Comment on David Ruccio on ‘"For years I thought what was good for our country was good for General Motors, and vice versa"’
Blog-Reference
Let us call it the Marshallian Vice. The vice consists in taking a firm or a sub-sector of the economy, to analyze the basic relationships under the condition of ceteris paribus, and then to generalize the result for the economy as a whole. As a rule, the generalization is false, despite the fact that the conclusions of partial analysis are, for all practical purposes, correct. Because of this, Walrasian total analysis is — in principle — the methodologically correct way. Marshallian partial analysis is — in principle — misleading and scientifically worthless.
To see this, let us make a simple example. Imagine two firms, GM and the rest of America. In the initial period, the respective prices are equal to unit wage costs, i.e., GM Pg=Wg/Rg and the rest of America Pr=Wr/Rr. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, so there is neither saving nor dissaving (for details, see 2014).
Now GM slashes the wage rate from Wg to W'g. Total employment is kept constant. Thus, total wage income falls. Because total consumption expenditures are equal to total wage income, nominal demand for both firms falls. Because total employment remains unchanged, the output of both firms remains unchanged. Under the condition of market-clearing, the respective prices adapt accordingly — both fall.
GM now makes a profit because the difference between the new price P'g and the lower unit wage costs W'g/Rg is now positive: “And thus we arrive at Mr. Ricardo’s principle, that profits depend upon wages; rising as wages fall, and falling as wages rise.” (Mill, 1874, IV.12)
GM provides the clear-cut empirical proof that the profit theory of all economic half-wits from Ricardo via Marx to Marshall and beyond is true — except for the conclusion ‘As goes GM, so goes America’.
The second firm (= the rest of America) now makes a loss because the new price P'r is lower than the unchanged unit wage costs Wr/Rr. The loss of the second firm is exactly equal to the profit of GM. The overall profit of the American economy is exactly zero, just as it was in the initial period. Because of this redistribution of profit, the generalization ‘As goes GM, so goes America’ is patently false. The nuisance with economic half-wits is not that they are downright false but that they are at best half true. This is the fatal methodological flaw of all partial analyses. The proper subject matter of economics is the world economy as a whole and NOT the profit-maximizing firm or the utility-maximizing agent.
In the value-laden language of political economics, the complete picture is as follows. With the wage cut, W'g < Wg GM increases its profit and exploits the rest of the American business sector, which now makes a loss of equal magnitude. Because output remains unchanged, the real situation of the household sector as a whole remains unchanged in real terms. However, the employees of the second firm now absorb a greater part of the total output because of lower prices and an unchanged wage rate. They exploit the employees of GM, who can buy less now because of their lower wage rate. So, what we have as a result is a cross-over exploitation WITHIN the business and the household sector. The big picture is entirely different from what simple-minded partial analysis suggests.
What the big picture shows is that the fundamental concepts of profit, exploitation, and class — which are common to Ricardo, Marx, the president of GM, the union leaders, the Econ 101 students, and all the other half-wits of political economics — are simply false.
When the profit theory is false, then the rest of the economic theory is false, including the theory of international trade. And when economic theory is false, then the economic policy is wrong-headed, and then the economy eventually goes down the drain.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On Profits and Interest. Library of Economics and Liberty. URL
For details of the big picture, see cross-references Profit.
March 16, 2016
Lucas: Confession of a scientific write-off
Comment on Lars Syll on ‘Robert Lucas the storyteller’
Blog-Reference
“We are storytellers, operating much of the time in worlds of make believe. We do not find that the realm of imagination and ideas is an alternative to, or retreat from, practical reality. On the contrary, it is the only way we have found to think seriously about reality.” (Lucas, 1988, see intro)
Something is wrong with this argument.
Imagine you tell a group of medieval philosophers that their prolonged inconclusive talk about how many angels can dance on a pinpoint is senseless/weird/stupid/fallacious, and get the answer “this the only way we have found to think seriously about reality.”
Think twice, to talk about blatant NONENTITIES like utility, equilibrium, rational expectations, and so on is the ONLY way you have found to think about REALITY? Clearly, you have found nothing at all.
And it is not exactly storytelling what is going on since Jevons/Walras/Menger, it is pseudo-scientific blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982, p. 698)
What everybody understands is that Lucas cannot possibly say: ‘I am a scientifically incompetent blatherer’. So let us take “storytelling” or “loose verbal reasoning” for it.
This is the actual situation: economics is a failed science, and the ultimate cause is the scientific incompetence of both orthodox and heterodox economists. #1 Walrasianism, Keynesianism, Marxianism, and Austrianism contradict one another. Logic tells us that only one can be true or, more probably, that all are false. The latter is actually the case. The common defect of the familiar approaches is that neither ever came to grips with profit (Desai, 2008, p. 10).
