Comment on Edward Fullbrook on 'Dr. X'
Blog-Reference
As a historian and defender of the idiographic method you actually face this trouble: “... the Dutch historian Peter Geyl ... wrote a brilliant book about Napoleon, amounting to the result that there are a dozen or so different interpretations ― we may safely say, models ― of Napoleon's character and career within academic history, all based upon “fact” (the Napoleonic period happens to be one of the best documented) and all flatly contradicting each other. Roughly speaking, they range from Napoleon as the brutal tyrant and egoistic enemy of human freedom to Napoleon the wise planer of a unified Europe; ... (von Bertalanffy, 1969, pp. 110-111)
As I put it in #62: “Verstehen [understanding] cannot lead to much more than to a gossip model of the world.”
At this point, we can borrow something really helpful from the natural sciences.
The flying autumn leaf and the falling cannonball both belong to the physical realm. The physicists completely ignore the leaf. Why? You can watch as many leaves as you please, but you will, at best, arrive at the “historical law” that all leaves sooner or later fall to the ground. That's not wrong, of course. It is realistic, it is inductive, it has been tested, and we all can agree upon it. Very complex, hum hum, we need further research. We know that Galileo found the law of the falling bodies by throwing cannonballs from the tower of Pisa (he may actually have performed this as a pure thought experiment).
By focusing on the rather boring cannonball and ignoring the wonderful trajectory of the red leaf in the autumn sunshine, Galileo came closer to reality than the realists, who never forget to bemoan the poverty of quantities and to praise the richness of qualities. Ignorance/Modesty is a good research strategy. This does not entail that one denies the existence of flying autumn leaves; it entails only that one cannot expect to learn much from them.
Historians who claim that, on principle, one cannot find something like laws in the economy may be right. We cannot know in advance. What we know is that there are NO behavioral laws like utility maximization. But this does not exclude other types that can be discovered. G. B. Shaw may have had historians at the back of his mind when he quipped: “People who say it cannot be done should not interrupt those who are doing it.”
Egmont Kakarot-Handtke
References
von Bertalanffy, L. (1969). General Systems Theory. New York: Braziller.
July 8, 2013
July 5, 2013
Demarcation
Comment on Edward Fullbrook on 'Dr. X'
Blog-Reference
Myth, well told, is still the most convincing way to explain how the world and humankind came to be in their present form. To recall, Zeus was the god of sky and thunder. He oversaw the universe, assigned the various gods their roles, and was known for his erotic escapades. Zeus was emotional and spontaneous and had a lot of trouble with other gods, goddesses, and humans. At Prometheus, for example, he was angry for three things: being tricked on sacrifices, stealing fire for Man, and refusing to tell him which of his children would dethrone him. To handle his problems, Zeus regularly fell back on chicanery, force, and violence (for details, see Wikipedia). Purified from all religious connotations, this is the stuff soap operas are made of until today. Let us call this the gossip model of the world.
The ancient Greeks regarded myths as ‘true stories’ and distinguished them from fables as ‘false stories’. Xenophanes made his contemporaries aware that their ‘true stories’ were what is now called a projection (Popper, 1994, p. 39).
With this, the problem of demarcation arose for the first time. And it was easily solved. The pre-Socratics rejected any mythological explanations of the world because they saw that everything could be explained by the actions of gods, which meant, on closer inspection, nothing. This methodological insight set science on its track.
Popper, for one, put the demarcation criterion to work. He rejected psychoanalysis because it could explain everything, even why it did not work as intended. He rejected Marxism because it could explain post factum why the Revolution happened in a less advanced country instead of in the most advanced, which should have happened according to Marx's best-known prediction.
It might seem that the original demarcation is a matter of history. This is not so. When Dawkins refuses to discuss with a creationist, we are back at the fundamental methodological decision that constituted science. Demarcation is a question that reappears continuously in new settings.
