this does not give you the determinants of total profit for the business sector as a whole. The generalization of partial truths is prone to the Fallacy of Composition. From individual experience, no correct profit theory follows. Because of this, business people do not know better than average citizens how the economy works.

If you are a consultant or advisor and your background knowledge contains assertions like: the value of the product equals the value of factor incomes, total income is the sum of wages and profits, distributed profit is equal to profit, or saving equals investment, your advice is not based on state-of-the-art analysis and is, at best, useless.

If you are a student, you are expected to find out whether your teacher's theory is true or false, or incomplete. Growth of knowledge is what science is all about. The acceptance of basic tenets of conventional economics is indicative of a lack of scientific acumen. From a student who has accepted supply-demand-equilibrium as an explanation, not much is to be expected.

With regard to the formal foundations of a Paradigm, it is not the case that anything goes. John Stuart Mill clearly stated the key question:

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.

Neither Orthodoxy nor Heterodoxy has accomplished the opus magnum. Economics is still at the stage of a proto-science. A 'sequence of models' (Koopmans) is no substitute for a comprehensive theory that realizes both formal and material consistency.

By looking at a single firm, it seems that profit depends on (List A):

• exploitation of the workforce
• innovation
• risk-taking
• capital accumulation
• monopolistic practices
• market imperfections
• the combination of the factors of production
• wage rate and employment
• the talent of managers and the motivation of the workforce
• aggressive expansion at home and abroad
• bamboozling the consumer
• speculation, financial manipulation, fraud, cheating
• corruption, cronyism, gaming the system
• the loss of other firms.

These factors play a role when it comes to the distribution of profits between firms. But these factors cannot explain the profit of the business sector as a whole. The conventional view is that total profit must be zero in equilibrium under the condition of perfect competition. This is an analytical conclusion because one cannot directly observe this limiting case in the real world. The conclusion depends, as with every theory, logically upon the premises. Hence, it all depends on whether the axioms are true or false.

By looking at the economy as a whole, which can be done with the help of an objective formal starting-point that radically reduces the complexity of the real thing, it follows that the total profit of the business sector is determined in the elementary case of a production-consumption economy by two factors (List B):

• by the relation of consumption expenditures to total income,
• by distributed profits in the period under consideration.

This theoretical conclusion can be verified with the accuracy of two decimal places by the proper application of national accounting. It does not depend on fantastic assumptions about human behavior, equilibrium, perfect competition, or other figments of the imagination. The explanations given in List A are obviously different from those in List B. In more general terms, List A is subjective/behavioral, while List B is objective/systemic and contains the elementary version of the AXEC profit theory. The profit formula Qm≡C−Y+DN is a logical implication of the structural/systemic axiom set. The elementary formula becomes more sophisticated as soon as investment, government, and foreign trade are added.

The first important conclusion of the macro-axiomatic analysis is that profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits. The second conclusion is that there is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole. Therefore, it is an elementary mistake to identify profit with a physical surplus. The third conclusion is that there is no antagonism between total wages and total profits, and that the distribution of output has nothing at all to do with the behavioral concept of marginal productivity. The fourth conclusion is that innovation and efficiency are irrelevant for the profit of the business sector as a whole. It is a Fallacy of Composition to trivially generalize what can be observed in an individual firm. This applies to many other microeconomic observations.

The crucial point is that profit for the economy as a whole cannot be derived from the behavior of the individual firm. That is, the standard microeconomic approach cannot, as a matter of principle, deliver the correct profit theory. And when the profit theory is false, the other parts of a comprehensive approach are open to doubt. What is immediately obvious is that, as collateral damage, the familiar theories of income distribution and wealth distribution are wrong by logical implication.

A correct theory is the precondition of economic policy. This, of course, is not new: “We have long known that the conduct of economic policy requires the policy-maker to have a theory of how the economy works.” (D. Laidler). The conventional economist's combination of a sense of mission, flawed theory, and self-delusion is not of great help, if any.

