Poor Schumpeter — abused as a testimonial for MMT

Comment on Lars Syll on ‘Schumpeter — an early champion of MMT’

Blog-Reference and Blog-Reference and Blog-Reference on Apr 22, 2019

Lars Syll cites Schumpeter: “The theory to which economists clung so tenaciously makes them out to be savers when they neither save nor intend to do so; it attributes to them an influence on the ‘supply of credit’ which they do not have. The theory of ‘credit creation’ not only recognizes patent facts without obscuring them by artificial constructions; it also brings out the peculiar mechanism of saving and investment that is characteristic of fullfledged capitalist society and the true role of banks in capitalist evolution. With less qualification than has to be added in most cases, this theory therefore constitutes definite advance in analysis.”

Lars Syll, though, fails to cite the sequel: “Nevertheless, it proved extraordinarily difficult for economists to recognize that bank loans and bank investments do create deposits. In fact, throughout the period under survey they refused with practical unanimity to do so. And even in 1930, when the large majority had been converted and accepted that doctrine as a matter of course, Keynes rightly felt it to be necessary to reexpound and to defend the doctrine at length (fn.5), and some of its most important aspects cannot be said to be fully understood even now.”

Fn. 5 says: “There is, however, a sequel to Lord Keynes’s treatment of the subject of credit creation in the Treatise of 1930 of which it is necessary to take notice in passing. The deposit-creating bank loan and its role in the financing of investment without any previous saving up of the sums thus lent have practically disappeared in the analytic schema of the General Theory, where it is again the saving public that holds the scene. Orthodox Keynesianism has, in fact, reverted to the old view according to which the central facts about the money market are analytically rendered by means of the public’s propensity to save coupled with its liquidity preference. I cannot do more than advert to this fact. Whether this spells progress or retrogression, every economist must decide for himself.”

Keynes’s GT is a clear regression. And, as a matter of fact, MMT followed the Keynes of the GT. It should not be too difficult to see this. The MMT balances equations reads (X−M)+(G−T)+(I−S)=0 (i). #1 When simplified to the bare bones, i.e., X, M, G, T, all 0, then we have I=S, that is, saving equals investment.

This is the Keynesian Ur-Blunder: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

The axiomatically correct balances equation reads (X−M)+(G−T)+(I−S)−(Q−Y_d)=0 (ii). #2 Legend: Q macroeconomic monetary profit, Y_d distributed profit.

The comparison of (i) and (ii) tells everybody that Keynes dealt with a zero-profit economy. Because a zero-profit economy is a NONENTITY, the whole of the GT is proto-scientific garbage. #3 Keynes, of course, never realized this, and neither did his dull followers up to the present, including Lars Syll and the MMTers. What happened as a practical result is that Keynes and MMT ultimately became the profit machine for the Oligarchy. #4

To portray Schumpeter as a forerunner of the analytically brain-dead MMT garbage is an insult to the outstanding scientist Schumpeter, who, as an exception #5, clearly saw the defects of Keynesian macroeconomics and who spotted exactly where macro and monetary theory took the wrong turn.

Egmont Kakarot-Handtke


#1 Down with idiocy!
#2 Profit and the Private-Property-Irrelevance Theorem
#3 Going beyond Wicksell, Keynes, and MMT
#4 Keynes, Lerner, MMT, Trump and exploding profit
#5 Economists ― standing on the shoulders of dwarfs

Related 'Poor Wicksell — abused as a testimonial for MMT'. For details of the big picture, see cross-references MMT.

***

REPLY to Calgacus on May 6

You say: “MMTers of course know all this. I used to frequently cite this very note of Schumpeter myself. Part of Minsky’s & MMT’s explicitly stated project in the early days was to combine Keynes’s General Theory with his more ‘creditary’ Treatise on Money. I mean, c’mon ― Minsky was Schumpeter’s student.”

All this biographical gossip is irrelevant. The point is that Keynes, Minsky, and MMTers got macroeconomic profit wrong.

Keynes messed up the basics of macro with this faulty syllogism: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

Minsky built on Keynesian macro but not on I=S: “The simple equation ‘profit equals investment’ is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (Minsky, 2008, p. 161) #1, #2

So Minsky ended up with Q=I. The axiomatically correct Profit Law reads Q≡Y_d+I−S+(X−M)+(G−T) (i) for the open economy with distributed profit. This boils down to Q=Y_d+I−S (ii) with government G, T, and foreign trade X, M set to zero; this, in turn, boils down to the Keynes of the Treatise Q=I−S, this boils down to Minsky’s Q=I on the one hand and to the Keynes of the General Theory I=S on the other.

Schumpeter realized that there was something wrong with profit: “The concept of windfall profits is now mainly in use for aggregate profits that arise (if, for this purpose, we may use the terminology of Keynes’s Treatise on Money) from a surplus of investment over saving, so that individual profits that are due to chance tend to drop out of the picture. It might be argued that this arrangement misses the essence of the profit phenomenon and falls below the level attained by Marshall.”

In contrast to Schumpeter, MMTers never realized anything, and in particular, that there must be something wrong with profit in their pivotal balances equation. #3

You claim: “MMTers of course know all this”. The fact is that MMTers know nothing about the foundational magnitude of economics. MMT is scientifically dead, I mean, c’mon ― it is pretty obvious that debt-does-not-matter MMTers are agenda pushers of the one-percenters. After all, the axiomatically correct Profit Law (i) tells everybody that Public Deficit = Private Profit.


#1 Sitcom economics
#2 Heterodoxy, too, is proto-scientific garbage
#3 For the full-spectrum refutation, see cross-references MMT

***

REPLY to Matt Franko on May 8

MMTers ARE agenda pushers of the one-percenters. This is not a hypothesis but a fact.

The somewhat skewed distribution of income and financial wealth is the empirical proof of the validity of the axiomatically correct macroeconomic Profit Law [Q=Yd+I−S+(X−M)+(G−T)], which clearly states that Public Deficit = Private Profit. #1

The main task of MMT is pushing deficit spending and sedating the ninety-nine-percenters with the slogan that public debt does not matter. You cannot take the ‘Marx Was Right After All and Give Every American a Job and a Pony’ rhetoric of the self-styled Progressives Tom Hickey, Bill Mitchell, Stephanie Kelton, and the rest of the MMT sales team seriously.

MMT is NOT a scientifically valid theory but soapbox economics. #2


#1 Keynes, Lerner, MMT, Trump and exploding profit
#2 Down with idiocy!

***

REPLY to Bob Roddis on 23 Apr 2019

You say: “The fundamental essence of Austrian analysis is an endless attack on the ability of banks to create credit from nothing. Before the Fed, after the Fed, after 1971. Always. Every day.”