And, lo and behold, monetary profit is — in contradistinction to the paradigmatic NONENTITY utility — a very real and measurable magnitude. Everybody can touch it in the cash box or see it on the bank account with the precision of two decimal places. The fact of the matter is that economists have not figured out to this day what the overall profit of an economy is and what its determinants are (2014).
The very characteristic of scientific thinking is to deal with entities, preferably with measurable entities like profit, and NOT with blatant NONENTITIES like utility/maximization/ equilibrium. The foundational error/mistake of economics has been to miss the subject matter altogether.
From the fact that the representative economist does not understand the foundational economic concept of profit follows that economic policy discussions have no scientifically valid foundations whatsoever. Arguments are hanging in midair because of scientific incompetence on all sides. The economist’s contribution to the solution of economic problems is at the same level as any witch doctor’s or agenda pusher’s proposal. This is what storytelling implies.
Storytelling is disqualifying for a scientist. The only way out of the cul-de-sac economics has trapped itself in is to avoid NONENTITIES like the plague and to deal exclusively with entities. For a start, here is a shortlist of the most obvious NONENTITIES: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, rational expectation, total income = value of output, I=S, real-number quantities/prices, ergodicity. Every theory/model that contains one of these NONENTITIES goes directly into the wastebasket. Only what then remains is acceptable for real scientific discussion and peer review.
Lucas and other storytellers, who have swallowed NONENTITIES hook, line, and sinker since Econ 101, are beyond help. They are outside of science for good.
Egmont Kakarot-Handtke
References
Dennis, K. (1982). Economic Theory and the Problem of Translation (I). Journal of Economic Issues, 16(3): 691–712. URL
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
#1 Why economics is a failed science ― 24 excuses and 1 explanation
Blog-Reference
“We are storytellers, operating much of the time in worlds of make believe. We do not find that the realm of imagination and ideas is an alternative to, or retreat from, practical reality. On the contrary, it is the only way we have found to think seriously about reality.” (Lucas, 1988, see intro)
Something is wrong with this argument.
Imagine you tell a group of medieval philosophers that their prolonged inconclusive talk about how many angels can dance on a pinpoint is senseless/weird/stupid/fallacious, and get the answer “this the only way we have found to think seriously about reality.”
Think twice, to talk about blatant NONENTITIES like utility, equilibrium, rational expectations, and so on is the ONLY way you have found to think about REALITY? Clearly, you have found nothing at all.
And it is not exactly storytelling what is going on since Jevons/Walras/Menger, it is pseudo-scientific blather: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982, p. 698)
What everybody understands is that Lucas cannot possibly say: ‘I am a scientifically incompetent blatherer’. So let us take “storytelling” or “loose verbal reasoning” for it.
This is the actual situation: economics is a failed science, and the ultimate cause is the scientific incompetence of both orthodox and heterodox economists. #1 Walrasianism, Keynesianism, Marxianism, and Austrianism contradict one another. Logic tells us that only one can be true or, more probably, that all are false. The latter is actually the case. The common defect of the familiar approaches is that neither ever came to grips with profit (Desai, 2008, p. 10).
And, lo and behold, monetary profit is — in contradistinction to the paradigmatic NONENTITY utility — a very real and measurable magnitude. Everybody can touch it in the cash box or see it on the bank account with the precision of two decimal places. The fact of the matter is that economists have not figured out to this day what the overall profit of an economy is and what its determinants are (2014).
The very characteristic of scientific thinking is to deal with entities, preferably with measurable entities like profit, and NOT with blatant NONENTITIES like utility/maximization/ equilibrium. The foundational error/mistake of economics has been to miss the subject matter altogether.
From the fact that the representative economist does not understand the foundational economic concept of profit follows that economic policy discussions have no scientifically valid foundations whatsoever. Arguments are hanging in midair because of scientific incompetence on all sides. The economist’s contribution to the solution of economic problems is at the same level as any witch doctor’s or agenda pusher’s proposal. This is what storytelling implies.
Storytelling is disqualifying for a scientist. The only way out of the cul-de-sac economics has trapped itself in is to avoid NONENTITIES like the plague and to deal exclusively with entities. For a start, here is a shortlist of the most obvious NONENTITIES: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions, supply/demand functions, simultaneous adaptation, rational expectation, total income = value of output, I=S, real-number quantities/prices, ergodicity. Every theory/model that contains one of these NONENTITIES goes directly into the wastebasket. Only what then remains is acceptable for real scientific discussion and peer review.