Economics faces the following alternative. If it wants to be accepted as science, it has to stick to the rules. The rules are quite simple: material and logical consistency (Klant, 1994, p. 31). No excuses (complexity, Duhem-Quine, etcetera), no pork sausage (inexact, separate). If economics cannot deliver on principle, as Robert Locke maintains, it has to join the Geisteswissenschaften and try its luck with Verstehen (see Drechsler's article). Verstehen, however, cannot lead to much more than a gossip model of the world. People like this kind of stuff, but that's not science. Everybody can understand why Zeus throws the thunderbolt, but no way leads from there to the lightning rod.
Egmont Kakarot-Handtke
References
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York: Routledge.
Blog-Reference
Myth, well told, is still the most convincing way to explain how the world and humankind came to be in their present form. To recall, Zeus was the god of sky and thunder. He oversaw the universe, assigned the various gods their roles, and was known for his erotic escapades. Zeus was emotional and spontaneous and had a lot of trouble with other gods, goddesses, and humans. At Prometheus, for example, he was angry for three things: being tricked on sacrifices, stealing fire for Man, and refusing to tell him which of his children would dethrone him. To handle his problems, Zeus regularly fell back on chicanery, force, and violence (for details, see Wikipedia). Purified from all religious connotations, this is the stuff soap operas are made of until today. Let us call this the gossip model of the world.
The ancient Greeks regarded myths as ‘true stories’ and distinguished them from fables as ‘false stories’. Xenophanes made his contemporaries aware that their ‘true stories’ were what is now called a projection (Popper, 1994, p. 39).
With this, the problem of demarcation arose for the first time. And it was easily solved. The pre-Socratics rejected any mythological explanations of the world because they saw that everything could be explained by the actions of gods, which meant, on closer inspection, nothing. This methodological insight set science on its track.
Popper, for one, put the demarcation criterion to work. He rejected psychoanalysis because it could explain everything, even why it did not work as intended. He rejected Marxism because it could explain post factum why the Revolution happened in a less advanced country instead of in the most advanced, which should have happened according to Marx's best-known prediction.
It might seem that the original demarcation is a matter of history. This is not so. When Dawkins refuses to discuss with a creationist, we are back at the fundamental methodological decision that constituted science. Demarcation is a question that reappears continuously in new settings.
Economics faces the following alternative. If it wants to be accepted as science, it has to stick to the rules. The rules are quite simple: material and logical consistency (Klant, 1994, p. 31). No excuses (complexity, Duhem-Quine, etcetera), no pork sausage (inexact, separate). If economics cannot deliver on principle, as Robert Locke maintains, it has to join the Geisteswissenschaften and try its luck with Verstehen (see Drechsler's article). Verstehen, however, cannot lead to much more than a gossip model of the world. People like this kind of stuff, but that's not science. Everybody can understand why Zeus throws the thunderbolt, but no way leads from there to the lightning rod.
Egmont Kakarot-Handtke
References
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York: Routledge.
July 3, 2013
Where is profit?
Comment on Edward Fullbrook on 'Dr. X'
Blog-Reference
What a coincidence! You sum up: To say it with a Keynes quip: “It is better to be vaguely right than precisely wrong.” In #26 I referred Paul Davidson to a paper of mine which starts on p. 96 with the quote: “For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’ (Davidson, 1984, p. 574).” The title of the paper is: Why Post Keynesianism is Not Yet a Science.
Let us start with a point that is beyond the slightest doubt. Keynes’ formal groundwork consisted in the main of two equations, i.e., Y=C+I and S=Y–C. (1973, p. 63). From this follows I=S immediately, and later the multiplier.
The first question is: Where is profit? How can Keynes present a formalization of the economy we happen to live in without mentioning profit? Keynes, of course, was fully aware that profit is the pivotal magnitude in the market system, and he defined on p. 23 that total income is the sum of factor costs and profit. The problem is that this definition does not harmonize with the formal groundwork above. Keynes knew this.
