What Keynes really meant but could not really prove

Comment Lars Syll on ‘Krugman and “what Keynes really meant”’

Blog-Reference and Blog-Reference

Keynes clearly saw that the economics of his time was just a matter of belief: “On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, ... Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting.” (See intro)

Belief is the very opposite of science. Science is about knowledge. And scientific knowledge is clearly defined by material and formal consistency. What Keynes meant is that there are two beliefs about the economy, and that neither side could prove its case. From this follows: “Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy ... they must attack them in their citadel ... There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment ...”

Neither Keynes nor the After-Keynesians, though, delivered anything that came close to scientific proof. All controversy remained on the level of opinion and belief. So let us now PROVE that the market economy is NOT self-adjusting as Orthodoxy claims.

Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (1973, p. 63)

This formal core, a.k.a. axiom set, is false, just as the Walrasian axiom set, a.k.a. citadel, is false. Consequently, what has to be done is to fully replace Keynes’s formal starting point. This is achieved as follows.
(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) 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.

For the graphical representation of the ABSOLUTE formal MINIMUM, see Graphic. #1.

(A1) to (A3) asserts: At any given level of employment L, the wage income Y_w 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 ADDED preliminary conditions of (i) budget balancing, i.e., C=Y_w, and (ii) market clearing, i.e., X=O.

Under the conditions (i)|(ii), the price is derived in each period as P=W/R (1), i.e., the market-clearing price is, in the most elementary case, equal to unit wage costs. This is the simplest form of the macroeconomic Law of Supply and Demand. It holds for the economy as a WHOLE.

The first point to notice is that the real wage W/P is invariably equal to the productivity R according to (1). So, for the economy as a whole, the marginal principle does NOT hold. This is the first blow to the citadel.

The second point to notice is that monetary profit, i.e., Q_m≡C−Y_w, in the most elementary case of the pure production-consumption economy, is zero because of (i). For profit/loss to emerge, this condition has to be lifted.

Note that the product market is cleared due to condition (ii), and it has been left open so far, HOW this is done in practical detail. These details are not needed at the moment.

It is assumed now that actual employment L is below full employment L_f. There is no need to define L_f at this stage in greater detail.

Now, the orthodox behavioral assumption is added that the wage rate W falls as long as there is unemployment, i.e., as long as L−L_f is less than 0. What happens then? From (1) follows that the price falls and that the real wage is invariably equal to the productivity R. The profit of the business sector is again zero. Hence, wage reduction does NOT increase profit.

For the firm/business sector, there is no motive to move in any direction. All employment levels are INDIFFERENT with regard to profit. There is NO such thing as equilibrium/ disequilibrium. The wage reduction can be repeated for an arbitrary number of periods; the only result is deflation. The flexible fall of the wage rate cannot clear the labor market. This is the second blow for the citadel.

Up to this point, we have dealt with the pure production-consumption economy. Perhaps things change when the business sector is differentiated? So, in the next step, the investment economy has to be investigated.

To cut the meticulous formal derivation short (2012; 2014a; 2014b), the most elementary version of the macroeconomic Employment Law is shown under the label of Graphic. #2.

From this equation follows:
(i) An increase in the expenditure ratio ρ_E leads to higher employment L (the letter ρ stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment; a slowdown in growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and import/export. Employment is now the dependent variable, and the price is among the independent variables.

Items (i) and (ii) cover Keynes’ arguments about effective demand. What is missing in the Keynesian employment multiplier, though, is the ratio ρ_F as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R, and vice versa.

This is the very OPPOSITE of what economics teaches. “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997, p. 11)

The orthodox adaptation rule for competitive markets DESTABILIZES the system. The system is NOT self-adjusting. This is the third and most lethal blow for the citadel. Note that all this is no longer a matter of belief and wish-wash but of proof. The macroeconomic Employment Law is formally consistent, and because it consists of measurable variables, its material consistency can be readily established through testing. This settles the matter once and for all according to the immutable scientific criteria of true/false.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014a). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2014b). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Tobin, J. (1997). An Overview of the General Theory. In G. C. Harcourt and P. A. Riach (Eds.), The ’Second Edition’ of The General Theory, Vol. 2, 3–27. Oxon: Routledge.

#1 Graphic AXEC31
#2 Graphic AXEC62

For more about self-adjusting, see AXECquery.

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REPLY to Paul Davidson 'Yes or No: Is the economy self-adjusting?' on May 23

Thank you for the reference to your INET article.#1 It covers the whole range of controversies between Keynes and what he called the citadel or Orthodoxy. The stated purpose of my post, though, is just the opposite; it is to focus exclusively on ONE point, the key point.

My understanding is the same as Keynes’: “We are ... at one of those uncommon junctures of human affairs where we can be saved by the solution of an intellectual problem, and in no other way.”#2

The only way the key question can be solved is by scientific proof. Proof has two dimensions: formal AND material consistency. Roughly speaking the procedure is as follows: (i) state your premises with utmost clarity, (ii) do NOT take outcomes into the premises (e.g. equilibrium = petitio principii), (iii) do NOT take nonentities into the premises (e.g. optimization, ergodicity, rational expectations), (iv) start with the MINIMUM of premises (= Occam’s razor), (v) derive the conclusions consistently from the premises, (vi) test the conclusions.

So, the key question is ‘Is the economy self-adjusting?’ and NOT how Keynes’ ideas have been perverted from Samuelson onward to Krugman. This is a legitimate question in itself, of course, but does not bear upon the key question, which is about the working of the economy and NOT about the working of academic discourse.

What is needed are the objective determinants of employment/unemployment and NOT the accustomed silly second-guessing of human nature/behavior. The most elementary version of the Employment Law for the economy as a whole, which satisfies the methodological requirements (i) to (v), is given with link #1 (2012).

This equation embodies the price mechanism and the interaction between TWO markets, the product, and the labor market. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R, and vice versa. This means that the orthodox rule, i.e., the remedy for excess supply is a reduction in price, does NOT apply to the labor market. This means, in turn, that Orthodoxy got the interaction of the two pivotal markets wrong. The Walrasian/Hayekian/Lucasian/ Krugmanian story of market coordination is provably false.

The structural instability is a feature, not a bug. So, the filibuster about flexibility/ stickiness or short run/long run is way beside the point.

