Comment on Asad Zaman/Tom Hickey on ‘My Journey from Theory to Reality’
Blog-Reference
The philosopher Tom Hickey sketches the great trends of history: “Many of the traditional worldviews are embedded in a religious contexts that have become cultural. Even in secular China, President Xi is resurrecting Confucius as a cultural icon, and in the supposedly secular US, dominant religious groups are asserting influence more openly, with science itself subject to challenge when it is perceived to conflict with tradition. Asad Zaman’s post is good example of this rising trend, as well as what a highly educated person asking such questions might do about it. This process is an iteration of the historical dialectic as liberal and traditionalism interact to forge a complementary Zeitgeist that moves history forward a step.”
What are the new insights of the new Zeitgeist? “Since most fancy assumptions we make in statistics and econometrics are wrong, we need to learn how to do simple and basic inferences, which actually makes life much easier for students of the subject ― we need to teach them basic and intuitive things, not complex models and math …”
The problem with simple and intuitive things is that they regularly turned out to be false as science progressed. This is why J. S. Mill had no friendly word for the bigots and votaries of common sense: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”
Common sense has never been a convincing argument in the scientific sphere, but it has always been a very effective rhetorical tool in the political sphere. All religious and political fraud in the last 3000 years has been performed by telling simple stories and by appealing to elementary emotions.
Science is different. Scientific truth is defined by material and formal consistency and not by what makes life easier for students. Lazy students have not developed aircraft and life-saving heart surgery. Neither have retarded political economists produced anything of scientific value. Walrasianism, Keynesianism, Marxianism, Austrianism, and MMT are provably false. Economics is not a body of certain knowledge but a heap of inconsistent opinions.
Asad Zaman resumes: “Regarding social, political and economic thought, many if not most of the foremost authorities equate economic liberalism with Western capitalism as the dominant mode of production and also view political liberalism in the form of representative democracy being determined by capitalism as economic liberalism.”
Obviously, liberalism and democracy are political concepts or ideologies. They have nothing to do with science. Economics as a science does NOT deal with ideologies but with how the economic system works. Political agenda pushers like Adam Smith or Karl Marx cannot, by any stretch of the imagination, be accepted as scientists. They were nothing but brain-dead political storytellers.
Asad Zaman is correct in his criticism of political economics. It is fake science. However, as long as he teaches his students “basic and intuitive things” economics will not rise above the proto-scientific level.#2 To replace one BS with another BS does not count as scientific progress.
The macroeconomic Profit Law reads Q≡Yd+(I−S)+(G−T)+(X−M), and it holds for Capitalism, Communism, and Socialism independently of whether the dominant belief is Islamic, Christian, Hinduistic, Confucian, Atheistic, or Pagan. Science is universal.
History tells one that human progress comes alone from science and neither from religious beliefs nor from political economics nor from philosophical Zeitgeist blather.
Egmont Kakarot-Handtke
#1 Why J. S. Mill had no friendly word for the bigots and votaries of common sense
#2 Zamanomics
Showing posts sorted by relevance for query label:Math. Sort by date Show all posts
Showing posts sorted by relevance for query label:Math. Sort by date Show all posts
July 22, 2019
The worthlessness of value theory
Comment on Matias Vernengo on ‘Why do we need a theory of value?’*
Blog-Reference and Blog-Reference
Matias Vernengo correctly observes: “The theory of value and distribution is at the heart of economics. … However, most economists have no clue about it, about the centrality of value.”
Then he summarizes the main approaches:
• “Let me start with the authors of the surplus approach. In fact, a bit earlier with the economists that would eventually be known as Mercantilists (if you can talk about a school). If we are allowed to generalize and simplify, the latter believed that the wealth of nations depended essentially on maintaining trade surpluses and accumulating precious metals. Profits were essentially the result of buying cheap and selling dear, or profits upon alienation, which indicates that, for Mercantilists, profits were generated in the exchange process.”
• “Classical political economy authors, starting with William Petty, emphasize the determination of profits in the process of production, as a residual of output, once the conditions for the reproduction of the productive system were satisfied. So profits are not the result of selling high and buying low, something that could result from the mere fluctuation of market prices, but from the ability to produce beyond what was needed for the simple material reproduction of society. … So the normal rate of profit is needed to determine prices, and prices are needed to determine the normal rate of profit. This was well understood by both Ricardo and Marx.”
• “In other words, for a coherent theory of output, accumulation, international trade, technological change and more (taxation, etc.) you need a theory of value and distribution. That is also the case in the mainstream. Marginalism developed in the last quarter of the 19th century, both as a result of the lack of analytical solution in that period for the problems of the LTV and as a reaction to radical revival of the theory (Marxism). The important distinction is that while classical political economy authors dealt only with objective factors, and considered demand as given when determined value and distribution, marginalism incorporated subjective preferences as central for the explanation of long term normal prices, and prices and quantities were determined simultaneously.”
Let us make it short here: the theory of value/profit/distribution is false since Adam Smith. #1, #2 However, Matias Vernengo, too, has no clue about what profit is and how the monetary economy works.
The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector, which, in turn, consists initially of one giant fully integrated firm. (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.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The elementary production-consumption economy is shown in picture AXEC31. #2
The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e., the real wage is always equal to the productivity, no matter how the wage rate W is set. Labor gets the whole product.
The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e., it holds X=O. The condition of budget-balancing, i.e., C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q≡−S.
The balances add up to zero. The mirror image of household sector saving S is the business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.
Ramifications: (i) The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income. (ii) In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity. (iii) Profit is, in the most elementary case, determined by the increase and decrease of the household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of debt for the economy as a whole. (iv) Wage income is the factor remuneration of labor input. Profit is not a factor income. Since capital is nonexistent in the elementary production-consumption economy, profit is not functionally attributable to capital. (v) There is no relation at all between profit, capital, marginal, or average productivity. (vi) The value of output is, in the general case, different from the sum of factor incomes. This is the defining property of the monetary economy. (vii) Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.
In brief, to this day, Walrasians, Keynesians, Marxians, Austrians, MMTers, and Matias Vernengo have no clue about profit and, as a consequence, about value and distribution. They will all be buried at the darkest corner of the Flat-Earth Cemetery.
Egmont Kakarot-Handtke
* Naked Keynesianism
#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Economics ― nothing but claptrap, twaddle, drivel, slip-slop, wish-wash, waffle, and proto-scientific garbage
#3 Graphic AXEC31 Elementary production-consumption economy
Related 'The Logic of Value and the Value of Logic'.
You say: “Price is not directly related to costs, be it wages or any other costs. A theory that relies on relations between prices and costs is lacking, to put it mildly.”
Observing one firm and then generalizing for the economy as a whole is called the Fallacy of Composition. This fallacy is the main reason why economics is proto-scientific garbage to this day.
Take, for a start, the most elementary case that the households fully spend their wage income on consumption, i.e., C=Yw, and that there are two products. Under the condition of market clearing and W1=W2=W, the prices are given by P1=W/R1 and P2=W/R2. The profits in both firms are zero, i.e., Q1≡C1―Yw1=0, Q2≡C2―Yw2=0, C=C1+C2, Yw=Yw1+Yw2, C=Yw, Q=Q1+Q2=0.
For relative prices, i.e., the exchange relation, holds P1/P2=R2/R1 in the most elementary case with equal wages. The exchange relation between the two goods is determined by the objectively given productivities.
Now firm 1 increases the price P1. The households pay more for good 1 but keep total consumption expenditures unchanged, i.e., C=Yw, so they spend less on good 2. P2 falls under the condition of market-clearing. As a result, firm 1 now makes a profit and firm 2 makes a loss, and the total profit of the business sector Q is zero as before.
Alternatively. Firm 1 increases the price P1. The households pay more for good 1 but keep expenditures on good 2 constant, that is, total consumption expenditures C are now greater than wage income Yw. In other words, the household sector deficit-spends or dissaves. In this case, the profit of the business sector as a whole Q is greater than zero. It holds Q≡−S, i.e., the total profit of the business sector is equal to the total dissaving of the household sector. The balances of the two sectors add up to zero, i.e., Q+S=0. One may call this the Law of the Conservation of Value.
One cannot do Price Theory and Value Theory without taking the macroeconomic balances equation into account. #1 OK, you can because you are a scientifically incompetent blatherer, to put it mildly.
#1 The Pure Logic of Value, Profit, Interest
You say: “Price is not necessarily related to costs, and this is a fact. If you ignore facts, you are just like a mainstream economist - ie, no scientist at all.”
Indeed, price is not necessarily related to costs. This is a well-known triviality. I treat this case in the section that starts with “Now firm 1 increases the price P1.” and in the section that starts with “Alternatively. Firm 1 increases the price P1.”
So, the point at issue is that you make a trivial statement about the price-setting capacity of a single firm. This is not “realism” but dumb partial analysis. The Walrasians can be criticized for many things, but their point is valid that Marshallian partial analysis is worthless and has to be replaced by total analysis because of the interdependence of markets.
The interdependence of markets is a reality. It is nowhere to be found in your trivial examples. You simply do not get the essential point of price/value theory, to put it mildly.
Blog-Reference and Blog-Reference
Matias Vernengo correctly observes: “The theory of value and distribution is at the heart of economics. … However, most economists have no clue about it, about the centrality of value.”
Then he summarizes the main approaches:
• “Let me start with the authors of the surplus approach. In fact, a bit earlier with the economists that would eventually be known as Mercantilists (if you can talk about a school). If we are allowed to generalize and simplify, the latter believed that the wealth of nations depended essentially on maintaining trade surpluses and accumulating precious metals. Profits were essentially the result of buying cheap and selling dear, or profits upon alienation, which indicates that, for Mercantilists, profits were generated in the exchange process.”
• “Classical political economy authors, starting with William Petty, emphasize the determination of profits in the process of production, as a residual of output, once the conditions for the reproduction of the productive system were satisfied. So profits are not the result of selling high and buying low, something that could result from the mere fluctuation of market prices, but from the ability to produce beyond what was needed for the simple material reproduction of society. … So the normal rate of profit is needed to determine prices, and prices are needed to determine the normal rate of profit. This was well understood by both Ricardo and Marx.”
• “In other words, for a coherent theory of output, accumulation, international trade, technological change and more (taxation, etc.) you need a theory of value and distribution. That is also the case in the mainstream. Marginalism developed in the last quarter of the 19th century, both as a result of the lack of analytical solution in that period for the problems of the LTV and as a reaction to radical revival of the theory (Marxism). The important distinction is that while classical political economy authors dealt only with objective factors, and considered demand as given when determined value and distribution, marginalism incorporated subjective preferences as central for the explanation of long term normal prices, and prices and quantities were determined simultaneously.”
Let us make it short here: the theory of value/profit/distribution is false since Adam Smith. #1, #2 However, Matias Vernengo, too, has no clue about what profit is and how the monetary economy works.
The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector, which, in turn, consists initially of one giant fully integrated firm. (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.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The elementary production-consumption economy is shown in picture AXEC31. #2
The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e., the real wage is always equal to the productivity, no matter how the wage rate W is set. Labor gets the whole product.
The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e., it holds X=O. The condition of budget-balancing, i.e., C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q≡−S.
The balances add up to zero. The mirror image of household sector saving S is the business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.
Ramifications: (i) The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income. (ii) In order that profit comes into existence for the first time in the elementary production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit-creating entity. (iii) Profit is, in the most elementary case, determined by the increase and decrease of the household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of debt for the economy as a whole. (iv) Wage income is the factor remuneration of labor input. Profit is not a factor income. Since capital is nonexistent in the elementary production-consumption economy, profit is not functionally attributable to capital. (v) There is no relation at all between profit, capital, marginal, or average productivity. (vi) The value of output is, in the general case, different from the sum of factor incomes. This is the defining property of the monetary economy. (vii) Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.
In brief, to this day, Walrasians, Keynesians, Marxians, Austrians, MMTers, and Matias Vernengo have no clue about profit and, as a consequence, about value and distribution. They will all be buried at the darkest corner of the Flat-Earth Cemetery.
Egmont Kakarot-Handtke
* Naked Keynesianism
#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Economics ― nothing but claptrap, twaddle, drivel, slip-slop, wish-wash, waffle, and proto-scientific garbage
#3 Graphic AXEC31 Elementary production-consumption economy
Related 'The Logic of Value and the Value of Logic'.