Obviously, you are an activist. Activists claim to fight for the greater good or for the survival of humanity. Activists populate the political realm. The political realm is ontologically different from the scientific realm. The mission of the economist as a scientist is to figure out how the economy works. The ambition of the scientist is different from the political agenda pusher: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future . . .” (Schumpeter) #1

The “fundamental essence of Austrian analysis” is that Austrians failed badly at the scientific task. Mainly because they were always too busy with political agenda pushing. The same holds for MMTers. #2

Your argument, “MMT and Keynesianism are like Russiagate and your treatment of Austrian analysis is like Rachel Maddow hiding Glenn Greenwald.” is absolutely incomprehensible for anyone who does not share your bad habit of endless TV watching.


#1 Schumpeter and the Essence of Profit
#2 MMT and the canonical macroeconomic model

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REPLY to Kaivey on Apr 23

You say: “I’m not so sure about economics = science. What about happiness, which isn’t scientific?”

Happiness is an issue for psychologists, NOT economists. Economists are traditionally confused about their real subject matter. #1, #2 This is why they have achieved NOTHING of scientific value in the last 200+ years.


#1 Economics is NOT about Happiness but about Profit
#2 MMTers: too much thought-reading, too little thinking

***

REPLY to Bob Roddis on Apr 24

You say: “It’s simply amazing how you can manage to know absolutely NOTHING about Austrian analysis and concepts but still cluelessly attack it again and again. It’s like critiquing a piano concert performance you didn’t attend of a performer you’ve never heard of who played a piece you had never even heard.”

That’s not accurate.

This is the piece everybody has heard: “The fundamental essence of Austrian analysis is an endless attack on the ability of banks to create credit from nothing. Before the Fed, after the Fed, after 1971. Always. Every day.”

This is an Austrian “piano concert performance,” and you are the performer, and it sounds more like a fart on a mouth organ.

What the Top 20 heterodox economists say

Comment Lars Syll on  'Mainstream macroeconomics distorts our understanding of economic reality'

Blog-Reference

In its present state, economics is unsatisfactory. Most economists can agree with this, albeit for different reasons. It is not surprising then that blaming and debunking flourish. Not much can be said against this, except that it is a detour. As Schumpeter, one of the 20 top heterodox economists (see here), already noted: “If we feel misgivings nevertheless, all we have to do is to start appropriate research. Anything else is pure filibustering.” (1994, p. 577)

So, what is urgently needed is a Paradigm Shift. Is Heterodoxy following Schumpeter's advice? What can be seen all around resembles nothing so much as pure filibustering.

The two criteria of science are material and formal consistency. The latter is guaranteed by the axiomatic-deductive method. What does Georgescu-Roegen, one of the 20 top heterodox economists, say about axiomatization (= arithmetization in his terminology)?

“Lest this position is misinterpreted again by some casual reader, let me repeat that my point is not that arithmetization of science is undesirable. Whenever arithmetization can be worked out, its merits are above all words of praise. My point is that wholesale arithmetization is impossible, that there is valid knowledge even without arithmetization, and that mock arithmetization is dangerous if peddled as genuine.” (Georgescu-Roegen, 1971, p. 15)

Repeat: the merits of axiomatization are above all words of praise (if properly applied, of course, which is not the case with Orthodoxy).

Tony Lawson, also one of the 20 top heterodox economists, on the other hand, did not get tired for 17 years of characterizing deductivism as the main culprit of all that went wrong in economics: “In his seminal book, Economics and Reality (1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.” (see intro)

It would be helpful to learn which of the two top heterodox economists is right on methodology.

We can agree that the axioms of Orthodoxy are uncertain and false. This fully explains its failure. But what about the premises and the formal consistency of Heterodoxy?

The profit theories of Marx, Schumpeter, Keynes, Kalecki, Davidson, Minsky, and Keen, all on the list of the 20 top heterodox economists, are provably false (2014; 2011a; 2011c; 2011b; 2013b). Despite the obvious fact that they cannot all be correct at the same time, all are propagated under the banner of pluralism as heterodox alternatives. As it happens, they are all different AND false. Real scientists would feel the need to clear up this internal contradiction and not hail it as freedom of opinion.

Is the heterodox understanding of economic reality less or just as confused as DSGE or even worse if that is possible at all (2013a)?

By not strictly insisting on material and formal consistency Orthodoxy and Heterodoxy in effect cooperate on the widely visible crappyfication of economics.

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2011a). Schumpeter and the Essence of Profit. SSRN Working Paper Series, 1845771: 1–26. URL
Kakarot-Handtke, E. (2011b). What is Wrong With Heterodox Economics? Kalecki’s Profit Theory as an Example. SSRN Working Paper Series, 1845803: 1–9. URL
Kakarot-Handtke, E. (2011c). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2013a). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2013b). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

For the Top 20 Heterodox Economics Books see here and here

Schumpeter's two axioms of discourse

Comment on Lars Syll on ‘Axiomatic economics — total horseshit’

Blog-Reference

I enjoyed Victor Aguilar's article, albeit — in rearview — sometimes for the wrong reasons. Aguilar's methodological critique of Tony Lawson is spot on, but he unnecessarily dilutes his argument by becoming personal.

“Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter, 1994, p. 11)

It is sufficient to demonstrate how Tony Lawson conflates taxonomy and deductive logic, but counterproductive to add in a footnote a derogatory remark about Marxism/Feminism.

It is also counterproductive to equate empiricism one-to-one with idiotism. While it is true that the empiricism of the Confederate artillerymen was indeed utterly dilettantish, this does not hold for the immensely valuable work of Tycho Brahe, for example.

Finally, it is counterproductive not to mention that there has also been some dilettantism in the application of the axiomatic-deductive method. For example, the philosopher Spinoza applied the method to prove the existence of God. More important for economists is that Debreu messed things up by choosing the wrong set of axioms.

So it is a bit misleading to play idiotic empiricism against the overwhelmingly successful axiomatization of Euler or Newton. It cannot be stressed enough that the success of the axiomatic-deductive method depends on the selection of axioms, as J. S. Mill already knew.

“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.” (2006, p. 746)

Orthodoxy is based on the following 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)

What can be said with certainty is that this set of axioms has proven its worthlessness. Orthodoxy is a total failure according to formal and empirical criteria. This is the decisive point where Lawson, Aguilar, Zaman — and in addition, all economists and scientists who really understand the axiomatic-deductive method — agree.