All this follows from the correct Employment Law #3, which in turn follows from three elementary structural premises. After having established formal consistency, the only thing that has to be done by Heterodoxy is to establish material consistency, that is, to empirically test the equation. To continue the discussion about what Keynes or Krugman meant or means is practical idiocy.

The market economy is NOT self-adjusting. Q.E.D.


References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL

#1 Article
#2 See Keynes’ 1934 BBC radio address at EconoSpeak
#3 Graphic AXEC62

Related 'Could we, please, all focus on the key question of economics?'

Could we, please, all focus on the key question of economics?

Comment on Paul Davidson on ‘Krugman and “what Keynes really meant”’

Blog-Reference

Keynes characterized the situation as follows: “Though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?” (See intro)

The key question that divides Orthodoxy and Heterodoxy is, in Keynes’ own words: “... is the existing economic system in any significant sense self-adjusting?”

You say “the key question is what causes changes in employment and output in a capitalist market-oriented economy?”

The answer to this question is in the elementary structural Employment Law, which is given with Graphic AXEC62:

From this equation follows:
(i) An increase in the expenditure ratio ρ_E leads to higher employment L (the letter ρ stands for the ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment; a slowdown of growth does the opposite.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law is a bit longer and contains, in addition, profit distribution, public deficit spending, and import/export.

Items (i) and (ii) cover Keynes’ arguments about effective demand. So, the structural Employment Law contains your argument about the determinants of employment: “The answer is changes in the market demand for the products of industry.”

Can we put this undisputed stuff aside now? The critical point is that the original Keynesian multiplier 1/1-c is incomplete, to put it mildly (2012). What is missing is the ratio ρ_F as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to the average price P and productivity R, and vice versa.

Now, every half-witted supply-demand-equilibrium economist fancies that the remedy for excess supply in any market is a reduction in price. From whence the claim comes that wage reductions will — in principle — restore full employment. This is the essence of the self-adjustment claim. The strong version, though, is regularly wish-washed by admitting practical hindrances, delays, and imperfections.

The structural Employment Lawn says that wage reductions INCREASE unemployment which means that the market system is — in principle — self-destabilizing. The structural Employment Law is composed of measurable variables and is therefore readily testable. So, Keynes’ key question is unequivocally answerable.

What Post Keynesians have overlooked is that there are TWO ratios in the multiplier, the expenditure ratio ρ_E and the factor cost ratio ρ_F. For economic policy, this means: an increase in the expenditure ratio can be counteracted at any time by a decrease in the factor cost ratio, that is, by a falling average wage rate or by a rising average price. The hitherto missing variable explains why Keynesian demand policies are sometimes effective and sometimes ineffective.

This, though, is an implication of the key point. The key point is that the price mechanism does NOT stabilize the market system, neither in the short run nor in the long run. This systemic feature cannot be cured by Keynesian demand management.

The correct answer to Keynes’ question “is the existing economic system in any significant sense self-adjusting?” is NO because (i) aggregate demand is not self-adjusting, and (ii) the structural interrelation between (average) wage rate, price, productivity, and employment moves the system farther away from full employment (2014).

Post Keynesians have to be reprobated for overlooking (ii), which proves that they have no idea about how (a) the price mechanism works, and (b), the profit mechanism works.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25. URL

Related 'What Keynes really meant but could not really prove' and 'Proof of the inherent instability of the market economy'.

Proof of the inherent instability of the market economy

Comment on Simon Wren-Lewis on ‘How Neoliberals weaponise the concept of an ideal market’

Blog-Reference and Blog-Reference and Blog-Reference on Oct 17

The foundational tenet of economics is that the interaction of free markets tends, in principle, to produce an inherently stable optimal outcome with all factors fully employed or, with regard to labor, at worst ‘naturally’ unemployed.

This tenet has NEVER been proven. General Equilibrium Theory is known to be a methodological disaster, and economics is known to be in need of a Paradigm Shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al.)

As a result, economic policy guidance in ALL variants between the outer right wing and outer left wing has had no sound scientific foundations for 200+ years. It can be proved that the market economy is inherently unstable.

Economics is a systems science. Accordingly, the correct approach is not microfoundations but macrofoundations.#1 The elementary version of the objective, systemic, behavior-free, macrofounded Employment Law is shown with Graphic AXEC62

From this equation follows
(i) An increase in the expenditure ratio ρ_E leads to higher employment L (the Greek letter ρ stands for the ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

Items (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio ρ_F, as defined in (iii), embodies the macroeconomic price mechanism. The fact is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to the average price P and productivity R, and vice versa. This is the OPPOSITE of what microfounded economics teaches: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin)*

This is false: a reduction of the average wage rate W in the situation of unemployment INCREASES unemployment. In general terms, at the heart of the market economy is a positive feedback loop, i.e., the very OPPOSITE of what is required for a self-adjusting system.

The lethal methodological blunder of the microfounded market theory consists of the Fallacy of Composition, i.e., the illegitimate generalization of truths that hold for one firm/market for the economy as a whole.

The free market system is neither efficient, self-adjusting, nor stable. Neoliberalism has no sound scientific foundations.

Egmont Kakarot-Handtke


#1 New Economic Thinking: the 10 crucial points

Related 'How to overcome the manifest silliness of Econ 101 and save the economy'

For more about self-adjusting, see AXECquery.

***

* Lars P. Syll blog, James Buchanan, Wall Street Journal

Hayek ― agenda pusher or scientist?

Comment on Syll/Solow on ‘Good Hayek vs. Bad Hayek’

Blog-Reference

Robert Solow is here quoted with: “The Good Hayek was a serious scholar who was particularly interested in the role of knowledge in the economy (and in the rest of society).” (See intro)

This is a misunderstanding that is grounded in the fact that most people/economists have no proper understanding of what economics is all about. Therefore, it is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda; the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics, anything goes; in theoretical economics, scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith to Hayek and beyond can be summarized as an utter scientific failure. A closer look at what is naively called economics as if it were a homogeneous entity shows that theoretical economics has been captured by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

It is a widespread misunderstanding to think that people who talk about the economy understand how the economy works. Hayek’s ‘Road to Serfdom’ is a political pamphlet and it is not backed by the true economic theory simply because Hayekian economics is scientifically worthless storytelling until this day.