Profit is a subject to which economists have addressed themselves for at least two hundred years, but without much success. For there is at the moment no general theory of profits which commands anything approaching universal acceptance either among academic economists or among men of affairs. (A. Wood)

His Collected Writings show that Keynes wrestled to solve the Profit Puzzle up till the semi-final versions of his General Theory but in the end he gave up and discarded the draft chapter dealing with it. (G. Tómasson and D. Bezemer)

A satisfactory theory of profits is still elusive. (M. Desai, New Palgrave Dictionary)

In the practical affairs of trade, industry and finance no concept is more fundamental or more familiar than profit. Yet to the questions what profit is, and by what causes it is shaped and determined, economic science has not as yet supplied answers which command general agreement. (R. G. Hawtrey)

"What determines profits?" is a key question for understanding how our economy works. (H. Minsky)

... one of the most convoluted and muddled areas in economic theory: the theory of profit. (P. Mirowski)

We need to know what profits have been, how they have been made, to what uses they have been put, ...: no light on these matters is shed by the analyses of value, of utility and disutility, that have preoccupied so many of us for so long. (C. Parry)

Much of what is usually offered as profit theory will be seen to be without merit. (M. Obrinsky)

But in my opinion contemporary profit theory is floundering in eclecticism and has lost touch with the major economic changes of the past twenty-five years. Until we have clearly established what it is we are talking about, what we say is not going to have much value. (P. Bernstein)

Profit theory has been largely concerned with specifying and isolating the 'function' for which profit is the 'reward.' This is scientifically irrelevant. (A. Murad)

Of all the traditional branches of economics, the theory of profits has had the greatest difficulty in attaining the "safe path of a science." Our knowledge of the causes determining value, or wages, is indeed incomplete; but in these fields we do not find, and have not found for some considerable time, that fundamental disagreement among competent writers about the mere direction of approach, or that utter failure of promising lines of inquiry to yield results of any great importance, which Kant declared to be the marks of a science still groping in the dark. (J. R. Hicks)

Nor do the modern variants add anything whatever on this score. For Debreu profits are simply a nonissue, while Arrow and Hahn make only passing reference to profits — and that only as a historical introduction. Whatever may be the usefulness of these idealized theoretical constructs, they cannot be said to throw any light on the profit issue; surely, therefore, they fail to capture the essence of a capitalist market economy. (M. Obrinsky)

Profit is the pivotal concept for the analysis of how the economy works. Without a correct profit theory, economics is vacuous. The conventional profit theory is logically indefensible. It is a unique fact of the history of economic thought that neither Classicals, nor Walrasians, nor Marshallians, nor Keynesians, nor Marxians, nor Institutionalists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit. Hence, they 'fail to capture the essence'. There are many opinions but no scientific understanding of the market economy, neither on the national nor on the global level. Rational economic policy or the implementation of a rational economic order is, therefore, a priori impossible. Economists have no true conception of the most important phenomenon in their universe.

***

Graphic AXEC204

Key Issues: Various Delusions

Were we seriously, by a single phrase, to attempt to characterize the modern age, — the age of Keynes, Samuelson, Hicks, Arrow, Debreu, and so on — we should call it the age of delusion, because it seems to involve nothing so much as a generalized delusion that sheer analytical technique might somehow permit us to resolve most of our problems. (Clower and Howitt, 1997, p. 31)

All too often, researchers, referees, and editors fail to ask these scientific questions. Instead, they ask the same questions that jugglers' audiences ask — Have virtuosity and skill been demonstrated? Was something difficult done? Often, these questions can be answered favorably even where no substantive contribution is being made. It is much easier to demonstrate technical virtuosity than to make a contribution to knowledge. (Summers, 1991, p. 146)

***

Methodology:

It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. (Arrow, 1994, p. 1)

Acceptance, though, is more an insistent autosuggestion.

But just as in the past, the economists' claim of ‘doing science’ hardly convinced their contemporaries outside of a very limited circle of followers. (Benetti und Cartelier, 1997, p. 204)

Equilibrium:

Whatever the source of the concept [equilibrium] the notion that a social system moved by independent actions in pursuit of different values is consistent with a final coherent state of balance, and one in which outcomes may be quite different from those intended by the agents, is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes. (Arrow and Hahn, 1991, p. 1)

Economic equilibrium, though, is a NONENTITY like absolute space, epicycles, or the perpetual motion machine.