Heterodoxy's most important task is to fully replace HC1 to HC5. As Schumpeter's 2nd axiom says: “If we feel misgivings ..., all we have to do is to start appropriate research. Anything else is pure filibustering.” (1994, p. 577)

Egmont Kakarot-Handtke


References
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

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

Key Issues: Sloppiness, multi-senseism, storytelling ― thriving in the thickness of confusion

... economics is a big omnibus which contains many passengers of incommensurable interests and abilities. (Schumpeter, 1994, p. 827)

***

... he [Adam Smith] disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along. (Schumpeter, 1994, p. 185)

But though the Wealth of Nations contained no really novel ideas and though it cannot rank with Newton's Principia or Darwin's Origin as an intellectual achievement, it is a great performance all the same .... (Schumpeter, 1994, p. 185)

With Adam Smith, economics had a clumsy start and, despite great performances of whatever sort, fell further back over the long haul in comparison to physics and biology.

***

A good principles of economics teacher is a good storyteller. (Colander, 1995, p. 169)

Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from “the richness of context.” (Coates, 2007, p. 87)

What a tricky business this all is! In his Treatise on Money, Mr. Keynes told the world that savings and investment are only equal in conditions of equilibrium; that an excess of investment over saving means rising prices, and vice versa. In his General Theory, he told us that saving and investment are always equal, and that this is a mere identity or truism, without significance for the determination of prices. 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. (Hicks, 1939, p. 184)

This is the articulate methodological commitment to inconclusiveness that, on a deeper level, unites economists of all camps: "... there are relevant and important senses in which all these statements are each of them right and each of them wrong. " Many senses make no sense at all. However, empirical and logical inconclusiveness quite effectively secured the ecological niche of Political Economy as a separate science. Demarcation does not work in the "thickness of confusion" (Suppes, 1968, p. 654).

Contradictory statements are reconciled routinely by relating them to one of the following distinctions: short run/long run, ex ante/ex post, identity/equality. Inconclusiveness helps passably against outright refutation. With regard to empirical testing, the commitment to inconclusiveness implies the — self-defeating — assertion that in economics no experimentum crucis is feasible. All questions that cannot possibly be decided by experiment are out of science in the first place.

... you cannot prove a vague theory wrong. (Feynman, 1992, p. 158)

With enough fog emitted, almost anything becomes possible. (Mirowski, 2013, p. 344)

... nothing is clear and everything is possible. (Keynes, 1973, p. 292)

You can define anything you want, but as a sage once said,  “A rose by any other name will smell as sweet!” (P. Davidson, RWER-Blog, July 2, 2013)

For, on principle, we may call things what we please. (Schumpeter, 1994, p. 598)

This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions. (Blinder, 1987, p. 131)

Let us mean by current income the value of current output, ... (Keynes, 1933, p. 699)

... twentieth-century neoclassical theory resembles nothing so much as the child's game of Mr. Potatohead – the fun comes in mixing and matching components with little or no concern for the coherence of the final profile. (Mirowski, 1995, p. 294)

Trying to pin down the essential ideas is sometimes difficult because neoclassical economics always seems to be a moving target. (Boland, 1992, p. 213)

Since everybody is indeed free to define whatever appears to be appropriate, it seems that a definition could not pose any real problem. This, indeed, is not true because the full freedom of definition holds but for the first definition. The subsequent definitions must be consistent with their predecessors. This continuously restricts the freedom of definition. It is by no means the case that anything can be defined as desired. This is a methodological illusion that is rather widespread among economists. It explains, for the most part, the discipline's state of manifest confusion. A consistent and agreed-upon framework of concepts is indispensable. Keynes's aforementioned determination of income, for example, invalidates the General Theory and all its legitimate and illegitimate offshoots (IS–LM, AD–AS) in one sentence (see Keynes's Missing Axioms URL or Why Post Keynesianism is Not Yet a Science URL).

***

We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter. (Rosenberg, 1980, p. 114)

As was standard with Marshall, the narrative told one story, the mathematics another. (Mirowski, 1995, p. 299)

Is it not a fact, which stares at us from the histories of all sciences, that it is much more difficult for the human mind to forge the most elementary conceptual schemes than it is to elaborate the most complicated superstructure when those elements are well in hand? (Schumpeter, 1994, p. 602)

The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts. (Schmiechen, 2009, p. 344)

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)

Thus, economics is apparently the study of the economy, the study of the coordination process, the study of the effects of scarcity, the science of choice, and the study of human behavior. One possible conclusion to draw from this lack of agreement is that the definition of economics does not really matter. (Backhouse and Medema, 2009, p. 221)

The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions. (Fisher, quoted in Mirowski, 1995, p. 86)

I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences. (von Neumann, quoted in Mirowski, 2002, p. 146 fn. 49)

Precision and rigor in the statement of premises and proofs can be expected to have a sobering effect on our beliefs about the reach of the propositions we have developed. (Hutchison, 1960, p. xxiii)

There has been no rigor and precision in the definition of income and profit for more than two centuries. The reach of conventional propositions is zero. That is more than sobering.

***

To be sure, economics may perform a valuable social role without adding any significant understanding to knowledge of the economy – a “good myth,” economically speaking, can work not only in primitive tribal cultures but also in modern societies. ... Indeed, ... the religious function may have been the most important role throughout the history of modern economics since the Enlightenment. (Nelson, 2006, pp. 300-301)

Myth, well told, is still the most convincing way to explain how the world and humankind came to be in their present form. To recall, Zeus was the god of the sky and thunder. He oversaw the universe, assigned the various gods their roles, and was known for his erotic escapades. Zeus was emotional, spontaneous, and had a lot of trouble with other gods, goddesses, and humans. At Prometheus, for example, he was angry for three things: being tricked into making sacrifices, stealing fire for man, and refusing to tell him which of his children would dethrone him. To handle his problems, Zeus regularly fell back on chicanery, force, and violence (for an overview, see Wikipedia URL). Since antiquity, everybody "understands" Zeus, and he easily provokes like/dislike. Purified from all religious connotations, Greek myth is the stuff of psychology, literature, soap operas, blogs, newspapers, and history to this day. Let us call this all-embracing panorama of human motives and actions the gossip model of the world. It affords immediate access to subjective understanding, which, however, is barely distinguishable from a projection. With the gossip model, everything and its opposite can be explained. That makes it both popular and preposterous. Utility maximization is the economist's reduced version of the gossip model. Science started the very day when Greek philosophers threw the gossip model out of the window.

... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung. (Morgenstern, 1941, p. 381)

Now, at any rate, we have an explanation for why the assumptions of economic theory about individual action have not been improved, corrected, sharpened, specified, or conditioned in ways that would improve the predictive power of the theory. None of these things have been done by economists because they cannot be done. The intentional nature of the fundamental explanatory variables of economic theory prohibits such improvement. (Rosenberg, 1992, p. 149)

***

Economics as a discipline faces the following alternative. If it wants to be accepted as a science, it has to stick to the rules. The rules are quite simple: material and logical consistency. No excuses (complexity, Duhem-Quine, etc.). If economics cannot deliver on principle, it has to join the Geisteswissenschaften/Humanities and try its luck with Verstehen/understanding. Feynman defended the standards in quite certain terms: "You don't like it? Go somewhere else!" Since J. S. Mill spoke — excusatory — of Political Economy as an inexact and separate science, economists attempted to water down the rules and to tergiversate material or logical consistency or both. Lower standards of Verstehen can, by its very nature, not lead to much more than a gossip model of the world. Homo oeconomicus may be replaced by the far more realistic homo socialis; this improvement, though, still remains within the confines of the gossip model and is not sufficient for a better understanding of how the economy works. No behavioral approach, whatever, is adequate. It is not a question of realism; it is a question of methodology. There is no such thing as an inexact and separate science. There is no hiding behind complexity. There is only science and non-science. The Unity of Sciences does not mean unity of science and its look-alikes.

***

The solution consists of replacing behavioral assumptions, both the sloppy and the axiomatized ones, with structural axioms. Structural axiomatization has the accessory advantage of putting off muddleheads, commonsensers, wishwashers, smatterers, storytellers, and all those "whom any discovery that brought quietus to a vexed question would inevitably vex because it would end the fun of arguing around it and about it and over it" (Peirce, 1931, 5.520). Objective/structural/systemic axiomatization strictly excludes the explanation or prediction of human behavior. Hence, there is no empty talk about it.

Filibuster economics may indeed have performed a multitude of useful social roles, but this is of no consequence for its scientific status. Social utility is not a criterion for the assessment of a theory. Sloppiness, incoherent definition, green cheese assumptionism, and self-protecting inconclusiveness are detrimental to the growth of knowledge. Social utility cannot exculpate proto-scientific garbage.

A Supreme Being would have no need for axioms, but they are often found quite useful for mere men. (Strotz, 1953, p. 390)

More specifically: The rigor and objectivity of structural/systemic axiomatization are needed to abandon the endemic sloppiness of economic argument and finally to advance from proto-science to science.


References
Backhouse, R. E., and Medema, S. G. (2009). On the Definition of Economics. Journal of Economic Perspectives, 23(1): 221–233.
Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic Review, 77(2): 130–136. URL
Coates, J. (2007). The Claims of Common Sense. Moore, Wittgenstein, Keynes and the Social Sciences. Cambridge, New York, etc.: Cambridge University Press.
Boland, L. A. (1992). The Principles of Economics. Some Lies My Teacher Told Me. London, New York: Routledge.
Colander, D. (1995). The Stories We Tell: A Reconstruction of AS/AD Analysis. Journal of Economic Perspectives, 9(3): 169–188. URL
Dennis, K. (1982). Economic Theory and the Problem of Translation (I). Journal of Economic Issues, 16(3): 691–712. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press, 2nd edition.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York: Kelley
Keynes, J. M. (1933). Mr. Robertson on "Saving and Hoarding". Economic Journal, 43(172): 699–712. 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.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Mirowski, P. (2002). Machine Dreams. Cambridge: Cambridge University Press.
Mirowski, P. (2013). Never Let a Serious Crisis Go to Waste. London, New York: Verso.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
Nelson, R. H. (2006). Economics as Religion: From Samuelson to Chicago and Beyond. Pennsylvania: Pennsylvania State University Press.
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce, volume I. Cambridge: Harvard University Press. URL
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago: University of Chicago Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Strotz, R. H. (1953). Cardinal Utility. American Economic Review, 43(2): 384–397. URL
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.

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


© 2013 EKH, except original quotes

How markets work

Comment on axdouglas on ‘Macroeconomic Theory and Operational Reality’

Blog-Reference

“I often wonder whether other subjects suffer as much from textbook writers.” (Hahn, 1980, p. 127)

Economists think they can explain economic phenomena by painting a supply-demand-equilibrium cross or what Leijonhufvud has ironically called the totem of the micro/macro. However, already Schumpeter found it necessary to diffuse doubts about the scientific content of the whole exercise.

“The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (Schumpeter, 1994, p. 9)

As a matter of fact, the ‘primitive apparatus of the theory of supply and demand’ is a thoroughly faulty construct: “There is little or nothing in existing micro- or macroeconomics texts that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way.” (McCauley, 2006, p. 16)

The familiar microeconomic SS-DD cross is built on NONENTITIES like utility, equilibrium, well-behaved production functions, decreasing returns, rational expectations, simultaneous adaptation, etcetera, and consequently, has to go out of the window. The same holds for macroeconomic versions like IS-LM. For the refutation of Krugman’s silly model see (2014): “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse.” (McCauley, 2006, p. 17)

Because the textbooks are wrong, it is one of the first tasks of Constructive Heterodoxy to deliver the correct formal depiction of a market (2015). It is high time that economists learn how the market system works.

Egmont Kakarot-Handtke


References
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
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: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

For more about the economic totem see AXECquery.

For more about Constructive Heterodoxy see AXECquery.

***

Twitter/X 21 Aug 2023 Long obsolete, the silly totem of economics

Economists — sloppy, stupid, or scientifically incompetent?

Comment on Lars Syll on 'Greg Mankiw on loanable funds — so wrong, so wrong'

Blog-Reference and parallel Blog-Reference

"The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand — as Bertil Ohlin put it — ‘in the same way as the price of eggs and strawberries on a village market.'” (See intro)

Economists think they have explained something when they paint a supply-demand-equilibrium cross or what Leijonhufvud called the Totem of the Micro. However, already Schumpeter found it necessary to diffuse doubts about the scientific content of the whole exercise: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (Schumpeter, 1994, p. 9)

As a matter of fact, the ‘primitive apparatus of the theory of supply and demand’ is a thoroughly faulty construct: “There is little or nothing in existing micro- or macroeconomics texts that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way.” (McCauley, 2006, p. 16), see also (2014a; 2015)

Because the generic supply-demand-equilibrium apparatus has to be rejected, the specific loanable funds application also goes out of the window. Keynes was right in this respect (see intro and 2014b).

However, Keynes also got it wrong. The formal core of the General Theory is given with:
“Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

This is rather elementary mathematics and pure conceptual sloppiness. Keynesians and the rest of the profession simply cannot tell the fundamental difference between income and profit (2011). As can be seen from the intro, Kalecki too got it wrong: “It should be emphasized that the equality between savings and investment … will be valid under all circumstances.”

