Comment on Lars Syll on ‘Science and truth’
Blog-Reference
“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)
Economists who are well aware that they, unfortunately, have missed the true theory, like Robert Aumann and other representatives of Orthodoxy, have not many alternatives — short of simply admitting failure — than to argue that there is no such thing as truth. These people then become histrionic and pose Pilate’s famous question ‘What is truth’.
What these pseudo-philosophers overlook is that scientific truth is well-defined as formal and material consistency (Klant, 1994, p. 31). “So the idea of truth (of an ‘absolute’ truth) ... is our main regulative idea.” (Popper, 1994, p. 161)
Genuine scientists have no problem with the concept of scientific truth but it has always been a big issue in the so-called social sciences, which Feynman famously characterized as cargo cult sciences.
Neither orthodox nor heterodox economists have developed the true economic theory. Economics is still at the proto-scientific stage: “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, in Deane, 1983, p. 8)
One possible reaction to this embarrassment is to give up the idea of objective truth in economics. This attitude is rather popular among heterodox economists — and it is self-defeating. “If economics cannot aspire to any substantive knowledge of economic relationships, it cannot speak with authority about questions of economic policy.” (Blaug, 1990, p. 111). Without this aspiration, economics degenerates to mere opinion, pluralism of false theories, and in the last consequence to brain-dead political blather.
The idea of truth has an implication for scientific debate that no blatherer can ever accept: if you do not have the true theory you better shut up. Blatherers, therefore, resort to questioning what NO genuine scientist ever questions because it defines his mission.
For economists, the mission is clear since J. S. Mill: “Science is a collection of truths; art, a body of rules, or directions for conduct. The language of science is, This is, or, This is not; This does, or does not, happen. The language of art is, Do this; Avoid that. Science takes cognizance of a phenomenon, and endeavours to discover its law; art proposes to itself an end, and looks out for means to effect it.” (1874, V.8)
Egmont Kakarot-Handtke
References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.
Deane, P. (1983). The Scope and Method of Economic Science. Economic Journal, 93(369): 1–12. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pp. 154–184. London, New York, NY: Routledge.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
March 24, 2016
March 23, 2016
Macro of and for the scientifically blind and deaf
Comment on Simon Wren-Lewis on ‘MMT and mainstream macro’
Blog-Reference
The summary argument against MMT from the standpoint of old/post-Keynesian/ mainstream macro is ‘the old is correct and well understood, while the new is substantially wrong.’ (Palley)
The old may be subjectively well understood, but it is objectively false nonetheless, since Keynes. In order to see where things went wrong, one has to return to the very beginnings of macro “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)
Keynes defined the formal foundations of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12). As a result, all I=S models, including the Keynesian multiplier, are false (2011; 2014b; 2014a; 2012). Neither the proponents nor the opponents of mainstream macro have gotten this point until this day. Wren-Lewis is only one among the many (for details, see this post).
It should be clear that when the foundational economic concept of profit is inconsistently defined, then the whole theoretical superstructure is a flawed construction without any scientific value whatsoever. No policy recommendation can be drawn from such a model. This applies to both old mainstream macro and new MMT macro. Therefore, any policy discussion between the two camps is vacuous.
The three main points of the axiomatically correct approach are
• All I=S models are false since Hicks (for the proof, see post Toward the true economic axioms). #1
• The Profit Law for the investment economy reads Qm≡Yd+I−Sm (2014b, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. Sm establishes the connection to the money/credit market.
• The correct Employment Law/Phillips Curve is given with Graphic AXEC62. For details, see the post Have data, lack theory.
Conclusion: The old macro is incorrect but nonetheless accepted by a majority, while the new MMT macro is incorrect but accepted by a minority. Neither approach can be taken seriously because the proponents do not know what macroeconomic profit is, but the stuff is good enough for another senseless economic policy debate.
Egmont Kakarot-Handtke
References
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. 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
#1 For details of the big picture, see cross-references Refutation of I=S.
COMMENT on Simon Wren-Lewis on Mar 28
You ask, “Can you suggest a better way of examining intergenerational issues than an OLG model?”
Yes. For the correct approach, see Settling the Theory of Saving.
COMMENT on axdouglas on Mar 29
Before you wreck your brain about how the state can positively/negatively affect employment, you first need the correct employment theory for the economy without the state. The fact of the matter is that the neoclassical and the Keynesian employment theories are provably false. Because you do not have the correct employment theory to start with, your whole argument is flawed.
To cut the meticulous formal derivation short (2015; 2014; 2012), the elementary version of the correct Employment Law for the economy as a whole is given with Graphic AXEC62
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the letter rho stands for ratio). An expenditure ratio ρE>1 indicates credit expansion, a ratio ρE<1 indicates credit contraction/debt repayment of the household sector.
(ii) Increasing investment expenditures I exert a positive influence on employment; a slowdown in growth does the opposite.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
The complete Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and import/export.
Items (i) and (ii) are familiar since Keynes. What is missing in the Keynesian employment multiplier, though, is the ratio ρF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R.
This is the very OPPOSITE of what standard economics claims. The explanation of unemployment is ultimately given by the fact that the price mechanism does NOT work as standard economics hallucinates, i.e., wages down, employment up. The axiomatically correct Employment Law tells you how market interaction produces unemployment and how full employment can be achieved WITHOUT the state’s variation of taxes/government spending.
References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
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
Blog-Reference
The summary argument against MMT from the standpoint of old/post-Keynesian/ mainstream macro is ‘the old is correct and well understood, while the new is substantially wrong.’ (Palley)
The old may be subjectively well understood, but it is objectively false nonetheless, since Keynes. In order to see where things went wrong, one has to return to the very beginnings of macro “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison, 1960, p. 5)
Keynes defined the formal foundations of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12). As a result, all I=S models, including the Keynesian multiplier, are false (2011; 2014b; 2014a; 2012). Neither the proponents nor the opponents of mainstream macro have gotten this point until this day. Wren-Lewis is only one among the many (for details, see this post).
