Microfoundations have been dead for 150+ years: high time to move on

Comment on Yoshinori Shiozawa on ‘Microfoundations and economic policy choices’

Blog-Reference

Yoshinori Shiozawa summarizes: “What is now necessary is not to criticize the Lucas critique more than 40 years later. It is useless to criticize microfoundations of New Classical or New Keynesian macroeconomic models. They are efforts in vain. As the old dictum put it, it takes a theory to beat a theory. What we really need is to build true microfoundations for our heterodox macroeconomic theories.”

Or, as Blaug put it: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.”

Economists know quite well that microfoundations are dead. Ingrao et al. concluded back in 1990: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.”

What it means is that economics has to move from microfoundations to macrofoundations. This is called a Paradigm Shift. To replace the Walrasian microfoundations with other microfoundations does NOT work. Methodologically, NO way leads from the second-guessing of Human Nature/motives/behavior/action to the understanding of how the economic system works. ALL microfounded/behavioral approaches inevitably fail at the Fallacy-of-Composition hurdle.

What has to be done is to move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations.

► Get it econ suckers: behavioral microfoundations ⇒ false, systemic macrofoundations ⇒ true
► Where economics went wrong (I)
► Where economics went wrong (II)
► Where modern macroeconomics went wrong
► Modern macro moronism
► Macroeconomics: Drain the scientific swamp
► Macro of and for the scientifically blind and deaf
► Funny folks in the big omnibus
► Macroeconomics and the fake History of Economic Thought
► Rethinking macro
► The new macroeconomic paradigm
► From false microfoundations to true macrofoundations (II)
► True macrofoundations: the reset of economics
► Show first your economic axioms or get out of the discussion
► The canonical macroeconomic model
► For more details of the big picture see cross-references Axiomatization and cross-references Paradigm Shift

Egmont Kakarot-Handtke


Related  'The future of economics: why you will probably not be admitted to it, and why this is a good thing' and 'How to restart economics'.

For more about microfoundations see AXECquery.

For more about macrofoundations see AXECquery.

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Wikipedia AXEC121f

Where economics went wrong (II)

Comment on Simon Wren-Lewis on ‘Talk on where macroeconomics went wrong’

Blog-Reference and Blog-Reference

Simon Wren-Lewis’ talk is a fine example of what may be called an epicycle explanation. Essentially, like a Ptolemaic astronomer, he argues that it was with the 23rd epicycle where an error sneaked in and this explains why the theory failed.

Simon Wren-Lewis maintains: “The mistake was the revolution part. In the US, DSGE models replaced traditional modelling within almost a decade. In my view DSGE models should have coexisted with more traditional modelling, each tolerating the other.”

No. Both DSGE modeling and more traditional modeling are methodologically defective and the first step on the way forward is to bury both for good at the Flat-Earth-Cemetery. As Joan Robinson put it: “Scrap the lot and start again.”

What is needed is NOT the repair of the 23rd epicycle but a Paradigm Shift from false microfoundations to true macrofoundations. Nothing less will do.

This is the state of economics. Provably false:
• profit theory, for 200+ years,
• microfoundations, for 150+ years,
• macrofoundations, for 80+ years,
• the application of elementary logic and mathematics since the founding fathers.

The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory, axiomatically false, and materially/formally inconsistent. Because of this, economic policy guidance NEVER had sound scientific foundations from Adam Smith/Karl Marx onward to DSGE and New Keynesianism.

It was Keynes who spotted the fatal flaw of mainstream economics: “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.” (Keynes)

In the same vein: “For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (Hutchison)

Clearly, it is microfoundations that are false. The Walrasian approach is defined by this axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub) Every model that is built upon HC1 to HC5 or contains a subset thereof is false.

On the other hand, the Keynesian macrofoundations approach is defined by this set of foundational propositions: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63) Every model that is built upon this elementary syllogism is false, in particular, all I=S/IS-LM models and the whole of MMT.

Because both the microfoundations approach and the macrofoundations approach are axiomatically false, roughly 90 percent of the content of peer-reviewed journals is scientifically worthless.

A Paradigm Shift is imperative.#1 Who still accepts and applies Walrasian microfoundations or Keynesian macrofoundations or a combination thereof goes straight to the Flat-Earth-Cemetery.

It is known for 2300+ years: “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) Economists’ premises have NEVER been certain, true, and primary. Economics went wrong from the very beginning.

Egmont Kakarot-Handtke


#1 From false microfoundations to true macrofoundations

Related 'Where modern macroeconomics went wrong' and 'Where economics went wrong (I)''. For details of the big picture see cross-references Failed/Fake Scientists and
cross-references Political Economics/Stupidity/Corruption and
cross-references Paradigm Shift.