***
REPLY to André on Jul 23You say: “Price is not directly related to costs, be it wages or any other costs. A theory that relies on relations between prices and costs is lacking, to put it mildly.”
Observing one firm and then generalizing for the economy as a whole is called the Fallacy of Composition. This fallacy is the main reason why economics is proto-scientific garbage to this day.
Take, for a start, the most elementary case that the households fully spend their wage income on consumption, i.e., C=Yw, and that there are two products. Under the condition of market clearing and W1=W2=W, the prices are given by P1=W/R1 and P2=W/R2. The profits in both firms are zero, i.e., Q1≡C1―Yw1=0, Q2≡C2―Yw2=0, C=C1+C2, Yw=Yw1+Yw2, C=Yw, Q=Q1+Q2=0.
For relative prices, i.e., the exchange relation, holds P1/P2=R2/R1 in the most elementary case with equal wages. The exchange relation between the two goods is determined by the objectively given productivities.
Now firm 1 increases the price P1. The households pay more for good 1 but keep total consumption expenditures unchanged, i.e., C=Yw, so they spend less on good 2. P2 falls under the condition of market-clearing. As a result, firm 1 now makes a profit and firm 2 makes a loss, and the total profit of the business sector Q is zero as before.
Alternatively. Firm 1 increases the price P1. The households pay more for good 1 but keep expenditures on good 2 constant, that is, total consumption expenditures C are now greater than wage income Yw. In other words, the household sector deficit-spends or dissaves. In this case, the profit of the business sector as a whole Q is greater than zero. It holds Q≡−S, i.e., the total profit of the business sector is equal to the total dissaving of the household sector. The balances of the two sectors add up to zero, i.e., Q+S=0. One may call this the Law of the Conservation of Value.
One cannot do Price Theory and Value Theory without taking the macroeconomic balances equation into account. #1 OK, you can because you are a scientifically incompetent blatherer, to put it mildly.
#1 The Pure Logic of Value, Profit, Interest
***
REPLY to André on Jul 23You say: “Price is not necessarily related to costs, and this is a fact. If you ignore facts, you are just like a mainstream economist - ie, no scientist at all.”
Indeed, price is not necessarily related to costs. This is a well-known triviality. I treat this case in the section that starts with “Now firm 1 increases the price P1.” and in the section that starts with “Alternatively. Firm 1 increases the price P1.”
So, the point at issue is that you make a trivial statement about the price-setting capacity of a single firm. This is not “realism” but dumb partial analysis. The Walrasians can be criticized for many things, but their point is valid that Marshallian partial analysis is worthless and has to be replaced by total analysis because of the interdependence of markets.
The interdependence of markets is a reality. It is nowhere to be found in your trivial examples. You simply do not get the essential point of price/value theory, to put it mildly.
***
#PointOfProof
Jul 24
post still missing
post still missing
February 9, 2016
Economists’ three-layered scientific incompetence
Comment on Asad Zaman on ‘Project: A heterodox macro textbook’
Blog-Reference and Blog-Reference
Economics is a failed science. This means more specifically for the history of economic thought: Orthodoxy has failed to produce anything of real scientific value and Heterodoxy has failed to develop a superior alternative. Thus, economics is stuck since its inception at the proto-scientific level “... we know little more now about ‘how the economy works,’ or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower, 1999, p. 401)
The failure of economics is provable and therefore no longer a matter of debate.
Economics has been understood as Political Economy. Economists saw themselves as agenda pushers for some greater good and science as a means to that end. The idea of pure science, i.e. the completely independent pursuit of knowledge, never occurred to the inventors of utility maximization.
With respect to the subject matter, there is no difference between Mill and Marx “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, ...” (Marx, 1906, M.9)
With Jevons/Walras/Menger the focus shifted to methodological individualism and economics became a mixture/intersection of psychology, sociology, and political science.
Economics is NOT a science of individual/social/political behavior — this is the social science delusion#1 — but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”
As a consequence, the Copernican turn in economics consists of the methodological switch from behavior-centered bottom-up, i.e. microfoundations, to structure-centered top-down, i.e. macrofoundations of the world economy. All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/Darwinism, political science, philosophy, etcetera) and are taken in from these by way of multi-disciplinary cooperation. To paraphrase J. S. Mill: ‘Economics as a systems science presupposes all the physical and social sciences; it takes for granted all such of the truths of those sciences as are concerned with the working of the economic system.’ (cf. Mill, 1874, V.29)
Economists must, first of all, stop the dilettantish dabbling in the so-called social sciences and in politics and focus on their proper subject matter. What they have collectively produced so far in their own domain is scientific garbage.
More explicitly and formally, i.e. axiomatically, Orthodoxy has been defined as “The [neo-Walrasian] program is organized around the following hardcore propositions:
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)
The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is an indefensible methodological blunder. Likewise for HC3.
HC6 and HC3 are methodologically unacceptable as axioms. Because of this the whole set of hardcore propositions — the sorta-kinda starting point — breaks apart and with it the WHOLE theoretical superstructure of Orthodoxy.
Keynes identified the pivotal methodological blunder correctly “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)
Consequently, Keynes formulated the foundational syllogism of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually and logically defective because Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12) As a result, all I=S models including the Keynesian multiplier are false (2014) and with it the WHOLE Post-Keynesian theoretical superstructure.
To see the enormity of intellectual failure one has to let this sink in: Keynes had no idea of the fundamental concepts of economics, viz. profit and income. This did not hinder him to push his economic policy agenda. Keynes’ policy proposals never had sound theoretical foundations but were at best commonsensical.
So, we have two reliable indicators of the intellectual incapacity of present-day economists: Keynesians are for more than 80 years in the dark. Sorta-kinda Neoclassicals are for more than 140 years in the dark. Because they have methodologically disqualified themselves neither Keynesians nor Walrasians can be taken seriously. The same holds for Marxists and Austrians. Economic policy advice has until this day no sound theoretical foundations because economic theory itself has no sound axiomatic foundations.
Certain/true/primary premises are hard to come by “There is no more fertile source of error than apparently trivial premises.” (Schumpeter, 1994, p. 269)
To state one’s hardcore premises consistently is the indispensable methodological minimum, to formalize them correctly is an additional step. The pivot of formalization is “Formal axiomatic systems must be interpreted in some domain ... to become an empirical science.” (Boylan et al., 1995, p. 198)
Debreu in his axiomatization of Walrasianism did explicitly the opposite, that is, he disconnected “Allegiance to rigor dictates the axiomatic form of the analysis where the theory, in the strict sense, is logically entirely disconnected from its interpretations.” (Debreu, 1959, p. x)
Debreu missed the crucial point: “From the axiomatic point of view, mathematics appears thus as a storehouse of abstract forms — the mathematical structures; and it so happens — without our knowing why — that certain aspects of empirical reality fit themselves into these forms, as if through a kind of preadaptation. ... It is only in this sense of the word ‘form’ that one can call the axiomatic method a ‘formalism’.” (Bourbaki, 2005, p. 1276)
NOT ALL mathematical structures incorporate a ‘certain aspect of empirical reality’, which means, that there is a “whole crop of monster-structures, entirely without application” (Bourbaki, 2005, p. 1275, fn. 9).
Debreu’s axiomatization of Walrasian General Equilibrium is a mathematical monster-structure that is due to Debreu’s misunderstanding of what formalization is all about. For parallel fatal mistakes with regard to the applicability of mathematical operations in the theory of value see (Barzilai, 2016).
In sum: economists misapply on a regular basis what they take from the ‘storehouse of abstract forms’. The problem is not the application of mathematics per se but the dilettantish application. Generally speaking, the economic content and the mathematical form do not fit together. Hence, the ultimate methodological blunder of what is widely criticized as mathiness has always been this “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights 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.” (Georgescu-Roegen, 1979, p. 317)
A mathematical form that has no interpretation in the monetary economy is vacuous at best and misleading at worst. Because of this, no economic policy proposals can ever be derived from such a model, or, to put the other way round, all policy proposals derived from incorrectly formalized models have no more scientific value than a horoscope.
The cumulated three-fold blunder of orthodox and heterodox economics manifests itself in one of the greater embarrassments in the history of science, that is, that the representative economist cannot tell the difference between the elementary concepts of income and profit.#2 This is like a physicist who cannot tell the difference between potential and kinetic energy. After more than 200 years of dilettantism and failure, there is no place for Walrasians, Keynesians, Marxians, and Austrians in the scientific community.
Egmont Kakarot-Handtke
References
Barzilai, J. (2016). Slutsky’s Mathematical Economics. Scientific metrics working paper, 1–5. URL #3
Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Volume II, 1265–1276. Oxford, New York: Oxford University Press.
Boylan, T. A., and O’Gorman, P. F. (1995). Beyond Rhetoric and Realism in Economics. Towards a Reformulation of Economic Methodology. London: Routledge.
Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post Keynesian Economics, 21(3): 399–414. URL
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. 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
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.
#1 For a full-horizon overview see Meta-References.
#2 How the intelligent non-economist can refute every economist hands down
#3 For the full scope of economists' mathematical incompetence see Jonathan Barzilai, Scientific Metrics Publications
I have replaced the neo-Walrasian axioms HC1 to HC6 with the objective-structural set of foundational propositions nHC1 to nHC3. See The creative destruction of Wren-Lewis.
This is what a Paradigm Shift is all about. For more details see cross-references Paradigm Shift.
The objective-structural set of foundational propositions yields testable equations, e.g. for employment and profit. See Have data, lack theory
You or anybody else can test the equations at any time. I will certainly accept an empirical refutation. This is how science works.
You take as hardcore proposition 4): “We eat without full knowledge of nutrients in the foods we eat, but, if we can afford it, we are naturally inclined to eat balanced diets.”
Could it be that you have seen too much health channel advertising or do you really think this is heterodox economics?
Blog-Reference and Blog-Reference
Economics is a failed science. This means more specifically for the history of economic thought: Orthodoxy has failed to produce anything of real scientific value and Heterodoxy has failed to develop a superior alternative. Thus, economics is stuck since its inception at the proto-scientific level “... we know little more now about ‘how the economy works,’ or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower, 1999, p. 401)
The failure of economics is provable and therefore no longer a matter of debate.
1st layer: Wrong subject matter
Since Adam Smith, economics claims to be a science. It started as a mixture/intersection of sociology and political science: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.” (J. S. Mill, 1874, V.39)Economics has been understood as Political Economy. Economists saw themselves as agenda pushers for some greater good and science as a means to that end. The idea of pure science, i.e. the completely independent pursuit of knowledge, never occurred to the inventors of utility maximization.
With respect to the subject matter, there is no difference between Mill and Marx “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, ...” (Marx, 1906, M.9)
With Jevons/Walras/Menger the focus shifted to methodological individualism and economics became a mixture/intersection of psychology, sociology, and political science.
Economics is NOT a science of individual/social/political behavior — this is the social science delusion#1 — but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”
As a consequence, the Copernican turn in economics consists of the methodological switch from behavior-centered bottom-up, i.e. microfoundations, to structure-centered top-down, i.e. macrofoundations of the world economy. All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/Darwinism, political science, philosophy, etcetera) and are taken in from these by way of multi-disciplinary cooperation. To paraphrase J. S. Mill: ‘Economics as a systems science presupposes all the physical and social sciences; it takes for granted all such of the truths of those sciences as are concerned with the working of the economic system.’ (cf. Mill, 1874, V.29)
Economists must, first of all, stop the dilettantish dabbling in the so-called social sciences and in politics and focus on their proper subject matter. What they have collectively produced so far in their own domain is scientific garbage.
2nd layer: Wrong axiomatization
Orthodoxy defines itself briefly as “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)More explicitly and formally, i.e. axiomatically, Orthodoxy has been defined as “The [neo-Walrasian] program is organized around the following hardcore propositions:
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)
The fact of the matter is that there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is an indefensible methodological blunder. Likewise for HC3.
HC6 and HC3 are methodologically unacceptable as axioms. Because of this the whole set of hardcore propositions — the sorta-kinda starting point — breaks apart and with it the WHOLE theoretical superstructure of Orthodoxy.