If economists find it difficult to free themselves from the commitment to equilibrium explanations, the reason is not really hard to understand. When it comes to explaining change, there are few more appealing stratagems than reducing change to stasis. The commitment to equilibrium explanation is metaphysically if not empirically as well grounded in economics as it is in physics or biology. The trouble is that the appeal to equilibrium is not well-founded in economic data the way it is in evolutionary or mechanical dynamics. (Rosenberg, 2001, p. 180)

But there is something scandalous in the spectacle of so many people refining the analysis of economic states which they give no reason to suppose will ever, or have ever, come about. (Hahn, 1984, p. 88)

Behavioral axioms:

In particular, it is supposed, in the main, that there is perfect competition and that the choices of economic agents can be deduced from certain axioms of rationality. (Arrow and Hahn, 1991, p. v)

I would identify the crucial moment at which we committed ourselves to this rather futile path as coinciding with the appearance of the Theory of Value. (Kirman, 2006, p. 247)

The [neo-Walrasian] program is organized around the following hard-core propositions:
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)

One remarkable feat in the foregoing, apart from the untenable behavioral assumptions, is to put equilibrium into the premises and to nourish the self-delusion that this petitio principii contributes to the general understanding of social processes. (Imagine a physicist demanding that all cosmic phenomena must be discussed with reference to an equilibrium state of the universe — no Big Bang, no slow-motion explosion of the universe, no Hubble constant.)

Another failed attempt to axiomatize:

Three fundamental economic axioms underlie any economy, regardless of environment and institutions, whether it be present-day America, Europe, Communist countries, or tribal organizations. These are truths that cannot be repealed by governments, and they cannot be ignored with impunity. ... These axioms of economics are:
a) Pursuit of Self-interest
b) Imputation of Values
c) Time-discount
(Piquet, 1978, p. 21)

In fact, the attempts to axiomatize human behavior can be traced back to Hutcheson, Hume's and Smith's celebrated teacher:

In the first equation, Hutcheson equates the “moral Importance of any Character, or the Quantity of publick Good produc'd by him” with the “compound Ratio of his Benevolence and Ability”. With the use of the variables
M=the moral impact of the agent's action on the public,
B=the benevolence of the agent, and
A=the ability of the agent,
Hutcheson obtains Axiom 1: M=BxA. (Redman, 1997, p. 116)

Behavioral axiomatization is deeply ingrained in economics; that is to say, with the Scottish School's focus on the "mysteries in the mind of man" economics started off on the wrong foot. Rather, it is the "mysteries of the economic system" that economists have to resolve.

Throughout its history, the idea of some "Fundamental Assumption", some basic "Economic Principle" about human conduct, from which much or most of economics can ultimately be deduced, has been deeply rooted in the procedure of economic theory. Some such notion is still, in many quarters, dominant at the present time. For example, it has recently been stated that the task of economics is "to display the structure and working of the economic cosmos as an outgrowth of the maximum principle.” (Hutchison, 1937, p. 636)

No way leads from some principle about human conduct to the understanding of the working of the economic cosmos. The proof is in the current state of conventional economics.

***

A mistake often made is to improvidently mingle axiom (logical/mathematical sphere) and law (physical sphere), or what Aristotle called, causa formalis and causa efficiens. The locus classicus of outright confusion is Jevons:

The science of Economics, however, is in some degree peculiar, owing to the fact ... that its ultimate laws are known to us immediately by intuition, or, at any rate, they are furnished to us ready made by other mental or physical sciences. That every person will choose the greater apparent good; that human wants are more or less quickly satiated; that prolonged labor becomes more and more painful; are a few of the simple inductions on which we can proceed to reason deductively with great confidence. From these axioms we can deduce the laws of supply and demand, the laws of that difficult conception, value, and all the intricate results of commerce, so far as data are available. (Jevons, 1911, p. 18)

For Evans economists, even mathematical economists like Jevons, Walras, and most certainly Marshall, were on the wrong track and had little useful to contribute if they believed in the analysis of value or utility. (Weintraub, 2002, p. 61)

***

The intellectual heirs are even farther on the wrong track.