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Wikimedia AXEC144c

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LINK to The science that never was, Blog-Reference on Oct 12

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REPLY to Kien, tom m on Oct 13

Your blather about good intentions and Pareto Optimality is an indicator that you simply don’t get the obvious facts straight:

• Economics is a cargo cult science,

• Both Nordhaus and Romer are fake scientists,

• The EconNobel is a fraud.

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REPLY to Daniel Schiffman on Oct 16

William Nordhaus is the co-author of the textbook Economics. This textbook was “first published in 1948, and it immediately became the authority for the principles of economics courses.” (Amazon, product information)

There is Orthodoxy with microfoundations and there is Keynesianism with macrofoundations. Both Walrasian microfoundations and Keynesian macrofoundations are provably false, i.e. materially/formally inconsistent.

In the Samuelson/Nordhaus synthesis the defective Walrasian micro axioms and Keynes’ defective macro axioms were cobbled together. Needless to emphasize that both halves do not logically fit together.

The Samuelson/Nordhaus textbook has the lowermost scientific content of all textbooks ever written. And nothing substantial has improved in the last 70 years. Supply-demand-equilibrium will forever stand out as the silliest construct in the history of sciences and it is still at the core of economics teaching.

William Nordhaus cannot by any stretch of the imagination be taken seriously as a scientist – except in a cargo cult science. Feynman defined it as follows: “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.”

Indeed, they have not realized for 80+ years that economics is proto-scientific garbage and they even award a cargo cult Nobel to the co-author of a cargo cult textbook.

From false microfoundations to true macrofoundations (II)

Comment on Simon Wren-Lewis on ‘Large models, small models and Brexit’

Blog-Reference

Anyone can climb on a soapbox and tell the world how they would save the country or humanity ― except an economist. An economist needs 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)

This, then, is the methodological challenge: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. (Schumpeter)

Economists do not have the true theory/model. The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science and later on with this very specific guideline: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)#1

Arrow’s definition covers General Equilibrium Theory, Marshallian partial analysis, Behavioral Economics, DSGE, Agent-Based Models, and verbalized/common sense/ad hoc/special purpose models.

The common denominator of these approaches is that they take individual/social behavior as a starting point and then try to explain the behavior of the economy as a whole. The methodological defect of the microfoundations approach is that NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works. This is known as the Fallacy of Composition. Economics does not conform to Aristotle’s general definition of science: “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.”

Because the premises/microfoundations are NOT certain/true/primary a Paradigm Shift is necessary. Economics has to move from microfoundations to macrofoundations. For a graphical summary of the methodological basics see Wikimedia.#2

Methodologically it holds, (i) all microfoundations approaches are axiomatically dead, (ii) all Keynesian approaches are defective with regard to the definition of macroeconomic profit/income,#3 (iii) if it isn’t macro-axiomatized it isn’t economics,#4 (iv) lacking the true theory, economists have not more to offer than educated/computer-aided common sense.

Egmont Kakarot-Handtke


#1 This translates into the neo-Walrasian hardcore propositions a.k.a. as axioms “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 Wikimedia AXEC126 From microfoundations to macrofoundations

Source of the inserted chart: Simon Wren-Lewis, mainly macro blog

#3 Is Nick Rowe stupid or corrupt or both?
#4 The core of macroeconomic premises a.k.a. axioms reads: (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Y_w=WL wage income Y_w 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.

Related 'Where economics went wrong (I)' and 'Where economics went wrong (II)' and 'Where modern macroeconomics went wrong' and 'How Arrow pushed economics over the cliff' and 'From false microfoundations to true macrofoundations (I)' and 'From false micro to true macro: the new economic paradigm' and 'Dilettantes at the end of the coal-pit' and 'Macro for dummies (II)' and 'The new macroeconomic Paradigm' and 'MMT and the canonical macroeconomic model'. For details of the big picture see cross-references Paradigm Shift.

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Wikimedia AXEC121i

The miracle cure of economists’ micro-macro schizo

Comment on Nick Rowe on ‘Micro Profs teaching Intro Macro’

Blog-Reference and Blog-Reference on Jul 3 and Blog-Reference Link EV

“Could it be that there is something deeply wrong with mainstream economics … ?” (Blaug, 1984) Sooner or later, the intelligent student of economics arrives at this critical juncture. Starting with Samuelson’s prototype of 1948, economics textbooks consist of micro and macro and it is obvious that the two parts do not fit together.#1 The cognitive dissonance is usually dispelled as follows: “Micro is a solid, cogent set of ideas that was carefully developed over several centuries. Macro was a desperate and doomed attempt to explain the Depression. Bad theories, inconsistent with micro and not even internally consistent, spouting nonsense like Y=C+I+G, AS/AD, IS/LM, and MV=PY.” (Sproul)

This is one of the many delusions of the representative economist. The fact is that microeconomics is proto-scientific garbage and macroeconomics is proto-scientific garbage and the synthesis of the two is proto-scientific garbage squared. This is state-of-art economics and teachers teach it and students swallow it.#2 Economics is for 200+ years now what Feynman called a cargo cult science.

