The canonical macroeconomic model

Comment on Noah Smith on ‘Examining an MMT model in detail’

Blog-Reference (Link) and Blog-Reference

Under the heading Formal Models vs. Guru-Based Theories Noah Smith demands: “These days, most economic theories are collections of mathematical models. If you want to know what the theory says, you can parse out the models and see for yourself. You don’t have to go ask Mike Woodford what New Keynesian theory says. You don’t have to go ask Ed Prescott what RBC theory says. You can go read a New Keynesian model or a Real Business Cycle model and figure it out on your own. MMT is different. There are many wordy explainers and videos that will explain some of the concepts behind MMT, or tell you some of MMT’s policy recommendations. But that’s different than having a formal model of the economy.” and “I want to be able to read a concrete, formal, well-specified model like the Tcherneva model above, and answer these questions myself.”

The problem with economics is this: microfoundations are false and because of this ALL microeconomic models are false. Supply-demand-equilibrium is proto-scientific garbage. However, macrofoundations are also false and because of this, ALL macroeconomic models are false since Keynes, including MMT. Proofs have been given elsewhere.

However, critique of Mainstream or MMT has run its course: “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)

From the overall failure of economics follows that a new theory has to be macrofounded but not Keynesian because Keynes messed things up. What is required is the Paradigm Shift from false microfoundations and false Keynesian macrofoundations to true macrofoundations.

So, let us forget methodological individualism and kick off the “concrete, formal, well-specified” macrofounded approach. The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The elementary production-consumption economy is shown on Wikimedia.#1

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 C=Yw, the idealized transaction pattern of deposits/overdrafts of the household sector at the Central Bank over the course of one period is shown on Wikimedia.#2

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 supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern.

If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of the transaction medium. Money is endogenous and neutral.

The general price level P can be anchored by setting the wage rate W. In order to avoid both inflation and deflation, the rate of change of W has always to be equal to the rate of change of R. The Quantity Theory is dead because M is not a price determinant.

The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e. the real wage is always equal to the productivity no matter how the wage rate W is set.

Ramifications: (i) The State is needed for the institutional setup of the monetary order, (ii) the State is NOT needed for injecting money into the economy, (iii) what is needed is an accommodative Central Bank, (iv) neither the State nor the Central Bank interferes with the autonomous transactions of the household and business sector, (v) money is a generalized IOU, (vi) money is created and destroyed by the transactions between the household and the business sector, (vii) the value of money is given by W/P=R (1b), i.e. is equal to the productivity, (viii) the value of money does NOT depend on the (average) stock of money M, (ix) the functionality of monetary institutions and the value of money does NOT depend on the taxing power of the State.

The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e. it holds X=O. The condition of budget balancing, i.e. C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q≡−S.

The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.

Ramifications: (i) Because the mirror image of saving is loss Keynes’ I=S is false, (ii) ALL IS-LM models are false, (iii) Post Keynesianism in ALL variants is false.

Now, additional sectors can be introduced. The complete macroeconomic Profit Law is given by Q≡Yd+(I−S)+(G−T)+(X−M). #3, #4 In order to focus on the interactions between household, business, and government sector, it is here reduced to Q≡−S+(G−T). Legend: Q macroeconomic profit, S household sector saving, G government expenditures, T taxes, (G−T)>0 government deficit.

If the government’s budget is balanced, i.e. G=T, and if the households dissave then the business sector makes a profit, i.e. Q is positive.

If the government’s budget is balanced and the households save, i.e. S≡Yw−C>0, then the business sector makes a loss, i.e. Q is negative.

If the government’s budget deficit, i.e. (G−T)>0, is equal to the household sector’s saving, i.e. (G−T)=S, then macroeconomic profit Q is zero.

If the government’s deficit is greater than household sector saving, then the business sector makes a profit.

If the household sector’s saving is zero, i.e. S=0, and the government deficit is greater than zero, i.e. (G−T)>0, then it holds Q=(G−T), i.e. the business sector’s profit equals the government sector’s deficit. So, if the State deficit-spends in the elementary production-consumption economy it follows (i) a one-off price hike (NO inflation) under the condition of market clearing, (ii) Public Deficit = Private Profit. Bringing money into the economy by public deficit spending is NOT distributionally neutral, just the opposite: it is a free lunch for the Oligarchy.

MMT’s sectoral balances equation is false. Because of this, the whole analytical superstructure is false. MMT policy guidance has no sound scientific foundations and is harmful to the ninety-nine-percenters. MMT is refuted on all counts.

Any model that lacks true macrofoundations is scientifically worthless. Axioms (A0) to (A3) define the canonical macroeconomic model. The rest of microfounded and macrofounded economics goes down the scientific drain.

Egmont Kakarot-Handtke


#1 Wikimedia AXEC31 Elementary production-consumption economy
#2 Wikimedia AXEC98 Idealized transaction pattern
#3 The Profit Law yields the correct macroeconomic sectoral balances equation (I−S)+(G−T)+(X−M)−(Q−Yd)=0 which compares to the false MMT equation (I−S)+(G−T)+(X−M)=0. The equations are testable with the precision of two decimal places.
#4 Refuting MMT’s Macroeconomics Textbook

Related 'MMT vs Mainstream: examining proto-scientific garbage in detail' and 'The Law of Supply and Demand: Here It Is Finally' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'The real trouble with Econ 101' and 'MMT sucks' and 'Where MMT got macroeconomics wrong' and 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It' and 'Why Post Keynesianism Is Not Yet a Science' and 'MMT: A free lunch for the Oligarchy' and 'New Economic Thinking: The 10 crucial points' and 'Economics for Economists'. For details of the big picture see Paradigm Shift and for the full-spectrum refutation of MMT see cross-references MMT.