Lucas and other storytellers, who have swallowed NONENTITIES hook, line, and sinker since Econ 101, are beyond help. They are outside of science for good.
Egmont Kakarot-Handtke
References
Dennis, K. (1982). Economic Theory and the Problem of Translation (I). Journal of Economic Issues, 16(3): 691–712. URL
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
#1 Why economics is a failed science ― 24 excuses and 1 explanation
***
Graphic AXEC140b
March 15, 2016
Toward the true economic axioms
Comment on Paul Davidson on ‘The gross substitution axiom’
Blog-Reference and Blog-Reference on Mar 17
Paul Davidson describes the methodology of Orthodoxy as follows: “Building their economic models, modern mainstream neoclassical economists ground their models on a set of core assumptions (CA) — describing the agents as ‘rational’ actors — and a set of auxiliary assumptions (AA).” (See intro)
Keynes saw that the set of core assumptions, a.k.a. axioms was unacceptable and consequently started his paradigm shift: “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.” (1973, p. 16)
Keynes based his approach on this set of objective axioms: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This set is free of the green cheese assumptions of maximization-and-equilibrium. This obviously goes in the right direction, but Keynes’s axioms are also defective. As a result, Keynes got the relationship between the product market and the money market wrong. Both markets are coupled via saving/dissaving (2015a; 2015b).
In order to see this, Keynes’s foundational propositions have to be replaced. The most elementary economic configuration is the production-consumption economy, which is given by three objective structural-systemic 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.‡
For the graphical representation, see Graphic AXEC31
Related 'Finalizing the Keynesian Revolution' and 'From Orthodoxy, to Heterodoxy, to Metadoxy' and 'How to restart economics'.
Blog-Reference and Blog-Reference on Mar 17
Paul Davidson describes the methodology of Orthodoxy as follows: “Building their economic models, modern mainstream neoclassical economists ground their models on a set of core assumptions (CA) — describing the agents as ‘rational’ actors — and a set of auxiliary assumptions (AA).” (See intro)
Keynes saw that the set of core assumptions, a.k.a. axioms was unacceptable and consequently started his paradigm shift: “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.” (1973, p. 16)
Keynes based his approach on this set of objective axioms: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This set is free of the green cheese assumptions of maximization-and-equilibrium. This obviously goes in the right direction, but Keynes’s axioms are also defective. As a result, Keynes got the relationship between the product market and the money market wrong. Both markets are coupled via saving/dissaving (2015a; 2015b).
In order to see this, Keynes’s foundational propositions have to be replaced. The most elementary economic configuration is the production-consumption economy, which is given by three objective structural-systemic 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.‡
For the graphical representation, see Graphic AXEC31
At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e., C=Yw, and market clearing, i.e., X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that W is the AVERAGE wage rate if the individual wage rates are different among the employees, which is normally the case. Under the INITIAL conditions of budget balancing and market-clearing holds P=W/R.
If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased, the price remains constant, provided productivity R does not change. If productivity decreases, the price rises. If productivity increases, the price falls. In any case, labor gets the whole product, the real wage is invariably equal to productivity, and profit for the business sector as a whole is zero. All changes in the system are reflected by the market-clearing price. The elementary consumption economy is reproducible for an indefinite number of periods at any level of employment.
In the next period, the households save. The condition of budget balancing is lifted. The condition of market clearing remains in place. The result is shown on Graphic AXEC33
Consumption expenditure C falls below Yw and with it the market-clearing price P. With perfect price flexibility, there are NO unsold quantities and NO change of inventory. The product market is cleared, and there is no such thing as an inventory investment. So we have household sector saving but no business sector investment, that is, monetary saving, which is given by Sm≡Yw−C, is NOT equal to investment I=0 as in Keynes’ formal foundations. I=S is always false.#1
The crucial result is that the business sector makes a monetary loss that is exactly equal to the household sector’s saving, i.e., Qm≡−Sm. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Qm≡C−Yw. It always holds Qm+Sm=0.
Now, monetary saving increases the stock of money of the household sector. Yet, the complementary monetary loss decreases the stock of money of the business sector. This effect is obviously missing in the gross substitution axiom. Neither Orthodoxy nor Keynes came to grips with profit and, as a consequence, with the interaction of the product and the money market. Substitution is inapplicable because saving and profit are complementary.
Conclusion: The orthodox set of subjective-behavioral axioms is false. The Keynesian set of objective axioms is false. Ergo, BOTH versions of the so-called gross substitution axiom are false. Alone, the objective-systemic set of axioms is true.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. 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.