It should be clear that when the foundational economic concept of profit is inconsistently defined, then the whole theoretical superstructure is a flawed construction without any scientific value whatsoever. No policy recommendation can be drawn from such a model. This applies to both old mainstream macro and new MMT macro. Therefore, any policy discussion between the two camps is vacuous.
The three main points of the axiomatically correct approach are
• All I=S models are false since Hicks (for the proof, see post Toward the true economic axioms). #1
• The Profit Law for the investment economy reads Qm≡Yd+I−Sm (2014b, p. 8, eq. (18)). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. Sm establishes the connection to the money/credit market.
• The correct Employment Law/Phillips Curve is given with Graphic AXEC62. For details, see the post Have data, lack theory.
Conclusion: The old macro is incorrect but nonetheless accepted by a majority, while the new MMT macro is incorrect but accepted by a minority. Neither approach can be taken seriously because the proponents do not know what macroeconomic profit is, but the stuff is good enough for another senseless economic policy debate.
Egmont Kakarot-Handtke
References
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. 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
#1 For details of the big picture, see cross-references Refutation of I=S.
***
COMMENT on Simon Wren-Lewis on Mar 28
You ask, “Can you suggest a better way of examining intergenerational issues than an OLG model?”
Yes. For the correct approach, see Settling the Theory of Saving.
***
COMMENT on axdouglas on Mar 29
Before you wreck your brain about how the state can positively/negatively affect employment, you first need the correct employment theory for the economy without the state. The fact of the matter is that the neoclassical and the Keynesian employment theories are provably false. Because you do not have the correct employment theory to start with, your whole argument is flawed.
To cut the meticulous formal derivation short (2015; 2014; 2012), the elementary version of the correct Employment Law for the economy as a whole is given with Graphic AXEC62
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the letter rho stands for ratio). An expenditure ratio ρE>1 indicates credit expansion, a ratio ρE<1 indicates credit contraction/debt repayment of the household sector.
(ii) Increasing investment expenditures I exert a positive influence on employment; a slowdown in growth does the opposite.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment.
The complete Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and import/export.
Items (i) and (ii) are familiar since Keynes. What is missing in the Keynesian employment multiplier, though, is the ratio ρF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R.
This is the very OPPOSITE of what standard economics claims. The explanation of unemployment is ultimately given by the fact that the price mechanism does NOT work as standard economics hallucinates, i.e., wages down, employment up. The axiomatically correct Employment Law tells you how market interaction produces unemployment and how full employment can be achieved WITHOUT the state’s variation of taxes/government spending.
References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
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
March 22, 2016
How to get out of the swamp of ignorance
Comment on Noah Smith on ‘New paradigms in economic theory? Not so fast.’
Blog-Reference and Blog-Reference on Mar 24
The natural cognitive state vis-à-vis reality — and by implication vis-à-vis the economy — is this: “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)
How to get out of the swamp is known for more than 2300 years as the scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)
Orthodoxy has followed this method and laid down its hard-core propositions: “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, 1985, p. 147)
Orthodoxy is a failed approach because this axiom set contains NONENTITIES, i.e. HC2, HC4, HC5 cannot by any stretch of the imagination taken to be true. Clearly, when the premises are not ‘certain, true, and primary’ the whole theoretical superstructure falls apart. Exactly this happened with maximization-and-equilibrium economics.
In this situation an ‘empirical revolution’ is pointless. Propositions that contain NONENTITIES like utility, equilibrium, or Easter Bunny are not testable, to begin with.
What instead has to be done is to replace the orthodox set of foundational propositions with a new set. J. S. Mill identified the very first question of methodology: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”
The current state of economics is that Heterodoxy, too, has failed at the opus magnum. It is not sufficient to throw in any number of unrelated concepts like evolution, complexity, networks, nonlinearity, incomplete optimization, incomplete forward-lookingness, externalities, behavioral heuristics, social preferences, and cooperative games. This only proves the utter confusion about the subject matter.
Economics is about the properties of the monetary economy. Because of this, economic analysis has to start with the objective system component of reality. The necessary Paradigm Shift requires the replacement of the false orthodox axiom set by an entirely new one.
The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by these three objective structural axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The Paradigm Shift consists of the move from HC1/HC6 to (A1)/(A3). Everything else is frog-quacking in the swamp of ignorance.
Egmont Kakarot-Handtke
References
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
Related 'Vain hopes in the ruins of economics' and 'Toward the true economic axioms' and 'Why economics is a failed science ― 24 excuses and 1 explanation'. For details of the big picture cross-references Paradigm Shift.
REPLY to Barkley Rosser on Mar 23
(i) As you should know from Econ 101, accounting identities consist exclusively of nominal magnitudes. The three structural axioms consist of nominal AND real variables. Therefore, there are NO accounting identities, stupid.
(ii) The three structural axioms constitute the formal backbone of economics. Models that do not consistently fit into this elementary mathematical framework, e.g. real models or Keynesian models, are out of economics for good.
(iii) The three structural axioms define the elementary consumption economy, which every economist should thoroughly understand. #1 Because who does not understand the most elementary case has no chance at all to understand anything.
(iv) Your problem is that you are not even aware that you never understood what profit is. For your overdue enlightenment, see the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai). What do you call an economist who cannot tell what profit is? Clearly, being incompetent would be a euphemism.
(v) From a deeper analysis of the elementary production-consumption economy follows the most elementary version of the Profit Law. #2 Every economist — even you — has now a chance to understand the basics of economics.
(vi) From the differentiated structural axiom set follows the Employment Law, see eq. (33) of the working paper Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. Either you empirically refute this equation or simply get out of the way. To recall, science is about formal and material proof. Blather does not count for much.
#1 Toward the true economic axioms
#2 How the intelligent non-economist can refute every economist hands down
REPLY to Barkley Rosser on Mar 24
You say: “Your supposed axioms are ... true by definition.” Yes, this is exactly what I assert. So we have common ground. Not only this, we are in perfect accordance with what Aristotle defined as the scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Having established a rock-solid starting point, we can now advance: “The object of reasoning is to find out, from the consideration of what we already know, something else which we do not know.” (Peirce)
From the axioms we have agreed upon to be true follows that Walrasianism and Keynesianism are provably false.