Hayek, of course, had the right to write political pamphlets, to defend capitalism, to support Thatcher, to found the political club Mont Pelerin, and to dabble in sociology and political philosophy. One thing, though, should be perfectly clear: the moment an economist starts with politics, he leaves economics, understood as a science, for good.

Political economists of all stripes are characterized by four common traits: (i) They are mainly occupied with sociology, psychology, anthropology, political science, history, law/institutions, Darwinism/evolution theory, social philosophy, etcetera. That is, they miss the essentials of economics proper. #1 (ii) They use theoretical economics as a means/support for their agenda. By this, they abuse science unknowingly or knowingly. (iii) As far as they have tried to underpin their agenda theoretically, it can be proved in each case that their approaches lack formal and material consistency. (iv) Political economists have no idea about how the actual economy works because they lack the correct profit theory.

It is not decisive what the political agenda is: ALL of the political economics is cargo cult science (Feynman’s term). Political economics has not produced anything of scientific value since Adam Smith.

One task of Heterodoxy is to refute false theories. The more important task, though, is to develop the true theory of how markets work (2015). Hayek argued that the existing economic system is self-adjusting. He could never prove it in a way that satisfies the criteria of material and formal consistency. Neither could General Equilibrium Theory. Worse, it can be rigorously proved that the existing economy is NOT self-adjusting #2 and that it must ― inescapably programmed by the Profit Law ― eventually break down (2014) even if the price mechanism is perfectly flexible and perfectly efficient. Hayek never understood the profit mechanism, which is the essential feature of the existing economy. Neither did the rest of the Mont Pelerin "thought collective" #3.

Not one of the political economists and agenda pushers from Smith to Hayek will, in the final assessment, be accepted as a scientist.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL

#1 Economics is the science that studies how the monetary economy works and NOT how society works, which means methodologically, it is NOT subjective-behavioral but objective-structural. See the working paper Objective Principles of Economics.
#2 Could we, please, all focus on the key question of economics?

#3 Mirowski, P., and Plehwe, D. (2009). The Road From Mont Pelerin. The Making of the Neoliberal Thought Collective. Cambridge, London: Harvard University Press.

Related 'Why Hayek was not a scientist' and 'Hayek was not an economist' and 'Hayek: mad, bad, or just another incompetent economist?' and 'Hayek or how economists miss their subject matter since more than 200 years'.

For more about Hayek see AXECquery.

***

Graphic AXEC108l

Hayek and other informationally retarded proto-economists

Comment on Jason Smith on ‘Should the left engage with neoclassical economics?’

Blog-Reference and Blog-Reference

Hayes characterizes the corpus of Hayek, Friedman, and neoclassical economics as “incredibly powerful, really important, really influential, tremendous amount of incredible insight, helpful for understanding how capitalism works, etc.”

The fact is that Hayek et al. is plain proto-scientific garbage. No amount of information theory make-up can change the fact that neoclassical economics had already been dead in the cradle 150+ years ago. Some retarded folks, though, have not realized this, among them Jason Smith. He maintains: “One thing that I think needs to be more widely understood is that Hayek did have some insight into prices having something to do with information, but got the details wrong.”

One thing that has to be clearly understood is that there is NO such thing as economics. There are TWO economixes and they are constantly confounded. Therefore, it is of the utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda; the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics, anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Theoretical economics (= science) has to be judged according to the criteria true/false and NOTHING else. Hayek et al. are provably false. Neoclassical economics has no truth-value, merely political use-value.

Hayek et al. are false because they are based on behavioral microfoundations ― like the rest of mainstream economics. Walrasian microfoundations, for example, are precisely defined 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)

From these axioms together with some auxiliary assumptions follows what Leijonhufvud called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium, which is the representative economist’s all-purpose tool.

This approach is false on all methodological counts; that is, supply-demand-equilibrium is a NONENTITY or plain proto-scientific garbage. Microfounded economics, in all its variants, is what Feynman called cargo cult science.

Hayek et al. argued that the existing economic system is self-adjusting. He could never prove it in a way that satisfies the criteria of material and formal consistency. Worse, it can be rigorously proved that the market system is NOT self-adjusting. #1

Clearly, economics has to abandon microfoundations altogether and move forward to macrofoundations.

Macrofoundations do away with the brain-dead blather of supply-demand-equilibrium. From macrofoundations follows the correct objective/systemic/behavior-free/testable macroeconomic Law of Supply and Demand, which is shown under the label Graphic AXEC64. #2

Conclusions:

• Hayek et al. NEVER understood how the price and profit mechanism works.
• The economic policy guidance of Hayek et al. NEVER had sound scientific foundations.
• NOT ONE of the political economists and agenda pushers from Smith to Hayek et al. will ever be accepted as a scientist.
• Hayek et al.’s approach cannot be improved, only abandoned, because it is axiomatically false.

Egmont Kakarot-Handtke

#1 Could we, please, all focus on the key question of economics?
#2 Essentials of Constructive Heterodoxy: The Market

Related 'Economists’ proto-scientific shell games' and 'The non-existence of economics' and 'Friedman and the cluelessness of fake scientists' and 'Why Hayek was not a scientist' and 'Krugman is not an economist' and 'Economics: Deadlocked between politics and science' and 'Hayek ― agenda pusher or scientist?' and 'Hayek or how economists miss their subject matter since more than 200 years' and 'Economics: ‘a tale told by an idiot ... signifying nothing’' and 'Hayek was not an economist' and 'Hayek: mad, bad, or just another incompetent economist?' and 'Hayek or how economists miss their subject matter since more than 200 years' and 'Pareto-efficiency, Hayek’s marvel, and the invisible executor' and 'The philosophy of know-nothingers' and 'Keynes, Hayek, Kant' and 'Time to get rid of political economics' and 'Nominal and real distribution' and 'Austrian idiocy ― the case of Hayek'.

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AXEC / E.K-HApril 26, 2017 at 4:27 AM

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Reply

Replies

1. 
   Jason SmithApril 26, 2017 at 12:48 PM

   This comment contains offensive language and will be removed.

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REPLY to Bob on Apr 27

You say: “Nothing stopping him [Jason Smith] from addressing AXEC and Bob Roddis over here.”

No way. Jason Smith has removed/deleted not one but several comments that have been posted on his blog Information Transfer Economics. He has even retrofitted his own posts. #1

Jason Smith violates basic scientific standards on a daily basis and therefore cannot be invited or admitted to any economics debate whatsoever.