#1 For details of the big picture, see cross-references Refutation of I=S,
If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased, the price remains constant, provided productivity R does not change. If productivity decreases, the price rises. If productivity increases, the price falls. In any case, labor gets the whole product, the real wage is invariably equal to productivity, and profit for the business sector as a whole is zero. All changes in the system are reflected by the market-clearing price. The elementary consumption economy is reproducible for an indefinite number of periods at any level of employment.
In the next period, the households save. The condition of budget balancing is lifted. The condition of market clearing remains in place. The result is shown on Graphic AXEC33
Consumption expenditure C falls below Yw and with it the market-clearing price P. With perfect price flexibility, there are NO unsold quantities and NO change of inventory. The product market is cleared, and there is no such thing as an inventory investment. So we have household sector saving but no business sector investment, that is, monetary saving, which is given by Sm≡Yw−C, is NOT equal to investment I=0 as in Keynes’ formal foundations. I=S is always false.#1
The crucial result is that the business sector makes a monetary loss that is exactly equal to the household sector’s saving, i.e., Qm≡−Sm. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Qm≡C−Yw. It always holds Qm+Sm=0.
Now, monetary saving increases the stock of money of the household sector. Yet, the complementary monetary loss decreases the stock of money of the business sector. This effect is obviously missing in the gross substitution axiom. Neither Orthodoxy nor Keynes came to grips with profit and, as a consequence, with the interaction of the product and the money market. Substitution is inapplicable because saving and profit are complementary.
Conclusion: The orthodox set of subjective-behavioral axioms is false. The Keynesian set of objective axioms is false. Ergo, BOTH versions of the so-called gross substitution axiom are false. Alone, the objective-systemic set of axioms is true.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. 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.
#1 For details of the big picture, see cross-references Refutation of I=S,
‡ The notation for consumption expenditures has later been changed from C to EC.
Related 'Finalizing the Keynesian Revolution' and 'From Orthodoxy, to Heterodoxy, to Metadoxy' and 'How to restart economics'.
For more about axiomatization, see AXECquery.
***
Graphic AXEC196
March 14, 2016
Trump and the weaponizing of economics
Comment on Paul Krugman on 'Trump Is No Accident'
Blog-Reference
Science is about true/false and it is well-known how to arrive at a clear-cut decision between the two: “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)
Thus, science separates the gold of knowledge from the rubble of opinion. Vagueness/ undecidability is the very antithesis of science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman) The ambition of science is to get out of the cacklers’ paradise between true and false where “nothing is clear and everything is possible.” (Keynes)
Now, science does not operate undisturbed in a guarded retreat but in an open social landscape shaped by antagonistic political forces. Politics cannot do other than try to draw the different sciences in different degrees into the battle, which means that science is weaponized. This happened to economics which started as Political Economy and, despite attempts to satisfy scientific standards, it never achieved the ideal state of the full independence of genuine science. So what we have today is political economics and theoretical economics, with the former dominating the latter. Political economics has produced nothing of scientific value since Adam Smith.
The goal of political economics is to stay in the realm between true/false where opinion thrives and to gain more ground there. The goal of theoretical economics is to focus on the development of the formally and materially consistent theory of how the monetary economy works. Economics is still at the proto-scientific level and is hampered by ongoing massive distractions. The weapons of mass distraction are:
• To do away with the ‘regulative idea’ (Popper) of truth (= formal and material consistency) with the assertion that there are many truths in economics and that they can coexist under the rainbow banner of pluralism and eclecticism.
• Playing ‘with the net down’ (Blaug), i.e. softening scientific standards or ignoring/ denying them altogether.
• Folk psychology, i.e. second-guessing the scientifically inaccessible motives and intentions of economic agents (utility maximization, bounded rationality, animal spirits, rational expectations, etc).
• Folk sociology, i.e. second-guessing the scientifically inaccessible motives and intentions of real or fictional social subgroups (one-percenters, capitalists, workers, consumers, middle class, bankers, etc).
• Folk politics, i.e. second-guessing the scientifically inaccessible motives and intentions of actual or historical political actors of all forms and shapes from heads of state via legitimate/illegitimate institutions/organizations to the lone nut.
Political economics is a degenerate form of economics. Folk politics in turn is the degenerate form of political economics. Krugman is at the zero lower bound of economics.
Egmont Kakarot-Handtke
Related 'Economics and the weapons of mass distraction'.