This, in a nutshell, is the straightforward application of the axiomatic-deductive method to economics. The method is known for more than 2300 years, and you can look it up in Wikipedia: “Euclid’s method consists in assuming a small set of intuitively appealing axioms, and deducing many other propositions (theorems) from these.”
One very important theorem is the Profit Law, which says in its most elementary form (i) Qm=-Sm (Qm monetary profit, Sm monetary saving). This is the beauty of the scientific method to ‘find out, from the consideration of what we already know, something else which we do not know.’ What theorem (i) tells you is that all I=S models are false and, by implication, that both Walrasianism and Keynesianism are as dead as a doornail. I am pretty sure that you did not know this until now.
You say about the axioms A1 to A3, “They lead to nowhere at all other than to help in a ‘measurement without theory’ sort of empirical investigation, which you claim is ‘pointless.’ But your axioms are good for nothing more, and not even all that useful for even that.”
It cannot be said that my axioms ‘lead to nowhere.’ At a minimum, they have led to the incontrovertible conclusion that you have been hanging around for too long in the scientific Neanderthal.
REPLY to Tom Brown on Mar 25
You say: “Your concept of science sounds more like mathematics.” This is perhaps because you have a wrong idea of what science is all about. Science was already well established when Adam Smith declared that economics, too, is a science. Economics defends this claim to this day but has never delivered anything fitting the description of science.
So, it is not “my” concept or “your” concept. Science is well-defined, and economists either stick to the rules or they will be thrown out of science. According to the criteria of formal and material consistency (Klant, 1994, p. 31), economics is indisputably a failed science. In methodological terms, this means that the old paradigm is dead and a new paradigm is urgently needed. Because a paradigm is defined by its foundational propositions, a.k.a axioms, a Paradigm Shift means practically fully replacing the old axiom set, i.e., HC1 to HC6 above, with a new one. This has nothing to do with mathematics as such. Newton put his PHYSICAL axioms on the first pages of the Principia.* In methodological analogy ECONOMIC axioms have to be laid down by economists. This defines the subject matter.
The actual situation is this: Orthodoxy clings to a thoroughly refuted axiom set, and Heterodoxy so far has failed to formulate a new one. As Keynes famously put it: “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)
As a matter of fact, Keynes’ Paradigm Shift (= overthrow of axioms) failed. This means in the strict sense that economics has no scientifically valid axiomatic foundations at all. Walrasian and Keynesian economics are what Feynman famously called cargo cult science. In other words, economics is de facto OUT of science.
Economists violate well-defined scientific standards on a daily basis. To recall: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)
In the proto-science of economics, it is indeed possible to teach falsified theories like supply-demand-equilibrium generation after generation, 'as if nothing had happened’.
Therefore, in economics, the task is NOT to replace something like true but qualified ‘Newtonian’ axioms with something like true but general ‘Einsteinian’ axioms but to replace the neoclassical axioms that are KNOWN to be FALSE.
There is no “my” or “your” concept of science or different concepts in mathematics, physics, the so-called social sciences, or economics. There is only ONE way to build up a valid theory: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein, 1934, p. 165)
The methodological term for ‘basic concepts and laws which are not logically further reducible’ is axioms. As long as economic theory is not based on a consistent set of axioms, it is out of science. This is the case since Adam Smith. There is no use to wish-wash around this embarrassing fact.
References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
REPLY to Tom Brown on Mar 26
(i) You say: “Having a consistent set of axioms is not a guarantee that you’re doing science.” Yes, indeed, because science requires formal AND material consistency. THIS is the guarantee: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
The fact of the matter is that orthodox economics lacks BOTH formal AND material consistency. This, in turn, is the guarantee that economics is NOT a science. In order to refute a theory, it SUFFICES to prove EITHER logical or material inconsistency.
Walrasian and Keynesian economics are logically defective, and the proof has been carried out by using the axiomatic-deductive method. No scientist will ever accept Walrasian or Keynesian economics.
(ii) Walrasian and Keynesian economics are refuted. Economists either do not know it, do not understand it, or ignore it. Either way, they are violating the well-defined standards of science. This is inexcusable.
(iii) It is a silly game to challenge a scientist by asking him to predict the future. He will simply tell you “The future is unpredictable.” (Feynman) #1 Predicting the future is the business of imbeciles.
(iv) Because of this, economics from Jevons/Walras/Menger onward to DSGE is NOT dismissed because it has not predicted crises. Neoclassics is unacceptable because it is logically and empirically inconsistent.
(v) From the structural axioms follows the elementary version of the Profit Law. #2 You, or a competent economist for that matter, are invited to test it against the DSGE profit law. This test, though, is an entirely separate issue and should not distract from the fact that neoclassical economics is axiomatically false for more than 150 years.
(vi) That the Fed uses DSGE does not speak for DSGE but against the Fed.
#1 Scientists do not predict and Prediction does not work? Try retrodiction first
#2 The three fundamental economic laws.
ADDENDUM
The formula for the simulation of the elementary structural axiomatic consumption economy is given with Graphic AXEC25. You are certainly in a position to produce the source code yourself.
REPLY to Tom Brown on Mar 28
We have two SEPARATE issues (i) orthodox economics is false and thoroughly refuted according to well-defined scientific criteria, and (ii), given that Orthodoxy is dead, what does the new paradigm look like?
The problem with Noah Smith and you is that you have not yet realized (i). Because of this, you are hopelessly locked in at the proto-scientific stage. With regard to Orthodoxy or so-called mainstream economics, this is the situation: “... we may say that ... 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)
Therefore, for every economist, there is but ONE worthwhile task: to contribute to the NEW paradigm. All the rest is pointless behind-the-curve blather.
Instead of doing your scientific homework, you argue with regard to (ii): “Even a zeroth order model will do (up or down). Is your theory useful? I’d like to see the evidence that it is. Make them conditional if you like: tell me what things cannot happen and what's more likely to happen. Tell us the kinds of states we’ll likely find the economy in, and those that are excluded by your theory (past, present, and future).”