Keynes identified the pivotal methodological blunder correctly “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)
Consequently, Keynes formulated the foundational syllogism of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)
This elementary syllogism is conceptually and logically defective because Keynes did not come to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12) As a result, all I=S models including the Keynesian multiplier are false (2014) and with it the WHOLE Post-Keynesian theoretical superstructure.
To see the enormity of intellectual failure one has to let this sink in: Keynes had no idea of the fundamental concepts of economics, viz. profit and income. This did not hinder him to push his economic policy agenda. Keynes’ policy proposals never had sound theoretical foundations but were at best commonsensical.
So, we have two reliable indicators of the intellectual incapacity of present-day economists: Keynesians are for more than 80 years in the dark. Sorta-kinda Neoclassicals are for more than 140 years in the dark. Because they have methodologically disqualified themselves neither Keynesians nor Walrasians can be taken seriously. The same holds for Marxists and Austrians. Economic policy advice has until this day no sound theoretical foundations because economic theory itself has no sound axiomatic foundations.
3rd layer: Wrong formalization
“When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle, Posterior Analytics)Certain/true/primary premises are hard to come by “There is no more fertile source of error than apparently trivial premises.” (Schumpeter, 1994, p. 269)
To state one’s hardcore premises consistently is the indispensable methodological minimum, to formalize them correctly is an additional step. The pivot of formalization is “Formal axiomatic systems must be interpreted in some domain ... to become an empirical science.” (Boylan et al., 1995, p. 198)
Debreu in his axiomatization of Walrasianism did explicitly the opposite, that is, he disconnected “Allegiance to rigor dictates the axiomatic form of the analysis where the theory, in the strict sense, is logically entirely disconnected from its interpretations.” (Debreu, 1959, p. x)
Debreu missed the crucial point: “From the axiomatic point of view, mathematics appears thus as a storehouse of abstract forms — the mathematical structures; and it so happens — without our knowing why — that certain aspects of empirical reality fit themselves into these forms, as if through a kind of preadaptation. ... It is only in this sense of the word ‘form’ that one can call the axiomatic method a ‘formalism’.” (Bourbaki, 2005, p. 1276)
NOT ALL mathematical structures incorporate a ‘certain aspect of empirical reality’, which means, that there is a “whole crop of monster-structures, entirely without application” (Bourbaki, 2005, p. 1275, fn. 9).
Debreu’s axiomatization of Walrasian General Equilibrium is a mathematical monster-structure that is due to Debreu’s misunderstanding of what formalization is all about. For parallel fatal mistakes with regard to the applicability of mathematical operations in the theory of value see (Barzilai, 2016).
In sum: economists misapply on a regular basis what they take from the ‘storehouse of abstract forms’. The problem is not the application of mathematics per se but the dilettantish application. Generally speaking, the economic content and the mathematical form do not fit together. Hence, the ultimate methodological blunder of what is widely criticized as mathiness has always been this “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights 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.” (Georgescu-Roegen, 1979, p. 317)
A mathematical form that has no interpretation in the monetary economy is vacuous at best and misleading at worst. Because of this, no economic policy proposals can ever be derived from such a model, or, to put the other way round, all policy proposals derived from incorrectly formalized models have no more scientific value than a horoscope.
The cumulated three-fold blunder of orthodox and heterodox economics manifests itself in one of the greater embarrassments in the history of science, that is, that the representative economist cannot tell the difference between the elementary concepts of income and profit.#2 This is like a physicist who cannot tell the difference between potential and kinetic energy. After more than 200 years of dilettantism and failure, there is no place for Walrasians, Keynesians, Marxians, and Austrians in the scientific community.
Egmont Kakarot-Handtke
References
Barzilai, J. (2016). Slutsky’s Mathematical Economics. Scientific metrics working paper, 1–5. URL #3
Bourbaki, N. (2005). The Architecture of Mathematics. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Volume II, 1265–1276. Oxford, New York: Oxford University Press.
Boylan, T. A., and O’Gorman, P. F. (1995). Beyond Rhetoric and Realism in Economics. Towards a Reformulation of Economic Methodology. London: Routledge.
Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post Keynesian Economics, 21(3): 399–414. URL
Debreu, G. (1959). Theory of Value. An Axiomatic Analysis of Economic Equilibrium. New Haven, London: Yale University Press.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. 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
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, etc.: Cambridge University Press.
#1 For a full-horizon overview see Meta-References.
#2 How the intelligent non-economist can refute every economist hands down
#3 For the full scope of economists' mathematical incompetence see Jonathan Barzilai, Scientific Metrics Publications
***
REPLY comment on larrymotuz of Feb 12I have replaced the neo-Walrasian axioms HC1 to HC6 with the objective-structural set of foundational propositions nHC1 to nHC3. See The creative destruction of Wren-Lewis.
This is what a Paradigm Shift is all about. For more details see cross-references Paradigm Shift.
The objective-structural set of foundational propositions yields testable equations, e.g. for employment and profit. See Have data, lack theory
You or anybody else can test the equations at any time. I will certainly accept an empirical refutation. This is how science works.
You take as hardcore proposition 4): “We eat without full knowledge of nutrients in the foods we eat, but, if we can afford it, we are naturally inclined to eat balanced diets.”
Could it be that you have seen too much health channel advertising or do you really think this is heterodox economics?
***
Amazon, Jonathan Barzilai, April 5, 2022
June 5, 2019
Controlled demolition of MMT ― an exercise in elementary logic
Comment on Randall Wray on ‘JAPAN DOES MMT?’*
Blog-Reference and Blog-Reference (Link)
Randall Wray analyses the current situation in Japan: “From the MMT perspective, what Japan needs is a good fiscal stimulus, albeit one that is targeted. Japan has three ‘injections’ into the economy: the fiscal deficit (which has fallen from 7% of GDP to about 5% over the past few years ― still a substantial injection), the current account surplus, and private investment. But what it needs is stronger growth of domestic consumer demand ― which would also stimulate investment directed to home consumption.”
This recommendation is based on the “sectoral balance perspective”. This perspective is clearly defined by the sectoral balances equation, which is given by (I−S)+(G−T)+(X−M)=0. The very characteristic of the MMT balances equation is that it does not contain the balance of the business sector, i.e., profit/loss. Accordingly, the word profit does not appear once in Randall Wray’s post. An economic model without profit, though, is like Hamlet without the prince or physics without the concept of energy.
The question is, why does macroeconomic profit not appear in the sectoral balances equation? The short answer is that economists in general, and MMTers, in particular, are scientifically incompetent.
What MMT policy guidance lacks is the underlying true macroeconomic theory. Here it is. #1, #2
The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector, which, in turn, consists initially of one giant fully integrated firm. (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.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R. The elementary production-consumption economy is shown under the label of Graphic. #3
The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e., it holds X=O. The condition of budget balancing, i.e., C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q≡−S.
The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.
It is the definition of macroeconomic profit, i.e., Q≡C−Yw, where the logical blunder of MMT sneaks in. A definition ≡ is a one-way operator: a new variable (= definiendum) is introduced as a relationship of variables that are given by the axioms (= definiens). #4 While in an equation y=x−z it is possible to bring z to the left side, i.e., y+z=x, this is NOT admitted in a definition. The case is analogous to the prohibition of division by 0.
The operator ≡ defines a one-way relationship; the operator = defines a two-way relationship. The methodological failure of economists consists of not keeping these logical relationships properly apart.
Macroeconomic profit has been defined above as a relationship of axiomatic variables, i.e., Q≡C−Yw. Now, the representative economist comes along and performs the inadmissible operation Q+Yw≡C and introduces one more definition, i.e., Q+Yw≡national income≡NI. This reduces to NI≡C, which is an improper definition because it applies TWO terms for the same thing, i.e., the terms “national income NI” and “consumption expenditures C” are interchangeable. This is like saying the words “apple” and “orange” apply to the same thing. So, the definition of “national income NI” is redundant, leads to economic gobbledygook, and therefore has to be cut off with Occam’s Razor.
The same holds for the investment economy. Profits for the two sub-sectors are given by Qc≡C−Ywc and Qi≡I−Ywi. Total profit Q is defined as the sum of sub-sectoral profits, i.e., Q≡Qc+Qi≡C+I−Yw. GDP is defined as GDP≡C+I, so Q≡GDP−Yw. The definition of GDP is admissible, but the definition of national income NI≡Q+Yw, is inadmissible. Therefore, NI≡GDP, or Keynes’ Income = value of output (GT p. 63), is economic gobbledygook. It leads to I=S and IS-LM and all the other falsehoods of After-Keynesian macroeconomics.
The axiomatically correct sectoral balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0. #5, #6
Ramifications: The Wray Curve, the Kelton See-Saw #7, the Krugman Cross #8, and the rest of MMT is proto-scientific garbage.
Egmont Kakarot-Handtke
* New Economic Perspectives
#1 True macrofoundations: the reset of economics
#2 The canonical macroeconomic model
#3 Graphic AXEC31 Elementary production-consumption economy
#4 Wikipedia Definition
#5 Wikipedia and the promotion of economists’ idiotism (I)
#6 Wikipedia and the promotion of economists’ idiotism (II)
#7 Stephanie Kelton What Happens When the Government Tightens its Belt?
#8 Scott Fullwiler The Sector Financial Balances Model of Aggregate Demand
Related 'Accounting for dummies' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Humpty Dumpty is back again' and 'The Humpty Dumpty methodology' and 'Is Nick Rowe stupid or corrupt or both?' and 'Profit, income, and the Humpty Dumpty Fallacy' and 'Mad but true: 200+ years after Adam Smith economists still have no idea what profit is' and 'Keynesians ― terminally stupid or worse?'. For details, see also cross-references Accounting and cross-references MMT.
Blog-Reference and Blog-Reference (Link)
Randall Wray analyses the current situation in Japan: “From the MMT perspective, what Japan needs is a good fiscal stimulus, albeit one that is targeted. Japan has three ‘injections’ into the economy: the fiscal deficit (which has fallen from 7% of GDP to about 5% over the past few years ― still a substantial injection), the current account surplus, and private investment. But what it needs is stronger growth of domestic consumer demand ― which would also stimulate investment directed to home consumption.”
This recommendation is based on the “sectoral balance perspective”. This perspective is clearly defined by the sectoral balances equation, which is given by (I−S)+(G−T)+(X−M)=0. The very characteristic of the MMT balances equation is that it does not contain the balance of the business sector, i.e., profit/loss. Accordingly, the word profit does not appear once in Randall Wray’s post. An economic model without profit, though, is like Hamlet without the prince or physics without the concept of energy.
The question is, why does macroeconomic profit not appear in the sectoral balances equation? The short answer is that economists in general, and MMTers, in particular, are scientifically incompetent.
What MMT policy guidance lacks is the underlying true macroeconomic theory. Here it is. #1, #2
The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector, which, in turn, consists initially of one giant fully integrated firm. (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.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R. The elementary production-consumption economy is shown under the label of Graphic. #3
 |
| Elementary production-consumption economy |
The focus is here on the nominal/monetary balances. For the time being, real balances are excluded, i.e., it holds X=O. The condition of budget balancing, i.e., C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−C. The monetary profit/loss of the business sector is defined as Q≡C−Yw. Ergo Q≡−S.
The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.
It is the definition of macroeconomic profit, i.e., Q≡C−Yw, where the logical blunder of MMT sneaks in. A definition ≡ is a one-way operator: a new variable (= definiendum) is introduced as a relationship of variables that are given by the axioms (= definiens). #4 While in an equation y=x−z it is possible to bring z to the left side, i.e., y+z=x, this is NOT admitted in a definition. The case is analogous to the prohibition of division by 0.
The operator ≡ defines a one-way relationship; the operator = defines a two-way relationship. The methodological failure of economists consists of not keeping these logical relationships properly apart.
Macroeconomic profit has been defined above as a relationship of axiomatic variables, i.e., Q≡C−Yw. Now, the representative economist comes along and performs the inadmissible operation Q+Yw≡C and introduces one more definition, i.e., Q+Yw≡national income≡NI. This reduces to NI≡C, which is an improper definition because it applies TWO terms for the same thing, i.e., the terms “national income NI” and “consumption expenditures C” are interchangeable. This is like saying the words “apple” and “orange” apply to the same thing. So, the definition of “national income NI” is redundant, leads to economic gobbledygook, and therefore has to be cut off with Occam’s Razor.