Blog-Reference
Science is about true/false and it is well-known how to arrive at a clear-cut decision between the two: “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)
Thus, science separates the gold of knowledge from the rubble of opinion. Vagueness/ undecidability is the very antithesis of science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman) The ambition of science is to get out of the cacklers’ paradise between true and false where “nothing is clear and everything is possible.” (Keynes)
Now, science does not operate undisturbed in a guarded retreat but in an open social landscape shaped by antagonistic political forces. Politics cannot do other than try to draw the different sciences in different degrees into the battle, which means that science is weaponized. This happened to economics which started as Political Economy and, despite attempts to satisfy scientific standards, it never achieved the ideal state of the full independence of genuine science. So what we have today is political economics and theoretical economics, with the former dominating the latter. Political economics has produced nothing of scientific value since Adam Smith.
The goal of political economics is to stay in the realm between true/false where opinion thrives and to gain more ground there. The goal of theoretical economics is to focus on the development of the formally and materially consistent theory of how the monetary economy works. Economics is still at the proto-scientific level and is hampered by ongoing massive distractions. The weapons of mass distraction are:
• To do away with the ‘regulative idea’ (Popper) of truth (= formal and material consistency) with the assertion that there are many truths in economics and that they can coexist under the rainbow banner of pluralism and eclecticism.
• Playing ‘with the net down’ (Blaug), i.e. softening scientific standards or ignoring/ denying them altogether.
• Folk psychology, i.e. second-guessing the scientifically inaccessible motives and intentions of economic agents (utility maximization, bounded rationality, animal spirits, rational expectations, etc).
• Folk sociology, i.e. second-guessing the scientifically inaccessible motives and intentions of real or fictional social subgroups (one-percenters, capitalists, workers, consumers, middle class, bankers, etc).
• Folk politics, i.e. second-guessing the scientifically inaccessible motives and intentions of actual or historical political actors of all forms and shapes from heads of state via legitimate/illegitimate institutions/organizations to the lone nut.
Political economics is a degenerate form of economics. Folk politics in turn is the degenerate form of political economics. Krugman is at the zero lower bound of economics.
Egmont Kakarot-Handtke
Related 'Economics and the weapons of mass distraction'.
Economics and the weapons of mass distraction
Comment on Peter Radford on ‘Why Trump?’
Blog-Reference
Science is about true/false and it is well-known how to arrive at a clear-cut decision between the two: “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)
While the scientific methodology is pretty obvious in general it says, of course, nothing about how to proceed in the concrete case. It is the researcher who combines induction and deduction in a unique way in order to solve the problem at hand. “The next scheme, the new discovery, is going to be made in a completely different way. So history does not help much.” (Feynman, 1992, p. 164)
Therefore, here is the first critical hazard: instead of keeping the balance on the tightrope, the incompetent researcher tumbles down either on the side of vacuous deductivism or on the side of blind empiricism.
Methodology is not prescriptive in the concrete case, it defines only a green range of what is acceptable and, by implication, the complementary red range of what is unacceptable. Methodology is prescriptive in the concrete case insofar as it enforces or helps to enforce logical and material consistency.
The characteristic of science is to focus and to clarify and specify with ever-increasing precision in order to eventually arrive at a clear-cut answer. Thus, science separates the gold of knowledge from the rubble of opinion. Vagueness/undecidability is the very antithesis of science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158). The very ambition of science is to get out of the cacklers’ paradise between true and false where “nothing is clear and everything is possible.” (Keynes, 1973, p. 292)
Now, science does not operate undisturbed in a guarded retreat but in an open social landscape that is shaped by antagonistic political forces. Politics cannot do anything other than try to draw the different sciences in different degrees into the battle, which means that science is weaponized. This happened to economics which started as Political Economy and, despite attempts to satisfy scientific standards, it never achieved the ideal state of the full independence of genuine science. So what we have today is political economics and theoretical economics, with the former dominating the latter. Political economics has produced NOTHING of scientific value since Adam Smith.
The goal of political economics is to stay in the realm between true/false where opinion thrives and to gain more ground there. The goal of theoretical economics is to focus on the development of the formally and materially consistent theory of how the actual economy works. Theoretical economics is hampered by ongoing massive distractions. The weapons of mass distraction are:
Under this perspective, any discussion about the presidential candidates is a massive distraction on a blog that is dedicated to New Economic Thinking.
Egmont Kakarot-Handtke
References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, 154–184. London, New York: Routledge.
Blog-Reference
Science is about true/false and it is well-known how to arrive at a clear-cut decision between the two: “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)
While the scientific methodology is pretty obvious in general it says, of course, nothing about how to proceed in the concrete case. It is the researcher who combines induction and deduction in a unique way in order to solve the problem at hand. “The next scheme, the new discovery, is going to be made in a completely different way. So history does not help much.” (Feynman, 1992, p. 164)
Therefore, here is the first critical hazard: instead of keeping the balance on the tightrope, the incompetent researcher tumbles down either on the side of vacuous deductivism or on the side of blind empiricism.
