Key Issues: One way to get profit right, many ways to get it wrong

There are two criteria to assess a theory: material consistency and formal consistency. A theory must satisfy both criteria; that is to say, it can be rejected either on empirical or on logical grounds alone.

From the structural axioms and definitions follows the monetary profit for the business sector as a whole in the case of an investment economy

Total monetary profit in period t is given by the difference between the business sector’s investment expenditures and the household sector’s monetary saving plus distributed profits of the business sector. Overall profit is spread among firms in the process of competition.

 

As a consequence, the following statements have to be rejected on purely formal grounds:

Smith: Wages, profit, and rent are the three original sources of all revenue as well as of all exchangeable value. (2008, p. 50)

Ricardo: … profits would be high or low in proportion as wages were low or high. (1981, p. 110)

Senior: In the second class we have the words Capital, Capitalist, and Profit. These terms express the instrument, the person who employs or exercises it, and his remuneration; but there is no familiar term to express the act, the conduct of which profit is the reward, and which bears the same relation to profit which labour does to wages. To this conduct we have already given the name of Abstinence. (1854, 4.9)

Mill: The cause of profit is, that labour produces more than is required for its support. (2006, p. 411)

Marx: Hence, if a commodity is sold at its value, a profit is realized, which is equal to the excess of its value over its cost-price, or equal to the entire surplus-value incorporated in the value of the commodity. (1909, I. I. 31)

Jevons: I think that in the equation Produce=profit+wages, the quantity of produce is essentially variable, and that profit is the part to be first determined. (1911, p. 270)

Marshall: The normal earnings of management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. (2009, p. 508)

Knight: The presence of true profit, therefore, depends on an absolute uncertainty in the estimation of the value of judgment, or on the absence of the requisite organization for combining a sufficient number of instances to secure certainty through consolidation. (2006, p. 285)

Schumpeter: And since the new combinations which are carried out if there is “development” are necessarily more advantageous than the old, total receipts must in this case be greater than total costs. (2008, p. 129)

von Mises: The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply. (2007, p. 293)

Keynes: Thus the factor cost and the entrepreneur’s profit make up, between them, what we shall define as the total income resulting from the employment given by the entrepreneur. (1973, p. 23), original emphasis

Hicks: The curve IS can therefore be drawn showing the relation between Income and interest which must be maintained in order to make saving equal to investment. (1937, p. 153)

Harrod: The relevant propositions may be stated in the form of truisms or tautologies, such as that the price of an article is equal to the sum of rewards to all persons contributing to its production, ... (1938, p. 392)

Shackle: Thus it seems that we might select decision-making and uncertainty-bearing as the economic roles to perform which men come forward because of the prize of profit in the sense we have been discussing. (1955, p. 226)

Samuelson: GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP. (1998, p. 392)

Debreu: … the consumers own the resources and control the producers. Thus, the ith consumer receives the value of his resources … and the shares … of the profit of the 1st, …, jth, …, nth producer. … Consider a private ownership economy E. When the price system is p, the jth producer tries to maximize his profit on Yj. Suppose that yj does this; the profit pj(p) = p • yj is distributed to shareholders. (1959, pp. 78-79)

Arrow and Hahn: Given a set of prices for all commodities, it is possible to calculate for each activity its profit, the excess of the values of its outputs over the value of its inputs; … The assumptions of perfect competition imply that … each firm chooses an activity that yields it at least as much profit as any other possible. (1991, p. 53)

Kaldor: Income may be divided into two broad categories, Wages and Profits (W and P), where the wage-category comprises not only manual labour but salaries as well, and Profits the income of property owners generally, and not only of entrepreneurs. (1956, p. 95)

Kalecki: Gross profits = Gross private investment + Capitalists’ consumption. (1942, p. 259)

Sraffa: This is because the surplus (or profit) must be distributed in proportion to the means of production (or capital) advanced in each industry; and such a proportion between two aggregates of heterogeneous goods (in other words, the rate of profits) cannot be determined before we know the prices of the goods. (1979, p. 6)