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Wikimedia AXEC121i

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LINKS on Pavlina Tcherneva’s ‘MMT, Models, Multidisciplinarity’ on Apr 8 and Blog-Reference

Pavlina Tcherneva’s model is NOT false because of some behavioral assumptions but because her macroeconomics is provably false. The model is built upon this defective accounting identity G+I=T+S. For details see

► MMT vs Mainstream: examining proto-scientific garbage in detail

► The canonical macroeconomic model

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REPLY to André on Apr 9

You say: “To understand finance or economics, you need first to understand what currency is (a tax credit). It is a prerequisite. You can’t move one step without it.” and “Send an email to any of them (Bill Mitchell, Warren Mosler, Randall Wray, Stephanie Kelton, Scot Fullwiler, etc) and they will tell that ‘taxes drive money’ is the pillar and integral part of MMT. Also, everything you read in MMT is a direct or indirect consequence of ‘taxes drive money’, 

Take notice that the assertion that taxes drive money is false and has been refuted.

► MMT: fundamentally false

► The Third Way: Towards the Happy Zero-Tax Economy

► The canonical macroeconomic model

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As of Jun 2020 Amazon.de, BoD, Amazon.com etc.

MMT vs Mainstream: examining proto-scientific garbage in detail

Comment on Noah Smith on ‘Examining an MMT model in detail’

Blog-Reference and Blog-Reference and Blog-Reference

MMT claims that mainstream economics is defective. MMT is right. Noah Smith, in turn, claims that MMT is defective. Noah Smith is right. The scientific fact of the matter is that the major approaches ― Walrasianism, Keynesianism/MMT, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and that all get the foundational concept of the subject matter ― profit ― wrong. Economics is a failed science. By consequence, any discussion between Mainstream and MMT never gets above the level of moronic blather.

Noah Smith becomes concrete and debunks an MMT model of Pavlina Tcherneva. However, he messes up the debunking. Generally speaking, the blunder of MMT lies in the macroeconomic foundations. Noah Smith, though, gets stuck with criticizing this assumption: “The economy produces one service only, fighting fires.”

To make matters short here: the lethal blunder of MMT lies in the macroeconomic accounting identity G+I=T+S (i). Written as sectoral balances equation this gives (I−S)+(G−T)=0 (ii) or I=S (iii) for the elementary case of G,T=0.

I=S is provably false since Keynes’ General Theory (p. 63) but neither MMTers nor Mainstreamers like Noah Smith have realized it to this day.#1, #2 The reason is that economists are too stupid for the elementary mathematics that underlies macroeconomics.

The correct sectoral balances equation reads (I−S)+(G−T)−(Q−Yd)=0 (iv) with Q as macroeconomic profit and Yd as distributed profit. Curiously, the word profit does NOT appear in MMT models. Curiously, Noah Smith does not realize this. Without realizing it, the whole MMT vs Mainstream discussion goes about a zero profit economy. As long as this planet exists there NEVER was a zero profit economy. Macroeconomics is false since Keynes.

When the theory is false the policy guidance is false. Equation (iv) can be reduced to the limiting case Q=(G−T) (v) which says in plain words Public Deficit = Private Profit. In even plainer words, the MMT policy of permanent deficit-spending/money-creation is a permanent free-lunch for the Oligarchy. The empirical result is the somewhat biased distribution of income and financial wealth that most people find somewhat irritating. MMTers, though, sell their proto-scientific garbage as a benefit for the ninety-nine-percenters.

It holds with mathematical certainty: MMT is a scientific/social/political fraud ― just like the Mainstream.

Egmont Kakarot-Handtke


#1 Wikipedia and the promotion of economists’ idiotism
#2 For the full-spectrum refutation of MMT see cross-references MMT

Related 'MMT vs WSJ: Another futile exercise in moron bashing' and 'Refuting MMT’s Macroeconomics Textbook' and ''MMT: fundamentally false' and 'Dear idiots, time to get saving and investment straight (II)' and 'Dear idiots, time to get saving and investment straight (I)' and 'Dear idiots, government deficits do NOT cause inflation' and 'Dear idiots, government deficits do NOT fund private savings'.

Immediately following The canonical macroeconomic model.

Dilettantes at the end of the coal pit

Comment on Jo Mitchell on ‘Dilettantes shouldn’t get excited’

Blog-Reference and Blog-Reference on Nov 20 and Blog-Reference on Nov 21

As Hume said, “... when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.”

With DSGE, Walrasian economics has, after 150+ years, reached the end of the coal pit. Lacking sound scientific judgment, though, Christiano/Eichenbaum/Trabandt maintain: “People who don’t like dynamic stochastic general equilibrium (DSGE) models are dilettantes. By this we mean they aren’t serious about policy analysis…”

Science is NOT about like/dislike but about true/false. The fact is that DSGE is provably false. Because of this, all policy proposals that have ever been derived from DSGE models lack sound scientific foundations.

Science is about the true theory. The characteristic of science is the insistence on consistency: “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)

Economics pretends to be a science but is what Feynman called a cargo cult science “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Economists lack genuine scientific instinct/ambition: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. (Schumpeter, 1946)

Theory construction started 2300+ years ago with clearly stated premises#1 and “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter)#2

Not only DSGE has failed at constructing the Simple Ur-Model. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept of profit wrong.

At the end of the coal pit, the lethal methodological blunder of DSGE is quite obvious: microfoundations are false since Jevons/Walras/Menger. And Keynes’ attempt to move from microfoundations to macrofoundations failed.#3

The methodologically correct action in the given situation is the Paradigm Shift. False Walrasian microfoundations and false Keynesian macrofoundations have to be replaced by true macrofoundations.

Economics is a failed/fake science. At the end of the coal pit, it is now quite obvious that scientific dilettantism leads the representative orthodox/heterodox economist astray for 200+ years.

Egmont Kakarot-Handtke


#1 “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)
#2 Microfoundations are given with this verbalized axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#3 How Keynes got macro wrong and Allais got it right

Related 'Yes, economics is a bogus science' and 'From false microfoundations to true macrofoundations' and 'Heterodoxy and Pluralism, too, are proto-scientific garbage' and 'First Lecture in New Economic Thinking' and '10 steps to leave cargo cult economics behind for good'. For details of the big picture see cross-references Scientific Incompetence and cross-references Failed/Fake Scientists.