Methodology is not prescriptive in the concrete case, it defines only a green range of what is acceptable and, by implication, the complementary red range of what is unacceptable. Methodology is prescriptive in the concrete case insofar as it enforces or helps to enforce logical and material consistency.
The characteristic of science is to focus and to clarify and specify with ever-increasing precision in order to eventually arrive at a clear-cut answer. Thus, science separates the gold of knowledge from the rubble of opinion. Vagueness/undecidability is the very antithesis of science: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158). The very ambition of science is to get out of the cacklers’ paradise between true and false where “nothing is clear and everything is possible.” (Keynes, 1973, p. 292)
Now, science does not operate undisturbed in a guarded retreat but in an open social landscape that is shaped by antagonistic political forces. Politics cannot do anything other than try to draw the different sciences in different degrees into the battle, which means that science is weaponized. This happened to economics which started as Political Economy and, despite attempts to satisfy scientific standards, it never achieved the ideal state of the full independence of genuine science. So what we have today is political economics and theoretical economics, with the former dominating the latter. Political economics has produced NOTHING of scientific value since Adam Smith.
The goal of political economics is to stay in the realm between true/false where opinion thrives and to gain more ground there. The goal of theoretical economics is to focus on the development of the formally and materially consistent theory of how the actual economy works. Theoretical economics is hampered by ongoing massive distractions. The weapons of mass distraction are:
- To do away with the ‘regulative idea’ (Popper, 1994, p. 161) of truth (= formal and material consistency) with the assertion that there are many truths in economics and that they can coexist under the rainbow banner of pluralism and eclecticism.
- Declaring deductivism and inductivism as antagonistic instead of complementary.
- Playing ‘with the net down’ (Blaug), i.e. softening scientific standards or ignoring/ denying them altogether.
- Being content with a plausible narrative/model.
- Arbitrariness/sloppiness in the definition of elementary concepts.
- Inconsistency of foundational propositions, a.k.a. axioms.
- Folk psychology, i.e. second-guessing the scientifically inaccessible motives and intentions of other people in general and of economic agents in particular (utility maximization, bounded rationality, animal spirits, rational expectations, etc).
- Folk sociology, i.e. second-guessing the scientifically inaccessible motives and intentions of real or fictional social subgroups (one-percenters, capitalists, workers, consumers, middle class, bankers, etc).
- Folk politics, i.e. second-guessing the scientifically inaccessible motives and intentions of actual or historical political actors of all forms and shapes from heads of state via legitimate/illegitimate institutions/organizations to the lone nut.
- Missing the subject matter of economics altogether (= the actual monetary economy as a whole) and getting lost in the so-called social sciences.
Egmont Kakarot-Handtke
References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, 154–184. London, New York: Routledge.
March 13, 2016
It’s the price mechanism, stupid!
Comment on Bradford DeLong on ‘Ordoliberalismus and Ordovolkismus’
Blog-Reference and Blog-Reference on Mar 14
You present three propositions about output, deficit spending, and the Keynesian multiplier and then sum up: “That is the simple arithmetic of expansionary fiscal policy in a liquidity trap.”
The fact of the matter is that the multiplier arithmetic is flawed since Keynes. Therefore, the rest of your argument falls flat.
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 under the label of Graphic as AXEC62:
Blog-Reference and Blog-Reference on Mar 14
You present three propositions about output, deficit spending, and the Keynesian multiplier and then sum up: “That is the simple arithmetic of expansionary fiscal policy in a liquidity trap.”
The fact of the matter is that the multiplier arithmetic is flawed since Keynes. Therefore, the rest of your argument falls flat.
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 under the label of Graphic as AXEC62:
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the letter ρ 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 of 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. From employment L, one comes to output O by multiplying both sides by productivity R. The employment/output equations contain but measurable variables and are testable.
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.
The Employment Law says that an increase in investment expenditure or deficit spending, i.e., ρE>1, increases employment. The multiplier, though, is different from Keynes’s flawed multiplier. The crucial difference consists of ρF.
The correct Employment Law reproduces the familiar Keynesian mechanisms. What is more important: it shows that the price mechanism, i.e., the relationship of wage rate, price, and productivity ρF, can be used to increase employment/output. Thus, there is, to begin with, no need to increase private/public debt or push investment. The crucial point is that the price mechanism does not work as standard economics claims, in other words, standard price theory is provably false.