Boland: The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. Thus, since in the short-run non-zero profit is possible, the actual short-run prices cannot always be used for aggregation. But, from the macro perspective of Walrasian general equilibrium, the total profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) but this does not preclude the possibility of short-run profits and losses of individual firms canceling each other out. (2003, p. 150), original emphasis

Minsky: The simple equation “profit equals investment” is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure. (2008, p. 161), original emphasis

Barro: Households receive income in four forms: profit …, wage income, rental income, and interest income. (2008, p. 131)

Wickens: Implicit measure of profits Πt = -kt+1 +(1+θ)kt. (2008, p. 82)

Ljungqvist and Sargent: In each period, the representative firm takes (rt, wt) as given, rents capital and labor from the households, and maximizes profits: Π=F(kt, nt)-rtkt-wtnt. (2004, p. 484)

Nadal: ... the budget constraint of consumers may be undetermined because it incorporates their share of firms' profits, which may not be defined. (2004, p. 39)

Keen: … net annual income in this simple model equals the sum of wages plus profits. (2011, pp. 366, 146)

About profit, economists have been groping in the dark since Adam Smith.

At all times, including the present, in judging from the standpoint of the requirements of each period ... the performance of economic theory has been below reasonable expectation and open to valid criticism. (Schumpeter, 1994, p. 19)

Not one of the quoted books contains the correct profit theory, and the compilation is far from complete.


References
Arrow, K. J., and Hahn, F. H. (1991). General Competitive Analysis. Amsterdam, New York, etc.: North-Holland.
Barro, R. (2008). Macroeconomics: A Modern Approach. Mason: Thompson South-Western.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Harrod, R. F. (1938). Scope and Method of Economics. Economic Journal, 48(191): 383–412. URL

Hicks, J. R. (1937). Mr. Keynes and the "Classics": A Suggested Interpretation. Econometrica, 5(2): 147–159. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. Online-version URL
Kaldor, N. (1956). Alternative Theories of Distribution. Review of Economic Studies, 23(2): 83–100. URL
Kalecki, M. (1942). A Theory of Profits. Review of Economic Studies, 52: 258–267. 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.
Knight, F. H. (2006). Risk, Uncertainty and Profit. Mineola: Dover. (1921).
Ljungqvist, L., and Sargent, T. J. (2004). Recursive Macroeconomic Theory. Cambridge, London: MIT Press, 2nd edition.
Marshall, A. (2009). Principles of Economics. New York: Cosimo, 8th edition. (1890). Online-version URL
Marx, K. (1909). Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole. Library of Economics and Liberty. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 2, Books I-II of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. Online-version URL
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago, San Francisco: McGraw-Hill, 2nd edition.
Nadal, A. (2004a). 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.
Ricado, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, etc.: Cambridge University Press. Online-version URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Schumpeter, J. A. (2008). The Theory of Economic Development. An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. New Brunswick, London: Transaction Publishers. (1934).
Senior, N. W. (1854). Political Economy. Library of Economics and Liberty. URL
Shackle, G. L. S. (1955). Expectation, Income, and Profit. Ekonomisk Tidskrift,57(4): 215–234. URL
Smith, A. (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press. (1776). Online-version URL
Sraffa, P. (1979). Production of Commodities by Means of Commodities. Prelude to a Critique of Economic Theory. Cambridge, London, etc.: Cambridge University Press.
von Mises, L. (2007). Human Action. A Treatise on Economics, Volume II. Indianapolis: Liberty Fund. Online-version URL
Wickens, M. (2008). Macroeconomic Theory. A Dynamic General Equilibrium Approach. Princeton, Oxford: Princeton University Press.

 

Related 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist, Sec. 4 URL' and 'Debunking squared' and 'Profit for Marxists URL'.


The theory of profit affects, first of all, the familiar ideas about the functioning of the market mechanism (for details see 'The Law of Supply and Demand: Here it is Finally' URL).