The simple Ur-Model is given with the Economics God Equation on Wikimedia AXEC25.

The Economics God Equation

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

NOTE on Lars Syll’s ‘DSGE models are missing the point’ on Nov 23

“Macroeconomics needs models which work to guide the interventions of government policy.” (Silsonwy)

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Neither Orthodoxy nor Heterodoxy has the true theory. See Dilettantes at the end of the coal pit.

The flat-earth realism of economists

Comment on Noah Smith on ‘Realism in macroeconomic modeling’

Blog-Reference

Noah Smith discusses a cool paper: “Ljungqvist and Sargent have a new paper synthesizing much of the work that’s been done in labor search-and-matching theory over the past decade or so.”

Like Ljungqvist and Sargent and the 99-percent majority of scientifically incompetent economists, Noah Smith has not realized that microfoundations is a failed approach for 150+ years. This becomes as obvious as anybody could wish when microfoundations are applied to macroeconomic issues.

The Iron Law of Economic Methodology says: NO WAY leads from the explanation of individual/social human behavior to the explanation of how the monetary economy works. In other words, the microfoundations approach has already been dead in the cradle because it is bound to crash with absolute necessity into the Fallacy of Composition.

By consequence, not only macroeconomics but the whole of economics has to be macrofounded.#1 Macrofoundations provide a consistent framework for microanalysis. Economic analysis has to switch from bottom-up to top-down.

In the following, a sketch of the formally and empirically correct employment theory is given.#2 The basic version of the objective-structural-systemic Employment Law reads (Wikimedia AXEC62)

This macroeconomic equation is not merely “realistic” but REAL because it consists alone of measurable variables. It follows:
(i) An increase in the expenditure ratio ρ_E leads to higher employment (the Greek letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 means dissaving or credit expansion, a ratio ρ_E less than 1 means saving or credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete AND testable Employment Law is a bit longer and contains in addition profit distribution, public deficit spending, and foreign trade.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρ_F as defined in (iii) embodies the price mechanism which, however, does not work as the microfounded cargo cult economist hallucinates. The fact is that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. THIS is the key to full employment policy.

It is pretty obvious to anyone with one iota of scientific instinct that one cannot figure out the determinants of overall employment by applying a brain-dead, microfounded, “realistic”, maximization-and-equilibrium labor search-and-matching model.

It is time now for Ljungqvist and Sargent to retire and for Noah Smith to follow suit.

Egmont Kakarot-Handtke


#1 This is the minimalist set of macroeconomic axioms: (A0) The objectively given and most elementary systemic configuration of the production-consumption 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.
#2 For the comprehensive treatment see Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Economics: 200+ years of scientific incompetence and fraud

Comment on Noah Smith on ‘Is economics a science?’

Blog-Reference

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

The fact of the matter is that economists do NOT have the true theory. More precisely, economists do not know how the price and profit mechanism works. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.#1 With the pluralism of provably false theories economics sits squarely at the proto-scientific level.

The representative economist either does not realize it or cannot officially admit it. In this dire situation, the Pavlovian reaction is always and everywhere to muddy the waters and to retreat deeper into the swamp. Noah Smith is no exception, he rhetorically asks: “What the heck is a ‘science’?” and answers “No one knows.”

This is patently false. Science is ― since the ancient Greeks made the distinction between opinion (= doxa) and knowledge (= episteme) ― well-defined by material and formal consistency: “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)

The first question to Noah Smith: if no one knows what science is how does it come that we have a prize with the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.#2 And how does it come that economics is since Adam Smith/Karl Marx explicitly defined as science? And what does every economist learn in Econ 101?: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

The fact is that economics claims to be a science but is what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing is the true theory. Economics is a failed science because none of the major approaches satisfies the criteria of material and formal consistency. When this is pointed out economists immediately retract and fire their barrage of brain-dead excuses.#3 Noah Smith applies the same old defense maneuvers. Needless to emphasize that every single of these excuses has been refuted long ago.

Economists have found a way to deal with the problem of manifest failure: they simply ignore and violate scientific standards. Or, as Blaug put it, they are playing tennis with the net down. Morgenstern reminded his fellow economists back in 1941: “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.”

This is why Walrasianism is still around although it has already been dead in the cradle 150+ years ago. Standard economics has been based on provably false axioms but economists proudly cling to them until this day: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman) Note in passing that maximization and equilibrium are NONENTITIES like angels or the Easter Bunny. Time for Krugman and the rest to end stubborn self-delusion: all equilibrium models are a priori false and this starts with textbook supply-demand-equilibrium.#4

Economics is a failed science because economists (i) are scientifically incompetent, and (ii), violate scientific standards/ethics on a daily basis. Since Adam Smith, economic policy guidance has never had sound scientific foundations. Both, orthodox and heterodox economists sell proto-scientific garbage in the bluff package of science.

In order to become a science, economics needs a Paradigm Shift.#5 Nothing less will do.

Egmont Kakarot-Handtke


#1 First Lecture in New Economic Thinking
#2 The real problem with the economics Nobel
#3 Failed economics: The losers’ long list of lame excuses
#4 The father of modern economics and his imbecile kids
#5 The identification problem and the dumping of the old guard

Related 'Yes, economics is a bogus science' and 'Media-fake-farce-fraud-storytelling-macro' and 'Schizonomics' and 'The miracle cure of economists’ micro-macro schizo'. For details of the big picture see cross-references Scientific Incompetence and cross-references Proto-Science/Cargo Cult Science/Science and cross-references Failed/Fake Scientists.

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REPLY to Jake Thompson on Jun 18

You argue: “It’s certainly, by a long shot, the most scientific of the social sciences.”

Your lethal methodological blunders are:
(i) The underlying binary code of science is true/false with NOTHING in between. Because of this, economics is either a science or not. The statement, that economics is more scientific than X, is entirely devoid of meaning. (Just like the statement, Jake Thompson is by a long shot more innocent than Lee Harvey Oswald. Guilty/not guilty is also binary with NOTHING in between.)
(ii) Scientific truth is well-defined by material and formal consistency. It is not an easy task to establish scientific truth but from these practical difficulties cannot be concluded that it does not exist or that anything goes.
(iii) The major approaches ― Walrasianism, Keynesianism, Marxianism, and Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept of profit wrong.