Premises:

... a commodity is a good or a service completely specified physically, temporally, and spatially. ... It is also assumed that the quantity of any one of them can be any real number. (Debreu, 1959, p. 32)

The real-number assumption makes sense only with regard to the intended proof of existence, not with regard to the quantities actually bought and sold in any real-world market. The chosen mathematical tool requires distorting reality (see Nadal, 2004, p. 36). Hence, its application cannot be justified in theoretical economics. To shape reality in order to make a tool applicable is more than a delusion; it is a blatant methodological blunder (for details, see Toolism! A Critique of Econophysics URL and Objective Principles of Economics URL).

In any case, I cannot see any role for real numbers in quantitative economics and, hence, none whatsoever for real analysis and the proof techniques allied to it. (Velupillai, 2005, p. 867)

Mathematics:

The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round. (Wittgenstein, quoted in Schmiechen, 2009, p. 368)

Economists habitually borrow prefabricated mathematics and tailor the theory. Debreu is a case in point. This wrong sequence makes mathematics ineffective.

Mathematics is not really of much fundamental use in a science unless that science is able to constitute its basic concepts with “exact axioms” and precise numerical results. (Weintraub, 2002, p. 26)

Root structure:

But this [establishing the analytic mother-structure] required one very crucial maneuver that was nowhere stated explicitly: namely, that the model of Walrasian general equilibrium was the root structure from which all further work in economics would eventuate. (Weintraub, 2002, p. 121)

This, unfortunately, was the wrong answer to Mill's key question:

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, 2006, p. 746)

Neither Orthodoxy nor Heterodoxy has hitherto provided an acceptable set of hardcore propositions, a.k.a. root structure, a.k.a. Set of Axioms. This set cannot possibly be subjective-behavioral. While it is true that axiomatization is indispensable, it is equally true that a behavioral assumption cannot take the role of an economic axiom. Heterodoxy has not got the first point, Orthodoxy not the second. Economic axioms deal only with economic magnitudes. Neither utility, equilibrium, force, nor ergodicity, for example, are proper economic concepts and are therefore unfit to make an appearance in a set of economic axioms.

Formal axiomatic systems must be interpreted in some domain ... to become an empirical science. (Boylan and O'Gorman, 1995, p. 198)

It is of some importance to keep the domains apart at the axiomatic level, in particular, economics and psychology.

***

To think that the formal basis of standard economics is sound has been part and parcel of the widespread self-delusion among economists. Without correct conceptual foundations, though, the most powerful analytical technique cannot achieve much. The criteria of science are formal and material consistency. Legacy economics does not satisfy these criteria. Some economists even entertain the methodological delusion that there is something to choose:

Is it better to start deductively from axioms or inductively from facts? When the time comes to choose between internal consistency and consistency with observations, which side should we take? (Blinder, 1987, p. 135)

No side at all! Again, it is both formal and material consistency. This synthesis is still outstanding. Conventional economics is many things to many people, but not science to scientists.


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Arrow, K. J., and Hahn, F. H. (1991). General Competitive Analysis. Amsterdam, New York, etc.: North-Holland.
Benetti, C., and Cartelier, J. (1997). Economics as an Exact Science: the Persistence of a Badly Shared Conviction. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, 204–219. Cheltenham, Brookfield: Edward Elgar.

Boylan, T. A., and O’Gorman, P. F. (1995). Beyond Rhetoric and Realism in Economics. Towards a Reformulation of Economic Methodology. London: Routledge.
Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic Review, 77(2): 130–136. URL
Clower, R. W., and Howitt, P. (1997). Foundations of Economics. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, 17–34. Cheltenham, Brookfield: Edward Elgar.
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge: MIT Press.
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition.
Kirman, A. (2006). Demand Theory and General Equilibrium: From Explanation to Introspection, a Journey down the Wrong Road. In P. Mirowski and D.W. Hands (Eds.), Agreement on Demand: Consumer Theory in the Twentieth Century, 246–280. Durham, London: Duke University Press.
Hutchison, T. W. (1937). Expectation and Rational Conduct. Zeitschrift für Nationalökonomie / Journal of Economics, 8(5): 636–653. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Nadal, A. (2004). Behind the Building Blocks. Commodities and Individuals in General Equilibrium Theory. In F. Ackerman and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, 33–47. London, New York: Routledge.
Piquet, H. S. (1978). The Economic Axioms. Their Bearings on Inflation, Interest Rates, and Unemployment. New York: Vantage.
Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and the Classical Economists. Cambridge, London: MIT Press.
Rosenberg, A. (2001). The Metaphysics of Microeconomics. In U. Mäki (Ed.), The Economic World View. Studies in the Ontology of Economics, 174–188. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
Summers, L. H. (1991). The Scientific Illusion in Empirical Macroeconomics. Scandinavian Journal of Economics, 93(2): 129–148. URL
Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics. Cambridge Journal of Economics, 29: 849–872.
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, London: Duke University Press.