This is the methodological core problem: “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)

Clearly, economists lack the true theory. It is pretty obvious that these cargo cult scientists never understood what methodology is all about. Aristotle put it thusly: “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.”

Here are the premises for everyone to evaluate. The (Walrasian) microfoundations approach is defined by this verbalized axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub) The (Keynesian) macrofoundations approach is defined by this set of foundational propositions: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT, p. 63)

Because both the microfoundations approach and the macrofoundations approach are axiomatically false a Paradigm Shift is imperative. Who accepts Walrasian micro or Keynesian macro is forever outside of science.

The microfoundations approach is bottom-up and runs with necessity into the Fallacy of Composition. The macrofoundations approach is top-down and proceeds by successive differentiation until one arrives at the individual agent. Differentiation is the opposite of bottom-up or aggregation. Keynes was right in moving from microfoundations to macrofoundations but due to his scientific incompetence he ultimately messed the Paradigm Shift up.#3

This is the starter set of the correct macrofoundations approach. (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Y_w=WL wage income Y_w 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 minimalistic, that is, it cannot be reduced further, only expanded. The graphical representation of the elementary production-consumption economy is given on Wikimedia.#4, #5, #6

Under the condition of market-clearing X=O and budget-balancing C=Y_w follows the macroeconomic Law of Supply and Demand P=W/R.

From the definition of monetary saving/dissaving S_m≡Y_w−C and of monetary profit/loss Q_m≡C−Y_w follows Q_m≡−S_m, i.e. the most elementary form of the macroeconomic Profit Law.

The average stock of transaction money is M=κY_w under the condition of budget balancing.

Given the minimalist core propositions (A1) to (A3), one has now to proceed top-down by successive differentiation, i.e. two firms ― one market, two firms ― two markets, and so on to n firms ― m markets.

It is important to realize that macroeconomic axioms are composed of measurable variables. This is the precondition for testing the derived complex relationships, i.e. the systemic economic laws, and this, in turn, is the precondition of final corroboration or refutation as the case may be.

The behavior-free objective-systemic macrofoundations fully replace the false Walrasian microfoundations and the false Keynesian macrofoundations. Economics leaves the proto-scientific stage and becomes ― what it falsely has claimed for more than two centuries ― a science.

Egmont Kakarot-Handtke


#1 The father of modern economics and his imbecile kids
#2 Fact of life: your econ prof is scientifically incompetent
#3 How Keynes got macro wrong and Allais got it right
#4 Wikimedia AXEC31 Elementary production-consumption economy
#5 Geometrical Exposition of Structural Axiomatic Economics
#6 Economics for Economists

Related 'Cryptoeconomics ― the best of Nick Rowe’s spam folder' and 'Is Nick Rowe stupid or corrupt or both?' and 'It has been said before but economists still don’t get it' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist' and 'Yes, economics is a bogus science' and 'Schizonomics' and 'The Logical Interface Between Objective Macrofoundations and Subjective Valuations' and 'Your economics is refuted on all counts: here is the real thing'. For details of the big picture see cross-references Axiomatization.

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Wikimedia AXEC137b Extended macrofoundations. Behavior is formally integrated as Propensity Function (last line)

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REPLY to Nick Rowe on Jun 2

You say: “Nobody knows what is going on!”

Walrasian microeconomists and Keynesian macroeconomists never had any clue, indeed, but economics is in the process of replacing them. See The miracle cure of economists’ micro-macro schizo.

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REPLY to Avraam Jack Dectis on Jul 5

You say: “Plenty of good Econ 101 textbooks out there.”

This is one of the many delusions of the representative economist. The fact is that microeconomics is proto-scientific garbage and macroeconomics is proto-scientific garbage and the synthesis of the two is proto-scientific garbage squared.#1 This is state-of-art economics and teachers teach it and students swallow it. Economics is for 200+ years now what Feynman called a cargo cult science.

#1 The father of modern economics and his imbecile kids

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REPLY to Nick Rowe on Jul 12

The microfoundations approach has been methodologically defined as follows: “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, Joan Robinson’s Critique of Equilibrium: An Appraisal, p. 147)

In order to be applicable, HC2 requires a lot of auxiliary assumptions, most prominently a well-behaved/differentiable production function.#1

HC2 introduces marginalism which is the all-pervasive principle of Orthodoxy. HC2, though, and HC4 and HC5 are plain NONENTITIES, that is, they have no more reality content than the Easter Bunny, dancing angels on a pinpoint, the Tooth Fairy, or Pegasus.

The methodological fact of the matter is that ALL models that take just one NONENTITY into the premises are a priori false. And methodology tells us that if the premises are false the whole analytical superstructure is false. Therefore, the standard microfoundations approach with all its variants and derivatives from Jevons/Walras/Menger up to DSGE is methodologically false.