Conclusion: Economics is NOT a science.

In order to rise above the proto-scientific level, economics needs a Paradigm Shift.#1 What failed economists first of all have to understand is that economics is NOT a social science but a systems science. To define economics as a social science has been the foundational blunder 200+ years ago. Being scientifically incompetent, though, economists will not understand this. It is Catch 22 and the representative economist is trapped in the scientific coal pit.#2


#1 For details see Redefining economics and cross-references Paradigm Shift
#2 “... but when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.” (Hume) Obviously, you lack even this tiny quantity of judgment.

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REPLY to Anonymous on Jun 20

You argue: “Some parts of Econ are a science (game theory and I’d argue basic macro in simple markets) while the rest is more of an art (everything else).”

You are trying to evade a clear-cut conclusion and your argument is way beside the point.
(i) Economics is either a science or not. That some parts of it are acceptable is irrelevant. Every false theory has acceptable parts. Even the flat earth theory has some content that is true. False theories are always partially and commonsensically true. This is exactly why they can survive.
(ii) Game theory is NOT economics because economics does not deal with human behavior but with the behavior of the economic system. Economics is a systems science and all Human Nature/behavior issues belong to psychology, sociology, anthropology, and so on. To define economics as a social science has been the foundational blunder 200+ years ago.
(iii) Basic macro is provably false.#1
(iv) To call economics an art is simply a euphemism.

The conclusion is inescapable: Economics is NOT a science.


#1 For details see Textbooks and the mental cloning of dumb economists and Why Post Keynesianism Is Not Yet a Science.

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REPLY to Anonymous on Jun 24

You say: “Tell me your definition of science and we can debate this further.”

(i) Science is well-defined for 2300+ years. There is NO such thing as “my” or “your” definition. Because of this, there is NOTHING to debate.
(ii) Either one complies with the well-defined and well-known scientific standards or one is outside of science.
(iii) Economics is materially and formally inconsistent and therefore outside of science.#1
(iv) The definition of science has been given in the post above.#2 It seems that your attention span is less than that of a fruit fly.
(v) You say “I thought rational choice theory and behavioral economics was a thing.” Yes, this is the defining characteristic of the scientifically incompetent economist.#3
(vi) All of your arguments show that you are trying to play silly semantic games.


#1 “… suppose they [the economists] did reject all theories that were empirically falsified … Nothing would be left standing; there would be no economics.” (Hands)
#2 See here or here
#3 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist

Getting out of the economics swamp

Comment on Noah Smith on ‘Vast literatures as mud moats’

Blog-Reference and Blog-Reference adapted to context

You say: “The point is, a bunch of smart people can get very big things wrong for a very long period of time, and that period of time may include the present.”

True, this happened with geocentrism for roughly 1500 years starting with the smart mathematician, astronomer, and geographer Ptolemy around 100 AD. It happened again with economics, starting 200+ years ago with the not-so-smart Adam Smith. As a result, it holds for economics in general “the vast literature actually contains more misinformation than information.”

The situation in economics is special insofar as there are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, and the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, scientific standards are observed.

Political economics as a whole is scientifically worthless. The proper place for this “vast literature” is the wastebasket. Political economics is easily recognizable by its swampiness. Swampiness is what Popper called an immunizing stratagem because: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman) Therefore, the political economist is mainly occupied with producing a methodological smoke screen that consists of vague concepts, anything goes, pluralism of false theories, alleged complexity, ontological uncertainty, unreliable data, the faux humility of ‘I know that I know nothing’, and the post-modern replacement of true theory by an emotional narrative.#1

The beauty of the swamp ‘where nothing is clear and everything is possible’ (Keynes) is that logical and empirical failure is inconsequential.#2 What you call the mud moat has indeed saved the life of the representative economist for 200+ years.

The other part of the “crappy vast literature” consists of methodological blunders, i.e. stuff that does not satisfy the scientific criteria of material and formal consistency. This holds for everything that comes under the banner of Walrasianism, Keynesianism, Marxianism, Austrianism, and Pluralism. These approaches are mutually contradictory, axiomatically false, materially/formally inconsistent and ALL got the pivotal economic concept of profit wrong.

There are the hard rocks of true or false and the swamp between them. The swamp is the natural habitat of agenda pushers, confused confusers, incompetent scientists, political economists, status-quo inertionalists, commonsensers, and anti-scientists. The very characteristic of science is to relentlessly drive the question under discussion to the point of a clear-cut decision between true or false, in other words, to get out of the swamp: “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)

The braids or bootstraps of science are material and formal consistency. Formal consistency is established by the axiomatic-deductive method, and material consistency by state-of-art testing.

The very characteristic of economics is that the “vast literature” consists of inconsistent and inconclusive blather or politics dressed up as science. So, perhaps 90 percent of the content of peer-reviewed quality journals consists of models/theories that are axiomatically false. Axiomatically false means based on false Walrasian microfoundations or false Keynesian macrofoundations or ad hoc plucked out of thin air. Therefore, the one and only interesting question in the given situation is how to achieve the paradigm shift from defective microfoundations and macrofoundations to materially and formally consistent macrofoundations.#3

Accordingly, the straightforward criterion for disposing of the “crappy vast literature” speedily into the wastebasket is: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke


#1 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 The political economist and incompetent scientist Keynes was one of the loudest defenders of conceptual vagueness: “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)
#3 True macrofoundations: the reset of economics

Related 'Macroeconomics: Drain the scientific swamp' and '#DrainTheScientificSwamp' and 'What is so great about cargo cult science? or, How economists learned to stop worrying about failure' and 'Solving Mill’s starting problem' and 'A new curriculum for swampies?' and 'It is better to be precisely right than roughly wrong' and 'Economic recommendations out of the swamp between true and false' and 'And the answer is NCND ― economics after 200+ years of Glomarization' and 'Marshall and the Cambridge School of plain economic gibberish' and 'Why J. S. Mill had no friendly word for the bigots and votaries of common sense' and 'Mental messies and loose losers'.