“His [Keynes's] Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson and Bezemer, 2010, pp. 12-13, 16)
My paper is a formal demonstration that the correct relation reads Qm≡I−Sm+Yd, i.e., total monetary profit in period t is given by the difference of the business sector’s investment expenditures and the household sector’s monetary saving plus distributed profits of the business sector. This implies that Keynes' I=S or the ex-ante/ex-post rationalization is untenable.‡
In sum, Keynes's profit theory is wrong, and because of this, the investment-equals-saving proposition is false. Now, there is no need to go any further, because: “Even if we cannot prove a theory or model is true, at the very minimum to be true it must be logically consistent.” (Boland, 2003, p. 24).
The General Theory is inconsistent, and Keynes's intellectual heirs never rectified it. Therefore, neither original Keynesianism nor its modern reincarnations or bastardizations can be accepted as a successor to neoclassics, which has debunked itself recently.
How does Davidson comment on this fatal situation in #29? “You can define anything you want, but as a sage once said, ‘A rose by any other name will smell as sweet!’”
Economics could be a real science if economists were real scientists.
Egmont Kakarot-Handtke
References
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Keynes, J. M. (1973). The General Theory of Employment, Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Graphic AXEC129f
Blog-Reference
What a coincidence! You sum up: To say it with a Keynes quip: “It is better to be vaguely right than precisely wrong.” In #26 I referred Paul Davidson to a paper of mine which starts on p. 96 with the quote: “For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’ (Davidson, 1984, p. 574).” The title of the paper is: Why Post Keynesianism is Not Yet a Science.
Let us start with a point that is beyond the slightest doubt. Keynes’ formal groundwork consisted in the main of two equations, i.e., Y=C+I and S=Y–C. (1973, p. 63). From this follows I=S immediately, and later the multiplier.
The first question is: Where is profit? How can Keynes present a formalization of the economy we happen to live in without mentioning profit? Keynes, of course, was fully aware that profit is the pivotal magnitude in the market system, and he defined on p. 23 that total income is the sum of factor costs and profit. The problem is that this definition does not harmonize with the formal groundwork above. Keynes knew this.
“His [Keynes's] Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson and Bezemer, 2010, pp. 12-13, 16)
My paper is a formal demonstration that the correct relation reads Qm≡I−Sm+Yd, i.e., total monetary profit in period t is given by the difference of the business sector’s investment expenditures and the household sector’s monetary saving plus distributed profits of the business sector. This implies that Keynes' I=S or the ex-ante/ex-post rationalization is untenable.‡
In sum, Keynes's profit theory is wrong, and because of this, the investment-equals-saving proposition is false. Now, there is no need to go any further, because: “Even if we cannot prove a theory or model is true, at the very minimum to be true it must be logically consistent.” (Boland, 2003, p. 24).
The General Theory is inconsistent, and Keynes's intellectual heirs never rectified it. Therefore, neither original Keynesianism nor its modern reincarnations or bastardizations can be accepted as a successor to neoclassics, which has debunked itself recently.
How does Davidson comment on this fatal situation in #29? “You can define anything you want, but as a sage once said, ‘A rose by any other name will smell as sweet!’”
Economics could be a real science if economists were real scientists.
Egmont Kakarot-Handtke
References
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Keynes, J. M. (1973). The General Theory of Employment, Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
***
‡ For an early forerunner of this equation, see Gerhard Michael Ambrosi Carl Föhl on Economic Activity and Money, eq. 1.
***
Graphic AXEC128c Humpty Dumpty's lethal methodological mistake: "You can define anything you want."
The moral of the story (I)
Comment on Edward Fullbrook on 'Dr. X'
Blog-Reference
ad #31
Here is the acknowledgment: “... theorists all over the world have become aware that anything based on this mock-up is unlikely to fly since it neglects some crucial aspects of the world, the recognition of which will force some drastic re-designing.” (Hahn, 1981, p. 1036)
This acknowledgment, however, does not help much: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)
There is no way around it, what is needed is a convincing alternative.
Heterodoxy does a good and indispensable job of debunking. However, there are two forms of debunking:
(a) debunking a theory
(b) debunking a person or a group.