To put NONENTITIES into the premises is the defining characteristic of fairy tales, science fiction, theology, Hollywood movies, politics, propaganda, cargo cult science, and microfounded economics.

Not only constrained optimization, i.e. HC2, has to be dismissed but the whole set of behavioral axioms. Microfoundations have to be fully replaced by objective-systemic macrofoundations. This is called a paradigm shift.#2

Teaching/studying behavioral optimization, just like teaching/studying epicycles, is a thing of the proto-scientific past.

#1 Putting the production function back on its feet

#2 New Economic Thinking: The 10 crucial points

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REPLY to Nick Rowe on Jul 16

Not only the microfoundations approach is axiomatically false but also the macrofoundations approach. For the lethal methodological blunder see Wikipedia and the promotion of economists’ idiotism (II).

Teaching/studying Walrasian Micro and Keynesian Macro is a thing of the proto-scientific past.

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REPLY to Livio de Matteo on Jul 23

Both the Walrasian microfoundations approach and the Keynesian macrofoundations approach are provably false. Economists are failed/fake scientists.#1 To this day, they do not know how the economy works. Since Adam Smith, they do not know what profit is#2 but they filibuster about the Russia-America CoDominium: an issue that is NOT AT ALL their business.#3

Time to end the shrunken heads perversity called economics.

#1 Economics: a science without scientists

#2 The profit theory is false since Adam Smith

#3 Economics: a “science” from suckers for suckers

The new macroeconomic Paradigm

Comment on Brian Romanchuk on ‘DSGE Wars (Again)’

Blog-Reference and Blog-Reference adapted to context and Blog-Reference

(i) Every economist knows by now that DSGE is a failed approach. Strictly speaking, the microfoundations approach has already been dead in the cradle 150+ years ago.

(ii) The microfoundations approach is defined by this verbalized axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. (Weintraub) The fact is that every model that contains just one of these axioms is false.

(iii) Because the microfoundations approach is axiomatically false a Paradigm Shift is imperative. Methodologically it holds: “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) The Paradigm Shift consists of the replacement of false premises, i.e. microfoundations, by true premises, i.e. macrofoundations.#1

(iv) This is the correct core of macroeconomic premises#2
(A0) The objectively given and most elementary systemic 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) Y_w=WL wage income Y_w 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 MINIMALISTIC, that is, it cannot be reduced further, only expanded. The graphical representation of the elementary production-consumption economy is given on Wikimedia.#3, #4

(v) The condition of market-clearing is X=O and of budget-balancing C=Y_w. From non-clearing and non-balancing follow the phenomena of inventory changes (O−X greater than 0 or less than 0) and of monetary saving/dissaving (S_m≡Y_w−C greater than 0 or less than 0) and of monetary profit/loss (Q_m≡C−Y_w greater than 0 or less than 0). It always holds Q_m≡−Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law.#5

(vi) Given the minimalist core propositions (A0) to (A3) one has to proceed top-down by successive DIFFERENTIATION until one arrives at the individual agent. Differentiation is the opposite of bottom-up or aggregation. The bottom-up = microfoundations approach has always been methodologically indefensible because it runs with necessity into the Fallacy of Composition.

(vii) Note that the macro axioms are composed of measurable variables. This is the precondition for testing the derived complex relationships = economic laws.

(viii) The correct systemic macrofoundations FULLY replace the false Walrasian microfoundations and the false Keynesian macrofoundations. There can be NO pluralism of axiom sets. For ALL economic research, the macroeconomic premises (A0) to (A3) are ABSOLUTELY necessary. It holds: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

‡ The symbol C for consumption expenditures is in the following interchangeable with E_c .


#1 Keynes’ macrofoundations are false, see How Keynes got macro wrong and Allais got it right.
#2 For the complete set of macroeconomic axioms see Section 14.7 Macrofoundations in Sovereign Economics

#3 Wikimedia AXEC31 The elementary production-consumption economy
#4 True macrofoundations: the reset of economics
#5 Wikimedia AXEC112c From the macroeconomic axiom set follow the Basic Economic Laws

Get it econ suckers: behavioral microfoundations ⇒ false, systemic macrofoundations ⇒ true

Comment on Lars Syll on ‘What is (wrong with) mainstream economics?’

Blog-Reference and Blog-Reference adapted to context

Lars Syll maintains: “The basic problem with [the] definition of neoclassical (mainstream) economics ― arguing that its differentia specifica is its use of demand and supply, utility maximization and rational choice ― is that it doesn’t get things quite right. As we all know, there is an endless list of mainstream models that more or less distance themselves from one or the other of these characteristics. So the heart of mainstream economic theory lies elsewhere. The essence of mainstream economic theory is its almost exclusive use of a deductivist methodology. A methodology that is more or less used without a smack of argument to justify its relevance.”