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REPLY to Barkley Rosser & other swampies on May 21

Noah Smith’s post has been titled “Vast literatures as mud moats” and deals with the use of cargo cult science for agenda pushing. Mud moats are just another term for the phenomenon which I call swampiness.

Noah Smith’s argument does not only apply to the production of scientifically worthless papers but a fortiori to blog posts.#1 It is pretty obvious that EconoSpeak is in the business of swampification. The proof is in Barkley Rosser’s recent posts about Trump, Putin, populism etcetera which do not contain one single atom of valid economics.

When Barkley Rosser occasionally turns to economics, swampiness goes into hyperdrive. To recall, Noah Smith’s argument has been: “If you and your buddies have a political argument, a vast literature can help you defend your argument even if it’s filled with vague theory, sloppy bad empirics, arguments from authority, and other crap.”

This is the actual situation in economics: economic policy arguments and proposals have NO sound scientific foundation. How does Barkley Rosser counter this argument which applies to Walrasianism, Keynesianism, Marxianism, Austrianism, and Pluralism alike? With the recommendation to read good review essays. This is off the point like recommending not to drink leaded water but to take the lead in the more convenient pill form.

Good review essays, of course, are NOT the way to get rid of the “crappy vast literature” that has been produced by incompetent scientists and agenda pushers. Good review essays only preserve the swamp. Harcourt’s review of the capital controversy is a case in point.

The ambition of science is, of course, to drain the swamp of mere opinion and to eventually reach the firm ground of true theory. Lifelong swampies who see their natural habitat in jeopardy quite naturally defend it.#2 This is why Walrasians, Keynesians, Marxians, and Austrians are currently so busy producing even more mud in the econblogosphere. Barkley Rosser and his buddies in their utter scientific incompetence are setting up new records in mud production.


#1 Feynman Integrity, fake science and the econblogosphere
#2 Failed economics: The losers’ long list of lame excuses

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Wikimedia AXEC121g

Smart young empirically-minded economists: another vain hope

Comment on Noah Smith on ‘How should theory and evidence relate to each other?’

Blog-Reference and Blog-Reference adapted to context and Blog-Reference on May 17

Economics fits perfectly Feynman’s description of a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Economists have realized that science consists of two components theory and evidence: “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)

But, for some reason, economists do not get the two components properly together.#1 With regard to the criteria of material and formal consistency, economics is a failed science.

Currently, economists are in the mode of thorough self-critique. Yes, we have done too much math, yes, there has been too much abstract model building and too little empirics, etc. But then, all this was what ‘thinking like an economist’ was meant to be: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

Economists readily admit obvious blunders. But then these are declared the faults of the old guard and now the smart young economists are on the right track. The fact is, though, that the new guard, just like the old, does not really understand what science is all about.

Science is about general and invariant features of reality. In marked contrast, history is about unique event configurations on the surface that never repeat themselves. Science abstracts from all spatiotemporal details, which are so dear to the commonsenser and realist, because NO way leads from the history of falling apples to the universal Law of Falling Bodies. Nozick defines invariance in general terms: “An objective fact is one that is invariant under all admissible transformations.”

Non-scientists and historians are glued to the ever-changing surface, so they produce stories while scientists try to get hold of the underlying structure and produce laws = invariances. Economists are dimly aware of this: “That’s a good reason to want a good structural model.” (Noah Smith)

The lethal defect of economics is that it is microfounded, i.e. based on behavioral axioms.#2 Now it holds that (i) there is NO such thing as an invariant of human behavior, and (ii), NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works.

Economics is NOT AT ALL about human behavior, this is the subject matter of psychology, sociology, anthropology, biology, political science, etc., but about the behavior of the economic system. As a consequence, economics has to be macrofounded.#3

Economics has to step down as the fake Queen of the so-called social sciences in order to eventually become an honorable member of the systems sciences. This Paradigm Shift, clearly, is beyond the means of Noah Smith's smart young empirically-minded economists’.

Egmont Kakarot-Handtke


#1 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 The happy end of the social science delusion
#3 True macrofoundations: the reset of economics

Related 'What is REALLY wrong with macro' and 'Does Asad Zaman fly with POL or SCI Airlines?' and 'Macro imbeciles' and 'From the pluralism of false models to the true economic theory'

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COMMENT on GW on May 17

You say: “I’d recommend closely reading and translating Blanchard’s ”

That is not such a good idea. Blanchard, too, is in deep methodological confusion. For details see:
► From the pluralism of false models to the true economic theory
► Eclecticism, anything goes, and the pluralism of false theories
► Getting out of IS-LM = Getting out of despair

Toward the New Academy

Comment on Noah Smith on ‘Can rationalist communities still change the world?’

Blog-Reference

The all too obvious problem of economics is that political economics (= agenda-pushing) has dominated theoretical economics (= science) since the founding fathers. The Chicago School with Hayek and Friedman as iconic figures is one of the better-known examples.

Political economics has changed the world but has not produced anything of scientific value: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum) Economists still lack the true theory. False theory, though, leads to false policy guidance. Scientifically incompetent economists bear the intellectual responsibility for the social devastation of mass unemployment since the Great Depression.

To get out of the current pluralism of provably false theories requires that theoretical economics emancipates itself from political economics. Or, more generally, that science emancipates itself from politics or any other conceivable other-directedness. Other-directedness — this is rather trivial — takes mostly the form of money. Clearly, if politics/ business is thrown out of science funding evaporates.

The proper separation of politics/business on the one hand and science on the other presupposes the solution to the funding problem. There can be no full scientific sovereignty without full financial sovereignty.

The curious thing is that what we call material wealth/innovative products/civilization/ culture/knowledge has for the most part been created by science but scientists have to go begging for funds and are de facto continuously threatened with the withdrawal of funds. As a result, science is leveraged where government or business pour money in and it is de-leveraged elsewhere. How the relationship between science and politics/business gradually developed over time can be gleaned from the following episodes.