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

***

Graphic AXEC109k

Key Issues: Critique of legacy economics

Logical inconsistency:

... Keynes was simply arguing that microeconomic theory is false! Presumably, it is false because it is not logically consistent with all macrophenomena – such as persistent disequilibria – and thus, by modus tollens, at least one of the assumptions of microtheory is false and hence microtheory as a whole is false. (Boland, 2003, p. 143)

Shoddy argumentation:

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)

 Inappropriate copying of physics:

Thus many are inclined to blame inappropriate copying of physics for the willingness of neoclassicals to tolerate bizarrely unrealistic assumptions and to place everything historical, cultural, institutional, and even psychological outside the framework of economic analysis. (Porter, 1994, p. 128)

The drive to incorporate the formalism of Hamiltonian dynamics is one pertinent example of the triumph of technique over theoretical insight. (Mirowski, 1995, p. 376)  

Borrowing the wrong concepts from mathematics:

The discipline of economics has so far successfully resisted all efforts to alter its character as an exercise in how to reason deductively from axiomatic principles. That is, it has insisted on remaining the Euclidean geometry of the social sciences. (Eichner, 1979, p. 172)

Overemphasis of the mathematical method:

It is thus not at all surprising that mainstream contributions are found continually to be so unrealistic and explanatorily limited. The (mathematical) method, or rather the emphasis placed upon it in the modern economics academy, is the overriding problem.  (Lawson, 2012, p. 3)

Misapplication of mathematics:

A second class of economists contain those who have abundantly employed mathematical apparatus, but, misunderstanding its true use, or being otherwise diverted from a true theory, have built upon the sand. (Jevons, 1911, p. xxv)

Mock precision:

Much economic theorising to-day suffers, I think, because it attempts to apply highly precise and mathematical methods to material which is itself much too vague to support such treatment. (Keynes, quoted in Chick, 1998, p. 1864)

Lack of facts:

Next, the empirical background of economic science is definitely inadequate. Our knowledge of the relevant facts of economics is incomparably smaller than that commanded in physics at the time when the mathematization of that subject was achieved. ... It is due to the combination of the above-mentioned circumstances that mathematical economics has not achieved very much. (von Neumann and Morgenstern, 2007, p. 4)

Inconclusiveness of facts:

Even econometricians using identical, or almost identical, data sets are regularly found to produce quite contrasting conclusions, usually with little attempt at explanation. The systematic result here, as the econometrician Edward Leamer observes, is that: "hardly anyone takes anyone else's data analysis seriously". (Lawson, 2012, p. 9)

Denial of empirical refutation:

... suppose they [the economists] did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics. (Hands, 2001, p. 404)

Misleading principles:

Now the rationality principle, which in the social sciences plays a role somewhat analogous to the universal laws of the natural sciences, is false, and if in addition the situational models are also false, then both the constituent elements of social theory are false. (Popper, 1994, p. 173)

Mistaken beliefs:

The notion that microeconomics is a branch of applied mathematics does economists more credit than several possible alternative explanations for its empirical weakness. ... It isolates the limitations of the theory in a factual supposition about the determinants of human behavior, one that economists share with all of us. But the supposition we all share is false, and so economics rests on a purely contingent, though nevertheless central, mistaken belief .... (Rosenberg, 1992, p. 247)

Lack of realism:

Upon leaving office, each new president of the American Economic Association gives the expected speech, showing that he knows full well it is all just a game, and chastises his colleagues for not being more realistic. (Hudson, 2010, p. 9)

Assumptionism:

Cunningham in 1891 remarked that in the choice of premises, “it is not always easy to tell when a professor of the dismal science is making a joke” and I suspect that Cunningham meant that if the professor was not joking, then he was making a fool of himself. (Viner, 1963, p. 12)

And no economist, if I may say so, has ever been helped toward its solution by starting his investigation on the basis of some general theory of value, particularly any theory of value which rested upon marginal utility or upon marginal disutility or upon some combination of the two. (Parry, 1921, p. 128)

Ignorance of time and history dependence:

The notion of time is so primitive and basic an element in man’s experience that its neglect by much economic theory constitutes an incredible puzzle. This puzzle is attributable, perhaps, to the almost irresistible lure of formalism – particularly one that cannot adequately handle time. (Rizzo, 1979, p. 1)

History dependence stares us in the face ..., but it is not the stuff of pure theory. (Hahn, 1991, p. 48)

Ignorance of institutions:

In the earlier part of the century there were major conflicts between institutional economists, who saw the particular arrangements by which particular economies conducted their economic affairs as essential, and neoclassical economists, who sought to see through these inessential details to the underlying fundamental forces - the forces of demand and supply. (Stiglitz, 1991, p. 136)

Counterfactual equilibrium and zero profits:

The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. ... But, from the macro perspective of of Walrasian general equilibrium, the total   profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) ... (Boland, 2003, p. 150)

Questionable foundational assumptions and unjustifiable policy advice:

Much of economic theory is based on three questionable assumptions: (1) the world is deterministic; (2) decision makers act as if they know the values of all relevant parameters; and (3) consumers and firms respectively, act as if they were maximizing utility and profit. ... 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. Economists derive theorems, make predictions, and (!) suggest economic policies using arguments which explicitly or implicitly postulate the validity of the first two assumptions mentioned above. Such endeavors are unjustifiable unless it can be demonstrated that the most important doctrines of economics are insensitive to a relaxation of these two assumptions. (Stigum, 1991, pp. 29-30)

Wrong methodology:

The essence of contemporary mainstream economics does not lie at the level of substantive theory as most of its critics suggest, but at the level of methodology. (Lawson, 1997, p. 282)

Evasion of reality:

The modern history of economic theory is a tale of evasion of reality. Faced with the challenge of these vast changes and vital problems for over a century, it reacted by denying their existence in order to be able to produce a scientific system, a smoothly-functioning self-balancing model. (Balogh, 1982, p. 32)

No predictive capacity:

Economic theory seems permanently stuck at the level of generic predictions – predictions that some change will happen some time and some place, without ever telling us when and where and how much of a change will occur. (Rosenberg, 1994, p. 217)

An unfinished task:

It is good to have [the technically best study of equilibria], but perhaps the time has now come to see whether it can serve in an analysis of how economies behave. The most intellectually exciting question of our subject remains: is it true that the pursuit of private interest produces not chaos but coherence, and if so, how is it done? (Hahn, 1984, p. 102)

Lack of imagination:

Thousands upon thousands of scholars, as well as thousands of statesmen and men of affairs, have contributed their efforts to the attempt to understand the course of events of the economic world. And today this field of investigation is being cultivated more extensively, than ever before. How is it, then, that in all these years, and with all the undoubted talent that has been lavished upon it, the subject of economics has advanced so little? (Schoeffler, 1955, p. 2)

In other words, the main developments in economics of the twentieth century ... had been more a matter of form than of substance. ... Little new of any great significance has been learned about the workings of markets since Adam Smith and ... Smith added much less to the discussion than most economists have commonly supposed. (Nelson, 2006, p. 298)

Yet most economists neither seek alternative theories nor believe that they can be found. (Hausman, 1992, p. 248)

Lack of convincing alternatives:

If one calls those individuals working in the field of microeconomic foundations of Keynesian economics Keynesian-economic theorist, then, as Hahn has said, these Keynesians were not much better. (Morishima, 1984, p. 57)

For as I said at the outset, the citadel is not at all secure and the fact that it is safe from a bombardement of soap bubbles does not mean that it is safe. (Hahn, 1984, p. 78)

No future:

There seems to be a quiet confidence in the profession that we are moving, if only slowly, towards a more scientific basis for economics. ... Paradoxically many of those who have contributed much to the development of general equilibrium theory are less complacent. (Kirman, 1989, p. 126)

... anything based on this mock-up is unlikely to fly. (Hahn, 1981, p. 1036)

Neoclassical economics is metaphorically boxed in, and cannot extricate itself. (Mirowski, 1995, p. 389)