#1 For my original contributions, see:

► What genuine scientists believe about economics

► Hayek and other informationally retarded proto-economists

► The key to macro and Keen’s debt-employment model

For Jason Smith’s original contributions, you have to urge him to put them back on his blog. I cannot recommend this because the sooner his unqualified blather about economics and physics is forgotten, the better.

***

REPLY to Bob on Apr 28

(i) There is political economics (= agenda-pushing) and theoretical economics (= science).
(ii) Political economics is scientifically worthless since Adam Smith.
(iii) Hayek was a political economist (= fake scientist).
(iv) Hayek’s contribution to theoretical economics is proto-scientific garbage.
(v) Jason Smith is putting lipstick (= Information Theory) on the dead pig.
(vi) By promoting Hayek, Jason Smith is promoting political economics (= fake science).

It is a curious fact that substandard physicists, mathematicians, and engineers turned in great numbers to economics. Mirowski has dealt with this phenomenon at great length in More Heat Than Light. It explains why economics is still at the proto-scientific stage.

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REPLY to Tom Hickey, Bob Roddis on Apr 28

The argument about identities/human action is one of the oldest clichés from the long list of lame excuses. #1

Obviously, you lack any understanding of the vital difference between political economics (= agenda-pushing) and theoretical economics (= science).

Economics is NOT about human behavior but about the behavior of the economic system. #2

Economists (including Hayekians) do not understand how the price and profit mechanism works. This is why they have NOTHING worthwhile to say. #3


#1 Failed economics: The losers’ long list of lame excuses
#2 The stupidity of Heterodoxy is the life insurance of Orthodoxy
#3 Economic policy advice has never had sound scientific foundations

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COMMENT on Tom Hickey's ‘Jason Smith — Should the left engage with neoclassical economics?’ on Apr 30

You kicked off this thread with “Getting the left up to speed by understanding information. There’s a lot of good stuff in this post.”

It is a puzzle wrapped in a conundrum of how you can recommend Jason Smith’s post. Take note of:

• Economics is a science and deals exclusively with true/false and NOT with left/right.
• Political economics is proto-scientific garbage, and Hayek is one of the better-known examples of fake science. Jason Smith’s attempt to improve Hayek is a no-go.
• Jason Smith has NO idea how the market economy works.
• Jason Smith has NOT realized that microfounded neoclassical economics is dead since 14
• 0+ years and macrofounded Keynesianism is dead for 80+ years. #1
• Jason Smith practices censorship on his blog and therefore throws himself out of the econ blogosphere.
• There is NOT one iota of ‘good stuff’ in his post or on his blog.

#1 IS-LM ― a crash course for EconoPhysicists

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#PointOfProof

Blog capture May 26

The prime primer on equilibrium

Comment on David Glasner on ‘A Primer on Equilibrium’

Blog-Reference and Blog-Reference and Blog-Reference

David Glasner discusses the relationship between equilibrium and rational expectations. Thus, he takes it for granted that something like equilibrium exists in the economy. This premise, though, is faulty, and it does not matter much that it is shared by the majority of economists.

The majority accepts the neo-Walrasian axiom set with these hardcore propositions: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states.” (Weintraub, 1985)

It is a primitive methodological error/mistake/blunder to take equilibrium into the premises and then to establish and discuss the properties of general equilibrium. This error/mistake/blunder — known since antiquity as petitio principii #1 — is an age-old characteristic of incompetent scientists or savants: “These savants, as Galileo put it, first decided how the world should function in accordance with their preconceived principles. ... He openly criticized scientists and philosophers who accepted laws which conformed to their preconceived ideas as to how nature must behave. Nature did not first make men’s brains, he said, and then arrange the world so that it would be acceptable to human intellects.” (Kline, 1982)

The methodologically correct way is to give a description of the interrelationships of fundamental economic magnitudes and then to see how this elementary system behaves. Logically, there are three possibilities: explosion, implosion, or steady-state/equilibrium, and we CANNOT KNOW at the beginning of the analysis what the outcome will be. Intuition is a bad guide because the rates of change of an explosion/implosion may be so low as to be practically imperceptible. Because of this, we are ― as a matter of methodological principle ― NOT allowed to take one of the three possible outcomes into the premises. Note that the physicists had the same problem with the universe. #2

The key question that stands at the beginning of economics is, in Keynes’ words: “... is the existing economic system in any significant sense self-adjusting?” This question has to be answered and not circumvented by putting the answer into the premises.

When the methodologically correct route is taken, then it turns out that the monetary economy is, in fact, unstable; that is, NO such thing as an equilibrium exists, neither in the short nor in the long run. #3

The right thing to do is throw the neo-Walrasian axiom set and all its NONENTITIES without further ado out of the window and to move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations and to NEVER use the word equilibrium in an economic text again.

Egmont Kakarot-Handtke


#1 Wikipedia
#2 See the story of the cosmological constant and Einstein’s “biggest blunder.”
#3 Could we, please, all focus on the key question of economics?

Related 'Equilibrium is a NONENTITY like dancing angels on a pinpoint' and 'Ground Control to David Glasner' and 'Major Defects of the Market Economy'.

For more about why the economy is not self-adjusting, see AXECquery.

For more about equilibrium, see AXECquery.

Occasional X: How it works (DXXIX)