“At one point in that 100 years, Lord Ernest Rutherford was visited by a minister of the Queen. He proudly and busily demonstrated what he had learned about radio. The minister said that’s all very good, but what is it good for. Lord Rutherford replied that he did not know, but he guaranteed that at some point the government would tax it.”#1

“The investors showed little interest in Tesla’s ideas for new types of motors and electrical transmission equipment. They were more interested in developing an electrical utility than inventing new systems. They eventually forced Tesla out, leaving him penniless. He even lost control of the patents he had generated, since he had assigned them to the company in lieu of stock. He had to work at various electrical repair jobs and as a ditch digger for $2 per day.”#2

“In the mid-1890s the conglomerate General Electric, backed by financier J. P. Morgan, was involved in takeover attempts and patent battles with Westinghouse Electric. A patent-sharing agreement was signed between the two companies in 1896, but Westinghouse was still cash-strapped from the financial warfare. To secure further loans, Westinghouse was forced to revisit Tesla’s AC patent, which bankers considered a financial strain on the company. … In 1897, Westinghouse explained his financial difficulties to Tesla in stark terms, saying that, if things continued the way they were, he would no longer be in control of Westinghouse Electric and Tesla would have to ‘deal with the bankers’ to try to collect future royalties. Westinghouse convinced Tesla to release his company from the licensing agreement over Tesla’s AC patents, in exchange for Westinghouse Electric purchasing the patents for a lump sum payment of $216,000. This provided Westinghouse a break from what had turned out to be an overly generous $2.50 per AC horsepower royalty, due to alternating current’s rapid gain in popularity.”#2

“Starting in 1934, the Westinghouse Electric & Manufacturing Company began paying Tesla $125 per month as well as paying his rent at the Hotel New Yorker, expenses the Company would pay for the rest of Tesla’s life. Accounts on how this came about vary. Several sources say Westinghouse was worried about potential bad publicity surrounding the impoverished conditions their former star inventor was living under. It has been described as being couched in the form of a “consulting fee” to get around Tesla’s aversion to accept charity, …”#2

Between Rutherford’s independent research and Tesla’s living from the corporate charity, something has gone badly wrong with science.

Roughly speaking, scientists are individuals who are confident that they can figure out exactly how a greater or smaller part of the universe works. Often, this part of reality is outside the perimeter of commonsensical everyday reality or of what Marshall called the ordinary business of life. What scientists need is time, the absence of all kinds of disturbances/ distractions, more or less expensive tools, cooperation/exchange of ideas, protection from morons/commonsensers/trolls, and, just like anybody else, food/clothing/shelter/health care. Whether this investment of time/resources/talent/genius produces (i) new scientific knowledge, (ii) a social surplus, and (iii) an economic profit is highly uncertain. This makes scientists dependent on people with a mindset and an agenda that is very different from their own, i.e. investors, speculators, bankers, sponsors, financiers, entrepreneurs, CEOs, politicians, etcetera.

While for the individual scientist, the outcome of her/his research is highly uncertain the monetary and nonmonetary profit of science as a collective enterprise is gigantic. What science as an institution — let us call it the New Academy — has to achieve is to get x percent of the selling price of every product/service that incorporates the results of scientific research. This money then flows back to new research. It takes two forms (i) unconditional lifelong support of researchers with the normal/minimum necessities of life, (ii) spending on necessary tools/instruments/hardware/software/materials etcetera. The decisions about the budget lie in the sovereignty of the members of the New Academy. Thus, the efforts/risks/rewards of scientific research are inter-generationally shared within the supra-national scientific community with NO interference from non-scientists.

The basic idea is to make science entirely free from other-directedness and to put it on its own financial feet. Needless to emphasize that the New Academy is strictly focused on science, education, and the dissemination of knowledge. It is separated from politics and all other non-, anti-, or unscientific activities by a very strong Chinese Wall.

What we have learned from the failure of political economics is that the political/business mindset is incompatible with the scientific mindset and that the former invariably cripples and corrupts the latter: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. … A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)

The practical/institutional separation of politics/business and science is an urgent necessity for scientists in general and economists in particular. The community of scientists has, first of all, to solve its funding problem in order to get politics/business off its back and then, in full material and intellectual sovereignty, to figure out how the universe, the world, and the economy work. The sole mission of the New Academy is to produce truth-value. And this also means that political economics as we know it from Keynes, Hayek, Friedman, Krugman, Varoufakis, and all the scientifically incompetent rest, and all their proto-scientific garbage, becomes a thing of the past.

Will the New Academy change the world? Yes. Will the New Academy improve the world? Who else could? Politician X? Spiritual leader Y? Businessman Z? The one-percenters? The ninety-nine-percenters? Conservative or liberal blatherers? Walrasians, Keynesians, Marxians, Austrians? Would you ever board an aircraft that is said to have been designed and built by these folks?

Egmont Kakarot-Handtke


#1 Source PSW
#2 Wikipedia

Related 'Economists’ proto-scientific shell games' and 'Scientific suicide in the revolving door' and 'There is NO such thing as an economic expert' and 'There is no scientific elite in economics' and 'Schizonomics'

How to overcome the manifest silliness of Econ 101 and save the economy

Comment on Noah Smith on ‘Why the 101 model doesn’t work for labor markets’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference on Apr 16

The Econ 101 labor market theory does not work because it is based on microfoundations. Microfoundations are given with the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

From these axioms together with some auxiliary assumptions follows what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium, which is the representative economist’s all-purpose tool.

This approach is false on all methodological counts, that is, supply-demand-equilibrium is a NONENTITY. General inapplicability implies that it is also inapplicable to the labor market.

Microfoundations is the wrong approach. This explains why economics is a failed science. The correct approach is macrofoundations.#1

The elementary version of the correct (objective, systemic, behavior-free, macrofounded) Employment Law is shown on Wikimedia AXEC62.#2

From this equation follows:
(i) An increase of the expenditure ratio ρ_E leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates credit expansion, a ratio ρ_E less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law contains in addition profit distribution, the public sector, and foreign trade.