Arrow formulated the essence of the neoclassical approach in more general terms: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.”

This translates into this set of neoclassical hardcore propositions, a.k.a. verbalized axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

There is a simple test of scientific competence: if you do not feel ― after thinking about HC1/HC5 for a second ― the urge to vomit you lack elementary scientific reflexes. And if you think the axiom set is acceptable as the starting point of economic analysis you are forever beyond help.

The point is: economics is NOT about the behavior of agents but about the behavior of the economic system. Economics is NOT a social science but a systems science. From this follows methodologically that economics has NOT to be based on microfoundations but on macrofoundations. Microfoundations are the lethal methodological blunder of economics and the reason why both orthodox and heterodox economics are scientifically worthless. So, microfoundations have to be abandoned. The move from false microfoundations to true macrofoundations is called Paradigm Shift. It was Keynes who messed it up 80+ years ago but economists have not realized it to this day.

So, every economist faces the option to do the Paradigm Shift or to be buried at the Flat-Earth-Cemetery together with the preceding Walrasian, Keynesian, Marxian, Austrian losers and their heap of proto-scientific garbage.

► Where economics went wrong (I)
► Where economics went wrong (II)
► Where modern macroeconomics went wrong
► Modern macro moronism
► Macroeconomics: Drain the scientific swamp
► Macro of and for the scientifically blind and deaf
► Funny folks in the big omnibus
► Macroeconomics and the fake History of Economic Thought
► Rethinking macro
► The new macroeconomic Paradigm
► From false microfoundations to true macrofoundations (II)
► True macrofoundations: the reset of economics
► The canonical macroeconomic model
► For details of the big picture see cross-references Axiomatization

Egmont Kakarot-Handtke

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Wikimedia AXEC106m

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Wikimedia AXEC121i

CORE: more lipstick on the dead economics pig

Comment on Bill Mitchell on ‘Paradigm shift ― not from the CORE Econ Project ― as mainstream as you will get’

Blog-Reference and Blog-Reference on Sep 18 adapted to context and Blog-Reference on Sep 19

This is the track record of economics: provably false
• profit theory, for 200+ years,
• Walrasian microfoundations (including equilibrium), for 150+ years,
• Keynesian macrofoundations (including I=S, IS-LM), for 80+ years.
The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concepts profit and income wrong.

In science, a "distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitutes legitimate contributions to a field is called a paradigm."#1 Because the four main approaches are provably false, that is, materially or/and formally inconsistent, a Paradigm Shift is an absolute necessity.

Keynes put it thus 80 years ago: “The [neo-]classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.”

In methodological terms, a Paradigm Shift is “a fundamental change in the basic concepts and experimental practices of a scientific discipline.” The Keynesian Paradigm Shift, though, failed because Keynes messed up the move from microfoundations to macro- foundations.#2 As a result, economics fell back on the Jevons/Walras/Menger paradigm. As Krugman so nicely put it “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

The Neoclassical paradigm is defined by methodological individualism = microfoundations, which translates into the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

These axioms (or slight variations thereof) define the orthodox paradigm. These microfoundations are false in multiple dimensions. This is a methodological fact. By consequence, the necessary Paradigm Shift consists of fully replacing ALL variants of behavioral microfoundations by systemic macrofoundations.

As an answer to both fundamental and superficial refutation economists talk much about New Economic Thinking and a new paradigm and more social commitment.#3 The members of the CORE project are no exception.#4

The fact is, the new CORE textbook does NOT present the urgently needed new paradigm but the maximization-and-equilibrium world in a redesigned user-friendly format that has been worked out by the marketing and PR folks in order to satisfy the demands of the new generation of dull economics students. These students do not want economics as objective scientific truth but as an easy way to understand the narrative. The new target group does not care about the material and formal consistency of theoretical economics but about the political message of political economics.

Economics had the bad luck to start as Political Economy. This means that the political agenda had been given and the argumentation had to support the agenda. Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers).

From this false start economics never recovered and it developed into what Feynman called cargo cult science, which he defined as: “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, with scientific truth well-defined as material and formal consistency. Economics is a failed science. The claim as expressed in the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is a false claim. Both orthodox and heterodox economists are cargo cult scientists.#5

Economics does not need a new marketing thinking of opportunistic orthodox and heterodox proto-scientific losers#6 but a Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to the true macrofoundations.#7 Nothing less will do. The first rule of the Paradigm Shift says: If it isn’t macro-axiomatized, it isn’t economics.

The CORE textbook is NOT economics, it is cargo cult economics in a new Zeitgeist outfit. The overdue replacement of the proto-scientific textbook garbage from Samuelson to Mankiw#8 lies still in the future.