“Earnings come from revenue, not debt. Debt pays for the capex that shows up later.” (Kyle Thompson) “You realize that someone's revenue is someone else's debt-funded expense?” (zerohedge) Neither Kyle Thompson nor zerohedge understands the relationship between revenue, profit, and debt; and, by logical consequence, how the economic system works. The free-market economy runs on profit. Macroeconomic profit is given by the axiomatically correct Profit Law Qm:=(I−Sm)+(G−T)+(X−M)+Yd. The Profit Law implies PublicDeficit=PrivateProfit Qm:=(G−T)>0, i.e., macroeconomic profit is (co-)produced by deficit-spending/money-creation, i.e., the growth of public debt. In free-market economies, public debt has increased with minor interruptions for over 200 years. Therefore, Qm:=(G−T)>0 has been a critical factor for Capitalism's survival. The free-market economy is temporarily saved from breakdown by the deficit-spending/money-creating duo of treasury/central bank, i.e., the State. This means that the premise of legacy economics, i.e., that the unfettered free-market economy is a self-adjusting, self-stabilizing, and self-optimizing system, is axiomatically false. This means that economics is failed/fake science. Economists are not scientists. They are mostly silly wafflers for a low-IQ audience. If they are good at disinfotainment, they are rewarded the EconNobel for 'economic sciences', which is the most prestigious fraud for the self-stabilisation of a failed/fake science. In essence, private/public deficit-spending is how the self-alimentation and self-preservation of WeTheOligarchy work. It has nothing to do with optimal allocation of resources, free people on free markets, or democratic consumer choices. The financial wealth of WeTheOligarchy has ultimately been printed by the central bank. It's roughly equal to the public debt of WeThePeople. By currently exploding the deficit, President Trump is exploding the number of millionaires/ trillionaies/ zillionaires until the smooth recycling of public debt by government bonds goes on and WeThePeople can be taxed for the interest that the State collects for WeTheOligarchy.

— AXEC (@EgmontHandtke) October 31, 2026

Occasional X: The foul spirit of political economics (CCCXCVII)

“There's no such thing as a free lunch.” (Milton Friedman) Of course, there is. Milton Friedman never understood profit and, by consequence, how the economic system works. That's self-defeating for an economist. The free-market economy runs on profit. Macroeconomic profit is given by the axiomatically correct Profit Law Qm:=(I−Sm)+(G−T)+(X−M)+Yd. The Profit Law implies PublicDeficit=PrivateProfit Qm:=(G−T)>0, i.e., macroeconomic profit is (co-)produced by deficit-spending/money-creation, i.e., the growth of public debt. In free-market economies, public debt has increased with minor interruptions for over 200 years. Therefore, Qm:=(G−T)>0 has been a critical factor for Capitalism's survival. The free-market economy is continuously saved from breakdown by the deficit-spending/money-creating duo of treasury/ central bank, i.e., the State. This means that the premise of legacy economics, i.e., that the unfettered free-market economy is a self-adjusting, self-stabilizing, and self-optimizing system, is axiomatically false. This means that economics is failed/fake science. Economists are not scientists. They are mostly silly wafflers for a low-IQ audience. Milton Friedman has been the most prominent case. The free-market polity is an Oligarchy with parliament / treasury / central bank / capital markets / big business / three-letter agencies as integral parts. With the other determinants excluded for the moment, private financial wealth grows with public debt. Eventually, WeTheOligarchy owns the financial assets, and WeThePeople owe the public debt and are taxed for interest on government bonds as long as the debt is rolled over. Interest payments on the debt reduce their disposable income for an indefinite time. The government taxes WeThePeople on behalf of WeTheOligarchy. This profit/interest/tax triple-whopper produces wealth for WeTheOligarchy and debt and real-income reductions for WeThePeople. On closer inspection, WeTheOligarchy gets three free lunches. This explains the observable distribution. In addition to legitimate monetary operations, the central bank is well-positioned to carry out or support illicit operations that are economically equivalent to putting counterfeit money into circulation. The volume of illicit deficit spending and money creation, as well as the quantity of Dark Money in circulation, is not publicly known. Therefore, Profit and Distribution Theory has no empirical leg to stand on. The financial sub-sector, big business, and billionaires recycle some of their profits and financial wealth to control major public, private, and political institutions. Thus, they corrupt the polity. In essence, this is how the self-alimentation and self-preservation of WeTheOligarchy work. Capitalism thrives on free lunches that are ultimately supplied by the duo of treasury/central bank, i.e., the State. There are no free lunches for WeThePeople, but there are voluminous free lunches for WeTheOligarchy. Milton Friedman should have known this.

— AXEC (@EgmontHandtke) October 20, 2026

Occasional X: The foul spirit of political economics (CDXXXII)

“For decades, both right and left politicians bought into neoliberal economics. It’s not a pretty story. jamestalarico says 'trickle-down economics is not a theory, it is theft.'” (Evonomics, The Next Evolution of Economics) Trickle-down economics is not theft; it's just another perverse catchword for the system's modus operandi. The folks at Evonomics do not understand profit and, by consequence, how the economic system works. That's self-defeating for an economist, but economists are not scientists. What has evolved in economics is not science but political propaganda. This is the modus operandi: The free-market economy runs on profit. Macroeconomic profit is given by the axiomatically correct Profit Law Qm:=(I−Sm)+(G−T)+(X−M)+Yd. The Profit Law implies PublicDeficit=PrivateProfit Qm:=(G−T)>0, i.e., macroeconomic profit is (co-)produced by deficit-spending/money-creation, i.e., the growth of public debt. In free-market economies, public debt has increased with minor interruptions for over 200 years. Therefore, Qm:=(G−T)>0 has been a critical factor for Capitalism's survival. The free-market economy is temporarily saved from breakdown by the deficit-spending/money-creating duo of treasury/central bank, i.e., the State. This means that the premise of legacy economics, i.e., that the unfettered free-market economy is a self-adjusting, self-stabilizing, and self-optimizing system, is axiomatically false. This means that economics is failed/fake science. Economists are not scientists. They are mostly silly wafflers for a low-IQ audience. Evonomics is a case in point. The free-market polity is an Oligarchy with parliament / treasury / central bank / capital markets / big business / three-letter agencies as integral parts. With the other determinants excluded for the moment, private financial wealth grows with public debt. Eventually, WeTheOligarchy owns the financial assets, and WeThePeople owe the public debt and are taxed for interest on government bonds as long as the debt is rolled over. Interest payments on the debt reduce their disposable income for an indefinite time. The government taxes WeThePeople on behalf of WeTheOligarchy. This profit/interest/tax triple-whopper produces wealth for WeTheOligarchy and debt and real-income reductions for WeThePeople. On closer inspection, WeTheOligarchy gets three free lunches. This explains the observable distribution. To call this trickle-down is an obvious inversion of the system's modus operandi. It works no longer. This is where Evonomics comes in with a new story. In addition to legitimate monetary operations, the central bank is well-positioned to carry out or support illicit operations that are economically equivalent to putting counterfeit money into circulation. The volume of illicit deficit spending and money creation, as well as the quantity of Dark Money in circulation, is not publicly known. Therefore, Profit Theory, Distribution Theory, and Monetary Theory have no empirical leg to stand on. The financial subsector, big business, and billionaires recycle some of their profits and financial wealth to control major public, private, and political institutions. Thus, they corrupt the polity. Economics is no exception. In essence, this is how the self-alimentation and self-preservation of WeTheOligarchy work. Capitalism thrives on free lunches that are ultimately supplied by the duo of treasury/central bank, i.e., the State. Trickle-down has been one of the biggest propaganda hoaxes of all time. The modus operandi is still what it always was. Evonomics won't change anything.