Obviously, you cannot read. With regard to the issues of scientific prediction and testable economic laws, I have referred you above to the pertinent posts, which are in turn backed up by working papers. You have not realized this either.
Economics could make much faster progress toward science if failed mainstream economists could simply get out of the way — NOW.
REPLY to Tom Brown on Mar 30
Science is not about preaching but proof. You are provably false and are defending the indefensible.
Thank you for the link to TheMoneyIllusion. See my comment there The futility of testing economics blather.
In case you have not followed the short excursion to Austrianism on TheMoneyIllusion-blog here is the resume that applies generally:
Science was there before economics was there. Economists either conform to scientific standards or are out of science: they are in NO position to redefine scientific criteria.
Because economics — as represented by the major sects Walrasians, Keynesians, Marxians, and Austrians — has never risen above the level of a proto-science, it has become popular among economists to question the standards, to lower them, or, as Blaug aptly put it, ‘to play tennis with the net down’. When this is pointed out, economists make the backward somersault: ‘Economics is not a Science with a capital S’ (Solow).
The scientific method is well-defined: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
Logical consistency is secured by applying the axiomatic-deductive method, and empirical consistency is secured by applying state-of-the-art testing.
Economics fails on both counts: the axiomatic foundations are provably false, and testing is regularly inconclusive. So, economics has happily established itself in the swamp between true and false where ‘nothing is clear, and everything is possible’ (Keynes).
The swamp between the hard rocks of true and false is the natural habitat of blathering frogs, of which there are four species, which are clearly identifiable by their respective axiom sets. The funniest species are the Austrians, who are in possession of an irrefutable magic axiom but never managed to produce a testable proposition. So, there is NO WAY to get an Austrian frog ever out of the swamp. And of this, they are very proud.
No problem with this, of course. What has to be made crystal clear is that Austrians have never produced anything of scientific value. For the proof, re-read Major.Freedom’s posts. With this stuff, the poor souls in scientific hell are tortured.
Time to become constructive now: let’s proceed with the Paradigm Shift.
Related 'Where Advanced Heterodoxy — represented by Steve Keen — took the wrong turn'and 'The futility of testing economics blather' and 'Austrian blather' and 'The zombie wars are over'
Blog-Reference and Blog-Reference on Mar 24
The natural cognitive state vis-à-vis reality — and by implication vis-à-vis the economy — is this: “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)
How to get out of the swamp is known for more than 2300 years as the scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)
Orthodoxy has followed this method and laid down its hard-core propositions: “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, 1985, p. 147)
Orthodoxy is a failed approach because this axiom set contains NONENTITIES, i.e. HC2, HC4, HC5 cannot by any stretch of the imagination taken to be true. Clearly, when the premises are not ‘certain, true, and primary’ the whole theoretical superstructure falls apart. Exactly this happened with maximization-and-equilibrium economics.
In this situation an ‘empirical revolution’ is pointless. Propositions that contain NONENTITIES like utility, equilibrium, or Easter Bunny are not testable, to begin with.
What instead has to be done is to replace the orthodox set of foundational propositions with a new set. J. S. Mill identified the very first question of methodology: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”
The current state of economics is that Heterodoxy, too, has failed at the opus magnum. It is not sufficient to throw in any number of unrelated concepts like evolution, complexity, networks, nonlinearity, incomplete optimization, incomplete forward-lookingness, externalities, behavioral heuristics, social preferences, and cooperative games. This only proves the utter confusion about the subject matter.
Economics is about the properties of the monetary economy. Because of this, economic analysis has to start with the objective system component of reality. The necessary Paradigm Shift requires the replacement of the false orthodox axiom set by an entirely new one.
The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by these three objective structural axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The Paradigm Shift consists of the move from HC1/HC6 to (A1)/(A3). Everything else is frog-quacking in the swamp of ignorance.
Egmont Kakarot-Handtke
References
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
Related 'Vain hopes in the ruins of economics' and 'Toward the true economic axioms' and 'Why economics is a failed science ― 24 excuses and 1 explanation'. For details of the big picture cross-references Paradigm Shift.
***
REPLY to Barkley Rosser on Mar 23
(i) As you should know from Econ 101, accounting identities consist exclusively of nominal magnitudes. The three structural axioms consist of nominal AND real variables. Therefore, there are NO accounting identities, stupid.
(ii) The three structural axioms constitute the formal backbone of economics. Models that do not consistently fit into this elementary mathematical framework, e.g. real models or Keynesian models, are out of economics for good.
(iii) The three structural axioms define the elementary consumption economy, which every economist should thoroughly understand. #1 Because who does not understand the most elementary case has no chance at all to understand anything.
(iv) Your problem is that you are not even aware that you never understood what profit is. For your overdue enlightenment, see the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai). What do you call an economist who cannot tell what profit is? Clearly, being incompetent would be a euphemism.
(v) From a deeper analysis of the elementary production-consumption economy follows the most elementary version of the Profit Law. #2 Every economist — even you — has now a chance to understand the basics of economics.
(vi) From the differentiated structural axiom set follows the Employment Law, see eq. (33) of the working paper Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. Either you empirically refute this equation or simply get out of the way. To recall, science is about formal and material proof. Blather does not count for much.
#1 Toward the true economic axioms
#2 How the intelligent non-economist can refute every economist hands down
***
REPLY to Barkley Rosser on Mar 24
You say: “Your supposed axioms are ... true by definition.” Yes, this is exactly what I assert. So we have common ground. Not only this, we are in perfect accordance with what Aristotle defined as the scientific method: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”
Having established a rock-solid starting point, we can now advance: “The object of reasoning is to find out, from the consideration of what we already know, something else which we do not know.” (Peirce)
From the axioms we have agreed upon to be true follows that Walrasianism and Keynesianism are provably false.