As a matter of fact, the IS-equality is invalid under all circumstances. The correct relationship for the 2-sector economy is given with the equation GHraphic AXEC09

It says: the business sector's monetary profit Q_m is equal to distributed profit Yd plus investment expenditure I minus the household sector's monetary saving S_m (2014c, Sec. 3). Alternatively: The business sector's retained profit Q_m−Y_d is equal to the difference between investment and saving. Seen from the business sector as a whole, with retained profit investment ‘finances itself.’ What has to be clearly seen, though, is that the firm with retained profit is normally not the same firm that finances investment. This establishes a direct or indirect financing relationship within the business sector. This is something quite different from financing relationships between the business and the household sector.

The representative economist has always argued that this is all a matter of definition and everybody is free to define whatever seems convenient. This anything-goes mentality fully explains the failure of economics. The representative economist has always been a scientific write-off.

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. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL
Kakarot-Handtke, E. (2014c). 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: The Market. SSRN Working Paper Series, 2547098: 1–10. 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).
McCauley, J. L. (2006). Response to "Worrying Trends in Econophysics". EconoPhysics Forum, 0601001: 1–26. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

For details of the big picture, see cross-references Refutation of I=S

***

Graphic AXEC172

Beside the point

Comment on Edward Fullbrook on 'Doctor X, “pure shit” and the Royal Society’s motto'

Blog-Reference

The Dr. X story is reminiscent of Joan Robinson: “Indeed, in the higher reaches of the profession, there was something of the atmosphere of the augurs touching their noses behind the altar. Amongst themselves, they admitted it was not really like that. But their pupils took it all literally. They formed an official opinion deeply influenced by the conception of equilibrium which could be relied upon to establish itself provided that no one tried to interfere.” (1972, p. 3)

Why are stories like these told and retold again? We know from history that conspiracy theories are stupid in the best case and harmful in all others. There is no excuse in the political realm to bring these kinds of arguments into circulation, much less so in scientific discourse. As Schumpeter put it:
“Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter, 1994, p. 11)

Yes, neoclassical economics is a failure. How can we be sure of it? Because neoclassicals themselves told us: “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets. Indeed, if it is the case that today General Equilibrium Theory is in some disarray, this is largely due to the work of General Equilibrium theorists, and not to any successful assault from outside.” (Hahn, 1980, p. 127)

Hence, neoclassicals stick to the scientific code of 'conjecture and refutation.' They have explicitly put forth hypotheses and followed their logic until the final conclusion of Sonnenschein-Mantel-Debreu.

It is well known that science is a trial-and-error process. Therefore, it is quite “legitimate” to put forth and defend a “wrong” theory because we cannot know in advance whether a theory is true or false.

The problem in economics is peculiar because we know that the standard theory, as codified in the textbooks, is wrong, but we have had no alternative until now. Heterodoxy has been occupied with debunking since Veblen. There is nothing wrong with this, but obviously, from this has not emerged a convincing alternative: “... we may say that the long-lasting success of our categories and the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

The provisional predominance of neoclassics in the classroom is neither due to scientific superiority nor to a conspiracy, but to a failure of reason to find a convincing alternative.

Egmont Kakarot-Handtke


References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Hahn, F. H. (1980). General Equilibrium Theory. Public Interest. Special Issue: The Crisis in Economic Theory, 123–138.
Robinson, J. (1972). The Second Crisis of Economic Theory. American Economic Review, 62(1/2): 1–10. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

Schumpeter and the essence of profit {04}

Working paper at SSRN

Working paper at ARCHIVE

Abstract  Schumpeter had a clear vision of the developing economy, but he did not formalize it. The quest for a germane formal basis is in the following guided by the general question: what is the minimum set of foundational propositions for a consistent reconstruction of the evolving money economy? We start with three structural axioms. The claim of generality entails that it should be possible to free Schumpeter's approach from its irksome Walrasian legacy and to give a consistent formal account of the elementary circular flow that served him as a backdrop for the analysis of the entrepreneur-driven market system.

Occasional X: Clueless economists / Profit (LV)

 

#Economics#FailedFakeScience#Profit

“Entrepreneurial profit is the expression of the value of what the entrepreneur contributes to production.” (Schumpeter)

Even Schumpeter got profit wrong.

Economics claims to be science but is NOT. The major approaches (#Walrasianism,… pic.twitter.com/35nYyXIGQs

— E.K-H (@AXECorg) November 8, 2024

Related 'Schumpeter and the Essence of Profit' 

Unfit in all dimensions

Comment on Lars Syll on ‘Models, math and macro’

Blog-Reference

Schumpeter remarked some time ago: “We are not yet out of the wood; in fact, we are not yet in it.” (1994, p. 7)

Schumpeter understood well what science is and saw clearly that, in his time, economics was still at the proto-scientific stage or — at best — that it had made it to the threshold of science.

“The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (1994, p. 9)

Are we much more advanced nowadays with DSGE models? Can economists explain better how the actual economy works? Not really. “The last thirty years seem to this observer to have been downhill almost all the way. So much of the literature ... I see as silly beyond all expectation and unscholarly beyond all endurance.” (Leijonhufvud, 1998, p. 234), see also (Quiggin, 2010)

True, many economists are prepared to admit that what passes as economics is probably false and certainly insufficient but ... “Critics of DSGE are however dismissed because — in a nutshell — there’s nothing better out there.” (See intro)

This, indeed, is the traditional last line of defense: “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)

In plain words, this says: until some superior economics comes along we are doing the accustomed inferior economics. This is not what real scientists do: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao and Israel, 1990, p. 362)

After more than 200 years it is pretty obvious that economists are unfit for science. Of course, there are different degrees of unfitness between the student who naively accepts the pivotal blunder of supply-demand-equilibrium and the heterodox economist who is clueless about what a superior alternative to current Orthodoxy looks like.

The ultimate proof of unfitness, though, is that neither orthodox nor heterodox economists can tell until this day the difference between income and profit (2014). Without a demonstrably correct profit equation, what are the chances that any macroeconomic model could be enlightening or of practical use? What do you understand about the economy if you do not understand the profit phenomenon?