— AXEC (@EgmontHandtke) November 6, 2026

Occasional X: The foul spirit of political economics (CCCLXXXIII)

“Economic knowledge necessarily and inevitably leads to Capitalism. And it's not because all economists must be liberals, but because understanding the fundamental mechanisms of the economy forces one to question state interventionism” (Diego Angulo) Diego Angulo never understood profit and, by consequence, how the economic system works. That's self-defeating for an economist. The free-market economy runs on profit. Macroeconomic profit is given by the axiomatically correct Profit Law Qm:=(I−Sm)+(G−T)+(X−M)+Yd. The Profit Law implies PublicDeficit=PrivateProfit Qm:=(G−T)>0, i.e., macroeconomic profit is (co-)produced by deficit-spending/money-creation, i.e., the growth of public debt. In free-market economies, public debt has increased with minor interruptions for over 200 years. Therefore, Qm:=(G−T)>0 has been a critical factor for Capitalism's survival. The free-market economy is continuously saved from breakdown by the deficit-spending/money-creating duo of treasury/central bank, i.e., the State. This means that the premise of legacy economics, i.e., that the unfettered free-market economy is a self-adjusting, self-stabilizing, and self-optimizing system, is axiomatically false. This means that economics is failed/fake science. Economists are not scientists. They are mostly silly wafflers for a low-IQ audience. Diego Angulo is living proof. The free-market polity is an Oligarchy with parliament / treasury / central bank / capital markets / big business / three-letter agencies as integral parts. With the other determinants excluded for the moment, private financial wealth grows with public debt. Eventually, WeTheOligarchy owns the financial assets, and WeThePeople owe the public debt and are taxed for interest on government bonds as long as the debt is rolled over. Interest payments on the debt reduce their disposable income for an indefinite time. The government taxes WeThePeople on behalf of WeTheOligarchy. This profit/interest/tax triple-whopper produces wealth for WeTheOligarchy and debt and real-income reductions for WeThePeople. In addition to legitimate monetary operations, the central bank is well-positioned to carry out or support illicit operations that are economically equivalent to putting counterfeit money into circulation. The volume of illicit deficit-spending and money-creation, as well as the quantity of Dark Money in circulation, is not publicly known. Therefore, Profit and Distribution Theory has no empirical leg to stand on. The financial sub-sector, big business, and billionaires recycle some of their profits and financial wealth to control major public, private, and political institutions. Thus, they corrupt the polity. In essence, this is how the self-alimentation and self-preservation of WeTheOligarchy work. It has nothing to do with optimal allocation of resources, free markets, or free consumer choices.

— AXEC (@EgmontHandtke) October 13, 2026

Occasional X: Clueless economists / Distribution, Inequality (XXIII)

“People ask me what is my aim when I write on inequality (pre-order my book btw). Some expect me to answer that its because I want to show some people (like Zucman, Piketty and Saez) are wrong. They are wrong to think that. My objective is to speak to those who are interested in listening — whether they agree with me or not already. In fact, any true social scientist should think that way: the next margin of convincing people that your results are correct.” (Vincent Geloso) To think that he is a 'true social scientist' is the economist's methodological ur-mistake. Vincent Geloso never understood profit and, by consequence, how the economic system works. Because his Profit Theory is wrong, his Distribution Theory is wrong. The free-market economy runs on profit. Macroeconomic profit is given by the axiomatically correct Profit Law Qm:=(I−Sm)+(G−T)+(X−M)+Yd. The Profit Law implies PublicDeficit=PrivateProfit Qm:=(G−T)>0, i.e., macroeconomic profit is (co-)produced by deficit-spending/money-creation, i.e., the growth of public debt. In free-market economies, public debt has increased with minor interruptions for over 200 years. Therefore, Qm:=(G−T)>0 has been a critical factor for Capitalism's survival. The free-market economy is continuously saved from breakdown by the deficit-spending/money-creating duo of treasury/central bank, i.e., the State. This means that the premise of legacy economics, i.e., that the unfettered free-market economy is a self-adjusting, self-stabilizing, and self-optimizing system, is axiomatically false. This means that economics is failed/fake science. Economists are not scientists. They are mostly silly wafflers for a low-IQ audience. Vincent Geloso is living proof. The free-market polity is an Oligarchy with parliament / treasury / central bank / capital markets / big business / three-letter agencies as integral parts. With the other determinants excluded for the moment, private financial wealth grows with public debt. Eventually, WeTheOligarchy owns the financial assets, and WeThePeople owe the public debt and are taxed for interest on government bonds as long as the debt is rolled over. Interest payments on the debt reduce their disposable income for an indefinite time. The government taxes WeThePeople on behalf of WeTheOligarchy. This profit/interest/tax triple-whopper produces wealth for WeTheOligarchy and debt and real-income reductions for WeThePeople. In addition, by reshuffling debt, resetting interest rates, and taking losses, the central bank acts as a direct profit pump. Its losses reappear mainly as profits of the business sector, particularly the banking sub-sector. In addition to legitimate monetary operations, the Fed is well-positioned to carry out or support illicit operations that are economically equivalent to putting counterfeit money into circulation. The volume of illicit deficit-spending and money-creation, as well as the quantity of Dark Money in circulation, is not publicly known. Therefore, Distribution Theory has no empirical leg to stand on. The financial sub-sector, big business, and billionaires recycle some of their profits and financial wealth to control major public, private, and political institutions. Thus, they corrupt the polity. In essence, this is how the self-alimentation and self-preservation of WeTheOligarchy work and how 'The Great Enrichment' comes about.