This, in a nutshell, is the straightforward application of the axiomatic-deductive method to economics. The method is known for more than 2300 years, and you can look it up in Wikipedia: “Euclid’s method consists in assuming a small set of intuitively appealing axioms, and deducing many other propositions (theorems) from these.”
One very important theorem is the Profit Law, which says in its most elementary form (i) Qm=-Sm (Qm monetary profit, Sm monetary saving). This is the beauty of the scientific method to ‘find out, from the consideration of what we already know, something else which we do not know.’ What theorem (i) tells you is that all I=S models are false and, by implication, that both Walrasianism and Keynesianism are as dead as a doornail. I am pretty sure that you did not know this until now.
You say about the axioms A1 to A3, “They lead to nowhere at all other than to help in a ‘measurement without theory’ sort of empirical investigation, which you claim is ‘pointless.’ But your axioms are good for nothing more, and not even all that useful for even that.”
It cannot be said that my axioms ‘lead to nowhere.’ At a minimum, they have led to the incontrovertible conclusion that you have been hanging around for too long in the scientific Neanderthal.
***
REPLY to Tom Brown on Mar 25
You say: “Your concept of science sounds more like mathematics.” This is perhaps because you have a wrong idea of what science is all about. Science was already well established when Adam Smith declared that economics, too, is a science. Economics defends this claim to this day but has never delivered anything fitting the description of science.
So, it is not “my” concept or “your” concept. Science is well-defined, and economists either stick to the rules or they will be thrown out of science. According to the criteria of formal and material consistency (Klant, 1994, p. 31), economics is indisputably a failed science. In methodological terms, this means that the old paradigm is dead and a new paradigm is urgently needed. Because a paradigm is defined by its foundational propositions, a.k.a axioms, a Paradigm Shift means practically fully replacing the old axiom set, i.e., HC1 to HC6 above, with a new one. This has nothing to do with mathematics as such. Newton put his PHYSICAL axioms on the first pages of the Principia.* In methodological analogy ECONOMIC axioms have to be laid down by economists. This defines the subject matter.
The actual situation is this: Orthodoxy clings to a thoroughly refuted axiom set, and Heterodoxy so far has failed to formulate a new one. As Keynes famously put it: “Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)
As a matter of fact, Keynes’ Paradigm Shift (= overthrow of axioms) failed. This means in the strict sense that economics has no scientifically valid axiomatic foundations at all. Walrasian and Keynesian economics are what Feynman famously called cargo cult science. In other words, economics is de facto OUT of science.
Economists violate well-defined scientific standards on a daily basis. To recall: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern, 1941, pp. 369-370)
In the proto-science of economics, it is indeed possible to teach falsified theories like supply-demand-equilibrium generation after generation, 'as if nothing had happened’.
Therefore, in economics, the task is NOT to replace something like true but qualified ‘Newtonian’ axioms with something like true but general ‘Einsteinian’ axioms but to replace the neoclassical axioms that are KNOWN to be FALSE.
There is no “my” or “your” concept of science or different concepts in mathematics, physics, the so-called social sciences, or economics. There is only ONE way to build up a valid theory: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein, 1934, p. 165)
The methodological term for ‘basic concepts and laws which are not logically further reducible’ is axioms. As long as economic theory is not based on a consistent set of axioms, it is out of science. This is the case since Adam Smith. There is no use to wish-wash around this embarrassing fact.
References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
***
REPLY to Tom Brown on Mar 26
(i) You say: “Having a consistent set of axioms is not a guarantee that you’re doing science.” Yes, indeed, because science requires formal AND material consistency. THIS is the guarantee: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
The fact of the matter is that orthodox economics lacks BOTH formal AND material consistency. This, in turn, is the guarantee that economics is NOT a science. In order to refute a theory, it SUFFICES to prove EITHER logical or material inconsistency.
Walrasian and Keynesian economics are logically defective, and the proof has been carried out by using the axiomatic-deductive method. No scientist will ever accept Walrasian or Keynesian economics.
(ii) Walrasian and Keynesian economics are refuted. Economists either do not know it, do not understand it, or ignore it. Either way, they are violating the well-defined standards of science. This is inexcusable.
(iii) It is a silly game to challenge a scientist by asking him to predict the future. He will simply tell you “The future is unpredictable.” (Feynman) #1 Predicting the future is the business of imbeciles.
(iv) Because of this, economics from Jevons/Walras/Menger onward to DSGE is NOT dismissed because it has not predicted crises. Neoclassics is unacceptable because it is logically and empirically inconsistent.
(v) From the structural axioms follows the elementary version of the Profit Law. #2 You, or a competent economist for that matter, are invited to test it against the DSGE profit law. This test, though, is an entirely separate issue and should not distract from the fact that neoclassical economics is axiomatically false for more than 150 years.
(vi) That the Fed uses DSGE does not speak for DSGE but against the Fed.
#1 Scientists do not predict and Prediction does not work? Try retrodiction first
#2 The three fundamental economic laws.
ADDENDUM
The formula for the simulation of the elementary structural axiomatic consumption economy is given with Graphic AXEC25. You are certainly in a position to produce the source code yourself.
***
REPLY to Tom Brown on Mar 28
We have two SEPARATE issues (i) orthodox economics is false and thoroughly refuted according to well-defined scientific criteria, and (ii), given that Orthodoxy is dead, what does the new paradigm look like?
The problem with Noah Smith and you is that you have not yet realized (i). Because of this, you are hopelessly locked in at the proto-scientific stage. With regard to Orthodoxy or so-called mainstream economics, this is the situation: “... we may say that ... 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)
Therefore, for every economist, there is but ONE worthwhile task: to contribute to the NEW paradigm. All the rest is pointless behind-the-curve blather.
Instead of doing your scientific homework, you argue with regard to (ii): “Even a zeroth order model will do (up or down). Is your theory useful? I’d like to see the evidence that it is. Make them conditional if you like: tell me what things cannot happen and what's more likely to happen. Tell us the kinds of states we’ll likely find the economy in, and those that are excluded by your theory (past, present, and future).”