The same holds for the investment economy. Profits for the two sub-sectors are given by Qc≡C−Ywc and Qi≡I−Ywi. Total profit Q is defined as the sum of sub-sectoral profits, i.e., Q≡Qc+Qi≡C+I−Yw. GDP is defined as GDP≡C+I, so Q≡GDP−Yw. The definition of GDP is admissible, but the definition of national income NI≡Q+Yw, is inadmissible. Therefore, NI≡GDP, or Keynes’ Income = value of output (GT p. 63), is economic gobbledygook. It leads to I=S and IS-LM and all the other falsehoods of After-Keynesian macroeconomics.
The axiomatically correct sectoral balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0. #5, #6
Ramifications: The Wray Curve, the Kelton See-Saw #7, the Krugman Cross #8, and the rest of MMT is proto-scientific garbage.
Egmont Kakarot-Handtke
* New Economic Perspectives
#1 True macrofoundations: the reset of economics
#2 The canonical macroeconomic model
#3 Graphic AXEC31 Elementary production-consumption economy
#4 Wikipedia Definition
#5 Wikipedia and the promotion of economists’ idiotism (I)
#6 Wikipedia and the promotion of economists’ idiotism (II)
#7 Stephanie Kelton What Happens When the Government Tightens its Belt?
#8 Scott Fullwiler The Sector Financial Balances Model of Aggregate Demand
Related 'Accounting for dummies' and 'The Common Error of Common Sense: An Essential Rectification of the Accounting Approach' and 'How the Intelligent Non-Economist Can Refute Every Economist Hands Down' and 'Humpty Dumpty is back again' and 'The Humpty Dumpty methodology' and 'Is Nick Rowe stupid or corrupt or both?' and 'Profit, income, and the Humpty Dumpty Fallacy' and 'Mad but true: 200+ years after Adam Smith economists still have no idea what profit is' and 'Keynesians ― terminally stupid or worse?'. For details, see also cross-references Accounting and cross-references MMT.
***
#PointOfProof
Jun 6
September 2, 2015
At last, mathiness problem settled
Comment on NoahSmith/Lars Syll on ‘Economics — a rogue branch of applied mathematics’
Blog-Reference
Noah Smith writes: “Traditionally, economists have put the facts in a subordinate role and theory in the driver’s seat. Plausible-sounding theories are believed to be true unless proven false, while empirical facts are often dismissed if they don’t make sense in the context of leading theories. This isn’t a problem with math ...” (See intro)
Exactly so. The problem has never been math but that economists have never grasped what science is all about: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
The problem can be exactly located here: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hardcore, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around 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.
By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. "Taken to be true" means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, p. 147)
The material refutation consists of the refutation of these behavioral axioms, that is, HC1 is vacuous and HC2 to HC5 lacks material consistency. This suffices to put an end to the traditional research program.
The formal — i.e. mathiness — refutation consists of: “Thus not all axiomatic theories need to be phrased in terms of set theory but much more conveniently and intelligibly rather in terms of some advanced mathematical structures.” (Schmiechen, 2009, p. 367)
The solution to the mathiness problem: economics has to move from Debreu's set-theoretical approach to an advanced formal structure (2014).
Genuine scientists always understood — and economists never got it — that a theory consists of two vital elements. “A scientific deductive system (“scientific theory”) is a set of propositions in which each proposition is either one of a set of initial propositions ... or a deduced proposition ... which is deduced from the set of initial propositions according to logico-mathematical principles of deduction, and in which some (or all) of the propositions of the system are propositions exclusively about observable concepts (properties or relations) and are directly testable against experience.” (Braithwaite, 1959, p. 429)
Note that the hardcore propositions HC1 to HC5 lack observable concepts. This has always been the pivotal problem, not math — or the underlying axiomatic-deductive method — per se.
Egmont Kakarot-Handtke
References
Braithwaite, R. B. (1959). Axiomatizing a Scientific System by Axioms in the Form of Identifications. In L. Henkin, P. Suppes, and A. Tarski (Eds.), The Axiomatic Method, 429–453. Amsterdam: North-Holland.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
Blog-Reference
Noah Smith writes: “Traditionally, economists have put the facts in a subordinate role and theory in the driver’s seat. Plausible-sounding theories are believed to be true unless proven false, while empirical facts are often dismissed if they don’t make sense in the context of leading theories. This isn’t a problem with math ...” (See intro)
Exactly so. The problem has never been math but that economists have never grasped what science is all about: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
The problem can be exactly located here: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hardcore, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around 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.
By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. "Taken to be true" means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, p. 147)
The material refutation consists of the refutation of these behavioral axioms, that is, HC1 is vacuous and HC2 to HC5 lacks material consistency. This suffices to put an end to the traditional research program.
The formal — i.e. mathiness — refutation consists of: “Thus not all axiomatic theories need to be phrased in terms of set theory but much more conveniently and intelligibly rather in terms of some advanced mathematical structures.” (Schmiechen, 2009, p. 367)
The solution to the mathiness problem: economics has to move from Debreu's set-theoretical approach to an advanced formal structure (2014).
Genuine scientists always understood — and economists never got it — that a theory consists of two vital elements. “A scientific deductive system (“scientific theory”) is a set of propositions in which each proposition is either one of a set of initial propositions ... or a deduced proposition ... which is deduced from the set of initial propositions according to logico-mathematical principles of deduction, and in which some (or all) of the propositions of the system are propositions exclusively about observable concepts (properties or relations) and are directly testable against experience.” (Braithwaite, 1959, p. 429)
Note that the hardcore propositions HC1 to HC5 lack observable concepts. This has always been the pivotal problem, not math — or the underlying axiomatic-deductive method — per se.
Egmont Kakarot-Handtke
References
Braithwaite, R. B. (1959). Axiomatizing a Scientific System by Axioms in the Form of Identifications. In L. Henkin, P. Suppes, and A. Tarski (Eds.), The Axiomatic Method, 429–453. Amsterdam: North-Holland.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
April 25, 2021
Occasional Tweets: Economists cannot properly apply scientific tools
#Economists are too stupid for the elementary #Algebra that underlies #MacroEconomics. Because they cannot properly apply the tools of #Logic, economists NEVER got above the level of proto-scientific garbage.
— E.K-H (@AXECorg) April 25, 2021
The GDP-death-blow for the economics professionhttps://t.co/QJycQUh0Uj pic.twitter.com/FHTXfBf5Xo
For more about Science see AXECquery.
For more about Methodology see AXECquery.
January 2, 2015
Total scientific Dadaism
Comment on Lars Syll on 'Axiomatic economics ― total horseshit'
Blog-Reference
In the intro, Lars Syll writes: “Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics, we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world.”
Economists have their philosophical roots in Bentham's utilitarianism. And it seems that they never dare to get out of this shallow intellectual puddle and to swim in deeper waters. Have they never heard what real scientists have said about mathematics and axiomatization? Have Galilei or Newton or Einstein said that mathematics is fun? That a little intellectual gymnastics is good against mental enfeeblement?
Above all: did one of these three better-known scientists ignore the problem of external validity?
Exactly the contrary! For all of them, mathematics was the key to reality ― to the very reality that is producing what the myopic utilitarian experiences when he looks in all his nativity out of the window.
“Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics.” (Einstein, 1934, p. 167)
Lawson's ontology suffers from several misunderstandings (2013).
“The central message of Lawson’s critique of modern economics is that an economy is an “open system” but economists insist on dealing with it as if it were “closed.” (see parallel intro)
This is true for equilibrium economics. And it is true that Orthodoxy is a failure. But now comes the logical blunder: “Modern economics has become increasingly irrelevant to the understanding of the real world. 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.”
While Orthodoxy indeed applies the axiomatic-deductive method there is no necessary connection between the method and closed systems. Physicists apply mathematics and the axiomatic-deductive method for the description of a universe that certainly displays no equilibrium and no closure in the sense of orthodox economics. What has to be rejected is the notion of equilibrium/closure and not the axiomatic-deductive method.
Because they are fixated on equilibrium economics Tony Lawson and Lars Syll misunderstand the role of the deductive-axiomatic method for scientific research.
Methodological discussions among economists are total scientific Dadaism.
Egmont Kakarot-Handtke
References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Kakarot-Handtke, E. (2013). Crisis and Methodology: Some Heterodox Misunderstandings. SSRN Working Paper Series, 2083519: 1–25. URL
Blog-Reference
In the intro, Lars Syll writes: “Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics, we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world.”
Economists have their philosophical roots in Bentham's utilitarianism. And it seems that they never dare to get out of this shallow intellectual puddle and to swim in deeper waters. Have they never heard what real scientists have said about mathematics and axiomatization? Have Galilei or Newton or Einstein said that mathematics is fun? That a little intellectual gymnastics is good against mental enfeeblement?
Above all: did one of these three better-known scientists ignore the problem of external validity?
Exactly the contrary! For all of them, mathematics was the key to reality ― to the very reality that is producing what the myopic utilitarian experiences when he looks in all his nativity out of the window.
“Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics.” (Einstein, 1934, p. 167)
Lawson's ontology suffers from several misunderstandings (2013).
“The central message of Lawson’s critique of modern economics is that an economy is an “open system” but economists insist on dealing with it as if it were “closed.” (see parallel intro)
This is true for equilibrium economics. And it is true that Orthodoxy is a failure. But now comes the logical blunder: “Modern economics has become increasingly irrelevant to the understanding of the real world. 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.”
While Orthodoxy indeed applies the axiomatic-deductive method there is no necessary connection between the method and closed systems. Physicists apply mathematics and the axiomatic-deductive method for the description of a universe that certainly displays no equilibrium and no closure in the sense of orthodox economics. What has to be rejected is the notion of equilibrium/closure and not the axiomatic-deductive method.
Because they are fixated on equilibrium economics Tony Lawson and Lars Syll misunderstand the role of the deductive-axiomatic method for scientific research.
Methodological discussions among economists are total scientific Dadaism.
Egmont Kakarot-Handtke
References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Kakarot-Handtke, E. (2013). Crisis and Methodology: Some Heterodox Misunderstandings. SSRN Working Paper Series, 2083519: 1–25. URL
May 2, 2025
Occasional X: Economics and math ― they just can't get it together (VI)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) May 2, 2025
Since the founding fathers, economics has been failed/fake science. To this day, economists have been unable to apply the proper mathematical tool to their subject matter. Unfortunately, they are even too stupid for the elementary algebra that… pic.twitter.com/TjD1cVkfkG
July 31, 2017
Economists: too stupid for counting
Comment on Tim Johnson on ‘Why mathematics has not been effective in economics’
Blog-Reference and Blog-Reference
The mathiness problem of economists does not consist in the application of advanced mathematics but in the incapacity to apply the straightforward algebra of accounting.
Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market-clearing holds, that is, quantity sold = output, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.
Nobody could be more down-to-earth and historically accurate than Mr. B and Mrs. H. At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers:
(a) Graphic AXEC94 National accounts, elementary production-consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.
The accountants are pleased that their respective numbers are exactly equal. This means that both have captured reality, i.e., every single transaction in the period under consideration, accurately.
At the end of the second period, they meet again and compare their numbers. This time they have:
(b) Graphic AXEC95 National accounts, consumption expenditures greater than wage income, C > Yw.
The accountants are again pleased that their respective numbers are exactly equal, but this time their accounts show balances.
Says Mr. B, I call my balance profit or loss, as the case may be. More specifically, I define monetary profit as Qm≡C−Yw.
Well, says Mrs. H, I call my balance saving or dissaving, as the case may be. More specifically, I define monetary saving as Sm≡Yw−C.
Then they calculate their respective balances and find out, to nobody’s surprise, that Qm≡−Sm. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise that is NOT backed by a real-world transaction.