— AXEC (@EgmontHandtke) October 8, 2026

Occasional X: How it works (DXXXIII)

“American military spending is only possible because the dollar is the reserve currency. This is not an opinion. It is arithmetic. The United States runs persistent deficits that would be unsustainable for any other country. It finances those deficits by issuing Treasury bonds.” (Sony Thang) With its double deficit, America has been the profit-maker for itself and the Rest of the World. That goes hand in hand with the dollar's role as a reserve currency. The free-market economy runs on profit. Macroeconomic profit is given by the axiomatically correct Profit Law Qm:=(I−Sm)+(G−T)+(X−M)+Yd. The Profit Law implies PublicDeficit=PrivateProfit Qm:=(G−T)>0, i.e., macroeconomic profit is (co-)produced by deficit-spending/money-creation, i.e., the growth of public debt. The Law implies also that America's foreign trade deficit, i.e., Qm:=(X−M)<0, is profit for the rest of the world, i.e., Qm:=(X−M)>0, which takes the form of currency reserves. In free-market economies, public debt has increased with minor interruptions for over 200 years. Therefore, Qm:=(G−T)>0 has been a critical factor for Capitalism's survival. The free-market economy is temporarily saved from breakdown by the deficit-spending/money-creating duo of treasury/ central bank, i.e., the State. This means that the premise of legacy economics, i.e., that the unfettered free-market economy is a self-adjusting, self-stabilizing, and self-optimizing system, is axiomatically false. This means that economics is failed/fake science. Economists are not scientists. They are mostly silly wafflers for a low-IQ audience. The free-market polity is an Oligarchy with parliament / treasury / central bank / capital markets / big business / three-letter agencies as integral parts. With the other determinants excluded for the moment, private financial wealth grows with public debt. Eventually, WeTheOligarchy owns the financial assets, and WeThePeople owe the public debt and are taxed for interest on government bonds as long as the debt is rolled over. Interest payments on the debt reduce their disposable income for an indefinite time. The government taxes WeThePeople on behalf of WeTheOligarchy. This profit/interest/tax triple-whopper produces wealth for WeTheOligarchy and debt and real-income reductions for WeThePeople. Via the foreign trade balance, America distributes part of its macroeconomic profit around the world. In addition to legitimate monetary operations, the central bank is well-positioned to carry out or support illicit operations that are economically equivalent to putting counterfeit money into circulation. The volume of illicit deficit spending and money creation, as well as the quantity of Dark Money in circulation, is not publicly known. Therefore, Profit Theory, Distribution Theory, and Monetary Theory have no empirical leg to stand on. The financial sub-sector, big business, and billionaires recycle some of their profits and financial wealth to control major public, private, and political institutions. Thus, they corrupt the polity. The direction of academic scientific research is controlled by grants. In essence, this is how the self-alimentation and self-preservation of WeTheOligarchy work. Capitalism thrives on free lunches that are ultimately supplied by the duo of treasury/ central bank, i.e., the State. America is still the source of profit free-lunches for itself and the Rest of the World. It's not the absolute amount of military spending that counts; it's the DEFICIT that counts; roughly speaking: ALL government spending (including social spending and interest on government bonds) minus ALL taxes.

— AXEC (@EgmontHandtke) November 2, 2026

Failed institutions

Comment on jlegge and Robert Locke on ‘Trade, Truth and Trump’

Blog-Reference

The monetary order and banking are institutions that evolved historically. Like in biological evolution, the outcome of this messy process is often sub-optimal. Institutions can and must be carefully designed and constructed. The U.S. is particularly bad at institution-building.

Mortgage financing, for example, is a very old and rather simple business. In Germany, it was institutionalized in 1900 with the Mortgage Banking Act. This law was so well-crafted that it worked with minor modifications until 2005, when deregulation became the hype of the day.

The core of the risk-minimizing regulation had been that a mortgage bank can finance at most 60 percent of the carefully assessed long-term value of a house (without imputed speculative gains). As a result, there has never been a real estate boom-bust cycle in Germany since 1900. That is quite remarkable when one considers that Japan, the U.S., the UK, Spain, and many other economies have been badly devastated by real estate busts.

Interim results: (i) financial crises are the result of bad institutional design, (ii) the U.S. is particularly untalented at institution building, (iii) in the international arena, according to a variant of Gresham’s Law, bad institutions crowd good institutions out. This is the most detrimental side effect of globalization.

What holds for banking holds for other institutions. First and foremost, for the relations between business and labor. The legal status of unions has always been precarious in the U.S.

With regard to trade, one has to keep in mind that the beneficial effects have been theoretically derived since Ricardo under the condition of equilibrium. So, the often lamented negative effects for the American workforce do not necessarily come from trade per se, but from the balance of trade deficits of the U.S.

Dean Baker concludes: “Donald Trump is a hateful bigot, but that doesn’t mean that everything he says is wrong. It would be a huge step forward if his critics could acknowledge that the recent pattern of trade has been harmful to large segments of the population.”

On closer examination, the harm to the U.S. population stems ultimately from the rather shaky micro and macro institutional setup. This, though, is alone the POLITICAL business of the American people and their future president. Politics, in turn, is NOT the proper business of economics understood as a science.

What Mr. Trump says about trade or any other economic issue is neither true nor false but simply irrelevant because we can be sure that he does not understand how the economy works. This sad fate he shares with orthodox and heterodox economists.

Egmont Kakarot-Handtke

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COMMENT on Ken Zimmerman, William Neil, Robert Locke on Aug 22

There is politics, and there is economics. If the American people elect a president who is committed to Neoliberalism, then this is their internal affair.

Economics is a science that tries to find out how the market economy works. At present, economics is a failed science. As far as Neoliberalism is based on economic theory, it has NO sound scientific foundation. This holds across the board for Walrasianism, Keynesianism, Marxianism, and Austrianism, which are all PROVABLY inconsistent.

So the whole discussion about economic policy hangs squarely in midair. Economists simply do not know how the market economy works. #1

The failure of traditional Heterodoxy consists of never rising above the level of baseless and pointless politicizing. The proper task of Heterodoxy is to replace Orthodoxy and to make economics a science. It is NOT the task of Heterodoxy to comment on Mr. Trump’s or Mrs. Clinton’s utterances about the economy. This has been done much better by comedians.

#1 For details, see here and here.

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REPLY to Robert Locke on Aug 23

There is politics, and there is economics. If the American people elect a president who is committed to Neoliberalism, then this is their internal affair. If the German people elect politicians who implement co-determination, then this is their internal affair. If the UK people vote for Brexit, then this is their internal affair. NO economist has to comment on this. In the political sphere, the economist can participate just like every other citizen, but NOT as an economist. Comment on Mr. Trump’s or Mrs. Clinton's policy is a political statement, but not economics.