Item (i) and (ii) cover Keynes’s familiar arguments about aggregate demand. The factor cost ratio ρF as defined in (iii) embodies the price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what standard economics teaches: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price.” (Tobin)

False theory leads to false policy guidance. Scientifically incompetent economists bear the intellectual responsibility for the social devastation of mass unemployment.

The systemic Employment Law contains nothing but measurable variables and is therefore readily testable. There is no need for further brain-dead supply-demand-equilibrium blather: as always in science, a test decides the matter.

Egmont Kakarot-Handtke


#1 The macrofoundations approach starts with three systemic (= behavior-free) 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) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
#2 For details see cross-references Employment

Related 'How economists murdered the economy and got away with it' and 'Economics is a science? You must be joking!' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'The father of modern economics and his imbecile kids' and 'Coming soon: the canonical economics textbook' and cross-references Econ 101

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REPLY to Tom Hickey on Apr 16

The concept of rent is ill-defined because economists do not know since Smith and Ricardo what profit is. See When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

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REPLY to JoeMac on Apr 17

“Every model is unrealistic” is an argument from the list of economists’ silliest excuses.#1 Time to bring yourself methodologically up to speed.

The point is NOT that Econ 101 is ‘unrealistic’ but that it is PROVABLY FALSE.#2 And the fact of the matter is that economists in their abysmal scientific incompetence have NOT realized it in the past 60 years.#3

#1 Failed economics: The losers’ long list of lame excuses
#2 All models are false because all economists are stupid
#3 The father of modern economics and his imbecile kids

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COMMENT on Bruce Wilder on Apr 17

Supply-demand-equilibrium is one of the most annoying constructs in the history of sciences but every student generation since Walras/Jevons/Menger swallowed this methodological crap without turning an eyelid.

Nobody with two brain cells can start with a NONENTITY like utility maximization, derive phantasmagorical functions and then wonder why econometrics runs straight into an identification problem.

It is NOT so that there were no timely warnings from genuine scientists: “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)

Every economist who has accepted supply-demand-equilibrium as a reasonable description of how the market system works has flunked the competency test.#1 There is no way around the nullification of all scientific credentials (Master, Ph.D., Peer Reviewer, Journal Editor, Professor, Nobel Laureate) economists ever received since Walras/Jevons/Menger. Heterodox economists are NOT exempted because they failed to develop an alternative to supply-demand-equilibrium since Veblen.

#1 How to Get Rid of Supply-Demand-Equilibrium

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ICYMI on Apr 17

Econ 101 is dead.#1

Psychology, sociology, politics, history have to be left to psychologists, sociologists, political scientists, and historians.#2 Economics is about how the economic system works.

Supply-demand-equilibrium is based on behavioral axioms (= microfoundations) and because of this methodological blunder the whole analytical superstructure as presented in the textbooks for 60+ years is provably false.#3

Econ 101 doesn’t work for the labor market and it doesn’t work anywhere else.

Economists’ memo: If it isn’t macro-axiomatized, it isn’t economics.


#1 Methodology 101, economic filibuster, and the mother of all excuses
#2 A farewell to PsySoc economics
#3 The father of modern economics and his imbecile kids

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REPLY to JoeMac on Apr 20

I said: “The point is NOT that Econ 101 is ‘unrealistic’ but that it is PROVABLY FALSE.”

You said: “I don’t understand your point. No one is against using empirical evidence to refute models.”

Provably false means false in the SAME way false as the geocentric theory is false, that is, TOTALLY false, that is, logically and empirically false. The consequence is that Econ 101 is OUTSIDE of science just as the geocentric theory or the flat-earth theory or the phlogiston theory are outside of science.

Econ 101 is based on microfoundations which are given with the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

This axiom set contains three NONENTITIES. Every theory/model that contains a NONENTITY is a priori false. In other words, Econ 101 is axiomatically false since Walras/Jevons/Menger. In still other words, economics from supply-demand-equilibrium to DSGE is false as clearly as 2+2=5 is false.

There is NO choice between partial equilibrium or total equilibrium because ALL models that contain equilibrium HC5 are false. The same holds for HC2 and HC4.

From this follows that the microfoundations paradigm has to be FULLY replaced just as the geocentric paradigm had to be fully replaced by the heliocentric paradigm.

In simple terms: axiomatically false is as different from ‘unrealistic’ as a death sentence is from a traffic ticket.

Econ 101 is one of the most annoying constructs since the ancient Greeks invented science 2300+ years ago but the representative economist has not realized it until this day. Econ 101 is outside of science, the representative economist is outside of science, and JoeMac is outside of science. Which part of ‘outside of science’ do you not understand?

Economists’ proto-scientific shell games

Comment on Noah Smith on ‘Can rationalist communities still change the world?’

Blog-Reference

Changing the world is easy. From history and fresh personal experience, we know that any moron can change the world. Change is a weasel word that covers both improvement and deterioration. In public discourse, it is therefore regularly used to euphemize a deterioration. When a politician speaks of change people know that things are NOT going to be better but worse.

The word change is ideally suited for verbal shell games. The same holds for rational community. Without these weasel words, Noah Smith’s question should read: ‘Can scientists still improve the world?’ His answer is, with some caveats, in the affirmative: “… I think it’s still clear that a relatively small community of smart people [e.g. “a group of physicists, mathematicians, and engineers who came out of Europe in the early 20th century”] can change the world.”

After this framing, the shell game begins: “Another group that changed the world was the Chicago School of economics.” By simple association we now have: economics = science, smart people = Chicago School, change = improvement.

The first thing to notice is that there is NO such thing as economics: there is theoretical economics and political economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. A closer look at the history of economic thought shows that theoretical economics had been hijacked from the very beginning by the agenda pushers of political economics. Smith, Ricardo, Malthus, Marx, Keynes, Hayek, Friedman, Krugman, Lucas and almost everybody in-between falls into the category of political economist.

Political economics has produced NOTHING of scientific value in the last 200+ years. And if there ever was a political sect that violated the scientific standards of material and formal consistency then the Chicago School.