© 2013 EKH, except original quotes

Key Issues: Sloppiness, multi-senseism, storytelling ― thriving in the thickness of confusion

... economics is a big omnibus which contains many passengers of incommensurable interests and abilities. (Schumpeter, 1994, p. 827)

***

... he [Adam Smith] disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along. (Schumpeter, 1994, p. 185)

But though the Wealth of Nations contained no really novel ideas and though it cannot rank with Newton's Principia or Darwin's Origin as an intellectual achievement, it is a great performance all the same .... (Schumpeter, 1994, p. 185)

With Adam Smith, economics had a clumsy start and, despite great performances of whatever sort, fell further back over the long haul in comparison to physics and biology.

***

A good principles of economics teacher is a good storyteller. (Colander, 1995, p. 169)

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)

What a tricky business this all is! In his Treatise on Money, Mr. Keynes told the world that savings and investment are only equal in conditions of equilibrium; that an excess of investment over saving means rising prices, and vice versa. In his General Theory, he told us that saving and investment are always equal, and that this is a mere identity or truism, without significance for the determination of prices. As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong. (Hicks, 1939, p. 184)

This is the articulate methodological commitment to inconclusiveness that, on a deeper level, unites economists of all camps: "... there are relevant and important senses in which all these statements are each of them right and each of them wrong. " Many senses make no sense at all. However, empirical and logical inconclusiveness quite effectively secured the ecological niche of Political Economy as a separate science. Demarcation does not work in the "thickness of confusion" (Suppes, 1968, p. 654).

Contradictory statements are reconciled routinely by relating them to one of the following distinctions: short run/long run, ex ante/ex post, identity/equality. Inconclusiveness helps passably against outright refutation. With regard to empirical testing, the commitment to inconclusiveness implies the — self-defeating — assertion that in economics no experimentum crucis is feasible. All questions that cannot possibly be decided by experiment are out of science in the first place.

... you cannot prove a vague theory wrong. (Feynman, 1992, p. 158)

With enough fog emitted, almost anything becomes possible. (Mirowski, 2013, p. 344)

... nothing is clear and everything is possible. (Keynes, 1973, p. 292)

You can define anything you want, but as a sage once said,  “A rose by any other name will smell as sweet!” (P. Davidson, RWER-Blog, July 2, 2013)

For, on principle, we may call things what we please. (Schumpeter, 1994, p. 598)

This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions. (Blinder, 1987, p. 131)

Let us mean by current income the value of current output, ... (Keynes, 1933, p. 699)

... twentieth-century neoclassical theory resembles nothing so much as the child's game of Mr. Potatohead – the fun comes in mixing and matching components with little or no concern for the coherence of the final profile. (Mirowski, 1995, p. 294)

Trying to pin down the essential ideas is sometimes difficult because neoclassical economics always seems to be a moving target. (Boland, 1992, p. 213)

Since everybody is indeed free to define whatever appears to be appropriate, it seems that a definition could not pose any real problem. This, indeed, is not true because the full freedom of definition holds but for the first definition. The subsequent definitions must be consistent with their predecessors. This continuously restricts the freedom of definition. It is by no means the case that anything can be defined as desired. This is a methodological illusion that is rather widespread among economists. It explains, for the most part, the discipline's state of manifest confusion. A consistent and agreed-upon framework of concepts is indispensable. Keynes's aforementioned determination of income, for example, invalidates the General Theory and all its legitimate and illegitimate offshoots (IS–LM, AD–AS) in one sentence (see Keynes's Missing Axioms URL or Why Post Keynesianism is Not Yet a Science URL).