The disciplines that we currently call “social sciences” may accumulate gossip or spot correlations, but Rosenberg believes they will never succeed in formulating laws and theories with the force and fruitfulness of those in the natural sciences. (Hausman, 1992, p. 326)

What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work ... (McCauley, 2006, p. 17)

Ideological bias:

Evidently, the tools are not strong enough to discriminate among fundamentally different hypotheses, or at least not strong enough to overcome differences in prior beliefs, beliefs which are often influenced by ideological concerns. (Stiglitz, 1991, p. 134)

Political bias:

Broadly speaking, policies fall into two categories: laissez-faire or interventionist public regulation. Each set of advocates has its own preferred mode of mathematical treatment, choosing the approach that best bolsters their own conclusions. (Hudson, 2010, p. 6)

Lack of public assurance:

... it is clear that the public's lack of faith in the scientific nature of economic knowledge is a fact, past and present. (Benetti and Cartelier, 1997, pp. 211-212)

Pseudo-science:

Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense "science," called "cargo cult science". (Clower, 1994, p. 809)

Pre-science:

The position I now favor is that economics is a pre-science, rather like astronomy before Copernicus, Brahe and Galileo. I still hold out hope of better behavior in the future, but given the travesties of logic and anti-empiricism that have been committed in its name, it would be an insult to the other sciences to give economics even a tentative membership of that field. (Keen, 2011, p. 158)

Economics is a peculiar subject. It looks like a science both in its formal structure and its basic concern with observable reality. And yet economics does not reveal the sort of cumulative progress in the practical manipulation of reality that is one of the abiding characteristics of physics, chemistry, geology and parts of biology. (Blaug, 1990, p. 233)

Within the whole of his [the economist's] science, or what he insists on calling science, no generally recognised result is to be found, as is also the case for theology and for roughly the same reasons; there is no single doctrine taken to be a scientific truth without the diametrically opposed view being similarly upheld by authors of high repute. (Wicksell, quoted in Deane, 1983, p. 8)

We are merely at the threshold of an economic science. (Morgenstern, 1941, p. 374)

Sloppiness:

Few people, and least of all we economists ourselves, are prone to offer us congratulations on our intellectual achievements. Moreover our performance is, and always was, not only modest but also disorganized. Methods of fact-finding and analysis that are and were considered substandard or wrong on principle by some of us do prevail and have prevailed widely with others. (Schumpeter, 1994, p. 6)

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)

Hubris:

... the economists, like the theoretical sociologists of old, only more so, tried to solve the largest possible problems from the least possible knowledge. (Postan, quoted in Viner, 1963, p. 12)

Counterproductive organization:

It could be argued, moreover, that the present organization of the profession is itself a negative factor to the extent that the requirement of rapidly obtained results discourages researchers from entering the domains that are most uncertain (even if they are essential). (Benetti und Cartelier, 1997, p. 215)

We are in danger of losing our grip on the concepts of truth, evidence, objectivity, disinterested inquiry. The preposterous environment in which academic work is presently conducted is inhospitable to genuine inquiry, hospitable to the sham and the fake.  (Haack, 1997, p. 1)

Increasing incompetence:

The last thirty years seem to this observer to have been downhill almost all the way. So much of the literature ... I see as silly beyond all expectation and unscholarly beyond all endurance. (Leijonhufvud, 1998, p. 234)

 Reluctance to scrap obsolete intellectual capital:

Gary Becker has suggested that a substantial resistance to the acceptance of new ideas by scientists can be explained by two familiar economic concepts. One is the concept of specific human capital: the established scholar possesses a valuable capital asset in his command over a particular body of knowledge. That capital would be reduced if his knowledge were made obsolete by the general acceptance of a new theory. Hence, established scholars should, in their own self-interest, attack new theories, possibly even more than they do in the absence of joint action. The second concept is risk aversion, which leads young scholars to prefer mastery of established theories to seeking radically different theories. Scientific innovators, like adventurers in general, are probably not averse to risk, but for the mass of scholars in a discipline, risk aversion is a strong basis for scientific conservatism. (Stigler, 1983, p. 538), see also (Sy, 2012, pp. 71-73)

Failed axiomatization:

The formal foundations of legacy economics are indefensible. (AXEC)

 

References

Balogh, T. (1982). The Irrelevance of Conventional Economics. London: Weidenfeld and Nicolson.