We certainly agree that (b) is inadmissible in scientific discourse. With conspiracy theories and moralizing (post #33, #35, and others) Heterodoxy debunks itself. In addition, economics is not mainly about the job problems of economists.
ad # 30
Theory entails the ambition to explain how the economy works including all phenomena like price, real wage, distribution, full employment, growth, depression, inflation/deflation, financial meltdown, etc. In this sense, we speak of Classical, Marxian, Walrasian, or Keynesian theory. To explain correctly why the consumer buys strawberry yogurt instead of raspberry yogurt is certainly desirable but no alternative to neoclassical theory. A heap of correct partial models is not a theory.
“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)
“Even if we cannot prove a theory or model is true, at the very minimum to be true it must be logically consistent.” (Boland, 2003, p. 24)
Egmont Kakarot-Handtke
References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Hahn, F. H. (1981). Review: A Neoclassical Analysis of Macroeconomic Policy. Economic Journal, 91(364): 1036–1039. URL
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge: MIT Press.
Blog-Reference
ad #31
Here is the acknowledgment: “... theorists all over the world have become aware that anything based on this mock-up is unlikely to fly since it neglects some crucial aspects of the world, the recognition of which will force some drastic re-designing.” (Hahn, 1981, p. 1036)
This acknowledgment, however, does not help much: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)
There is no way around it, what is needed is a convincing alternative.
Heterodoxy does a good and indispensable job of debunking. However, there are two forms of debunking:
(a) debunking a theory
(b) debunking a person or a group.
We certainly agree that (b) is inadmissible in scientific discourse. With conspiracy theories and moralizing (post #33, #35, and others) Heterodoxy debunks itself. In addition, economics is not mainly about the job problems of economists.
ad # 30
Theory entails the ambition to explain how the economy works including all phenomena like price, real wage, distribution, full employment, growth, depression, inflation/deflation, financial meltdown, etc. In this sense, we speak of Classical, Marxian, Walrasian, or Keynesian theory. To explain correctly why the consumer buys strawberry yogurt instead of raspberry yogurt is certainly desirable but no alternative to neoclassical theory. A heap of correct partial models is not a theory.
“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)
“Even if we cannot prove a theory or model is true, at the very minimum to be true it must be logically consistent.” (Boland, 2003, p. 24)
Egmont Kakarot-Handtke
References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Hahn, F. H. (1981). Review: A Neoclassical Analysis of Macroeconomic Policy. Economic Journal, 91(364): 1036–1039. URL
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge: MIT Press.
July 2, 2013
Beside the point
Comment on Edward Fullbrook on 'Doctor X, “pure shit” and the Royal Society’s motto'
Blog-Reference
The Dr. X story is reminiscent of Joan Robinson: “Indeed, in the higher reaches of the profession, there was something of the atmosphere of the augurs touching their noses behind the altar. Amongst themselves, they admitted it was not really like that. But their pupils took it all literally. They formed an official opinion deeply influenced by the conception of equilibrium which could be relied upon to establish itself provided that no one tried to interfere.” (1972, p. 3)
Why are stories like these told and retold again? We know from history that conspiracy theories are stupid in the best case and harmful in all others. There is no excuse in the political realm to bring these kinds of arguments into circulation, much less so in scientific discourse. As Schumpeter put it:
“Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter, 1994, p. 11)
Yes, neoclassical economics is a failure. How can we be sure of it? Because neoclassicals themselves told us: “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed, if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)
Hence, neoclassicals stick to the scientific code of 'conjecture and refutation.' They have explicitly put forth hypotheses and followed their logic until the final conclusion of Sonnenschein-Mantel-Debreu.
It is well known that science is a trial-and-error process. Therefore, it is quite “legitimate” to put forth and defend a “wrong” theory because we cannot know in advance whether a theory is true or false.
The problem in economics is peculiar because we know that the standard theory, as codified in the textbooks, is wrong, but we have had no alternative until now. Heterodoxy has been occupied with debunking since Veblen. There is nothing wrong with this, but obviously, from this has not emerged a convincing alternative: “... we may say that the long-lasting success of our categories and the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)
The provisional predominance of neoclassics in the classroom is neither due to scientific superiority nor to a conspiracy, but to a failure of reason to find a convincing alternative.