Hence, the real problem is not at all that 'Ordoliberalismus and Ordovolkismus' do not understand the logic of deficit spending, but that both Keynesians and Walrasians have no idea of how the price mechanism in the monetary economy works.
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
(i) An increase in the expenditure ratio ρE leads to higher employment L (the letter ρ 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 of 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. From employment L, one comes to output O by multiplying both sides by productivity R. The employment/output equations contain but measurable variables and are testable.
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.
The Employment Law says that an increase in investment expenditure or deficit spending, i.e., ρE>1, increases employment. The multiplier, though, is different from Keynes’s flawed multiplier. The crucial difference consists of ρF.
The correct Employment Law reproduces the familiar Keynesian mechanisms. What is more important: it shows that the price mechanism, i.e., the relationship of wage rate, price, and productivity ρF, can be used to increase employment/output. Thus, there is, to begin with, no need to increase private/public debt or push investment. The crucial point is that the price mechanism does not work as standard economics claims, in other words, standard price theory is provably false.
Hence, the real problem is not at all that 'Ordoliberalismus and Ordovolkismus' do not understand the logic of deficit spending, but that both Keynesians and Walrasians have no idea of how the price mechanism in the monetary economy works.
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
March 12, 2016
Low-IQ economics: the beginner’s guide
Comment on Thomas Palley on ‘Self-Protectionist Moment: Paul Krugman protects himself and the establishment’
Blog-Reference and Blog-Reference on Mar 13
Economics is a failed science, but the fatal flaw is not obvious, just the contrary. It holds in general that a false theory is in good accordance with common sense and naive empiricism, and vague enough so as to be almost irrefutable. Because of this, false theories can survive for centuries. A case in point is the geocentric theory which is intuitively convincing. In marked contrast, the very characteristic of the heliocentric theory is that it is counter-intuitive. This paradigmatic case tells us that common sense and naive empiricism are the most obstinate hindrances to science. This is why J. S. Mill cursed them.
“People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcilable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” (Mill, 2006, p. 783)
While common sense/naive empiricism is a nuisance for all sciences they are less so in fields that are remote from ‘the ordinary business of life’ (Marshall) and more so in economics, sociology, psychology, etc. Everybody has something heartfelt to say about wealth, or class struggle, or greed, or sociopaths, or the Good Society, but only a few about quantum entanglement.
Because of this, the inflow of common sense and naive empiricism has always been disproportionally high in economics. This proved to be the intellectual dead weight that prevented the rise of economics above the proto-scientific level of storytelling until this very day.
Walrasianism, Keynesianism, Marxianism, and Austrianism contradict each other. Logic tells us that only one can be true or, more probable, that all are false. The latter is actually the case. The common defect of the familiar approaches is that neither ever came to grips with profit (Desai, 2008, p. 10).
From the fact that the representative economist does not understand the pivotal economic concept follows that economic policy discussions have no scientifically valid foundation whatever. Arguments are hanging in the air because of scientific incompetence on all sides.
Lack of scientific knowledge does not hinder participation in political debate. Rather the opposite. The prerequisites of political debate are opinion and rhetoric, and not knowledge and proof.
Political economics (= non-science, opinion) and theoretical economics (= science, knowledge) are based on different modes of thinking: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)
The pseudo-inquirers of political economics use economic theory as a means to push an agenda. Thus, theoretical economics is hijacked and abused. Needless to emphasize that political economics has produced nothing of scientific value since Adam Smith. What we have are various narratives but not the formally and materially consistent economic theory.
What Thomas Palley calls gattopardo economics is good old political economics only a bit more specified in order to characterize the pseudo-inquirers of Orthodoxy. The characterization is spot on, but now we have a problem.
The situation is this: Krugman’s approach is provably false (2014). So far, Heterodoxy is on the safe side. But unfortunately, Post-Keynesianism is also provably false (2011). So, both Orthodoxy and Heterodoxy are good old political economics.
The general public can know by now that political economics is the domain of low-IQ agenda pushers.#1 The scientific content of every economic policy debate is zero. What students of Econ 101 have to clearly understand is that their choice is not between Walrasianism/Keynesianism/Marxianism/Austrianism or Orthodoxy/Heterodoxy but between political economics and theoretical economics.
The task of theoretical economics is to figure out how the actual monetary economy works — no less, no more. Political economists of all colors have failed at this task. Krugman is but one of the many low-IQ economists who can well be an agenda-pushing member of a party but never of the scientific community. The same holds, of course, for Keynes, Hayek, Friedman, Varoufakis, and all the rest of political economists.