The next day, the two accountants hand their numbers = Figure (b), over to the economist. Says the economist, hmm, for my purposes, I have to rearrange the accounts, after all, profit has to be treated as the income of capital, analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does NOT realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) Graphic AXEC97 National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income:
The economist now says to himself, obviously, Gross Domestic Income GDI is ‘equal’ to consumption expenditures, which follows from the definitions GDI≡Yw+Qm and Qm≡C−Yw, ergo GDI≡C. Let us call the right-hand side of the business sector’s account Gross Domestic Product GDP for the general case of the sum of consumption expenditures and investment expenditures, i.e., GDP≡C+I. Then we have GDI≡GDP by definition, more precisely, by FALSE definition. This ― Gross Domestic Income is ‘equal’ to Gross Domestic Product ― is the so-called fundamental macroeconomic accounting identity, the supposedly unassailable quantitative/empirical bedrock of economics.
The economist’s exercise is, of course, futile because profit is NOT the income of capital but the mirror image of dissaving, i.e., the household sector’s increase of debt. Income is a flow, and profit is a balance of flows, and to lump the two together is sheer stupidity.
From the graphics, it is immediately obvious that Keynes’ foundational identity “Income = value of output” is false. Why? Because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.) #1
Because economists ― Keynes, Keynesians, Post-Keynesians, Anti-Keynesians, and all the rest ― cannot even do the elementary mathematics of accounting, the profit theory is false since Adam Smith. #2 This means: because economists are too stupid for simple math, all of economics is proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Economists do not solve problems; they are the problem
#2 For more details, see cross-references Accounting and cross-references Profit and cross-references Incompetence and cross-references Math/Mathiness.
Economics is a failed science because economists are scientifically incompetent. The proof is in the misapplication of mathematics. Of course, this is NOT how economists explain their failure. They come up like a Pavlovian dog with explanations = excuses #1 like these:
• “In mathematics, an object is something we can quantify. Now comes the problem: in economics, what we need to identify is the relation between emotions (greed, fear of loss, investor euphoria, etc.) and behavior (buying, selling, tolerance for risk, and so forth). Alas, this requires that we mathematize emotions. To my knowledge, no one has succeeded in doing this in some 8,000 years of recorded history.”
• “Isn’t the problem just the level of complexity of the system? The fundamental agents in economic models, people, all have huge variation in possible actions. We then have self-consciousness and reflexivity. We react to each other’s actions; then, as a system, react again to the changed situation.” #2
• “What economists ought to do is take a more inductive (historical) approach. This is exactly what the tradition’s best thinkers have done, but the approach is not currently popular in academia.” (Cavalla)
• “Economics uses mathematics in the same way medieval religions use Latin. It is to give an air of mystery and power to the charlatans doing the ‘interpretation’.” (Wilson)
All this sounds plausible, but it demonstrates only a poor understanding of science. Economics suffers from the fact that the subject matter is ill-defined. Economics is NOT a social science but a systems science. The subject matter is the structure and behavior of the economic system, and all questions about Human Nature/motives/behavior/action are the business of other disciplines (psychology, sociology, anthropology, political science, history, etc.). The beauty of the correct systemic approach is that a system is mathematically unambiguously defined. #3 So, there is no mathiness problem but only the problem of blatherers who pointlessly gossip about other people’s motives and behavior, but cannot tell for 200+ years what profit is.
#1 Failed economics: The losers’ long list of lame excuses
#2 Complexity and stupidity
#3 Graphic AXEC 25 The Economics God Equation
Blog-Reference and Blog-Reference
The mathiness problem of economists does not consist in the application of advanced mathematics but in the incapacity to apply the straightforward algebra of accounting.
Imagine we have two accountants, one for the business sector, Mr. B, and one for the household sector, Mrs. H. Mr. B is supposed to make an entry every time the firm makes a wage payment and every time the firm sells its output. To make matters simple, the condition of market-clearing holds, that is, quantity sold = output, that is, there is no change of inventory. Mrs. H is supposed to make an entry every time one of the households receives wage income and every time a household buys the firm’s product.
Nobody could be more down-to-earth and historically accurate than Mr. B and Mrs. H. At the end of the first period, they meet at the Honest Accountant Bar and compare their numbers:
(a) Graphic AXEC94 National accounts, elementary production-consumption economy, two sectors, initial period, consumption expenditures = wage income, C=Yw.
At the end of the second period, they meet again and compare their numbers. This time they have:
(b) Graphic AXEC95 National accounts, consumption expenditures greater than wage income, C > Yw.
The accountants are again pleased that their respective numbers are exactly equal, but this time their accounts show balances.
Says Mr. B, I call my balance profit or loss, as the case may be. More specifically, I define monetary profit as Qm≡C−Yw.
Well, says Mrs. H, I call my balance saving or dissaving, as the case may be. More specifically, I define monetary saving as Sm≡Yw−C.
Then they calculate their respective balances and find out, to nobody’s surprise, that Qm≡−Sm. Note that NO real transactions and transaction entries correspond to the balances. To draw the balances is an ex-post exercise that is NOT backed by a real-world transaction.
The next day, the two accountants hand their numbers = Figure (b), over to the economist. Says the economist, hmm, for my purposes, I have to rearrange the accounts, after all, profit has to be treated as the income of capital, analogous to wage income. I define Gross Domestic Income as GDI≡Yw+Qm. He does NOT realize that he puts a flow and a balance together, something no accountant worth his salt would ever do. Now the accounts look like this:
(c) Graphic AXEC97 National accounts, consumption expenditures greater than wage income, with profit redefined as a kind of income:
The economist’s exercise is, of course, futile because profit is NOT the income of capital but the mirror image of dissaving, i.e., the household sector’s increase of debt. Income is a flow, and profit is a balance of flows, and to lump the two together is sheer stupidity.
From the graphics, it is immediately obvious that Keynes’ foundational identity “Income = value of output” is false. Why? Because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.) #1
Because economists ― Keynes, Keynesians, Post-Keynesians, Anti-Keynesians, and all the rest ― cannot even do the elementary mathematics of accounting, the profit theory is false since Adam Smith. #2 This means: because economists are too stupid for simple math, all of economics is proto-scientific garbage.
Egmont Kakarot-Handtke
#1 Economists do not solve problems; they are the problem
#2 For more details, see cross-references Accounting and cross-references Profit and cross-references Incompetence and cross-references Math/Mathiness.
***
REPLY to Neil Wilson on Jul 31Economics is a failed science because economists are scientifically incompetent. The proof is in the misapplication of mathematics. Of course, this is NOT how economists explain their failure. They come up like a Pavlovian dog with explanations = excuses #1 like these:
• “In mathematics, an object is something we can quantify. Now comes the problem: in economics, what we need to identify is the relation between emotions (greed, fear of loss, investor euphoria, etc.) and behavior (buying, selling, tolerance for risk, and so forth). Alas, this requires that we mathematize emotions. To my knowledge, no one has succeeded in doing this in some 8,000 years of recorded history.”
• “Isn’t the problem just the level of complexity of the system? The fundamental agents in economic models, people, all have huge variation in possible actions. We then have self-consciousness and reflexivity. We react to each other’s actions; then, as a system, react again to the changed situation.” #2
• “What economists ought to do is take a more inductive (historical) approach. This is exactly what the tradition’s best thinkers have done, but the approach is not currently popular in academia.” (Cavalla)
• “Economics uses mathematics in the same way medieval religions use Latin. It is to give an air of mystery and power to the charlatans doing the ‘interpretation’.” (Wilson)
All this sounds plausible, but it demonstrates only a poor understanding of science. Economics suffers from the fact that the subject matter is ill-defined. Economics is NOT a social science but a systems science. The subject matter is the structure and behavior of the economic system, and all questions about Human Nature/motives/behavior/action are the business of other disciplines (psychology, sociology, anthropology, political science, history, etc.). The beauty of the correct systemic approach is that a system is mathematically unambiguously defined. #3 So, there is no mathiness problem but only the problem of blatherers who pointlessly gossip about other people’s motives and behavior, but cannot tell for 200+ years what profit is.
#1 Failed economics: The losers’ long list of lame excuses
#2 Complexity and stupidity
#3 Graphic AXEC 25 The Economics God Equation
 |
| The Economics God Equation ® |
August 16, 2021
Occasional Tweets: The futile attempt to recycle Keynes (I)
#Economics#FailedScience#FakeScience#Economists#StupidOrCorruptOrBoth#Keynes messed up #MacroFoundations because he was too stupid for elementary #Algebra.
— E.K-H (@AXECorg) August 16, 2021
Keynes ― the poster boy for the weakness of the economist’s mindhttps://t.co/RgruUzd0gx pic.twitter.com/oqS7PbPJUx
For more about Keynes see AXECquery.
February 19, 2016
Economists’ perennial trouble with accounting
Comment on Steve Keen on ‘Hey Joe, banks can’t lend out reserves’
Blog-Reference
Steve Keen says: “... the useful stuff accountants know is double-entry bookkeeping. Why don’t economists know this themselves? Today’s economists simply don’t study it ... Economists of Joe’s generation often did learn accounting as undergraduates ... but very few of them ever integrated accounting concepts with their economics.”
Accounting is elementary mathematics, and, true, it is regularly beyond the capacities of economists (2012). Unfortunately, also heterodox economists. This includes Steve Keen.
The matrix is not the best tool to present the accounting interrelationships, so I present my refutation of Keen’s argument in an alternative format under the label Graphic AXEC68.
1. In the beginning, there is only the central bank that creates overdrafts and deposits uno actu out of nothing. Overdrafts stand here for all forms of direct loans to the household or the business sector. The deposits of the central bank are money and are used for transactions between the household and the business sector. Other forms of money are kept out of the picture.
2. The banking sector is now split between the central bank and commercial banks. The central bank creates 10 monetary units (million, billion, trillion, Euro, Dollar, Yuan) of overdrafts and deposits for the commercial banks only.
3. The commercial banks start their lending business and create 100 monetary units of overdrafts and deposits for the business sector. The deposits of the commercial banks are the transaction money used by the business sector to pay wages and by the household sector to buy consumption goods. The ratio of central bank deposits (= reserves) to business overdrafts is here 10 %, i.e., 10/100 units) and it is assumed that this is the maximal ratio. So, the commercial banks have here reached their limit of money creation. It is the central bank’s turn to act.
4. In the course of quantitative easing, the central bank takes over 5 monetary units of business sector overdrafts (= loans) from the commercial banks. The ratio of central bank deposits to business overdrafts is now 15.8 %, i.e., 15/95. So the commercial banks have excess reserves. With regard to the 10 % limit, they need 9.5 units of central bank deposits but have 15.
5. The commercial banks now again take up their lending business and increase overdrafts to the business sector by 55 units. Of course, the same increase takes place on the debit side (= business deposits +55). The ratio of central bank deposits to business overdrafts is now again 10 %, i.e., 15/150).
In a strict sense, it is misleading to say that commercial banks lend out reserves. In an elementary credit economy, the commercial banks create overdrafts and deposits uno actu out of nothing. The reserve ratio is not a practical but a legal limit.
So, literally, it is right to say that commercial banks do not lend out reserves. But it is obvious that between step 4 and step 5, the banks have excess reserves and therefore are in the position to create money in the form of bank deposits for the business and the household sector. Between steps 4 and 5, the credit multiplier is indeed greater than 0. Steve Keen’s conclusion, “Therefore, the $1.4 trillion of excess reserves that QE has created in the USA alone has added precisely $0 to the lending power of banks” is false.
The lending power is there, but of no use if the household and business sectors prefer to deleverage (Koo, 2009).
The real problem of QE is that the central bank takes toxic loans off the commercial/ investment banks' balance sheets and thus protects them from losses.
Egmont Kakarot-Handtke
References
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
Koo, R. C. (2009). The Holy Grail of Macroeconomics. Lessons from Japan’s Great Recession. Singapore: Wiley.
Related 'Accounting for dummies' and 'Accounting basics' and 'End of confusion' and 'Either stupid or duplicitous' and 'Unaccountable' and cross-references Accounting
COMMENT on Asad Zaman and John Hermann on Feb 21
The two criteria of science are formal and material consistency (Klant, 1994, p. 31). The latter is established by empirical testing. How important this is for genuine scientists, one may glean from the fact that physicists have built ‘the world’s most expensive and complex experimental facilities to date’ (CERN, Wikipedia) in order to test a hypothesis that was put forth around 1964 by six theoretical physicists.