Egmont Kakarot-Handtke


References
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Leijonhufvud, A. (1998). Discussion: Involuntary Unemployment One More Time. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),
Economics and Methodology. Crossing Boundaries, 225–235. Houndmills, Basingstoke, London: Palgrave.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

***

Youtube Mar 30, 2023, For a different analytical path that arrives at the same conclusion, see Richard Werner's What Most Economists Get Wrong

Gold-making, wine from water, M―C―M', perpetuum mobile, free lunch, beating the stock market, and the perennial human dream

Comment on Peter Radford on 'Superior Economists'

Blog-Reference

The psychological and sociological underpinning of the economist's role in society is based on the archetypal idea of something-for-nothing or the creation of value out of base stuff. In contradistinction to medieval gold-makers, however, economists claim that they are scientists and that they have found the principle of wealth creation. This guarantees that economists always have an interested and impressible audience: “... in the introduction to Book IV we read that Political Economy ‘proposes to enrich both the people and the sovereign,’ and it is this definition which expresses both what Smith wanted above everything and what interested his readers more than anything else.” (Schumpeter, 1994, p. 186)

Of course, there was always the problem of credibility since physics has shown that, because of the law of energy conservation, something like value creation is impossible in principle. Physical reality is a zero-sum game (with entropy ignored). This irritation was defused with the assertion that economics, too, is a science.

“That Political Economy is a science which teaches, or professes to teach, in what manner a nation may be made rich. This notion of what constitutes the science is in some degree countenanced by the title and arrangement which Adam Smith gave to his invaluable work.” (J. S. Mill, 1874, V.7)

What, then, turned out to be the economist's magic formula? It was exchange that squared the circle. Two agents exchange equivalents (remember physics), yet both increase their utility. No swindling, no exploitation, no environmental degradation, win-win all around through reallocation of goods. The elementary two-person value creation is then multiplied many times over by market exchange. Not nature, not labor ― the market creates wealth.

What about the moral side of richness? The economist's job description strictly excludes moralizing: “It has been well said by M. Say that it is not the province of the Political Economist to advise ― he is to tell you how you may become rich, but he is not to advise you to prefer riches to indolence, or indolence to riches.” (Ricardo, quoted in Redman, 1997, p. 303)

That the scientific content of economics was rather poor from the very beginning was not much of a problem: “But though the Wealth of Nations contained no really novel ideas and though it cannot rank with Newton's Principia or Darwin's Origin as an intellectual achievement, it is a great performance all the same and fully deserves its success.” (Schumpeter, 1994, p. 185)

After all, anybody can see that something-out-of-nothing works on the stock market, the real estate market, and other less spectacular places. But there is no free lunch (remember physics). What can be expected from non-economists? Should they care about whether general equilibrium theory is nonsense or not? As long as no economic crisis proves the contrary, economists' stories and claims are socially accepted.

What about the scientific claims?

The fact of the matter is, that economists have no scientifically valid theory about how the economy works: “Surely the greatest oddity in contemporary economics, granted that ‘Smith's Problem’ is the central issue of economics, is the absence, more than 200 years after the publication of Smith's Wealth of Nations, of an intellectually satisfying account of the modus operandi of the ‘invisible hand’; so the question whether actual monetary exchange economics are in some relevant sense self adjusting ... not only remains to be resolved, it has yet to be seriously addressed.” (Clower and Howitt, 1997, p. 24)

According to the scientific criteria of material/formal consistency, economics is a failure. Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionalists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit (cf. Desai, 2008). Hence, 'they fail to capture the essence of a capitalist market economy' (Obrinsky, 1981, p. 495). See also: (2014b; 2014a).

Economics is proto-scientific garbage and still stands where physics stood in the Middle Ages before the elementary concepts of force and mass were properly defined and clearly understood. To this day, economists do NOT understand the elementary concept of profit because they are too stupid for elementary algebra. 

The economist's combination of a sense of mission, flawed theory, and self-delusion is ― not exactly superior ― but certainly unique among the sciences.

Egmont Kakarot-Handtke


References
Clower, R. W., and Howitt, P. (1997). Foundations of Economics. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, 17–34. Cheltenham, Brookfield: Edward Elgar.
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. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
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
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and the Classical Economists. Cambridge, London: MIT Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

Related 'Wikipedia, economics, scientific knowledge, or political agenda pushing?' and  'Profit: The most powerful formula of economics'. For details of the big picture, see cross-references Political Economics/Stupidity/Corruption.

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

Hicks, J. R. (1937). Mr. Keynes and the "Classics": A Suggested Interpretation. Econometrica, 5(2): 147–159. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. Online-version URL
Kaldor, N. (1956). Alternative Theories of Distribution. Review of Economic Studies, 23(2): 83–100. URL
Kalecki, M. (1942). A Theory of Profits. Review of Economic Studies, 52: 258–267. URL
Keen, S. (2011). Debunking Economics. London, New York: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London: Macmillan.
Knight, F. H. (2006). Risk, Uncertainty and Profit. Mineola: Dover. (1921).
Ljungqvist, L., and Sargent, T. J. (2004). Recursive Macroeconomic Theory. Cambridge, London: MIT Press, 2nd edition.
Marshall, A. (2009). Principles of Economics. New York: Cosimo, 8th edition. (1890). Online-version URL
Marx, K. (1909). Capital: A Critique of Political Economy, Vol. III. The Process of Capitalist Production as a Whole. Library of Economics and Liberty. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, Volume 2, Books I-II of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. Online-version URL
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago, San Francisco: McGraw-Hill, 2nd edition.
Nadal, A. (2004a). Behind the Building Blocks. Commodities and Individuals in General Equilibrium Theory. In F. Ackerman and A. Nadal (Eds.), The Flawed Foundations of General Equilibrium, 33–47. London, New York: Routledge.
Ricado, D. (1981). On the Principles of Political Economy and Taxation. The Works and Correspondence of David Ricardo. Cambridge, New York, etc.: Cambridge University Press. Online-version URL
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, Burr Ridge, etc.: Irwin, McGraw-Hill, 16th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Schumpeter, J. A. (2008). The Theory of Economic Development. An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. New Brunswick, London: Transaction Publishers. (1934).
Senior, N. W. (1854). Political Economy. Library of Economics and Liberty. URL
Shackle, G. L. S. (1955). Expectation, Income, and Profit. Ekonomisk Tidskrift,57(4): 215–234. URL
Smith, A. (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press. (1776). Online-version URL
Sraffa, P. (1979). Production of Commodities by Means of Commodities. Prelude to a Critique of Economic Theory. Cambridge, London, etc.: Cambridge University Press.
von Mises, L. (2007). Human Action. A Treatise on Economics, Volume II. Indianapolis: Liberty Fund. Online-version URL
Wickens, M. (2008). Macroeconomic Theory. A Dynamic General Equilibrium Approach. Princeton, Oxford: Princeton University Press.

