Going beyond ink-blot association

Comment on J. W. Mason on ‘Causes and Effects of Wage Growth’

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It is pretty clear that your post lacks an underlying coherent theory. Looking at data without a well-defined theoretical perspective is not different from reading tea leaves or from freely associating about an inkblot. Accordingly, the argument consists of a parade of various popular stories (here, five in total, i.e., labor/political, China/robot, Friedman, markup, NAIRU).

Storytelling is the natural mode of communication in political (i.e., proto-scientific) economics. As Hicks once summed up a similar discussion:
“As far as I can make out, there are relevant and important senses in which all these statements are each of them right and each of them wrong.” (1939, p. 184)

Inconclusiveness is a convenient stratagem because “... you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158). Exactly for this reason, it is methodologically unacceptable.

In order to get out of this medieval angels-on-a-pinpoint discussion, a theoretical fixpoint is needed that satisfies the criteria of material and formal consistency. To make a long argument (2015; 2014; 2012) short, the correct Employment Law for the investment economy is given with Graphic AXEC46

The equation says that employment L increases with:
• investment expenditures I,
• an increasing expenditure ratio ρ_E (≡C/Y),
• an increasing factor cost ratio ρ_F (≡W/PR),
under the condition of product market-clearing if price P and productivity R in the consumption and investment good industry as well as distributed profit Yd remain unaltered in the period under consideration. A falling average wage rate for the business sector as a whole increases unemployment.

The testable structural Employment Law is general; it includes the working of the wage-price mechanism and contains Keynes's argument as a special case. Finally, it holds under inflationary and deflationary conditions.

The testable structural Employment Law terminates inconclusive wish-wash and unambiguously determines the relationship of wage rate, price, productivity, aggregate demand, income distribution, and employment.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.
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). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

Black holes and white noise

Comment on merijnknibbe on ‘What’s inside the neoliberal mind? Part 2 — Marketfundamentalist Marxism, kind of’

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Inside the neoliberal mind is the same strange thing as in the Marxist mind: a scientific black hole. Constructive Heterodoxy has rigorously demonstrated that both approaches lack the correct profit theory (2015b) and, as a matter of logical consequence, the correct employment theory (2015a). Employment for the investment economy with profit distribution is given with Graphic AXEC46

The Employment Law says that there is a central defect in the market system, viz., there is positive feedback between wage rate and employment. This explains the greater part of rampant unemployment.

Not much more than rhetorical white noise evaporates from Neoliberal or Marxist black holes.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL

Forget Krugman, forget Keynes, forget economists

Comment on Lars Syll on ‘Why Paul Krugman is no real Keynesian’

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Keynes wrote in his General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

It has been rigorously demonstrated that this syllogism contains an elementary mistake (2011). By consequence, all models that contain I=S are scientifically worthless. This holds for all variants of IS-LM and, therefore, also for Krugman's model (2014).

Because of defective logic, both Krugman and Keynes are outside of science. There is nothing to choose from.

Constructive Heterodoxy cannot build upon the accustomed concepts but has to dig deeper (2015). This leads to the testable Employment Law for the investment economy, shown with Graphic AXEC46

This equation helps to answer Keynes's pivotal question, i.e.  Is the economy self-adjusting? The answer is no. This follows from the factor cost ratio ρ_FC, which formally represents the price mechanism. This variable is defined as the quotient of average wage rate W, price P_c, and productivity R_c in the consumption good industry.

The fact of the matter is that a fall in the average wage rate relative to the price reduces employment L under the condition of market clearing in the product market (all other variables fixed for the moment). The fatal defect of the price mechanism is that the right (= full employment) factor cost ratio does not come about spontaneously. Just the contrary. If unemployment effects a flexible fall in the average wage rate then unemployment increases. Thus, stickiness is not a problem. There is a positive feedback loop built right into the structural core of the economic system.

The claim that the market system is basically an equilibrium system that regulates itself with a tendency to full employment is entirely unfounded (methodologically, it is a quite ordinary petitio principii). Politicians who rely on the advice of representative economists to get out of recession or depression are bound to fail.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2014). 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. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. 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.

Confounding the Quantity Theory and Say's Law

Comment on Lars Syll on ‘Money hoarding — an explanation of today’s low inflation’

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The core problem of economics is that the representative economist never managed to keep political and theoretical economics properly apart. The mixture is toxic indeed. The preceding discussion is a fine specimen of the resulting all-around confusion.

Let us untangle the mess by starting with Pontus's confession. “Anyhow, I still believe in Say’s law.” Many economists have not understood until this day that science has nothing to do with belief but with knowledge. What can be shown in a formal rigorous way is that Say's Law does not imply full employment but is compatible with any level of employment (2015).

What the believers in Say's Law persistently overlook is the role of the profit mechanism. More generally, both the Walrasian and Keynesian profit theory is false (2015).

The correct version of Say's Law implies that the quantity of money is not a determinant of the market-clearing price (2015, eq. (4)) and (2015, eq. (7)).

The most urgent task of Constructive Heterodoxy is to rethink pivotal concepts like market, Say's Law, money, profit, etcetera. The reconstruction of the theoretical superstructure from scratch is an absolute methodological necessity.