This vividly contrasts with the silly methodological motto of most economists, i.e., “it is better to be roughly right than precisely wrong!” (Davidson, 1984, p. 574)
The analog to the physicists’ fervor of measurement would be to install a giant facility that records every economic transaction in real-time according to the principles of accounting. This facility then delivers the exact numbers (two digits) of total income per period, consumption expenditures, saving, and so on. And these numbers are the rock-solid foundation of empirical testing.
Curiously, economists have never shown any ambition to build such a facility. Worse, economic theory is not even built upon concepts that correspond with what could actually be produced with such a gigantic bookkeeping machine. Just the contrary, economic theory has been built upon concepts like utility or equilibrium, and it should have been evident from the very start that there is no testable correspondence to these green cheese concepts in the real world. Thus, the scientific failure of economics was methodologically pre-programmed 150 years ago.
What most economists have not realized to this day is that accounting is pivotal to their discipline. Their manifest incompetence consists of not understanding the elementary mathematics that underlies accounting (2012). This is the real mathiness problem.
“Somewhere between the Political Arithmetician, alias the National Income Accountant, and the Financial Analyst, alias the Accountant, lies the task of the quantitative economist’s analytical role and none of the theoretical or applied tasks of these two pragmatic and paradigmatic figures requires anything more than arithmetic, statistics, and the rules of compound interest. These, in turn, require nothing more than an understanding of the conditions under which systems of equations can and cannot be solved. But what kind of quantities do these equations encapsulate as parameters, constants, and variables? Surely, the kind of quantities that enter the equations of the Political Arithmetician and the Accountant cannot be other than rational or natural numbers — negative and non-negative? Eminent theorists, working in core areas of economic theory — price theory and monetary theory — have made this point in interesting ways over the past half a century.” (Velupillai, 2005, pp. 866-867)
To be sure, accounting is not all of economics. But make no mistake, above the entrance to economics as a science is inscribed the phrase: “Let None But Those Who Mastered The Elementary Mathematics of Accounting Enter Here.”
References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. 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
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics. Cambridge Journal of Economics, 29: 849–872.
Blog-Reference
Steve Keen says: “... the useful stuff accountants know is double-entry bookkeeping. Why don’t economists know this themselves? Today’s economists simply don’t study it ... Economists of Joe’s generation often did learn accounting as undergraduates ... but very few of them ever integrated accounting concepts with their economics.”
Accounting is elementary mathematics, and, true, it is regularly beyond the capacities of economists (2012). Unfortunately, also heterodox economists. This includes Steve Keen.
The matrix is not the best tool to present the accounting interrelationships, so I present my refutation of Keen’s argument in an alternative format under the label Graphic AXEC68.
1. In the beginning, there is only the central bank that creates overdrafts and deposits uno actu out of nothing. Overdrafts stand here for all forms of direct loans to the household or the business sector. The deposits of the central bank are money and are used for transactions between the household and the business sector. Other forms of money are kept out of the picture.
2. The banking sector is now split between the central bank and commercial banks. The central bank creates 10 monetary units (million, billion, trillion, Euro, Dollar, Yuan) of overdrafts and deposits for the commercial banks only.
3. The commercial banks start their lending business and create 100 monetary units of overdrafts and deposits for the business sector. The deposits of the commercial banks are the transaction money used by the business sector to pay wages and by the household sector to buy consumption goods. The ratio of central bank deposits (= reserves) to business overdrafts is here 10 %, i.e., 10/100 units) and it is assumed that this is the maximal ratio. So, the commercial banks have here reached their limit of money creation. It is the central bank’s turn to act.
4. In the course of quantitative easing, the central bank takes over 5 monetary units of business sector overdrafts (= loans) from the commercial banks. The ratio of central bank deposits to business overdrafts is now 15.8 %, i.e., 15/95. So the commercial banks have excess reserves. With regard to the 10 % limit, they need 9.5 units of central bank deposits but have 15.
5. The commercial banks now again take up their lending business and increase overdrafts to the business sector by 55 units. Of course, the same increase takes place on the debit side (= business deposits +55). The ratio of central bank deposits to business overdrafts is now again 10 %, i.e., 15/150).
In a strict sense, it is misleading to say that commercial banks lend out reserves. In an elementary credit economy, the commercial banks create overdrafts and deposits uno actu out of nothing. The reserve ratio is not a practical but a legal limit.
So, literally, it is right to say that commercial banks do not lend out reserves. But it is obvious that between step 4 and step 5, the banks have excess reserves and therefore are in the position to create money in the form of bank deposits for the business and the household sector. Between steps 4 and 5, the credit multiplier is indeed greater than 0. Steve Keen’s conclusion, “Therefore, the $1.4 trillion of excess reserves that QE has created in the USA alone has added precisely $0 to the lending power of banks” is false.
The lending power is there, but of no use if the household and business sectors prefer to deleverage (Koo, 2009).
The real problem of QE is that the central bank takes toxic loans off the commercial/ investment banks' balance sheets and thus protects them from losses.
Egmont Kakarot-Handtke
References
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
Koo, R. C. (2009). The Holy Grail of Macroeconomics. Lessons from Japan’s Great Recession. Singapore: Wiley.
Related 'Accounting for dummies' and 'Accounting basics' and 'End of confusion' and 'Either stupid or duplicitous' and 'Unaccountable' and cross-references Accounting
***
COMMENT on Asad Zaman and John Hermann on Feb 21
The two criteria of science are formal and material consistency (Klant, 1994, p. 31). The latter is established by empirical testing. How important this is for genuine scientists, one may glean from the fact that physicists have built ‘the world’s most expensive and complex experimental facilities to date’ (CERN, Wikipedia) in order to test a hypothesis that was put forth around 1964 by six theoretical physicists.
This vividly contrasts with the silly methodological motto of most economists, i.e., “it is better to be roughly right than precisely wrong!” (Davidson, 1984, p. 574)
The analog to the physicists’ fervor of measurement would be to install a giant facility that records every economic transaction in real-time according to the principles of accounting. This facility then delivers the exact numbers (two digits) of total income per period, consumption expenditures, saving, and so on. And these numbers are the rock-solid foundation of empirical testing.
Curiously, economists have never shown any ambition to build such a facility. Worse, economic theory is not even built upon concepts that correspond with what could actually be produced with such a gigantic bookkeeping machine. Just the contrary, economic theory has been built upon concepts like utility or equilibrium, and it should have been evident from the very start that there is no testable correspondence to these green cheese concepts in the real world. Thus, the scientific failure of economics was methodologically pre-programmed 150 years ago.
What most economists have not realized to this day is that accounting is pivotal to their discipline. Their manifest incompetence consists of not understanding the elementary mathematics that underlies accounting (2012). This is the real mathiness problem.
“Somewhere between the Political Arithmetician, alias the National Income Accountant, and the Financial Analyst, alias the Accountant, lies the task of the quantitative economist’s analytical role and none of the theoretical or applied tasks of these two pragmatic and paradigmatic figures requires anything more than arithmetic, statistics, and the rules of compound interest. These, in turn, require nothing more than an understanding of the conditions under which systems of equations can and cannot be solved. But what kind of quantities do these equations encapsulate as parameters, constants, and variables? Surely, the kind of quantities that enter the equations of the Political Arithmetician and the Accountant cannot be other than rational or natural numbers — negative and non-negative? Eminent theorists, working in core areas of economic theory — price theory and monetary theory — have made this point in interesting ways over the past half a century.” (Velupillai, 2005, pp. 866-867)
To be sure, accounting is not all of economics. But make no mistake, above the entrance to economics as a science is inscribed the phrase: “Let None But Those Who Mastered The Elementary Mathematics of Accounting Enter Here.”
References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. 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
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics. Cambridge Journal of Economics, 29: 849–872.
October 14, 2015
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 are false that are built upon the following concepts: 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
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 Knights 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.
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 are false that are built upon the following concepts: 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
***
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 Knights 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.
July 9, 2017
We are not yet out of the wood; in fact, we are not yet in it
Comment on Peter Turchin on ‘What Economics Models Really Say: A Review of Economics Rules’
Blog-Reference and Blog-Reference on Jul 10 and Blog-Reference
It is known for 2300+ years how science works: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)
We know after 200+ years that economics is a failed science or what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”
What is missing is the true theory: “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)#1
The true theory is defined by material and formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.
Now, every economist knows:
(i) The major approaches Walrasianism, Keynesianism, Marxianism, Austrianism are materially/formally inconsistent. What we actually have is the pluralism of false theories/models.
(ii) The foundational concept of profit is ill-defined (see Desai, Palgrave Dictionary). By implication income, too, is ill-defined.#2
(iii) The concept of capital is ill-defined (see Cambridge Capital Controversy CCC)
(iv) The concept of equilibrium is ill-defined: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin.” (Blaug) see also (Ingrao et al.), (Ackerman et al.)
Therefore, ALL theories/models that apply the traditional concepts of profit, income, capital, equilibrium are A PRIORI false. The mathiness discussion misses the crucial point altogether.#3 It is not at all the question whether the axiomatic-deductive method is productively applicable in economics, the problem is (i) that the method works only if the premises are “certain, true, and primary”, and (ii), that the axiomatic foundations of economics are provably false.#4 Economists do not even apply the elementary mathematics of macro accounting correctly.#5
What we have is Walrasian microfoundations and Keynesian macrofoundations and both are cobbled together for 70+ years in something called synthesis. Needless to emphasize that both halves do not logically fit. Because the axiomatic foundations of both microeconomics and macroeconomics are false, ALL modern economics textbooks from Samuelson to Mankiw and Rodrik are false.#6 This has nothing to do with mathiness but much with scientific incompetence.
Egmont Kakarot-Handtke
* Title taken from Schumpeter
#1 Economics: 200+ years of scientific incompetence and fraud
#2 Economists: scientists or political clowns?
#3 Morons on math
#4 First Lecture in New Economic Thinking
#5 A crash course in macro accounting
#6 The father of modern economics and his imbecile kids
Blog-Reference and Blog-Reference on Jul 10 and Blog-Reference
It is known for 2300+ years how science works: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)
We know after 200+ years that economics is a failed science or what Feynman called a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”
What is missing is the true theory: “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)#1
The true theory is defined by material and formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.
Now, every economist knows:
(i) The major approaches Walrasianism, Keynesianism, Marxianism, Austrianism are materially/formally inconsistent. What we actually have is the pluralism of false theories/models.
(ii) The foundational concept of profit is ill-defined (see Desai, Palgrave Dictionary). By implication income, too, is ill-defined.#2
(iii) The concept of capital is ill-defined (see Cambridge Capital Controversy CCC)
(iv) The concept of equilibrium is ill-defined: “At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin.” (Blaug) see also (Ingrao et al.), (Ackerman et al.)
Therefore, ALL theories/models that apply the traditional concepts of profit, income, capital, equilibrium are A PRIORI false. The mathiness discussion misses the crucial point altogether.#3 It is not at all the question whether the axiomatic-deductive method is productively applicable in economics, the problem is (i) that the method works only if the premises are “certain, true, and primary”, and (ii), that the axiomatic foundations of economics are provably false.#4 Economists do not even apply the elementary mathematics of macro accounting correctly.#5
What we have is Walrasian microfoundations and Keynesian macrofoundations and both are cobbled together for 70+ years in something called synthesis. Needless to emphasize that both halves do not logically fit. Because the axiomatic foundations of both microeconomics and macroeconomics are false, ALL modern economics textbooks from Samuelson to Mankiw and Rodrik are false.#6 This has nothing to do with mathiness but much with scientific incompetence.
Egmont Kakarot-Handtke
* Title taken from Schumpeter
#1 Economics: 200+ years of scientific incompetence and fraud
#2 Economists: scientists or political clowns?
#3 Morons on math
#4 First Lecture in New Economic Thinking
#5 A crash course in macro accounting
#6 The father of modern economics and his imbecile kids
January 31, 2016
Economists cannot do the simple math of profit — better keep them out of politics
Comment on Dean Baker on ‘Paul Krugman, Bernie Sanders, and the Experts’
Blog-Reference and Blog-Reference and Blog-Reference on Feb 3
Economists are supposed to be experts on the economy. So it is quite natural to think that they know what profit is; after all, this is the foundational concept of their subject matter. Yet, this is definitely not the case. This means that economists give economic policy advice without having a true understanding of the market economy. This holds for Walrasians, Keynesians, Marxians, and Austrians.