Egmont Kakarot-Handtke
References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
Robinson, J. (1972). The Second Crisis of Economic Theory. American Economic Review, 62(1/2): 1–10. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Blog-Reference
The Dr. X story is reminiscent of Joan Robinson: “Indeed, in the higher reaches of the profession, there was something of the atmosphere of the augurs touching their noses behind the altar. Amongst themselves, they admitted it was not really like that. But their pupils took it all literally. They formed an official opinion deeply influenced by the conception of equilibrium which could be relied upon to establish itself provided that no one tried to interfere.” (1972, p. 3)
Why are stories like these told and retold again? We know from history that conspiracy theories are stupid in the best case and harmful in all others. There is no excuse in the political realm to bring these kinds of arguments into circulation, much less so in scientific discourse. As Schumpeter put it:
“Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter, 1994, p. 11)
Yes, neoclassical economics is a failure. How can we be sure of it? Because neoclassicals themselves told us: “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed, if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)
Hence, neoclassicals stick to the scientific code of 'conjecture and refutation.' They have explicitly put forth hypotheses and followed their logic until the final conclusion of Sonnenschein-Mantel-Debreu.
It is well known that science is a trial-and-error process. Therefore, it is quite “legitimate” to put forth and defend a “wrong” theory because we cannot know in advance whether a theory is true or false.
The problem in economics is peculiar because we know that the standard theory, as codified in the textbooks, is wrong, but we have had no alternative until now. Heterodoxy has been occupied with debunking since Veblen. There is nothing wrong with this, but obviously, from this has not emerged a convincing alternative: “... we may say that the long-lasting success of our categories and the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)
The provisional predominance of neoclassics in the classroom is neither due to scientific superiority nor to a conspiracy, but to a failure of reason to find a convincing alternative.
Egmont Kakarot-Handtke
References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
Robinson, J. (1972). The Second Crisis of Economic Theory. American Economic Review, 62(1/2): 1–10. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
May 29, 2013
Profit is the key
Comment on Lars Syll on 'The great IS-LM obfuscation.'
Blog-Reference:
It is laudable to direct students away from irrelevant economic models.
Orthodox economics is irrelevant from Jevons to DSGE. The problem is that Heterodoxy from Veblen to Minsky is only slightly better. With a critical stance, it is easy to identify and avoid the worst blunders of standard theory. Davidson is a case in point. Of course, the ergodic hypothesis is inapplicable in economics. Keynes was right word-for-word in what he said about uncertainty (1937, p. 214). The point is that this was only revolutionary vis-à-vis the 'classical' economists. Outside this intellectually closed sphere, the argument is trivial. The next taxi driver can tell you that ‘the price of copper and the rate of interest twenty years hence’ is uncertain. If this is scientific progress, it is not terribly impressive. It is a sad fact that heterodox economists have a strong bias to draw the wrong conclusions from correct observations. This brings us to Minsky.
Minsky (2008, p. 160) states correctly, “What determines profits? is a key question for understanding how our economy works.” Clearly, it is irresponsible to give economic advice without a proper understanding of profit. With his zero-profit economy, Walras demonstrated a complete lack of understanding. Therefore, he and the neo-Walrasians are out. However, the General Theory is also based on a false profit theory (Tómasson and Bezemer, 2010), which has not been rectified by the Post Keynesians (Kakarot-Handtke, 2013), (Desai, 2008, p. 10). Therefore, Keynesian models, including bastardizations like IS-LM, are out, too.
What about Minsky in particular? He tells us: “The simple equation 'profit equals investment' is the fundamental relation for macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (2008, p. 161)
Unfortunately, this simple equation covers only a limiting case. This is not much in absolute terms, but considerably more than what IS-LM, which is a zero-profit model, ever had to offer. Minsky, too, got macroeconomic profit wrong. The axiomatically correct formula for the elementary case reads Qm≡I−Sm Legend: Qm business sector's monetary profit, I investment expenditures, Sm household sector's monetary saving. Minsky implies Sm=0, IS-LM implies Qm=0. Macroeconomics has been proto-scientific garbage since Keynes.