Egmont Kakarot-Handtke


#1 Wikipedia Paradigm, Paradigm shift
#2 Post Keynesianism, too, is indefensible
#3 New Economic Thinking, or, let’s put lipstick on the dead pig
#4 Samuel Bowles, Wendy Carlin A new paradigm for the introductory course in economics
#5 Fact of life: your econ prof is scientifically incompetent
#6 In search of new economists
#7 First Lecture in New Economic Thinking
#8 The father of modern economics and his imbecile kids

Related 'Economics: the emancipation of science from politics' and 'What makes economics a failed science?' and 'MMT: scientific incompetence or political fraud?' and 'The flat-earth realism of economists' and 'Why economists don’t know what profit is' and 'A bitter pill for political economists' and 'You are fired!' and 'To this day, economists have produced NOT ONE textbook that satisfies scientific standards'

***

LINK at Economist's View on Sep 14

Comment on A New Way to Learn Economics ― The New Yorker. See
CORE: more lipstick on the dead economics pig

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Wikimedia AXEC121e

The Theory of Value and the worthlessness of economics

Comment on Peter Dorman on ‘The Value of Life and the Metaphor of Choice’

Blog-Reference

Peter Dorman summarizes what economics is all about: “Here’s what I think it comes down to: the metaphor of choice. This metaphor is so deeply ingrained in economic analysis most economists can’t think beyond it, but the moment it is invoked the very notion of what it means to be alive rather than dead is rendered irrelevant.”

The curious thing, to begin with, is that choice is NOT AT ALL an issue for economics but for psychology and sociology. To build economics on behavioral concepts like utility/choice/optimization was the foundational blunder of Orthodoxy. Economists, though, either have not realized it to this day or did not find the way out of the proto-scientific PsySoc swamp. Human behavior is NOT the subject matter of economics ― the behavior of the economic system is.

Methodologically, economics is a systems science but economists wasted 200+ years with second-guessing Human Nature/motives/behavior/action.

To this day, economists have been unable to give a consistent description of how the monetary economy works. Economists do not even know what profit is. Because Profit Theory is false Value Theory is false. This is like medieval physics before the concept of energy was consistently defined and fully understood. Economic policy guidance has NO sound scientific foundations since Adam Smith/Karl Marx.

For this compelling methodological reason, a paradigm shift is necessary which means practically that Walrasianism, Keynesianism, Marxianism, Austrianism, has to be buried at the Flat-Earth-Cemetery.

These are the correct systemic foundations of economics.#1, #2 The elementary production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C). From this follows Qm≡−Sm, that is, macroeconomic profit comes in the most elementary case from the growth of household sector debt.#3 Macroeconomic profit has NOTHING to do with exploitation or innovation or value creation or optimization or the choice between strawberry and raspberry yogurt.#4

Capitalists don’t know this. Workers don’t know this. Orthodox economists don’t know this. Heterodox economists don’t know this. And Peter Dorman, too, does NOT know the most elementary fact about the economic system.

Egmont Kakarot-Handtke


#1 Do first your macroeconomic homework!
#2 Wikimedia, New Foundations of Economics
#3 Wikimedia, AXEC Profit Law and Balances Equation
#4 For details of the big picture see cross-references Profit

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REPLY to Barkley Rosser on Jul 11

You say: “Egmont dismisses studying optimization.”

Not exactly. Egmont dismisses microfoundations and advances in a genuine paradigm shift to macrofoundations (see preceding post).

The microfoundations approach has been methodologically defined as follows: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, 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, Joan Robinson’s Critique of Equilibrium: An Appraisal, p. 147)

In order to be applicable, HC2 requires a lot of auxiliary assumptions, most prominently a well-behaved/differentiable production function.

HC2 introduces marginalism which is the all-pervasive principle of Orthodoxy. HC2, though, and HC4 and HC5 are plain NONENTITIES, that is, they have not more reality content than the Easter Bunny, dancing angels on a pinpoint, the Tooth Fairy, or Pegasus.

The methodological fact of the matter is that ALL models that take just one NONENTITY into the premises are a priori false. And methodology tells us that if the premises are false the whole analytical superstructure is false. Therefore, the standard microfoundations approach with all its variants and derivatives from Jevons/Walras/Menger up to DSGE is methodologically false.

To put NONENTITIES into the premises is the defining characteristic of fairy tales, science fiction, theology, Hollywood movies, politics, journalism, PR, propaganda, cargo cult science, and microfounded economics.

Not only constrained optimization, i.e. HC2, has to be dismissed but the whole set of behavioral axioms. Microfoundations have to be fully replaced by objective-systemic macrofoundations.#1, #2, #3

Studying behavioral optimization, just like studying epicycles, is a thing of the proto-scientific past.