 

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


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


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

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Graphic AXEC109k

The irrelevance of economics

Comment on Lars Syll ‘On the irrelevance of formal logic in economics’

Blog-Reference and Blog-Reference

See also the almost identical post ‘Scientifically incompetent’ Comment on ‘In Search of the Science in Economics’

Blog-Reference

(i) Since the ancient Greeks, it is known that science is about knowledge and that politics is about opinion/belief/second-guessing/filibustering. “There are always many different opinions and conventions concerning any one problem or subject-matter ... This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other ...” (Popper, 1994, 39-40). Accordingly, there is political economics and theoretical economics. The political economist cranks out opinions; the theoretical economist contributes to knowledge.

(ii) The goal of political economics is to push an agenda, and the goal of theoretical economics is to explain how the actual economy works. In political economics, anything goes; in theoretical economics, scientific standards are observed.

(iii) Scientific standards are 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, 1994, 31)

(iv) Most economists are political economists: “However much economists may evoke their purity, they want to change the world. They want to contribute to the solution of urgent practical problems. ... Of course, they also pursue the consistency of the theories they make, for he who contradicts himself proves nothing.” (Klant, 1988, 112-113)

(v) As Klant makes it clear, being a political economist does not involve a license to suspend the rules of logic. Toulmin is utterly wrong when he speaks of the irrelevance of formal logic. He is right only insofar as formal logic is vacuous if the basic/primitive/elementary concepts have no empirical content. Formal logic is necessary, but not sufficient.

(vi) It is important to distinguish between method and actual application. Spinoza, for example, used the axiomatic-deductive method to rigorously prove the existence of God. This, obviously, is a misapplication. In general terms, the methodological blunder consists of applying formal logic to NONENTITIES.

(vii) This is the correct understanding of the scientific method: “When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts  ... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ... The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge — a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability. (Hilbert, 2005, 1107-1109)

(viii) Neither Orthodoxy nor Heterodoxy has hitherto produced an economic theory that fits Hilbert’s description. Economics is a failed science. We are left with political economics, which is scientifically worthless.

(ix) The first step of the student of economics is to realize that all theories/models that are built upon the following concepts are false: utility, expected utility, rationality/ bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply-demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic NONENTITIES. The second step is to replace NONENTITIES with concepts that have a counterpart in reality (2014).

(x) Economics is not even a plausible myth; the fundamental defect is that it deals with NONENTITIES. Because of this, all formalization has hitherto been without effect. This is not the fault of formalization, but of the scientific incompetence of the representative economist ― orthodox or heterodox does not matter.

Egmont Kakarot-Handtke


References
Hilbert, D. (2005). Axiomatic Thought. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Vol II, pages 1107–1115. Oxford, New York: Oxford University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1988). The Natural Order. In N. de Marchi (Ed.), The Popperian Legacy in Economics, 87–117. Cambridge: Cambridge University Press.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York: Routledge.

For details of the big picture, see cross-references Incompetence

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ICYMI (comment on Sandwichman of October 14, on October 15)

Georgescu-Roegen is one of the few economists who grasped what science is all about, and he settled the ridiculous mathiness filibuster before it even occurred. “Lest this position is misinterpreted again by some casual reader, let me repeat that my point is not that arithmetization of science is undesirable. Whenever arithmetization can be worked out, its merits are above all words of praise. My point is that wholesale arithmetization is impossible, that there is valid knowledge even without arithmetization, and that mock arithmetization is dangerous if peddled as genuine.” (1971, 15)

Long before DSGE, he arrived at the conclusion that economists are scientifically incompetent. “Knight lamented that there are many members of the economics profession who are "mathematicians first and economists afterwards." The situation since Knight's time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists.” (1979, 317)

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

Time to make economics a science. #1


References
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge: Cambridge University Press
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

 #1 More details in Time to make economics a science.

The zombie wars are over

Comment on Scott Sumner on ‘Fiscal multiplier studies far worse than I thought’

Blog-Reference

Economics is a failed science. In more detail, this means that the major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — have not produced much scientific value, if anything, in more than 200 years.

Economists have not risen above supply-demand-equilibrium and have still not realized that this is poor science. Schumpeter already came close to a thumbs-down, but then made this concession: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (1994, p. 9), see also (2013)

Lacking sound scientific foundations (= episteme), economic debate up to the present consists of an inconclusive exchange of opinions (= doxa) between the four approaches. In other words, economics hitherto took place at the proto-scientific level, yet: “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 obviously lack the true theory; Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives are provably false. So, what is needed is a termination of the senseless cross-talk among the four zombie approaches, because “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean. (Ingrao et al., 1990, p. 362)

At the moment, economists produce mindlessly inconsistent models according to accustomed templates: “… most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman). No penny-drop, no realization that maximization and equilibrium are NONENTITIES.

In methodological terms, a Paradigm Shift means to completely replace the obsolete axiom sets of the four failed approaches with an entirely new set. To make this concrete, here is the axiom set of Walrasianism:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

HC1 is just another expression of methodological individualism. Except for HC6, which is a petitio principii, all axioms are subjective-behavioral, which is to say, much too swampy.

Because the subjective-behavioral approaches have been a detour from the very start (as more than 150 years of blather since Jevons/Walras/Menger prove) they have now to be replaced by the objective-structural approach.

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.

From this minimal set, which is composed of measurable real and nominal variables, follow propositions that are testable. The nonentities of methodological individualism are gone.

Methodologically correct economics starts with the SYSTEMIC axioms of the monetary economy. This yields objective systemic laws, expressed, for example, as Profit Law or Employment Law. Systemic laws are readily testable, and this is the ONLY way to settle questions according to scientific standards.

Useful input to the continuing discussion of the new paradigm is not to be expected from Walrasianism, Keynesianism, Marxianism, and Austrianism. So, let these scientific zombies go: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work ...” (McCauley, 2006, p. 17)

Egmont Kakarot-Handtke


References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, London: MIT Press.
Kakarot-Handtke, E. (2013). How to Get Rid of Supply-Demand-Equilibrium. SSRN Working Paper Series, 2263172: 1–24. URL
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.

Immediately preceding Austrian blather

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REPLY to Major.Freedom on Apr 3

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

This is a vacuous Austrian waffle.

Profit is ultimately determined by the Profit Law, which states for the investment economy Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. This equation is testable with the precision of two decimal places.

(ii) von Mises says: “Economics is not about goods and services, it is about the action of living men.” (2007, p. 357)

This is how Austrians missed the subject matter of economics altogether and got lost in the woods of psychologism, thought-reading, second-guessing other people’s actions, and silly gossiping and storytelling. Because of this: Austrianism = gossip economics.

Correct definition: “Economics is the science that studies how the monetary economy works.”

(iii) von Mises says: “In the imaginary construction of a stationary economy, the total sum of all entrepreneurs’ profit equals the total sum of all entrepreneurs’ losses. (2007, p. 294)

This is provably false. In the stationary economy, it holds Qm≡Yd. #1


References
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. II. Indianapolis: Liberty Fund.