Obviously, you cannot read. With regard to the issues of scientific prediction and testable economic laws, I have referred you above to the pertinent posts, which are in turn backed up by working papers. You have not realized this either.
Economics could make much faster progress toward science if failed mainstream economists could simply get out of the way — NOW.
***
REPLY to Tom Brown on Mar 30
Science is not about preaching but proof. You are provably false and are defending the indefensible.
Thank you for the link to TheMoneyIllusion. See my comment there The futility of testing economics blather.
***
ICYMI Tom Brown on Apr 7In case you have not followed the short excursion to Austrianism on TheMoneyIllusion-blog here is the resume that applies generally:
Science was there before economics was there. Economists either conform to scientific standards or are out of science: they are in NO position to redefine scientific criteria.
Because economics — as represented by the major sects Walrasians, Keynesians, Marxians, and Austrians — has never risen above the level of a proto-science, it has become popular among economists to question the standards, to lower them, or, as Blaug aptly put it, ‘to play tennis with the net down’. When this is pointed out, economists make the backward somersault: ‘Economics is not a Science with a capital S’ (Solow).
The scientific method is well-defined: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)
Logical consistency is secured by applying the axiomatic-deductive method, and empirical consistency is secured by applying state-of-the-art testing.
Economics fails on both counts: the axiomatic foundations are provably false, and testing is regularly inconclusive. So, economics has happily established itself in the swamp between true and false where ‘nothing is clear, and everything is possible’ (Keynes).
The swamp between the hard rocks of true and false is the natural habitat of blathering frogs, of which there are four species, which are clearly identifiable by their respective axiom sets. The funniest species are the Austrians, who are in possession of an irrefutable magic axiom but never managed to produce a testable proposition. So, there is NO WAY to get an Austrian frog ever out of the swamp. And of this, they are very proud.
No problem with this, of course. What has to be made crystal clear is that Austrians have never produced anything of scientific value. For the proof, re-read Major.Freedom’s posts. With this stuff, the poor souls in scientific hell are tortured.
Time to become constructive now: let’s proceed with the Paradigm Shift.
***
NOTE on Apr 19Related 'Where Advanced Heterodoxy — represented by Steve Keen — took the wrong turn'and 'The futility of testing economics blather' and 'Austrian blather' and 'The zombie wars are over'
***
Graphic AXEC176b
March 21, 2016
Vain hopes in the ruins of economics
Comment on Noah Smith on ‘New paradigms in economic theory? Not so fast.’
Blog-Reference and Blog-Reference
Economics is a failed science and the ultimate cause is the proven multi-generation scientific incompetence of economists. Since Adam Smith economists have not grasped what science is all about — despite the fact that it is unambiguously defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
It is always BOTH, logical AND empirical consistency and NOT either/or. This is the critical hazard: instead of keeping the balance on the high methodological tightrope, the incompetent researcher tumbles down either on the side of vacuous deductivism or on the side of blind empiricism. What the history of economic thought clearly shows is a pointless flip-flop between fact-free model bricolage and theory-free application of statistical tools or, worse, commonsensical stylized-facts storytelling.
So it comes as no surprise that, after the proven failure of maximization-and-equilibrium economics, it is again the turn of ‘empirical revolution’ (See intro). Needless to emphasize that this is just another instance of scientific incompetence because methodologically the theoretical revolution must precede any empirical revolution: “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)
Walrasianism, Keynesianism, Marxianism, and Austrianism are logically inconsistent or empirically inconsistent or both (2015).
Always when economics is in open crisis four reactions are to be observed: (i) self-delusional denial, (ii) backpedaling and relativization, e.g. ‘economics is not a Science with a capital S’ (Solow), (iii) admission of the most noticeable flaws with the reassurance that our best brains are already working on them, (iv) clueless actionism and innovation showbiz.
The two main pseudo-innovations consist of borrowing from either evolution theory or from the latest vintages of physics (complexity, networks, chaos, non-linearity, thermodynamics, disequilibrium, information, emergence, etc.). The actual confused state of these misdirected approaches may be gleaned from The Journal of Evolutionary Economics and from the EconoPhysics blog.
Mindless copying/borrowing is the characteristic of what Feynman famously characterized as cargo cult science. Neither evolution theory nor EconoPhysics is the way forward. Economics has to redefine itself in a genuine paradigm shift. In very general terms, the methodological revolution consists of the switch from behavior-centered bottom-up, i.e. subjective microfoundation, to structure-centered top-down, i.e. objective macrofoundations (2014).
First of all, the orthodox set of axioms (Weintraub, 1985, p. 109) has to be fully replaced. #1 Nothing short of a theoretical revolution, a.k.a. Paradigm Shift will do. Needless to stress that the superior paradigm has to be logically AND empirically consistent. After more than 200 years of failure and Noah Smith’s latest methodological wind egg economics needs the true theory — fast.
Egmont Kakarot-Handtke
References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.
#1 From Orthodoxy, to Heterodoxy, to Metadoxy and cross-references Paradigm Shift
Related 'Toward the true economic axioms' and 'Low-IQ economics: the beginner’s guide'.
REPLY to Tom Brown on Mar 21
Specifically, I propose to test the structural-axiomatic Employment Law/Phillips Curve (33) of the working paper Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster because of its overriding importance for improving the actual employment situation.
Related 'How to get out of the swamp of ignorance'
Blog-Reference and Blog-Reference
Economics is a failed science and the ultimate cause is the proven multi-generation scientific incompetence of economists. Since Adam Smith economists have not grasped what science is all about — despite the fact that it is unambiguously defined: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
It is always BOTH, logical AND empirical consistency and NOT either/or. This is the critical hazard: instead of keeping the balance on the high methodological tightrope, the incompetent researcher tumbles down either on the side of vacuous deductivism or on the side of blind empiricism. What the history of economic thought clearly shows is a pointless flip-flop between fact-free model bricolage and theory-free application of statistical tools or, worse, commonsensical stylized-facts storytelling.