#1 If it isn’t macro-axiomatized, it isn’t economics
#2 How to restart economics
#3 New Economic Thinking: The 10 crucial points

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REPLY to Barkley Rosser on Jul 11

You say: “It [behavioral economics] studies how people behave and does not assume people optimize or are rational. It is clear that regarding many things they are not, and there are well known ways in some matters how they tend to deviate in actual behavior.”

Oh dear, this was already known 150+ years ago when Jevons/Walras/Menger started blathering about rational choice/constrained optimization.

Note that there is NO way that leads from the understanding of Human Nature/motives/ behavior/action to the understanding of the behavior of the economic system. All human-centered approaches invariably crash against the methodological wall of the Fallacy of Composition.

So, microfoundations are the lethal methodological blunder and it does NOT help to replace constrained optimization by behavioral economics. This dead-pig cosmetics does not alter the fact that economics is a failed/fake science.

The microfoundations approach in ALL conceivable variants is bound to fail. Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.

By the way, while you are occupied with folk psychology/sociology your academic colleagues from the MMT camp are pulling off a political fraud by pushing deficit spending/money creation and hiding the macroeconomic fact that Public Deficit = Private Profit.#1

Too bad for the American worker that you are of no help because as a micro-behavior guy, cheerleader of cargo-cult economics, and political storyteller you never had any idea what profit is and how the profit-mechanism works.


#1 The Kelton-Fraud

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REPLY to Barkley Rosser on Jul 16

With regard to the Theory of Value you complain: “But you are uninterested in such matters, only your vacuous macro tautology based on your idiosyncratic definition of profit.”

Fact is that I have rectified the ridiculous behavioral Paradox of Value long ago. See The Value of Water and Diamonds: Back to Square One.

Time for you to do some scientific homework.

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REPLY to Barkley Rosser on Jul 18

This is the behavioral theory of value: “In other words, how is it that water, which is essential to life, has little value, while diamonds, which are generally used for conspicuous consumption, command an exalted price? Although it troubled Adam Smith 200 years ago, we can resolve this paradox as follows: ‘The supply and demand curves for water intersect at a very low price, while supply and demand for diamonds are such that their equilibrium price is very high.’” (Samuelson et al., 1998, p. 90)

Note that a consumption good, which vanishes in the act of consumption, is juxtaposed to a durable=not-to-be-consumed store of value. This is imbecilic, to begin with, and the rest of the pseudo-explanation consists of vacuous supply-demand-equilibrium blather.

The axiomatically correct objective-systemic Law of Value for produced consumption goods reads P₁/P₂=R₂/R₁.#1

Because you do not understand anything there is no need to elaborate on this fundamental economic relationship in any detail here.


#1 Wikimedia AXEC89 Law of Value

Microfoundations R.I.P.

Comment on Simon Wren-Lewis on ‘Why the microfoundations hegemony holds back macroeconomic progress’

Blog-Reference and Blog-Reference

Economics of the last 200+ years is the most embarrassing failure in the history of modern science.

The goal of economics is to figure out how the actual economic system works and to communicate the results in the format of a materially and formally consistent theory.

Methodologically, there seem to be two ways to attack the problem: microfoundations or bottom-up and macrofoundations or top-down. Economists made the wrong methodological choice 150+ years ago. Since Jevons/Walras/Menger they are on the wrong track because NO way leads from the second-guessing of Human Nature/motives/behavior/action to the understanding of how the economic system works.

Economics is a failed science because the definition of the subject matter is false: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)#1

There is, as a matter of methodological principle, NO such thing as microfounded economics. Unfortunately, Keynes messed up the macrofoundations approach and After-Keynesians have not figured out until this day where things went wrong.#2

Wren-Lewis’ attempt to go from DSGE Modeling to Structural Econometric Modeling is bound to fail. Nothing less than a Paradigm Shift will do.#3, #4 The microfoundations approach and its scientifically incompetent proponents have to be solemnly buried next to the Flat-Earth and Phlogiston folks.#5

Egmont Kakarot-Handtke


#1 Microfoundations are formally given with this set of verbalized axioms “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. (Weintraub) Every model that applies just one of the axioms is a priori false.
#2 Where modern macroeconomics went wrong
#3 True macrofoundations: the reset of economics
#4 The new macroeconomic paradigm
#5 If it isn’t macro-axiomatized, it isn’t economics

Economic methodology for the little guy

Comment on Lars Syll on ‘Methodological arrogance’

Blog-Reference and Blog-Reference

It is a fact that the little man has an ego problem. Worse, this psychological disadvantage is exploited in all kinds of discussions. To position oneself as the humble friend of the people and to call the opponent an arrogant elitist is a sure way to win standing ovations in every sitcom, no matter what the issue is.

These age-old rhetorical maneuvers, though, are entirely misplaced in a discussion about the methodology of economics. David Glasner disqualifies himself with this argument: “So what do I mean by methodological arrogance? I mean an attitude that invokes micro-foundations as a methodological principle — philosophical reductionism in Popper’s terminology — while dismissing non-microfounded macromodels as unscientific.” Note that the introduction of the psychological notion of arrogance adds nothing of relevance but merely emotionally distracts from the point at issue.