This is not to say, of course, that economists know nothing. In fact, they know some easy-to-grasp practical, institutional, or historical details. This, though, is not what science is all about. When the task is to explain how the universe works, and the astronomer goes on describing in great detail how his kitchen works, then one is inclined to think that this expert is a moron.
The situation is analogous in economics. You have many experts talk about whether the Fed should or should not lower the interest rate, but all these guys have no idea of how the market system works because they have not figured out since Econ 101 what the crucial difference between profit and income is.
All this is by no means new or some hidden secret of the profession. Every economist knows or can know because it is in the Palgrave Dictionary that “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
So, the simple fact is that economists do not know what profit is, and this means that they do not know how the market system works, and this, in turn, means that their economic policy advice has NO valid scientific foundations.
When economists talk about the economy, this is storytelling decorated with some charts of crossing curves and exemplified with some actual numbers. It looks more scientific than tea leaves reading, clearly, an economic model that is based on nonentities and inconsistent concepts is not different in principle from a cup of tea leaves.
The fact of the matter is that economists are incompetent scientists who fail already at the level of elementary math. This assertion, of course, needs formal proof.
This is the set of premises to start with (each step of the argument can be checked on the back of an envelope by inserting arbitrary numbers for L, W, R)
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimal, that is, it cannot be reduced further, only expanded. The set contains no nonentities like maximization or equilibrium and no normative assertions. For the graphical representation, see Graphic AXEC31
At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e., C=Yw, and market clearing, i.e., X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. Note also that the wage rate W is an average when the individual wage rates are different among the employees, which is normally the case.
Under the conditions of market-clearing and budget-balancing in each period, the price is derived as P=W/R (1), i.e., the market-clearing price is always equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.
If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased, the price remains constant, provided productivity R does not change. If productivity decreases, the price P rises. If productivity increases, the price falls. In any case, labor gets the whole product, the real wage W/P is invariably equal to the productivity R according to (1), and profit for the business sector as a whole is zero. All changes in the system are reflected by the market-clearing price. The most elementary economy is reproducible for an indefinite number of periods. For the inclusion of money, see (2014).
Defining a reproducible minimal economy and making its properties absolutely transparent has been the first step. With the second step, the conditions of market clearing and budget balancing have to be lifted. This produces the phenomena of inventory changes (O−X>0 or <0) and of saving/dissaving (Yw−C>0 or <0) and of profit/loss (C−Yw>0 or <0).
One has three logical cases for the household sector Sm≡ Yw−C>0, <0, =0, that is, the household sector either saves Sm>0, dissaves Sm<0, or balances the budget Sm=0.
One has three logical cases for the business sector Qm≡C−Yw>0, <0, =0, that is, the business sector either makes a profit Qm>0, a loss Qm<0 or breaks even Qm=0.
The balances of the two sectors add up to zero Sm+Qm=0. This follows directly from the definition of saving/dissaving Sm and profit/loss Qm.
This gives one the most elementary version of the macroeconomic Profit Law: profit is positive if the households dissave (increase debt/decrease financial assets) and negative if the households save, that is, Qm≡−Sm. So profit for the economy as a whole has nothing to do with productivity, the wage rate, risk, or any other of the usual explanations that stem from the observation of a single firm among many others. In fact, exactly here is where error/mistake comes in because what is true for a single firm is not true for the economy as a whole. This logical blunder of the representative economist is well-known as the Fallacy of Composition.
In science, there is no need at all to believe in anything. Science is not about credibility or an expert opinion, or whether the scientist is simpatico, but alone about proof, that is, logical and empirical consistency.
Imagine a simple experiment for the ongoing election campaigns. Ask every economist who comes along with a proposal on how to fix the economy about their underlying model. Check what this model says about profit. Admit only those economists to a public discussion whose profit theory is correct — the silence will be deafening.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Blog-Reference and Blog-Reference and Blog-Reference on Feb 3
Economists are supposed to be experts on the economy. So it is quite natural to think that they know what profit is; after all, this is the foundational concept of their subject matter. Yet, this is definitely not the case. This means that economists give economic policy advice without having a true understanding of the market economy. This holds for Walrasians, Keynesians, Marxians, and Austrians.
This is not to say, of course, that economists know nothing. In fact, they know some easy-to-grasp practical, institutional, or historical details. This, though, is not what science is all about. When the task is to explain how the universe works, and the astronomer goes on describing in great detail how his kitchen works, then one is inclined to think that this expert is a moron.
The situation is analogous in economics. You have many experts talk about whether the Fed should or should not lower the interest rate, but all these guys have no idea of how the market system works because they have not figured out since Econ 101 what the crucial difference between profit and income is.
All this is by no means new or some hidden secret of the profession. Every economist knows or can know because it is in the Palgrave Dictionary that “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)
So, the simple fact is that economists do not know what profit is, and this means that they do not know how the market system works, and this, in turn, means that their economic policy advice has NO valid scientific foundations.
When economists talk about the economy, this is storytelling decorated with some charts of crossing curves and exemplified with some actual numbers. It looks more scientific than tea leaves reading, clearly, an economic model that is based on nonentities and inconsistent concepts is not different in principle from a cup of tea leaves.
The fact of the matter is that economists are incompetent scientists who fail already at the level of elementary math. This assertion, of course, needs formal proof.
This is the set of premises to start with (each step of the argument can be checked on the back of an envelope by inserting arbitrary numbers for L, W, R)
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector, which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimal, that is, it cannot be reduced further, only expanded. The set contains no nonentities like maximization or equilibrium and no normative assertions. For the graphical representation, see Graphic AXEC31
At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e., C=Yw, and market clearing, i.e., X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. Note also that the wage rate W is an average when the individual wage rates are different among the employees, which is normally the case.
Under the conditions of market-clearing and budget-balancing in each period, the price is derived as P=W/R (1), i.e., the market-clearing price is always equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.
If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased, the price remains constant, provided productivity R does not change. If productivity decreases, the price P rises. If productivity increases, the price falls. In any case, labor gets the whole product, the real wage W/P is invariably equal to the productivity R according to (1), and profit for the business sector as a whole is zero. All changes in the system are reflected by the market-clearing price. The most elementary economy is reproducible for an indefinite number of periods. For the inclusion of money, see (2014).
Defining a reproducible minimal economy and making its properties absolutely transparent has been the first step. With the second step, the conditions of market clearing and budget balancing have to be lifted. This produces the phenomena of inventory changes (O−X>0 or <0) and of saving/dissaving (Yw−C>0 or <0) and of profit/loss (C−Yw>0 or <0).
One has three logical cases for the household sector Sm≡ Yw−C>0, <0, =0, that is, the household sector either saves Sm>0, dissaves Sm<0, or balances the budget Sm=0.
One has three logical cases for the business sector Qm≡C−Yw>0, <0, =0, that is, the business sector either makes a profit Qm>0, a loss Qm<0 or breaks even Qm=0.
The balances of the two sectors add up to zero Sm+Qm=0. This follows directly from the definition of saving/dissaving Sm and profit/loss Qm.
This gives one the most elementary version of the macroeconomic Profit Law: profit is positive if the households dissave (increase debt/decrease financial assets) and negative if the households save, that is, Qm≡−Sm. So profit for the economy as a whole has nothing to do with productivity, the wage rate, risk, or any other of the usual explanations that stem from the observation of a single firm among many others. In fact, exactly here is where error/mistake comes in because what is true for a single firm is not true for the economy as a whole. This logical blunder of the representative economist is well-known as the Fallacy of Composition.
In science, there is no need at all to believe in anything. Science is not about credibility or an expert opinion, or whether the scientist is simpatico, but alone about proof, that is, logical and empirical consistency.
Imagine a simple experiment for the ongoing election campaigns. Ask every economist who comes along with a proposal on how to fix the economy about their underlying model. Check what this model says about profit. Admit only those economists to a public discussion whose profit theory is correct — the silence will be deafening.
Egmont Kakarot-Handtke
References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Related 'Economics: failure, fake, fraud' and 'Why is economics a total scientific failure?' and 'Profit'.
I summarized “The fact of the matter is that economists are incompetent scientists who fail already at the level of elementary math. Because of this, their economic policy advice has no sound scientific foundation.” This summary is based on the shortest possible formal proof.
You say, “Beyond this confusing criticism I have no idea what the essay is about and suggest a clear and simple summary. Unless a clear and simple summary is set down, I at least will never again read a sentence by this writer.”
This makes my point that economists (including anne) cannot grasp an elementary proof, much less formulate a consistent economic theory/model.
(i) You know pretty well that it is a silly game to ask for a two-line summary of an argument that rectifies the conceptual foundations of economics.
(ii) It is well known that it takes more words to correct/explain a faulty proposition than to make one. To say ‘the sun goes up’ is short and immediately convincing, to explain why this is an optical illusion takes a whole book at minimum.
(iii) Marginalism had more than 140 years and a lot of manpower to fully develop an axiomatically ill-founded approach [“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)]. Fairness alone demands that you grant more than a two-liner for the refutation of entrenched neoclassical junk. #1
(iv) To demand a catchy summary and then to complain that a lot has been left out, which unfortunately makes the argument incomprehensible, is an outworn catch-22.
(v) If you need more information for understanding new economics, you will surely find it. If you “will never again read a sentence by this writer” that is perfectly in order and the inalienable privilege of all irredeemable proto-scientific economists.
#1 Economists and methodology: the horror of all horrors
(i) My post has been cut off in the middle. For the intact text, see here.
(ii) My key point is “So, the simple fact is, that economists do not know what profit is, and this means that they do not know how the market system works, and this, in turn, means, that their economic policy advice has no sound scientific foundation.”
(iii) I give a formal proof of the known fact that profit theory has been false since Adam Smith (2014). Every intelligent non-economist can check this proof.#1
(iv) From this proof follows: neither you nor any of the expert economists you quote/defend/support has realized to this very day that their underlying model is logically and empirically defective and therefore unacceptable (2015).
(v) Now you ask me “Again and finally, discuss a single tangible economic problem with feeble me and I will bother reading another line. Structural change in the Chinese economy? Growth in India? Dependence on commodity exports in Africa? I am waiting.”
(vi) Clearly, there is no point in discussing these issues with an economist who cannot tell the difference between profit and income. But it would be a good idea to inform yourself first about the correct employment theory.#2 Then we can together answer the question of why the Fed’s 2 percent inflation target is the stupidest idea that so-called expert economists have ever come up with.
(vii) Incompetent economists are a menace to their fellow citizens.
References
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
#1 How the intelligent non-economist can refute every economist hands down
#2 How to save the economy from storytelling economists
The price mechanism does not work as standard economics imagines. As a matter of fact, overall employment increases if the average wage rate increases relative to the average price and productivity. This gives one the lever to improve the employment situation all over the world and to fend off deflation without rising debt and without artificial capacity growth. Increasing the average price relative to the average wage rate and productivity increases unemployment. This is the current Fed policy.
You say: “If scientists didn’t believe there was something to observe, there are ways to do those observations that will help the scientist understand the observed, and that all the work of observing would lead to better understanding why they would waste the time doing it? Science itself is just one big belief, on big faith.”
You are a bit behind the curve as far as the relationship between theory and observation is concerned. And, worse, you have not yet gotten the fundamental distinction between belief (= religion) and knowledge (= science).
What commonsensers and naive empiricists have never understood is that science starts where their myopic common sense ends. Here is a classic example.
Roughly speaking, Aristotle put the Law of Motion thus: every body moves to its natural place of rest. Then he took a stone and threw it skywards. The stone came down some meters away. Never in the history of mankind had a law been empirically tested and confirmed without exception.
Against this, Galileo said, roughly, every body moves in a straight line until eternity. An empirical proof could not be given until space flight was possible.
Nevertheless, this counterintuitive assertion reappears as the first axiom of motion in Newton’s Principia. (Axiomata Sive Leges Motus, Wikipedia)
And this is what Galileo told naive empiricists, commonsensers, and brain-dead realists about the essence of science: “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (quoted in Popper, 1994, p. 84)
The only thing scientists believe in is formal and empirical proof. Economics is a failed science. It has been logically and empirically refuted. There is no such thing as an economic expert. Peer review does not work in economics because the author and reviewer share the same false belief (2013).