It is a mission impossible these days to direct students to relevant economic models because there are none.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago, San Francisco: McGraw-Hill, 2nd edition.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Blog-Reference:
It is laudable to direct students away from irrelevant economic models.
Orthodox economics is irrelevant from Jevons to DSGE. The problem is that Heterodoxy from Veblen to Minsky is only slightly better. With a critical stance, it is easy to identify and avoid the worst blunders of standard theory. Davidson is a case in point. Of course, the ergodic hypothesis is inapplicable in economics. Keynes was right word-for-word in what he said about uncertainty (1937, p. 214). The point is that this was only revolutionary vis-à-vis the 'classical' economists. Outside this intellectually closed sphere, the argument is trivial. The next taxi driver can tell you that ‘the price of copper and the rate of interest twenty years hence’ is uncertain. If this is scientific progress, it is not terribly impressive. It is a sad fact that heterodox economists have a strong bias to draw the wrong conclusions from correct observations. This brings us to Minsky.
Minsky (2008, p. 160) states correctly, “What determines profits? is a key question for understanding how our economy works.” Clearly, it is irresponsible to give economic advice without a proper understanding of profit. With his zero-profit economy, Walras demonstrated a complete lack of understanding. Therefore, he and the neo-Walrasians are out. However, the General Theory is also based on a false profit theory (Tómasson and Bezemer, 2010), which has not been rectified by the Post Keynesians (Kakarot-Handtke, 2013), (Desai, 2008, p. 10). Therefore, Keynesian models, including bastardizations like IS-LM, are out, too.
What about Minsky in particular? He tells us: “The simple equation 'profit equals investment' is the fundamental relation for macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (2008, p. 161)
Unfortunately, this simple equation covers only a limiting case. This is not much in absolute terms, but considerably more than what IS-LM, which is a zero-profit model, ever had to offer. Minsky, too, got macroeconomic profit wrong. The axiomatically correct formula for the elementary case reads Qm≡I−Sm Legend: Qm business sector's monetary profit, I investment expenditures, Sm household sector's monetary saving. Minsky implies Sm=0, IS-LM implies Qm=0. Macroeconomics has been proto-scientific garbage since Keynes.
It is a mission impossible these days to direct students to relevant economic models because there are none.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago, San Francisco: McGraw-Hill, 2nd edition.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
***
Graphic AXEC143d Macroeconomic profit with increasing complexity
May 19, 2013
Key Issues: Logic and platitude
Deductive logic is one pattern of rationality in reasoning, but it is not the only one; good reasoning in science typically yields conclusions that go beyond the logical entailments of deductive logic. (Suppe, 1977, p. 657)
The economists of the twentieth century, by pushing the neoclassical model to its logical conclusions, and thereby illuminating the absurdities of the world which they had created, have made an invaluable contribution to the economics of the coming century: they have set the agenda, work on which has already begun. (Stiglitz, 1991, p. 136)
For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises. (Keynes, 1973, p. xxi)
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For Keynes as for Post Keynesians the guiding motto is "it is better to be roughly right than precisely wrong!" (Davidson, 1984, p. 574)
Marshall followed the maxim: Better to be ambigous and relevant than precise and irrelevant. (Colander, 1995, p. 283)
It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent. (Valentino, 1988, p. 239)
... a remorseless logician can end up in Bedlam. (Keynes, quoted in Moggridge, 1976, p. 36)
But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system. (Laidler, 1999, p. 281)
Toutes ses [Keynes’s] deductions, à notre avis, manquent absolument de rigeur. ... L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir. (Allais, 1993, p. 70)
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Even if we cannot prove a theory or model is true, at the very minimum to be true it must be logically consistent. (Boland, 2003, p. 24)When we define the ambition of science as getting it precisely right, then the guiding motto of Post Keynesianism amounts to an invitation to ‘Babylonian incoherent babble’ and leads, predictably, to a loss of theoretical coherence. Confronted with the phony alternative relevance vs. rigor or truth vs. precision, the non-Keynesians opted for rigor: "Mathematical economics, it seems, had the great virtue of demonstrable irrelevance, which was morally preferable to spurious relevance." (Porter, 1994, p. 155)
... each chief step in science has been a lesson in logic. (Peirce, 1992, p. 111)
Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned. (Klant, 1994, p. 31)
Economists today do not wish to discuss the ‘truth’ of economic theories but only examine their logical validity. (Boland, 1992, p. 36)
Logical validity is indispensable. However, if the premises are false, the logical validity of the conclusions is pointless. Truth resides in the axioms, not in the deductive process. Because of a logical blind spot — the place one stands on is, for the moment, invisible — economists today cannot see that they operate with inadmissible axioms. Logical validity is indispensable but not sufficient.