The point at issue is whether Walrasian microfoundations or Keynesian macrofoundations are the correct starting point of economic analysis. And the short and simple answer is, without humbleness or arrogance, that BOTH are unacceptable proto-scientific garbage.

Microfoundations are given with these verbalized Walrasian axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

From these premises follows supply-demand-equilibrium and all the rest of microeconomics.

Obviously, the Walrasian axiom set contains three NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5. Every theory/model that contains a NONENTITY is a priory false. Consequently, the economics from Jevons/Walras/Menger to DSGE/RBC is false.

Keynes has to be credited for realizing that Orthodoxy was false at its core and that nothing less than a Paradigm Shift was needed.

The Keynesian Revolution, though, failed because Keynes messed up the move from microfoundations to macrofoundations. Keynes’ own methodological blunder can be exactly located in the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This syllogism is conceptually and logically defective because Keynes NEVER came 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.)

Because profit and income are ill-defined the whole theoretical superstructure of Keynesianism is false. It was Allais who identified and rectified Keynes’ lethal foundational blunder.#1 After-Keynesians have not noticed anything to this very day.

What the team Glasner/Syll has not realized is that BOTH Walrasian microfoundations and Keynesian macrofoundations have to be buried. The former is dead for 150+ years, the latter for 80+ years.

As a consequence, there is only ONE worthwhile task in today’s economics: the Paradigm Shift from false microfoundations and false macrofoundations to the true macrofoundations.#2 It holds: If it isn’t macro-axiomatized, it isn’t economics.

Do not expect this urgent Paradigm Shift from the self-declared champions of the little guy, long-standing proto-scientific blatherers, and cargo cult scientists David Glasner and Lars Syll.

Egmont Kakarot-Handtke


#1 How Keynes got macro wrong and Allais got it right
#2 First Lecture in New Economic Thinking

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Wikimedia AXEC121i

Dilettantes at the end of the coal pit

Comment on Jo Mitchell on ‘Dilettantes shouldn’t get excited’

Blog-Reference and Blog-Reference on Nov 20 and Blog-Reference on Nov 21

As Hume said, “... when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.”

With DSGE, Walrasian economics has, after 150+ years, reached the end of the coal pit. Lacking sound scientific judgment, though, Christiano/Eichenbaum/Trabandt maintain: “People who don’t like dynamic stochastic general equilibrium (DSGE) models are dilettantes. By this we mean they aren’t serious about policy analysis…”

Science is NOT about like/dislike but about true/false. The fact is that DSGE is provably false. Because of this, all policy proposals that have ever been derived from DSGE models lack sound scientific foundations.

Science is about the true theory. The characteristic of science is the insistence on consistency: “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)

Economics pretends to be a science but is 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.”

Economists lack genuine scientific instinct/ambition: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. (Schumpeter, 1946)

Theory construction started 2300+ years ago with clearly stated premises#1 and “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter)#2

Not only DSGE has failed at constructing the Simple Ur-Model. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept of profit wrong.

At the end of the coal pit, the lethal methodological blunder of DSGE is quite obvious: microfoundations are false since Jevons/Walras/Menger. And Keynes’ attempt to move from microfoundations to macrofoundations failed.#3

The methodologically correct action in the given situation is the Paradigm Shift. False Walrasian microfoundations and false Keynesian macrofoundations have to be replaced by true macrofoundations.

Economics is a failed/fake science. At the end of the coal pit, it is now quite obvious that scientific dilettantism leads the representative orthodox/heterodox economist astray for 200+ years.

Egmont Kakarot-Handtke


#1 “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)
#2 Microfoundations are given with this verbalized axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#3 How Keynes got macro wrong and Allais got it right

Related 'Yes, economics is a bogus science' and 'From false microfoundations to true macrofoundations' and 'Heterodoxy and Pluralism, too, are proto-scientific garbage' and 'First Lecture in New Economic Thinking' and '10 steps to leave cargo cult economics behind for good'. For details of the big picture see cross-references Scientific Incompetence and cross-references Failed/Fake Scientists.

The simple Ur-Model is given with the Economics God Equation on Wikimedia AXEC25.

The Economics God Equation

For this equation, Computational Irreducibility in the sense of Stephen Wolfram, A New Kind of Science, Wolfram Media, 1959, pp. 737 ff. holds.

NOTE on Lars Syll’s ‘DSGE models are missing the point’ on Nov 23

“Macroeconomics needs models which work to guide the interventions of government policy.” (Silsonwy)

“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)

Neither Orthodoxy nor Heterodoxy has the true theory. See Dilettantes at the end of the coal pit.