The real antagonism in economics is not between Liberalism/Socialism/Communism/ Fascism/etc, the fundamental antagonism is between political economics and theoretical economics, that is, between storytelling and science. The history of economic thought proves that the representative economist is too stupid for science.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online,1–11. Palgrave Macmillan, 2nd edition. URL
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
#1 How the intelligent non-economist can refute every economist hands down.
Related 'Krugman and the scientific implosion of economics' and 'What heterodox economists are embarrassed to admit' and 'Political economics: a playground for scientific deadbeats' and 'On economists’ stupidity' and 'Agenda pushing or science?' and 'Confused Orthodoxy vs. confused Heterodoxy'. For details of the big picture see cross-references Political Economics/Stupidity/ Corruption.
Blog-Reference and Blog-Reference on Mar 13
Economics is a failed science, but the fatal flaw is not obvious, just the contrary. It holds in general that a false theory is in good accordance with common sense and naive empiricism, and vague enough so as to be almost irrefutable. Because of this, false theories can survive for centuries. A case in point is the geocentric theory which is intuitively convincing. In marked contrast, the very characteristic of the heliocentric theory is that it is counter-intuitive. This paradigmatic case tells us that common sense and naive empiricism are the most obstinate hindrances to science. This is why J. S. Mill cursed them.
“People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcilable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” (Mill, 2006, p. 783)
While common sense/naive empiricism is a nuisance for all sciences they are less so in fields that are remote from ‘the ordinary business of life’ (Marshall) and more so in economics, sociology, psychology, etc. Everybody has something heartfelt to say about wealth, or class struggle, or greed, or sociopaths, or the Good Society, but only a few about quantum entanglement.
Because of this, the inflow of common sense and naive empiricism has always been disproportionally high in economics. This proved to be the intellectual dead weight that prevented the rise of economics above the proto-scientific level of storytelling until this very day.
Walrasianism, Keynesianism, Marxianism, and Austrianism contradict each other. Logic tells us that only one can be true or, more probable, that all are false. The latter is actually the case. The common defect of the familiar approaches is that neither ever came to grips with profit (Desai, 2008, p. 10).
From the fact that the representative economist does not understand the pivotal economic concept follows that economic policy discussions have no scientifically valid foundation whatever. Arguments are hanging in the air because of scientific incompetence on all sides.
Lack of scientific knowledge does not hinder participation in political debate. Rather the opposite. The prerequisites of political debate are opinion and rhetoric, and not knowledge and proof.
Political economics (= non-science, opinion) and theoretical economics (= science, knowledge) are based on different modes of thinking: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)
The pseudo-inquirers of political economics use economic theory as a means to push an agenda. Thus, theoretical economics is hijacked and abused. Needless to emphasize that political economics has produced nothing of scientific value since Adam Smith. What we have are various narratives but not the formally and materially consistent economic theory.
What Thomas Palley calls gattopardo economics is good old political economics only a bit more specified in order to characterize the pseudo-inquirers of Orthodoxy. The characterization is spot on, but now we have a problem.
The situation is this: Krugman’s approach is provably false (2014). So far, Heterodoxy is on the safe side. But unfortunately, Post-Keynesianism is also provably false (2011). So, both Orthodoxy and Heterodoxy are good old political economics.
The general public can know by now that political economics is the domain of low-IQ agenda pushers.#1 The scientific content of every economic policy debate is zero. What students of Econ 101 have to clearly understand is that their choice is not between Walrasianism/Keynesianism/Marxianism/Austrianism or Orthodoxy/Heterodoxy but between political economics and theoretical economics.
The task of theoretical economics is to figure out how the actual monetary economy works — no less, no more. Political economists of all colors have failed at this task. Krugman is but one of the many low-IQ economists who can well be an agenda-pushing member of a party but never of the scientific community. The same holds, of course, for Keynes, Hayek, Friedman, Varoufakis, and all the rest of political economists.
The real antagonism in economics is not between Liberalism/Socialism/Communism/ Fascism/etc, the fundamental antagonism is between political economics and theoretical economics, that is, between storytelling and science. The history of economic thought proves that the representative economist is too stupid for science.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online,1–11. Palgrave Macmillan, 2nd edition. URL
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, Vol. 8 of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund.
#1 How the intelligent non-economist can refute every economist hands down.
Related 'Krugman and the scientific implosion of economics' and 'What heterodox economists are embarrassed to admit' and 'Political economics: a playground for scientific deadbeats' and 'On economists’ stupidity' and 'Agenda pushing or science?' and 'Confused Orthodoxy vs. confused Heterodoxy'. For details of the big picture see cross-references Political Economics/Stupidity/ Corruption.
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