So it comes as no surprise that, after the proven failure of maximization-and-equilibrium economics, it is again the turn of ‘empirical revolution’ (See intro). Needless to emphasize that this is just another instance of scientific incompetence because methodologically the theoretical revolution must precede any empirical revolution: “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)
Walrasianism, Keynesianism, Marxianism, and Austrianism are logically inconsistent or empirically inconsistent or both (2015).
Always when economics is in open crisis four reactions are to be observed: (i) self-delusional denial, (ii) backpedaling and relativization, e.g. ‘economics is not a Science with a capital S’ (Solow), (iii) admission of the most noticeable flaws with the reassurance that our best brains are already working on them, (iv) clueless actionism and innovation showbiz.
The two main pseudo-innovations consist of borrowing from either evolution theory or from the latest vintages of physics (complexity, networks, chaos, non-linearity, thermodynamics, disequilibrium, information, emergence, etc.). The actual confused state of these misdirected approaches may be gleaned from The Journal of Evolutionary Economics and from the EconoPhysics blog.
Mindless copying/borrowing is the characteristic of what Feynman famously characterized as cargo cult science. Neither evolution theory nor EconoPhysics is the way forward. Economics has to redefine itself in a genuine paradigm shift. In very general terms, the methodological revolution consists of the switch from behavior-centered bottom-up, i.e. subjective microfoundation, to structure-centered top-down, i.e. objective macrofoundations (2014).
First of all, the orthodox set of axioms (Weintraub, 1985, p. 109) has to be fully replaced. #1 Nothing short of a theoretical revolution, a.k.a. Paradigm Shift will do. Needless to stress that the superior paradigm has to be logically AND empirically consistent. After more than 200 years of failure and Noah Smith’s latest methodological wind egg economics needs the true theory — fast.
Egmont Kakarot-Handtke
References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.
#1 From Orthodoxy, to Heterodoxy, to Metadoxy and cross-references Paradigm Shift
Related 'Toward the true economic axioms' and 'Low-IQ economics: the beginner’s guide'.
***
REPLY to Tom Brown on Mar 21
Specifically, I propose to test the structural-axiomatic Employment Law/Phillips Curve (33) of the working paper Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster because of its overriding importance for improving the actual employment situation.
Related 'How to get out of the swamp of ignorance'
March 19, 2016
Helicopter money — a free lunch for the one-percenters
Comment on Erwan Mahé on ‘The arrival of helicopter money’
Blog-Reference
Heterodoxy, understood as political economics, is in favor of all measures that benefit ‘the people’ and against all measures that benefit ‘the one-percenters’. Quite naturally, Heterodoxy is in favor of citizen helicopter money.
Unfortunately, most heterodox economists have not done their scientific homework and, by consequence, have merely a superficial idea of how the monetary economy works. This is what they have in common with most orthodox economists (2014; 2015). Because of this, the discussion about helicopter money lacks a sound theoretical foundation. More specifically, the profit theory of both Orthodoxy and Heterodoxy is provable false.*
This lack of understanding produces an unintended perverse effect because what seems at first sight to benefit ‘the people’ benefits ultimately ‘the one-percenters’. In the simplest case the additional nominal demand increases either the price at constant employment or employment at constant price or something in between, yet in ALL cases the profit of the business sector as a whole increases exactly by the amount of helicoptered money. In other words, if fully spent the money thrown from the helicopter reappears one-to-one as profit. This effect is not directly visible because total profit is distributed among many firms depending on what goods the households buy.
To this day, neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect can tell the difference between income and profit. As the Palgrave Dictionary sums up “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
This has three consequences: (i) ALL opinion-input to the discussion about helicopter money lacks a sound scientific foundation, (ii) unenlightened good intentions backfire, i.e. in the course of time helicopter money leads to an extremely unequal distribution of financial wealth, (iii) heterodox economists become politically the useful idiots of the one-percenters.
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, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
* For more details see cross-references Profit
Related 'Deficit spending, helicopter money, and profit' and 'Crisis, cranks, and scientists' and 'Profit and the collective failure of economists' and 'Keynesianism as ultimate profit machine'.
Blog-Reference
Heterodoxy, understood as political economics, is in favor of all measures that benefit ‘the people’ and against all measures that benefit ‘the one-percenters’. Quite naturally, Heterodoxy is in favor of citizen helicopter money.
Unfortunately, most heterodox economists have not done their scientific homework and, by consequence, have merely a superficial idea of how the monetary economy works. This is what they have in common with most orthodox economists (2014; 2015). Because of this, the discussion about helicopter money lacks a sound theoretical foundation. More specifically, the profit theory of both Orthodoxy and Heterodoxy is provable false.*
This lack of understanding produces an unintended perverse effect because what seems at first sight to benefit ‘the people’ benefits ultimately ‘the one-percenters’. In the simplest case the additional nominal demand increases either the price at constant employment or employment at constant price or something in between, yet in ALL cases the profit of the business sector as a whole increases exactly by the amount of helicoptered money. In other words, if fully spent the money thrown from the helicopter reappears one-to-one as profit. This effect is not directly visible because total profit is distributed among many firms depending on what goods the households buy.
To this day, neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect can tell the difference between income and profit. As the Palgrave Dictionary sums up “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
This has three consequences: (i) ALL opinion-input to the discussion about helicopter money lacks a sound scientific foundation, (ii) unenlightened good intentions backfire, i.e. in the course of time helicopter money leads to an extremely unequal distribution of financial wealth, (iii) heterodox economists become politically the useful idiots of the one-percenters.
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, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
* For more details see cross-references Profit
Related 'Deficit spending, helicopter money, and profit' and 'Crisis, cranks, and scientists' and 'Profit and the collective failure of economists' and 'Keynesianism as ultimate profit machine'.
March 18, 2016
Hayek was not an economist
Comment on Maria Alejandra Madi on ‘Economic discourse and the market’
Blog-Reference
You say “In the last decades, the emergence and diffusion of the neoliberal agenda reflected the intellectual victory of Hayek’s ideas about the supremacy of the competitive economic order and the rejection of interventionism to promote economic growth and social justice.” (See intro)
This is a misunderstanding that is grounded in the provable fact that most people/ economists have no proper understanding of economics. #1 Therefore, it is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are:
(i) The goal of political economics is to push an agenda; the goal of theoretical economics is to explain how the actual economy works.