***

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)

As was standard with Marshall, the narrative told one story, the mathematics another. (Mirowski, 1995, p. 299)

Is it not a fact, which stares at us from the histories of all sciences, that it is much more difficult for the human mind to forge the most elementary conceptual schemes than it is to elaborate the most complicated superstructure when those elements are well in hand? (Schumpeter, 1994, p. 602)

The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts. (Schmiechen, 2009, p. 344)

The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking. (Dennis, 1982, p. 698)

Thus, economics is apparently the study of the economy, the study of the coordination process, the study of the effects of scarcity, the science of choice, and the study of human behavior. One possible conclusion to draw from this lack of agreement is that the definition of economics does not really matter. (Backhouse and Medema, 2009, p. 221)

The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions. (Fisher, quoted in Mirowski, 1995, p. 86)

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. (von Neumann, quoted in Mirowski, 2002, p. 146 fn. 49)

Precision and rigor in the statement of premises and proofs can be expected to have a sobering effect on our beliefs about the reach of the propositions we have developed. (Hutchison, 1960, p. xxiii)

There has been no rigor and precision in the definition of income and profit for more than two centuries. The reach of conventional propositions is zero. That is more than sobering.

***

To be sure, economics may perform a valuable social role without adding any significant understanding to knowledge of the economy – a “good myth,” economically speaking, can work not only in primitive tribal cultures but also in modern societies. ... Indeed, ... the religious function may have been the most important role throughout the history of modern economics since the Enlightenment. (Nelson, 2006, pp. 300-301)

Myth, well told, is still the most convincing way to explain how the world and humankind came to be in their present form. To recall, Zeus was the god of the sky and thunder. He oversaw the universe, assigned the various gods their roles, and was known for his erotic escapades. Zeus was emotional, spontaneous, and had a lot of trouble with other gods, goddesses, and humans. At Prometheus, for example, he was angry for three things: being tricked into making sacrifices, stealing fire for man, and refusing to tell him which of his children would dethrone him. To handle his problems, Zeus regularly fell back on chicanery, force, and violence (for an overview, see Wikipedia URL). Since antiquity, everybody "understands" Zeus, and he easily provokes like/dislike. Purified from all religious connotations, Greek myth is the stuff of psychology, literature, soap operas, blogs, newspapers, and history to this day. Let us call this all-embracing panorama of human motives and actions the gossip model of the world. It affords immediate access to subjective understanding, which, however, is barely distinguishable from a projection. With the gossip model, everything and its opposite can be explained. That makes it both popular and preposterous. Utility maximization is the economist's reduced version of the gossip model. Science started the very day when Greek philosophers threw the gossip model out of the window.

... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung. (Morgenstern, 1941, p. 381)

Now, at any rate, we have an explanation for why the assumptions of economic theory about individual action have not been improved, corrected, sharpened, specified, or conditioned in ways that would improve the predictive power of the theory. None of these things have been done by economists because they cannot be done. The intentional nature of the fundamental explanatory variables of economic theory prohibits such improvement. (Rosenberg, 1992, p. 149)

***

Economics as a discipline faces the following alternative. If it wants to be accepted as a science, it has to stick to the rules. The rules are quite simple: material and logical consistency. No excuses (complexity, Duhem-Quine, etc.). If economics cannot deliver on principle, it has to join the Geisteswissenschaften/Humanities and try its luck with Verstehen/understanding. Feynman defended the standards in quite certain terms: "You don't like it? Go somewhere else!" Since J. S. Mill spoke — excusatory — of Political Economy as an inexact and separate science, economists attempted to water down the rules and to tergiversate material or logical consistency or both. Lower standards of Verstehen can, by its very nature, not lead to much more than a gossip model of the world. Homo oeconomicus may be replaced by the far more realistic homo socialis; this improvement, though, still remains within the confines of the gossip model and is not sufficient for a better understanding of how the economy works. No behavioral approach, whatever, is adequate. It is not a question of realism; it is a question of methodology. There is no such thing as an inexact and separate science. There is no hiding behind complexity. There is only science and non-science. The Unity of Sciences does not mean unity of science and its look-alikes.