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.

Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield: Edward Elgar.

Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.

Chick, V. (1998). On Knowing One’s Place: The Role of Formalism in Economics. Economic Journal, 108(451): 1859–1869. URL

Deane, P. (1983). The Scope and Method of Economic Science. Economic Journal, 93(369): 1–12. URL

Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.

Dennis, K. (1982). Economic Theory and the Problem of Translation (I). Journal of Economic Issues, 16(3): 691–712. URL

Eichner, A. S. (1979). A Look Ahead. In A. S. Eichner (Ed.), A Guide to Post-Keynesian Economics,  165–184. London, Basingstoke: Macmillan.

Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7.

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

Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge: MIT Press.

Hahn, F. H. (1991). The Next Hundred Years. Economic Journal, 101(404): 47–50.

Hands, D.W. (2001). Reflection without Rules. Economic Methodology and Contemporary Science Theory. Cambridge, New York, etc: Cambridge University Press.

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

Hudson, M. (2010). The Use and Abuse of Mathematical Economics. real-world economics review, (55): 2–22.

Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition.

Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.

Kirman, A. (1989). The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes. Economic Journal, Conference Papers, 99(395): 126–139.

Lawson, T. (1997). Economics and Reality. New York: Routledge.

Lawson, T. (2012). Mathematical Modelling and Ideology in the Economics Academy: Competing Explanations of the Failings of the Modern Discipline? Economic Thought, 1(1): 3–22.

Leijonhufvud, A. (1998). Discussion: Involuntary Unemployment One More Time. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),

Economics and Methodology. Crossing Boundaries, 225–235. Houndmills, Basingstoke, London: Palgrave.

McCauley, J. L. (2006). Response to "Worrying Trends in Econophysics". EconoPhysics Forum, 0601001: 1–26. URL

Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.

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

Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393.

Morishima, M. (1984). The Good and Bad Use of Mathematics. In P. Wiles and G. Routh (Eds.), Economics in Disarray, 51–73. Oxford: Blackwell.

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

Parry, C. E. (1921). A Revaluation of Traditional Economic Theory. American Economic Review, Papers and Proceedings, 11(1): 123–131.

Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York: Routledge.

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.

Rizzo, M. J. (1979). Disequilibrium and All That: An Introductory Essay. In M. J. Rizzo (Ed.), Time, Uncertainty, and Disequilibrium, 1–18. Lexington, Toronto: Lexington Books.

Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago: University of Chicago Press.

Rosenberg, A. (1994). What is the Cognitive Status of Economic Theory? In R. E. Backhouse (Ed.), New Directions in Economic Methodology, 216-235. London, New York: Routledge.

Schoeffler, S. (1955). The Failures of Economics: A Diagnostic Study. Cambridge: Harvard University Press.

Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Policical Economy, 91(4): 529–545.

Stiglitz, J. E. (1991). Another Century of Economic Science. Economic Journal, 101(404): 134–141.

Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.

Sy, W. (2012). Endogenous Crisis and the Economic Paradigm. real-world economics review, (59): 67–82.

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von Neumann, J., and Morgenstern, O. (2007). Theory of Games and Economic Behavior. Princeton: Princeton University Press. (1944).

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

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Abstract  This paper provides a substantial reconceptualization of the serial clearing of the product market on the basis of structural axioms. The change of premises is required simply because from the accustomed premises only the accustomed conclusions can be derived and these are known to be inapplicable in the real world. This holds in particular for the still-popular idea that the working of a market can be described in terms of the triad supply-function—demand-function—equilibrium. Structural axiomatization provides the complete and consistent picture of interrelated product market events.