(ii) In political economics, anything goes; in theoretical economics, scientific standards are observed.
Theoretical economics has to be judged according to the criteria of true/false and nothing else. The history of political economics since Adam Smith can be summarized as a perpetual violation of well-defined scientific standards.
Theoretical economics has been hijacked by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.
It is a widespread misunderstanding to think that people who talk about the economy are economists and understand how the economy works. Hayek’s Road to Serfdom is a political pamphlet that is not backed by the true economic theory simply because Hayekian economics is scientifically worthless storytelling until this day.
Hayek, of course, had the right to write political pamphlets, defend capitalism, support Thatcher, and found a political club-like Mont Pelerin. One thing, though, should be perfectly clear: the moment an economist starts with politics, he leaves economics, understood as a science, for good.
When Krugman supports the Democrats, Wren-Lewis and Keen support Corbyn, and Varoufakis fights for democratizing the Eurozone. Does this have anything to do with scientific research? What do they have in common? Neither has a scientifically valid theory about how the actual economy works. So, all their arguments and opinions have no sound scientific foundations.
One task of Heterodoxy is to refute false theories. The more important task, though, is to develop the true theory of how markets work (2015). Hayekian economics never satisfied the criteria of material and formal consistency. It is worthless political economics. Let Heterodoxy throw Hayek out of economics and over the disciplinary fence to political science, where he belongs.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
#1 How the intelligent non-economist can refute every economist hands down
Related 'Economics and the weapons of mass distraction' and 'Low-IQ economics: the beginner’s guide' and 'Krugman and the scientific implosion of economics' and 'Political economics: a playground for scientific deadbeats' and 'Every thinking economist is heterodox by default, but how do we proceed from here?' and 'Are economists natural-born scientific failures?'.
Blog-Reference
You say “In the last decades, the emergence and diffusion of the neoliberal agenda reflected the intellectual victory of Hayek’s ideas about the supremacy of the competitive economic order and the rejection of interventionism to promote economic growth and social justice.” (See intro)
This is a misunderstanding that is grounded in the provable fact that most people/ economists have no proper understanding of economics. #1 Therefore, it is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are:
(i) The goal of political economics is to push an agenda; the goal of theoretical economics is to explain how the actual economy works.
(ii) In political economics, anything goes; in theoretical economics, scientific standards are observed.
Theoretical economics has to be judged according to the criteria of true/false and nothing else. The history of political economics since Adam Smith can be summarized as a perpetual violation of well-defined scientific standards.
Theoretical economics has been hijacked by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.
It is a widespread misunderstanding to think that people who talk about the economy are economists and understand how the economy works. Hayek’s Road to Serfdom is a political pamphlet that is not backed by the true economic theory simply because Hayekian economics is scientifically worthless storytelling until this day.
Hayek, of course, had the right to write political pamphlets, defend capitalism, support Thatcher, and found a political club-like Mont Pelerin. One thing, though, should be perfectly clear: the moment an economist starts with politics, he leaves economics, understood as a science, for good.
When Krugman supports the Democrats, Wren-Lewis and Keen support Corbyn, and Varoufakis fights for democratizing the Eurozone. Does this have anything to do with scientific research? What do they have in common? Neither has a scientifically valid theory about how the actual economy works. So, all their arguments and opinions have no sound scientific foundations.
One task of Heterodoxy is to refute false theories. The more important task, though, is to develop the true theory of how markets work (2015). Hayekian economics never satisfied the criteria of material and formal consistency. It is worthless political economics. Let Heterodoxy throw Hayek out of economics and over the disciplinary fence to political science, where he belongs.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
#1 How the intelligent non-economist can refute every economist hands down
Related 'Economics and the weapons of mass distraction' and 'Low-IQ economics: the beginner’s guide' and 'Krugman and the scientific implosion of economics' and 'Political economics: a playground for scientific deadbeats' and 'Every thinking economist is heterodox by default, but how do we proceed from here?' and 'Are economists natural-born scientific failures?'.
***
For an overview of the recent political corruption of economics, see Dániel Oláh: If You Look Behind Neoliberal Economists, You’ll Discover the Rich: How Economic Theories Serve Big Business, The road to serfdom – sponsored by Big Business → Evonomics Blog.
***
Graphic AXEC108l
March 17, 2016
The Fed should first of all get economics right
Comment on MoneyWatch on ‘The Fed Should Allow Wages to Rise’
Blog-Reference
Standard labor market theory is provably false. To cut the meticulous formal derivation short (2015; 2014; 2012), the most elementary version of the correct Employment Law for the economy as a whole is given on Graphic AXEC62
Blog-Reference
Standard labor market theory is provably false. To cut the meticulous formal derivation short (2015; 2014; 2012), the most elementary version of the correct Employment Law for the economy as a whole is given on Graphic AXEC62
From this equation follows the employment multiplier. It says roughly#1: if the Fed wants an inflation rate of, say, 2 percent and the actual productivity growth is, say, 1.5 percent, then the AVERAGE wage rate must rise by 3.5 percent. And there is no use in waiting until this miraculously happens, but the Fed has to actively promote a wage increase in those sectors/firms with an above-average profit rate. These sectors then pull the economy out of recession/deflation. This works best when applied worldwide.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
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 It’s the price mechanism, stupid!.
Related 'Deficit spending, helicopter money, and profit' and 'Austerity and the utter scientific ignorance of economists' and 'Have data, lack theory' and 'Going beyond sitcom economics' and 'The labor market and the consistent failure of 101-economics'.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
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 It’s the price mechanism, stupid!.
Related 'Deficit spending, helicopter money, and profit' and 'Austerity and the utter scientific ignorance of economists' and 'Have data, lack theory' and 'Going beyond sitcom economics' and 'The labor market and the consistent failure of 101-economics'.
Subscribe to:
Posts (Atom)