***

The solution consists of replacing behavioral assumptions, both the sloppy and the axiomatized ones, with structural axioms. Structural axiomatization has the accessory advantage of putting off muddleheads, commonsensers, wishwashers, smatterers, storytellers, and all those "whom any discovery that brought quietus to a vexed question would inevitably vex because it would end the fun of arguing around it and about it and over it" (Peirce, 1931, 5.520). Objective/structural/systemic axiomatization strictly excludes the explanation or prediction of human behavior. Hence, there is no empty talk about it.

Filibuster economics may indeed have performed a multitude of useful social roles, but this is of no consequence for its scientific status. Social utility is not a criterion for the assessment of a theory. Sloppiness, incoherent definition, green cheese assumptionism, and self-protecting inconclusiveness are detrimental to the growth of knowledge. Social utility cannot exculpate proto-scientific garbage.

A Supreme Being would have no need for axioms, but they are often found quite useful for mere men. (Strotz, 1953, p. 390)

More specifically: The rigor and objectivity of structural/systemic axiomatization are needed to abandon the endemic sloppiness of economic argument and finally to advance from proto-science to science.


References
Backhouse, R. E., and Medema, S. G. (2009). On the Definition of Economics. Journal of Economic Perspectives, 23(1): 221–233.
Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic Review, 77(2): 130–136. URL
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Colander, D. (1995). The Stories We Tell: A Reconstruction of AS/AD Analysis. Journal of Economic Perspectives, 9(3): 169–188. URL
Dennis, K. (1982). Economic Theory and the Problem of Translation (I). Journal of Economic Issues, 16(3): 691–712. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley
Keynes, J. M. (1933). Mr. Robertson on "Saving and Hoarding". Economic Journal, 43(172): 699–712. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Mirowski, P. (2013). Never Let a Serious Crisis Go to Waste. London, New York: Verso.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Nelson, R. H. (2006). Economics as Religion: From Samuelson to Chicago and Beyond. Pennsylvania: Pennsylvania State University Press.
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce, volume I. Cambridge: Harvard University Press. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago: University of Chicago Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Strotz, R. H. (1953). Cardinal Utility. American Economic Review, 43(2): 384–397. URL
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.

Related Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist URL


© 2013 EKH, except original quotes

Key Issues: Hilbert-Bourbaki-Mill and von Neumann's monster-structure

... for nothing is farther from the axiomatic method than a static conception of the science. We do not want to lead the reader to think that we claim to have traced out a definitive state of the science. (Bourbaki, 2005, p. 1274)

When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts [Fachwerk von Begriffen ] .... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ... The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge — a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability. (Hilbert, 2005, pp. 1107-1109), original emphases

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, 2006, p. 746)

Could all the phaenomena of nature be deduced from only thre [sic] or four general suppositions there might be great reason to allow those suppositions to be true. (Newton, quoted in Westfall, 2008, p. 642)

I find it quite amazing that it is possible to predict what will happen by mathematics, which is simply following rules which really have nothing to do with what is going on in the original thing. (Feynman, 1992, p. 171)

From the axiomatic point of view, mathematics appears thus as a storehouse of abstract forms — the mathematical structures; and it so happens — without our knowing why — that certain aspects of empirical reality fit themselves into these forms, as if through a kind of preadaptation. (Bourbaki, 2005, p. 1276)

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However, there also occur structures entirely without application, the so-called monster-structures (Bourbaki, 2005, p. 1275, fn. 9).

From the structural axiomatic point of view, the subjective-behavioral axioms yielded such a formalism without application. Its sole merit was "that of showing the exact bearing of each axiom, by observing what happened if one omitted or changed it."

Bourbaki cannot be made accountable for the conventional monster-structure. The same holds for Hilbert and, of course, Mill.

..., it was the von Neumann perspective that shaped general equilibrium theory ..., and thus reconstituted economic theory. (Weintraub, 2002, p. 78)

As a student of Hilbert and a proponent of axiomatization, von Neumann immediately realized that Walras's mathematics was insufficient:

The so-called "mathematical" economists in the narrower sense — Walras, Pareto, Fisher, Cassel, and hosts of other later ones — especially, have completely failed even to see the task that was before them. Professor Hicks has to be added to this list, which is regrettable because he wrote several years after decisive work had been done — in principle — by J. von Neumann and A. Wald. (Morgenstern, 1941, p. 369)