Toolism! A critique of EconoPhysics {41}

Working paper at SSRN

Working paper at ARCHIVE

Abstract  Economists are fond of the physicists' powerful tools. As a popular mindset, Toolism is as old as economics but the transplants failed to produce the same successes as in their aboriginal environment. Economists, therefore, looked more and more to the math department for inspiration. Now the tide turns again. The ongoing crisis discredits standard economics and offers the chance for a comeback. Modern EconoPhysics commands the most powerful tools and argues that there are many occasions for their application. The present paper argues that it is not a change of tools that is most urgently needed but a Paradigm Shift.

Hanging in the air

Comment on Lars Syll on 'IS-LM is bad economics no matter what Krugman says'

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There seems to be consensus that it is alone IS-LM that concerns us here.

The main point is rather simple: the General Theory (GT) is a loose composition of formal and verbal arguments. The problem is that most of Keynes's verbal arguments cannot be derived from the foundational formalism. This is not to say that the verbal arguments are factually wrong, it means that, in the best case, they are hanging in the air. This does not diminish the value of the GT as a piece of political opinion making but certainly as a piece of theoretical economics.

In the GT the original formalism and the original interpretation (oK) do not match. In addition, the formalism is indefensible with regard to the treatment of income and profit. With IS-LM Hicks provided a second interpretation (H). The (oK)-interpretation and the (H)-interpretation do not match either. What is more, we have a new interpretation but the foundational formalism is still defective. That is, the (H)-interpretation is also hanging in the air.

Krugman has been reprimanded for not admitting that interpretations (oK) and (H) are incompatible. The salient point is, instead, that Krugman and Hicks before him have not realized that, to begin with, Keynes's formal foundations are indefensible with regard to the treatment of income and profit. This is the oversight that counts from the viewpoint of theory building.

In sum: Keynes, Hicks, and Krugman provide different interpretations of the same flawed formalism. In order to advance economics from a talk-show to a science, all three interpretations have to be rejected on purely formal grounds.

Flawed logic

Comment on Lars Syll on 'IS-LM is bad economics no matter what Krugman says'

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Lars Syll and Paul Davidson argue (a) that IS-LM is bad economics and (b) that it has not much in common with Keynes' economic reasoning in the General Theory.

I agree with both points. My question is a more fundamental one. Does this clarification make the General Theory look much better?

Let me resume the point that I have made at length in: Why Post Keynesianism is Not Yet a Science, Economic Analysis and Policy, March 2013, pp. 95-106. There is no need to lose many words about equilibrium, ergodicity, or the finance motive because Keynes' formalism is logically defective. This is sufficient to refute it and with it all illegitimate IS-LM derivatives.

Hence, we have to go one step further: it is not so simple that IS-LM is bad economics and Keynes is good economics; both are bad economics and for the same reason.

Keynes' profit theory is false. The correct relation reads Qret≡I−S, i.e., retained profit is equal to the difference between the business sector's investment and the household sector's saving. Since retained profit for the economy as a whole is always different from zero, we have empirical proof that investment and saving are, as a corollary, never equal. The ex-ante/ex-post argument can be shown to be logically defective. Because the IS schedule of IS-LM is formally unacceptable, the whole argumentation built upon it is vacuous. Free association, interpreting IS-LM, or reading tea leaves is scientifically on the same level. What unites Keynes, Hicks, and Krugman, as well as their critics, is the same logical flaw in the formal foundations.

Egmont Kakarot-Handtke


Related 'How Keynes got macro wrong and Allais got it right'.

Crisis and Methodology: Some Heterodox Misunderstandings {31b}

Working paper at SSRN

Working Paper at ARCHIVE

Abstract  Whether justified by the concrete circumstances or not, an economic crisis is, by simple association, taken as an implicit refutation of the invisible hand vision and the underlying theory. The fundamental heterodox critique locates the source of apparent theoretical difficulties at the level of methodology. Although acceptable in principle, this belief involves some actual misunderstandings with regard to the respective roles of deterministic laws and deductive reasoning. In order to clarify these, the present paper revisits some key episodes in the history of economic methodology.