#1 The proofs are to be found in the working papers on SSRN

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REPLY to Major.Freedom on Apr 4

(i) You ask, “What are you trying to accomplish by your continual evasions?” For someone who has an irrefutable theory of human action, this is a stupid question. It is well known: “... observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung.” (Morgenstern, 1941, p. 381)

So you certainly can interpret my behavior until you are blue in the face. Obviously, you are missing the subject matter: economics is NOT about economists but about the economy.

Economists try to figure out the objective systemic laws of the monetary economy. Speculation about other people’s behavior/actions and ad hominem argumentation is a moronic pursuit. Austrians are no economists. #1

(ii) You ask, “Did you know that the GDP equation, Y = G + I + C + (X−M), can be “predicted” to 14 million decimal places, provided that people trade goods at prices to within that accuracy?”

Did you know that the GDP equation is false? For proof, see (2012). Austrians have not figured this out to this day, but swallowed the underlying logical defect hook, line, and sinker. The GDP equation is an intelligence test for economists, and Austrians flunked it.

(iii) You say: “All Mises is saying is that entrepreneurial profit, not profit per se as in your childish equation above, exists because of uncertainty.”

Uncertainty is a psychological state, and it does not produce profit just like wishful thinking or greed does not produce a profit. Mises’ explanation is at the level of voodoo thinking. For the correct explanation of profit, see (2011).

(iv) Imagine for a moment an aircraft flying from, say, New York to Paris. Now we can ask why? One way to answer the question is to speculate about the motives and reasons of the passengers, the pilot, the crew, the flight controllers, and the managers and stockholders of the airline. The other way to look at flight is to think about the laws of aerodynamics, thermodynamics, and so forth.

The first way of explanation is the Austrian way, and it yields the same trivial psychologistic crap over and over again. Notice: Whatever the subjective motives and actions of passengers are, they do — as a matter of principle — NOT explain the phenomenon of flight.

The second way is the scientific method. Thinking people, this excludes Austrians, know that there is no such thing as an irrefutable law of human action that could explain flying.

So, just as flying is explained by the objective laws of physics, the economy is explained by the objective laws of economics.

Needless to say, Austrians never got the point: “Mises’ contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do.” (Foreword, von Mises, 2007, p. v)

This is as extremely profound as ‘the sun goes up’.

(v) You have already declared that you have won the debate. Do you realize that 'to win every debate' has been the selling proposition of the ancient Sophists, whom Plato famously criticized? Plato made it clear that a SCIENTIFIC debate is about episteme=knowledge and NOT about doxa=opinion and to twist an audience, or what Popper characterized as demonstration of ‘the bad taste of a finicky scholasticism’.

(vi) I agree that the action axiom is just as irrefutable as ‘Zeus threw the thunderbolt because he was angry’. What I say is that with your behavior/action approach, you will never come up with something helpful like the lightning conductor. And that is rather bad because you have won the debate, but Zeus hit you with the thunderbolt. Rest in peace, Austrians.


References
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. 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
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
von Mises, L. (2007). Human Action. A Treatise on Economics, Vol. I. Indianapolis: Liberty Fund.

#1 Hayek was not an economist.

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COMMENT on Don Geddis on Apr 5

(i) Any discussion about the character of interlocutors leads away from the point at issue: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false. (Schumpeter, 1994, p. 11)

The question at issue is whether Austrianism is true or false, and not whether Major.Freedom is a tape recorder or a broken record.

(ii) Refutation is necessary but insufficient. Effective refutation consists of developing the new paradigm: “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)

And, by the way, it is not only Austrianism that is obsolete. Walrasianism, Keynesianism, and Marxianism have to be left behind the curve, too. From the huge heap of scientific garbage called economics, Austrianism is only an insignificant part. It goes down the drain with the whole of methodological individualism.

References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.

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REPLY to Major.Freedom on Apr 6

(i) Physicists long ago proved that, given the laws of physics, a perpetual motion machine is impossible. This did not stop some people from submitting patent applications for perpetual motion machines to this very day.

It is the same thing with Austrians and other pseudo-scientific economists. “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)

Austrians are ignoring/violating scientific standards.

(ii) Austrianism subscribes to methodological individualism, which claims: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that, in principle, the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

Methodological individualism is (i) unacceptable for cogent methodological reasons, and (ii) has failed for everyone to see. General equilibrium theory in all variants (RBC, DSGE, etc) is indefensible, and the same holds for Austrianism as a fellow traveler of methodological individualism.

(iii) The major claim of Austrianism is that it solved the mind-body problem. Clearly, Austrians are in the wrong movie. Philosophy/psychology/metaphysics is NOT economics. The first problem to solve for an economist is the profit-income problem and NOT the mind-body problem.

(iv) NO way leads from the subjective action axiom to the objective Profit Law. It is irrelevant whether the action axiom is irrefutable or not. Austrians do not know what profit is, and by consequence, they have no idea how the economy works. The profit theory is the pivot of all of economics.

(v) The profit theory must be testable. This brings us back to the starting point of this thread. Vacuous theories like Austrianism are not testable and therefore not of interest for the point at issue.

(vi) You say, “I will declare for a third time that you lost the debate.” Did it ever occur to you that as a party to the debate, you have nothing to declare?

(vii) Austrianism is a zombie approach for more than 150 years, just like Walrasianism and everything else that subscribes to methodological individualism.

(viii) Economics needs a Paradigm Shift.


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

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COMMENT on Don Geddis on Apr 7

Science was there before economics was there. Economists either conform to scientific standards or are outside of science: they are in NO position to redefine scientific criteria.

Because economics — as represented by the four failed sects Walrasians, Keynesians, Marxians, 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 somersault backward: ‘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 is the Austrian, which is in the 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 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.

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FAREWELL to Major.Freedom on Apr 8

Science was there before economics was there; that is, Newton was there before Adam Smith was there. Newton is famous for his ‘hypotheses non fingo’, which means, I do not waffle but prove.

“But he [A. Smith] had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter)

While physics has evolved exponentially, economics is stuck at the proto-scientific level of storytelling. The key narrative is supply-demand-equilibrium and it has been false already in Smith’s days. After 200+ years, compare the entirely vacuous General Equilibrium Theory with General Relativity Theory — is there any doubt that economics is a failed science?

It seems that the irrefutable magic action axiom somehow did not work.

Economists are confused confusers, and Austrians are the worst of them. See Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist.


Related 'From microfoundations to macrofoundations'

For more about von Mises, see AXECquery.