References
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality, Ch. Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.
You certainly have to take Georgescu-Roegen off the list because he and I are of one mind: “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights' 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.” (Georgescu-Roegen, 1979, p. 317)
So, yes, I think and even prove that economists are “incompetent scientists who fail at the level of elementary math.” #1
References
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
#1 How the intelligent non-economist can refute every economist hands down
In methodology, there is a distinction between the context of discovery and the context of justification. What Kuhn and others have put forth is a sociology/history of how major paradigm shifts have happened. Mirowski did the same in the field of economics, e.g., (2009). With rare exceptions, though, economic methodology has entirely degenerated to storytelling and gossiping “Much of the work in methodology over the last ten years has thus consisted of methodological analysis of what economists do and how they argue.” (Dow, 1997, p. 78)
The context of discovery appeals very much to so-called social scientists. This is because the only way they can understand the world is in the form of a narrative, i.e., Galileo said the earth moves, the Pope did not like it, he mobilized the Inquisition, Galileo was put on trial, he did not recant, after his conviction, he said the historical words ‘Eppur si muove’. This is the stuff Hollywood then makes a sitcom about.
With regard to the context of justification, Kuhn stated: “First, a theory should be accurate within its domain, that is, consequences deducible from a theory should be in demonstrated agreement with the results of existing experiments and observations. (quoted in Redman, 1993, p. 3)
This is pretty much in accordance with what I said, isn’t it?
The unbridgeable difference between genuine scientists and so-called social scientists is that the former seek a clear decision between true or false, while the latter are happy with storytelling in the vast realm between true/false where “nothing is clear, and everything is possible.” (Keynes, 1973, p. 292). #1
To see the crucial point, it suffices to compare the scientist Newton and the economist Adam Smith: “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, 1994, p. 185)
Economics never moved above the heads of the dullest readers to this day.
References
Dow, S. C. (1997). Mainstream Economic Methodology. Cambridge Journal of Economics, 21: 73–93.
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., and Plehwe, D. (2009). The Road From Mont Pelerin. The Making of the Neoliberal Thought Collective. Cambridge, London: Harvard University Press.
Redman, D. A. (1993). Economics and the Philosophy of Science. New York, Oxford: Oxford University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
#1 Economics as fool’s paradise
REPLY comment on Ken Zimmerman of Feb 6
Economics claims to be a science: “Starting with Adam Smith’s history of astronomy, the main theorists of classical economics sought to capture the essence of the scientific method in order to employ in the sphere of economic research.” (Mirowski, 1995, p. 198)
What is the essence of science? “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
In more than 200 years, economists have not produced much scientific value but have been very much of silly storytelling.
In view of obvious scientific failure, economists have to make up their minds: (i) to stick to storytelling and to voluntarily get out of science, or (ii) to comply with the methodology and ethics of science and to come up eventually with the true theory of how the economy works.
As Eichner put it more specifically: “Economics as a discipline therefore has a choice: It can retain the neoclassical core of its theory or, alternatively, it can one day become a science. It cannot have it both ways.” (1983, p. 518)
Make no mistake, when the dust is settled, and the history of science becomes written, neither an orthodox nor a heterodox economist of the last 200 years will appear in the index under the heading Scientists.
References
Eichner, A. S. (1983). Why Economics Is Not Yet a Science. Journal of Economic Issues, 17(2): 507–520. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Entertainment is about like/dislike, science is about true/false.
The problem with Krugman is that his economic policy arguments have no sound theoretical foundation. He, for example, uses still IS-LM or a variant thereof. Because the IS-LM model is provably false, since Keynes/Hicks, this is a reliable indicator of logical incompetence (2014).
Whatever Krugman argues for or against is his personal opinion. Having disqualified himself, he has no legitimacy to speak in the name of science.
References
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
***
REPLY comment on anne of Jan 31I summarized “The fact of the matter is that economists are incompetent scientists who fail already at the level of elementary math. Because of this, their economic policy advice has no sound scientific foundation.” This summary is based on the shortest possible formal proof.
You say, “Beyond this confusing criticism I have no idea what the essay is about and suggest a clear and simple summary. Unless a clear and simple summary is set down, I at least will never again read a sentence by this writer.”
This makes my point that economists (including anne) cannot grasp an elementary proof, much less formulate a consistent economic theory/model.
***
REPLY comment on anne of Jan 31(i) You know pretty well that it is a silly game to ask for a two-line summary of an argument that rectifies the conceptual foundations of economics.
(ii) It is well known that it takes more words to correct/explain a faulty proposition than to make one. To say ‘the sun goes up’ is short and immediately convincing, to explain why this is an optical illusion takes a whole book at minimum.
(iii) Marginalism had more than 140 years and a lot of manpower to fully develop an axiomatically ill-founded approach [“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)]. Fairness alone demands that you grant more than a two-liner for the refutation of entrenched neoclassical junk. #1
(iv) To demand a catchy summary and then to complain that a lot has been left out, which unfortunately makes the argument incomprehensible, is an outworn catch-22.
(v) If you need more information for understanding new economics, you will surely find it. If you “will never again read a sentence by this writer” that is perfectly in order and the inalienable privilege of all irredeemable proto-scientific economists.
#1 Economists and methodology: the horror of all horrors
***
REPLY comment on anne of Jan 31 on Feb 1(i) My post has been cut off in the middle. For the intact text, see here.
(ii) My key point is “So, the simple fact is, that economists do not know what profit is, and this means that they do not know how the market system works, and this, in turn, means, that their economic policy advice has no sound scientific foundation.”
(iii) I give a formal proof of the known fact that profit theory has been false since Adam Smith (2014). Every intelligent non-economist can check this proof.#1
(iv) From this proof follows: neither you nor any of the expert economists you quote/defend/support has realized to this very day that their underlying model is logically and empirically defective and therefore unacceptable (2015).
(v) Now you ask me “Again and finally, discuss a single tangible economic problem with feeble me and I will bother reading another line. Structural change in the Chinese economy? Growth in India? Dependence on commodity exports in Africa? I am waiting.”
(vi) Clearly, there is no point in discussing these issues with an economist who cannot tell the difference between profit and income. But it would be a good idea to inform yourself first about the correct employment theory.#2 Then we can together answer the question of why the Fed’s 2 percent inflation target is the stupidest idea that so-called expert economists have ever come up with.
(vii) Incompetent economists are a menace to their fellow citizens.
References
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
#1 How the intelligent non-economist can refute every economist hands down
#2 How to save the economy from storytelling economists
***
REPLY comment on anne of Feb 1 on Feb 2, summary of the correct Employment LawThe price mechanism does not work as standard economics imagines. As a matter of fact, overall employment increases if the average wage rate increases relative to the average price and productivity. This gives one the lever to improve the employment situation all over the world and to fend off deflation without rising debt and without artificial capacity growth. Increasing the average price relative to the average wage rate and productivity increases unemployment. This is the current Fed policy.
***
REPLY comment on Ken Zimmerman of Feb 4You say: “If scientists didn’t believe there was something to observe, there are ways to do those observations that will help the scientist understand the observed, and that all the work of observing would lead to better understanding why they would waste the time doing it? Science itself is just one big belief, on big faith.”
You are a bit behind the curve as far as the relationship between theory and observation is concerned. And, worse, you have not yet gotten the fundamental distinction between belief (= religion) and knowledge (= science).
What commonsensers and naive empiricists have never understood is that science starts where their myopic common sense ends. Here is a classic example.
Roughly speaking, Aristotle put the Law of Motion thus: every body moves to its natural place of rest. Then he took a stone and threw it skywards. The stone came down some meters away. Never in the history of mankind had a law been empirically tested and confirmed without exception.
Against this, Galileo said, roughly, every body moves in a straight line until eternity. An empirical proof could not be given until space flight was possible.
Nevertheless, this counterintuitive assertion reappears as the first axiom of motion in Newton’s Principia. (Axiomata Sive Leges Motus, Wikipedia)
And this is what Galileo told naive empiricists, commonsensers, and brain-dead realists about the essence of science: “I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (quoted in Popper, 1994, p. 84)
The only thing scientists believe in is formal and empirical proof. Economics is a failed science. It has been logically and empirically refuted. There is no such thing as an economic expert. Peer review does not work in economics because the author and reviewer share the same false belief (2013).
References
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality, Ch. Science: Problems, Aims, Responsibilities, 82–111. London, New York: Routledge.
***
REPLY comment on Norman L. Roth on Feb 4You certainly have to take Georgescu-Roegen off the list because he and I are of one mind: “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights' 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.” (Georgescu-Roegen, 1979, p. 317)
So, yes, I think and even prove that economists are “incompetent scientists who fail at the level of elementary math.” #1
References
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
#1 How the intelligent non-economist can refute every economist hands down
***
REPLY comment on Ken Zimmerman of Feb 5In methodology, there is a distinction between the context of discovery and the context of justification. What Kuhn and others have put forth is a sociology/history of how major paradigm shifts have happened. Mirowski did the same in the field of economics, e.g., (2009). With rare exceptions, though, economic methodology has entirely degenerated to storytelling and gossiping “Much of the work in methodology over the last ten years has thus consisted of methodological analysis of what economists do and how they argue.” (Dow, 1997, p. 78)
The context of discovery appeals very much to so-called social scientists. This is because the only way they can understand the world is in the form of a narrative, i.e., Galileo said the earth moves, the Pope did not like it, he mobilized the Inquisition, Galileo was put on trial, he did not recant, after his conviction, he said the historical words ‘Eppur si muove’. This is the stuff Hollywood then makes a sitcom about.
With regard to the context of justification, Kuhn stated: “First, a theory should be accurate within its domain, that is, consequences deducible from a theory should be in demonstrated agreement with the results of existing experiments and observations. (quoted in Redman, 1993, p. 3)
This is pretty much in accordance with what I said, isn’t it?
The unbridgeable difference between genuine scientists and so-called social scientists is that the former seek a clear decision between true or false, while the latter are happy with storytelling in the vast realm between true/false where “nothing is clear, and everything is possible.” (Keynes, 1973, p. 292). #1
To see the crucial point, it suffices to compare the scientist Newton and the economist Adam Smith: “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, 1994, p. 185)
Economics never moved above the heads of the dullest readers to this day.
References
Dow, S. C. (1997). Mainstream Economic Methodology. Cambridge Journal of Economics, 21: 73–93.
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., and Plehwe, D. (2009). The Road From Mont Pelerin. The Making of the Neoliberal Thought Collective. Cambridge, London: Harvard University Press.
Redman, D. A. (1993). Economics and the Philosophy of Science. New York, Oxford: Oxford University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
#1 Economics as fool’s paradise
***
Economics claims to be a science: “Starting with Adam Smith’s history of astronomy, the main theorists of classical economics sought to capture the essence of the scientific method in order to employ in the sphere of economic research.” (Mirowski, 1995, p. 198)
What is the essence of science? “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)
In more than 200 years, economists have not produced much scientific value but have been very much of silly storytelling.
In view of obvious scientific failure, economists have to make up their minds: (i) to stick to storytelling and to voluntarily get out of science, or (ii) to comply with the methodology and ethics of science and to come up eventually with the true theory of how the economy works.
As Eichner put it more specifically: “Economics as a discipline therefore has a choice: It can retain the neoclassical core of its theory or, alternatively, it can one day become a science. It cannot have it both ways.” (1983, p. 518)
Make no mistake, when the dust is settled, and the history of science becomes written, neither an orthodox nor a heterodox economist of the last 200 years will appear in the index under the heading Scientists.
References
Eichner, A. S. (1983). Why Economics Is Not Yet a Science. Journal of Economic Issues, 17(2): 507–520. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
***
REPLY comment on Jon Cloke of Feb 6Entertainment is about like/dislike, science is about true/false.
The problem with Krugman is that his economic policy arguments have no sound theoretical foundation. He, for example, uses still IS-LM or a variant thereof. Because the IS-LM model is provably false, since Keynes/Hicks, this is a reliable indicator of logical incompetence (2014).
Whatever Krugman argues for or against is his personal opinion. Having disqualified himself, he has no legitimacy to speak in the name of science.
References
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
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