And so — faithful to the theory's conceptual cornerstones and hoping against all hope that the unthinkable may still be achieved (i.e., a satisfactory theory of the price mechanism) — the tormented upholders of the validity of the paradigmatic core of economic equilibrium theory appear singularly reluctant to face the problem of comparing expectations and results and assessing the consistency of the theory. (Ingrao and Israel, 1990, p. 346)Formal consistency does not count for much if the axioms lack material consistency. Realism does not count for much if it cannot be properly formalized.
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We are lost in a swamp, the morass of our ignorance. ... We have to find the roots and get ourselves out! ... Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits and pieces together in an orderly fashion. (Schmiechen, 2009, p. 11)Logical bootstrapping is what axiomatization is all about. Therefore, one has to jump to new premises to see the defects of the previous premises. There is no path between them. Axiom Sets are incommensurable; there is no synthesis and no continuity; the previous set is simply abandoned. In practical terms, this means that both Walrasians and Keynesians are left behind the curve for good. Both approaches can still fulfill a useful role as practical examples of how not to do science.
References
Allais, M. (1993). Les Fondements Comptables de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Hudson, M. (2010). The Use and Abuse of Mathematical Economics. real-world economics review, (55): 2–22. URL
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Peirce, C. S. (1992). The Fixation of Belief. In N. Houser and C. Kloesel (Eds.), The Essential Peirce. Selected Philosophical Writings, Vol. 1,109–123. Bloomington: Indiana University Press.
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, 128–170. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
Stiglitz, J. E. (1991). Another Century of Economic Science. Economic Journal, 101(404): 134–141. URL
Suppe, F. (1977). Afterword. In F. Suppe (Ed.), The Structure of Scientific Theories, 615–730. Urbana, Chicago: University of Illinois Press.
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, 238–249. Cambridge, New York, etc.: Cambridge University Press.
Related 'Why Post Keynesianism is Not Yet a Science URL' and 'Crisis and Methodology, Sec. 3 URL' and 'Objective Principles of Economics URL'.
© 2013 EKH, except original quotes
Allais, M. (1993). Les Fondements Comptables de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Boland, L. A. (2003). The Foundations of Economic Method. A Popperian Perspective. London, New York: Routledge, 2nd edition.
Colander, D. (1995). Marshallian General Equilibrium Analysis. Eastern Economic Journal, 21(3): 281–293. URL
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Hudson, M. (2010). The Use and Abuse of Mathematical Economics. real-world economics review, (55): 2–22. URL
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Peirce, C. S. (1992). The Fixation of Belief. In N. Houser and C. Kloesel (Eds.), The Essential Peirce. Selected Philosophical Writings, Vol. 1,109–123. Bloomington: Indiana University Press.
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, 128–170. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
Stiglitz, J. E. (1991). Another Century of Economic Science. Economic Journal, 101(404): 134–141. URL
Suppe, F. (1977). Afterword. In F. Suppe (Ed.), The Structure of Scientific Theories, 615–730. Urbana, Chicago: University of Illinois Press.
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, 238–249. Cambridge, New York, etc.: Cambridge University Press.
Related 'Why Post Keynesianism is Not Yet a Science URL' and 'Crisis and Methodology, Sec. 3 URL' and 'Objective Principles of Economics URL'.
© 2013 EKH, except original quotes
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