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

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

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

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

Since Adam Smith/Karl Marx economists are in a state of incorrigible self-deception: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.” (Feynman)#1

The fact is, there is no such thing as economics. There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, and the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency have to be strictly adhered to.

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

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

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

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

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

What, then, are these premises? Orthodox economics is based upon the Walrasian axiom set = microfoundations: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

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

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

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

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

Egmont Kakarot-Handtke


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

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

Rethinking the Profit Law

Comment on David F. Ruccio on ‘Value and the Marxian critique of political economy’

Blog-Reference

David F. Ruccio writes: “When I ask students to compare Marx’s theory of profits with the neoclassical theory of profits, they have no idea what I’m talking about.”

It’s worse, economists, in general, have NO idea about what profit is. This includes the four main sects Walrasianism, Keynesianism, Marxianism, and Austrianism. The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

The Profit Theory is false since Adam Smith. #1 Economists have NO idea about the pivotal magnitude of their subject matter. This includes, of course, David F. Ruccio. #2

There is three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a WHOLE, (iii) DISTRIBUTION of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.

The Law of Value says that relative prices in the elementary production-consumption economy are inverse to the productivities. #3 This Law replaces the Labour Theory of Value.

The Profit Law for the elementary production-consumption economy says that overall/macroeconomic profit depends on the expenditure ratio and the distributed profit ratio. #4, #5

It holds in particular:

• Overall profit does not depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior. These subjective factors are IRRELEVANT. Profit for the economy as a whole is OBJECTIVELY determined.
• Profit/loss of the business sector is, in the simplest case, determined by the increase/decrease of the household sector’s debt.
• Wage income is the factor remuneration of labor input. Profit is NOT a factor income.
• There is no relation at all between profit, capital, marginal, or average productivity.
• 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 ownership of the firms that comprise the business sector. The macroeconomic Profit Law is the SAME in Capitalism and Communism.
• It is an elementary mistake to maintain that total income is the sum of wages and profits.

The classical/Marxian/neoclassical and the Keynesian/Post-Keynesian theories of value/profit are provably false or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” One thing has always been equally distributed between the major economic sects, viz., scientific incompetence.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith
#2 Profit for Marxists
#3 The Pure Logic of Value, Profit, Interest
#4 Essentials of Constructive Heterodoxy: Profit
#5 See the Profit Law for the elementary production-consumption economy in ratio-form on  Graphic AXEC08

Related 'Why economists know nothing' and 'Economics ― a doctor worse than the disease' and 'How the intelligent non-economist can refute every economist hands down' and 'True macrofoundations: the reset of economics' and 'First Lecture in New Economic Thinking' and 'Profit'

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Graphic AXEC143d Profit Law (with increasing complexity) and Balances Equation

Have data, lack theory

Comment on David Ruccio on ‘Why is slow growth a problem?’

Blog-Reference and Blog-Reference

Everybody knows: the economy does not function as economics textbooks say. This holds — with damaging consequences — in particular for the labor market. The fatal professional incompetence consists of:
• To this day, the representative economist has not realized that the overall systemic interdependencies establish a POSITIVE feedback loop between the (aggregate) product and the (aggregate) labor market.
• To this day, the representative economist cannot tell the difference between income and profit.

In the following, a sketch of the formally and empirically correct employment and profit theory is given.

The most elementary version of the Employment Law is shown on Graphic AXEC62a

 From this equation follows inter alia:
(i) An increase in the expenditure ratio ρ_E leads to higher employment. An expenditure ratio ρ_E>1 indicates credit expansion, a ratio ρ_E<1 indicates credit contraction/debt repayment.
(ii) Increasing investment expenditures I exert a positive influence on employment; a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F=W/PR leads to higher employment. This implies that a HIGHER average wage rate W leads to HIGHER employment. This is, of course, contrary to conventional economic wisdom (2015).
(iv) The complete and testable Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and the trade balance with the rest of the world.

Points (i) and (ii) are familiar Keynesian stuff. Let us focus here alone on the factor cost ratio ρ_F as defined in (iii). This variable embodies the price mechanism, which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment increases if the average wage rate W increases relative to the average price P and productivity R.

In order to avoid worldwide unemployment and deflation, the average wage rate must, therefore, rise worldwide. For the relationship between real wage, productivity, profit, and real shares, see (2015, Sec. 10)

The axiomatically correct Profit Law reads Qm≡Yd+I−Sm (2014, p. 8, eq. (18)) #1 Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditures.

The Profit Law gets a bit more complex when foreign trade and government are included. The equation says (for the world economy as a whole):
(v) Strong growth = high investment I is good for the overall monetary profit of the business sector as a whole.
(vi) Strong consumption expenditures = low saving Sm or even dissaving -Sm = growing consumer debt is good for profit.
(vii) By implication, high government deficit spending = growing public debt is good for profit.
(viii) High profit distribution Yd is good for profit.

Profit and profit distribution constitute a self-reinforcing feedback loop. The same holds for profit and investment. These built-in positive feedback loops explode the notion of equilibrium: the monetary economy is NOT a self-optimizing equilibrium system.

Note that overall profit has nothing to do with productivity or low wages. These and other factors affect only the distribution of overall profit between firms or countries. Note also that the profit equation holds for the USA, Russia, China, the EU, and all other countries/ associations; that is, it does not matter at all whether one has a market economy or private property or free enterprise or any other of the alleged characteristics of capitalism.

David Ruccio has to do a lot of scientific homework to make his data speak.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

#1 See Graphic AXC09 or Graphic AXEC08 or Graphic AXEC42.

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REPLY to graccibros of Feb 11

From the same set of equations follow consistently the real shares (which, of course, have nothing at all to do with marginal productivity). For details, see the 23 pages of the working paper The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?.

Related 'Accounting for dummies'.