At the moment, both Orthodoxy and traditional Heterodoxy are defended by confused confusers, i.e., proto-scientific believers.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–17. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL
Kakarot-Handtke, E. (2015c). Essentials of Constructive Heterodoxy: Say’s Law. SSRN Working Paper Series, 2556434: 1–10. URL


For details of the big picture, see cross-references Paradigm Shift.

Kaput toys

Comment on Nick Rowe on ‘Wren-Lewis Takes a Stab at It’

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You write: “Firms are worker-owned cooperatives, so we don't need to distinguish wages from profits.”

That is, of course, a fatal error/mistake. You have to distinguish between wage income, distributed profit and profit. These are quite different things. It is irrelevant whether the firm is a cooperative or a joint-stock company. Your error/mistake, though, is pardonable because the profit theory is false since Adam Smith and the models of Stephen, Simon, Nick E. and all the rest are not one iota better in this respect. Time to realize that RBC, NK and NC models are logically defective.

For the correct profit theory see first here and for the correct theory of money see then here.

Egmont Kakarot-Handtke

Beyond methodological madness

Comment on Lars Syll on ‘On the value of theoretical models in economics’

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Economists are in a state of manifest self-delusion. They are convinced that what they do is science. Time to face reality.

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

After summarizing the neoclassical premises Paul Schächterle concludes: “That is no science. That is madness. In a better world there we would have no reason to even discuss such models.” (Preceding post)

Indeed, no other conclusion is possible for everyone with a modicum of scientific intuition. Economics is a proto-science, at best on the level of medieval physics. That is bad enough, but it gets worse when economists start talking about methodology.

How can anyone take seriously what Krugman, who cannot tell the difference between profit and income (2014), says about the significance of simplicity? Simplicity as such has never been a truth criterion: “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein, quoted in Brown, 2011, 244)

Note that Einstein talks about the area of applicability. How large is the area of applicability of neoclassical economics in all its current variants? Yes, exactly zero, and this has nothing to do with simplicity but with simple-mindedness.

Note also that it is the extent of applicability that makes the difference between Einstein's and Newton's theories. Newton is the limiting case of Einstein for low speeds. This has nothing to do with simplicity.

Beginning with equilibrium, economists borrowed most of their concepts from physics and then misapplied them (Mirowski, 1995). The same holds for methodology. Neither Orthodoxy nor Heterodoxy understands to this day how the axiomatic-deductive method is to be applied correctly.

As Einstein said: ‘A theory is the more impressive the greater the simplicity of its premises ...’. It is Constructive Heterodoxy that displays the greatest simplicity of premises. These premises are objective and have no resemblance at all with the green cheese assumptionism of New Classicals or New Keynesians. The Paradigm Shift, which leaves these approaches as well as traditional Heterodoxy behind, is already on the way. See the cross-references here.

Egmont Kakarot-Handtke


References
Brown, K. (2011). Reflections on Relativity. Raleigh: Lulu.com.
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.

Vacuonomics II

Comment on J. W. Mason on ‘A Quick Point on Models’

Blog-Reference

Economists are in a state of manifest self-delusion. They are convinced that what they do is science.

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

Keynes provides as good an example as any classical or neoclassical economist. JW Mason writes:
“According to Keynes the purpose of economics is ‘to provide ourselves with an organised and orderly method of thinking out particular problems’.” (See intro post)

Let us accept this for the moment and see how it plays out in practice. As a centerpiece of his General Theory Keynes formulated the foundational syllogism of macroeconomics: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

The fault of Keynes' syllogism is in the premise income = value of output. It can be formally demonstrated that this equality holds only in the limiting case of zero profit in both the consumption and investment good industry (2014b). Keynes himself felt that something was wrong with profit but he could not identify it: “His 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, p. 12)

Keynes was first and foremost a political economist and this means — as a matter of principle — that methodological trivia are never allowed to derail the good cause: “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 real scientist's motto is of course ‘It is better to be precisely right than roughly wrong.’ When von Neumann considered the overall poor performance of economics he came to this conclusion: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.” (quoted in Mirowski, 2002, p. 146 fn. 49)

Indeed, when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. It is with profit where the confusion about saving ‘equals’ investment starts. In addition, when income and profit are not correctly defined then distribution theory goes down the tube. And this in turn means that Piketty's study lacks sound conceptual foundations already long before he comes to the definition of capital.

The representative economist is not much disturbed by all this. He builds one zero profit I=S model after the other (2014a). Economics has its own methodology: “The test of a good model is not whether it corresponds to the true underlying structure of the world, but whether it usefully captures some of the regularities in the concrete phenomena we observe.” (see intro)

The sun goes up: this model ‘usefully captures some of the regularities we observe.' Indeed. Another regularity for more than two hundred years is that the representative economist cannot tell the difference between income and profit. It can hardly be denied that this distinction is fundamental for all economic models. Yet, neither in the Keynesian nor the Walrasian context it is carried out correctly.

The quickest point on economic models is therefore that they do not satisfy the most elementary methodological requirements. Or, in Joan Robinson's unsurpassable tweet format: Scrap the lot and start again.

Egmont Kakarot-Handtke


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. 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. (1936).
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
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