So, Noah Smith’s shell game has to be set right: economics = cargo cult science, agenda pushers = Chicago School, change = deterioration. To be sure “Gary Becker, Robert Lucas, Milton Friedman, Ronald Coase, Frank Knight, and many others” will never be accepted in the community of scientists. They have to be content with the membership of the political club Mont Pelerin.

Egmont Kakarot-Handtke


Immediately following Toward the New Academy.

Related 'Scientists and science actors'.

The thinking economist

Comment on Noah Smith on ‘Beware of "thinking like an economist"’

Blog-Reference

What it means to think like an economist is well-defined: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

The definition of the subject matter translates into the following hardcore propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

So, thinking like an economist boils down to: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)

The problem with the maximum-and-equilibrium world is that it consists of NONENTITIES: constrained optimization, rational expectations, equilibrium. One must be a rather feeble thinker to accept these green cheese assumptions as premises of economic analysis. Economists do this for 150+ years.

Those economists who do not subscribe to HC1/HC5 are called heterodox economists. Unfortunately, Heterodoxy is good at debunking but failed to replace the neoclassical starting point with something better. As a result, the current state of economics is this: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, materially/formally inconsistent, axiomatically false, and ALL got profit, which is the foundational magnitude of economics, wrong.

No economic advice ever had sound scientific foundations. Obviously, “thinking like an economist” does not yield acceptable results. Noah Smith tries to save the situation and to put some lipstick on the dead pig: “So while “thinking like an economist” is in principle a good thing, beware of people who claim to know how to do it.”

The fact of the matter is that “thinking like an economist” amounts to accepting proto-scientific garbage as science. No thinking being will ever do this.#1

Egmont Kakarot-Handtke


#1 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist

Related 'How Arrow pushed economics over the cliff' and 'In economics, the scientific breakthrough is always just around the next corner' and 'Where economics went wrong' and 'Economics is NOT a misunderstanding but cargo cultic crap' and 'There is no scientific elite in economics' and 'The economist as stand-up comedian' and 'Confounding Is and Ought: the economist as moralist' and 'Economists’ proto-scientific shell games' and 'The inexorable Paradigm Shift in economics'. For details of the big picture see cross-references Paradigm Shift.

In economics, the scientific breakthrough is always just around the next corner

Comment on Noah Smith on ‘Anti-empiricism is not humility’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference

The scientific method is well-defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

All this has been clear in principle since the ancient Greeks, but economists never got it. The very characteristic of economics is that it does not realize BOTH material AND formal consistency but oscillates between theory without measurement and measurement without theory.

After even the dullest economist has realized that DSGE/RBC/New Keynesianism has no counterpart in the real world the flight to empiricism is in full swing: “Empirical economics is taking over the profession.” (See intro)

The main goals of this new movement are:
― To “recapture some of the public respect that it’s lost over the last decade”
― “We’d all like economists to be more humble, right?”

In other words, we have to do something about image, branding, and customer retention. The general public is said to have enough of arrogant experts, incomprehensible abstractions, pesky mathiness, and the inability to predict the next crash.#1

Not only this: “That’s what natural science looks like ― a small number of theory papers, supported by a very large base of applied theory and empirical work. It’s the sign of a mature field.”

The problem with economics, though, is that it is NOT a mature field. Just the contrary. Economics languishes for 200+ years at the level of a proto-science. The representative economist is in a state of incurable self-delusion. Until this day, economists have not even gotten the foundational concepts of profit and income right.#2 This is like medieval physics before the concepts of mass, force, and energy were consistently defined and properly understood.

Economists claim to do science but obviously lack any deeper understanding. Feynman put it thus: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”#3

What is missing is a proper understanding of what science is all about. The goal of theoretical economics is the true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists do not have the true theory. But without the true theory, empirical work is a cargo cultic exercise: “And in the social sciences, it is even more obvious than in the natural sciences that we cannot see and observe our objects before we have thought about them. For most of the objects of social science, if not all of them, are abstract objects; they are theoretical constructions.” (Popper)

The economy is, clearly, an abstract object. Empiricism, realism, common sense, and loose verbal reasoning are always popular but do not cut much ice. Science goes beyond common sense and requires some abstraction. The functioning of the price and profit mechanism for the economy as a whole cannot be observed with the naked eye but only with the third eye of theory.

The current wave of empiricism and humility is just another instantiation of fake science. The only thing the representative economist can do to further the progress of economics is to throw himself under the bus.

Egmont Kakarot-Handtke


#1 New economic thinking, or, let’s put lipstick on the dead pig
#2 How the intelligent non-economist can refute every economist hands down
#3 Wikipedia Cargo cult science

Related 'Where economics went wrong' and 'There is no scientific elite in economics' and 'A vacuous analysis of profits and productivity' and 'Economics between mathiness, dyscalculia and idiocy' and 'Modern macro moronism' and 'If it isn’t macro-axiomatized, it isn’t economics'.

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COMMENT  Practical recommendations for economics methodology on Mar 17

(i) The problem of economists is NOT arrogance but incompetence. Because of this, humility is NOT the solution.

(ii) If one puts NONENTITIES into the axioms (constrained optimization, rational expectations, equilibrium) one runs with absolute necessity into the identification problem. This problem cannot be overcome with more empiricism or better statistical technique but only by retiring cargo cult scientists who proudly announce “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)#1

(iii) The subjective-behavioral starting point of standard economics has to be fully replaced by objective-systemic axioms from which testable propositions readily follow.

(iv) Economists, who have not yet arrived at something akin to Archimedes’s Law of the Lever, should not invoke Heisenberg’s Uncertainty Principle in a methodological discussion.

(v) Economists, who cannot handle elementary mathematics,#2 should not invoke Gödel’s Incompleteness Theorem in a methodological discussion.#3

(vi) If it isn’t macro-axiomatized, it isn’t economics.

#1 How Arrow pushed economics over the cliff
#2 How the intelligent non-economist can refute every economist hands down
#3 See ‘Economics, Gödel, and a would-be field day for math-Luddites