Von Neumann did not realize, though, that Walras' supply-demand-zero-profit-equilibrium was mistaken in the first place and never represented any feasible economy. It was only Walras's formalism that was eventually repaired. For von Neumann, general equilibrium was first and foremost a mathematical puzzle. To crack the nut, he advocated the fixpoint approach. With explicit disregard of economic content, the axiomatization of Walrasian economics was completed by Debreu and others. This, however, could not change the fact that equilibrium is a NONENTITY. What, in effect, had been solved was an angels-on-the-pinpoint problem. This subsequently became the core competence of standard economics. It is a curious fact that the physicists and mathematicians who came in great numbers with advanced tools to economics to help the indigenous folk (Mirowski, 1995) in effect moved the whole thing deeper into the Walrasian cul-de-sac.

It is difficult to contemplate the evolution of the economic science over the last hundred years without reaching the conclusion that its mathematization was a rather hurried job. (Georgescu-Roegen, 1979, p. 271)

Axiomatization in economics suffers from many misunderstandings (see also Crisis and Methodology: Some Heterodox Misunderstandings URL). This, clearly, is not an argument against the method but against economists.

The method of reasoning by chains of syllogisms is nothing but a transformation mechanism, applicable just as well to one set of premisses as to another; it could not serve therefore to characterize these premisses. (Bourbaki, 2005, pp. 1267-1268)

The deductive method does not prove that the premises are true. The truth of theorems and the truth of premises are entirely different questions. The deductive method guarantees that the conclusions are true if the premises are true.

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Outside pure mathematics, the usefulness of axiomatization crucially depends on the real-world domain. Not everything is axiomatizable. There is, for example, no such thing as a behavioral axiom. By borrowing from physics and mathematics, the neoclassicals got the essentials wrong from the very beginning.

The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions. (Brown, 2011, p. 211)

Jevons' rhetorical question points exactly to the source of neoclassical confusion:

Must not the same inexorable reign of law which is apparent in the motions of brute matter be extended to the subtle feelings of the human heart? (Jevons, quoted in Mirowski, 1995, p. 219 )

Jevons had, with the laws of motion, the archetype of science on his mind:

But it was a second and more important quality that struck readers of the Principia. At the head of Book I stand the famous Axioms, or the Laws of motion … For readers of that day, it was this deductive, mathematical aspect that was the great achievement. (Truesdell, quoted in Schmiechen, 2009, p. 213)

What Jevons did not understand was that the trinity of law, axiom, and behavior does not work because behavior is original, as the scientists of all ages knew well (for details, see Objective Principles of Economics URL). With far-fetched analogies and his shallow scientific understanding, Jevons placed neoclassical economics on poor foundations (for details, see The Logic of Value and the Value of Logic URL), and there it stood, with some formal improvements, until recently.

For an outside observer without prior knowledge of habitual human reactions, behavior appears at first random. This is the point to start with, not introspection. The laws of motion of the human heart are pure kitsch and remain so in the abstract form of the first derivative of a utility function. From the marginal principle follows nothing that could help to understand how the market economy works. To think of human behavior in terms of deterministic laws is an unforgivable analytical blunder. It is the structure that is deterministic (see the Period Core), not the behavior.

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... 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, see also Hudík, 2011).

This is the defining property of the objective/structural/systemic axiom set.


References
Brown, K. (2011). Reflections on Relativity. Raleigh: Lulu.com.
Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Vol. II, 1265–1276. Oxford, New York: Oxford University Press.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Georgescu-Roegen, N. (1979a). Energy and Economic Myths, chapter Measure, Quality, and Optimum Scale, 271–296. New York, Toronto: Pergamon.
Hilbert, D. (2005). Axiomatic Thought. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Vol. II, 1107–1115. Oxford, New York: Oxford University Press.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Vol. 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, Vol. 1. Norderstedt: Books on Demand, 2nd edition.
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, London: Duke University Press.
Westfall, R. S. (2008). Never at Rest. A Biography of Isaac Newton. Cambridge: Cambridge University Press, 17th edition.

Related Euclid, Newton . For details about the Period Core, which represents a structural law, see The Synthesis of Economic Law, Evolution, and History URL.


© 2013 EKH, except original quotes

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Twitter/X Jan 13, 2026  Hilbert and Wiener

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