An economist is committed to scientific standards alone, and his subject matter is the economy and nothing else. From history, we know that science and politics do NOT mix. Science has never bettered politics, but politics has always corrupted science. So both spheres have to be kept strictly apart.

All this is clear since J. S. Mill: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.”

Political economics has not produced anything of scientific value in the last 200 years. Science has nothing to do with opinion but solely with knowledge. Scientific knowledge takes the form of a consistent theory. At the moment, neither Orthodoxy nor Heterodoxy has to offer anything in the way of a consistent theory ― only storytelling and agenda-pushing.

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REPLY to William Neil on Aug 23

You ask: “Are you familiar with L. Randall Wray’s book, ‘Modern Monetary Theory,’ which is, in my view, an attempt to do what you say has not been done: advance a heterodox theory, internally consistent.”

Yes. I commented on Wray’s approach on several occasions. #1

You say: “... if Neoliberalism is right, then both Great Britain, at the end of the Napoleonic wars in 1815-1830, and the U.S. at the end of WWII should have been in deep economic trouble based on the size of their national debts in relation to GDP.”

These concerns are as old as economics: “Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by ‘political economy’ a ‘branch of the science of the statesman or legislator’, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt through the conquest of her colonial Empire.” (Halévy, 1960, pp. 104-105)

What is not well understood since Adam Smith is the relationship between growing private/public debt and monetary profit for the economy as a whole (2014). The axiomatically correct Profit Law reads Qm≡Yd+I−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditure. The profit equation gets a bit more complex when foreign trade and government are included.

Roughly speaking, what happens in the monetary economy is this: the profit of the business sector as a WHOLE does NOT depend on productivity or low wages or the greed of capitalists or the smartness of managers or the degree of monopoly but on the growth of the household sector’s (public sector’s) debt. Therefore, as long as this private (public) debt grows, employment and profit are fine. Needless to add, this implies the existence of a banking sector with the capacity of credit/money creation. Things become worrisome, though, as soon as the credit expansion stops, and nastier as soon as the household sector (public sector) as a whole pays the debt back. In this case, profit turns into loss, and the business sector breaks down (2014). Note well, this happens without any debt crisis or market failure, or wrongdoing of the banking sector. It SUFFICES that the private (public) households eventually pay back their debt as they are supposed to do. This is because a growing/shrinking household sector (public sector) debt immediately translates into profit/loss of the business sector. Economists cannot see this because the standard price and profit theory has been false since Adam Smith.

The size of the debt is of secondary importance. Of primary importance is whether (the sum of private and public sector) debt grows or shrinks ― the first derivative of debt, so to speak. The debt/GDP ratio is a misleading indicator.


References
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston: Beacon Press.
Kakarot-Handtke, E. (2014a). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL

#1 Please go to the AXEC blogspot and enter Wray in the search field. See also the references to working papers

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REPLY to William Neil

You say: “It was pre-credit card, although there was a growing segment of long-time purchases of consumer capital goods…but I never see that debt cited as a major contributing factor…more the speculative frenzy on stocks as the chief form of ‘indebtedness’, ...”

The outer form of debt is secondary. If the household sector as a WHOLE gets 100 monetary units per period as wage income and spends 110 units, this is dissaving -S and increases the household sector’s debt. This involves creating money out of nothing. However, whether the increase of debt takes the form of overdrafts or credit card debt, or whatever concrete historical form, is secondary. It is (-S) where the positive effect on employment comes from.

When speculators buy stocks on credit, this is an entirely DIFFERENT matter which has NO immediate effect on employment (2011).

In very rough terms, the Great Depression had three interlocking and self-reinforcing causes: (0) Trigger: stock market crash, which weakened the banking sector, (i) debt deflation as described by Koo (2016d; 2016c), (ii) shortfall of aggregate demand as described by Keynes, (iii) falling profits, FALLING wages (2016b).

The Great Depression is the empirical proof that the market economy is NOT self-adjusting (2016a). In other words, it is a REFUTATION of equilibrium theory or Orthodoxy as a WHOLE.

In a nutshell, this is what formally/materially consistent economics (= theoretical economics = science) tells you. Political economics in the incarnation of Friedman tells you that it was all the fault of the FED, and Bernanke gladly repeats it (2000).

As for every economist, your first decision is to do (a) theoretical economics (= science), or (b), political economics (= agenda-pushing). In case (b), you will forever burn in scientific hell. It is as simple as that.


References
Bernanke, B. S. (2000). Essays on the Great Depression. Princeton, NJ: Princeton University Press.
E.K-H (2016a). Could we, please, all focus on the key question of economics? Blog post. URL
E.K-H (2016b). Demystifying employment theory and policy. Blog post. URL
E.K-H (2016c). The other half plus the hitherto missing true foundations of macroeconomics. Blog post. URL
E.K-H (2016d). There is no thrift paradox, or, How economists fell over their own feet. Blog post. URL
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL

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REPLY to Robert Locke on Aug 25

You say: “Keynes gave ONE explanation for it; others long before him gave explanations. Marx. for example, List, for another, Hobson, Lenin for two more, etc.”

In economics, almost everything and the exact opposite have already been said sometime, somewhere, by somebody.

The problem is more than 2700 years old, and Parmenides solved it: “There are always many different opinions and conventions concerning any one problem or subject-matter (such as the gods). 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)

Science is the way to figure out what is mere opinion = doxa and what is genuine knowledge = episteme. Knowledge is what is materially/formally consistent, and this has to be established by PROOF. Blah-blah and opinion count for nothing.

Keynes understood this. In the 1934 BBC radio address, he tried to answer the central question of economics: “Is the Economic System Self-Adjusting?” Obviously, this is the fundamental question for economic policy because it defines the roles of business/state.

Now, this is the situation. General equilibrium theory delivered the formal proof that an equilibrium exists. This proof is, for several reason,s not acceptable as we know by now.

What is still lacking since Keynes is the PROOF that the monetary economy is NOT self-adjusting. #1 All else is opinion, and of opinion, we have more than enough.

Heterodoxy has to become serious and move from political economics (= blah-blah, plausible myth, agenda-pushing) to theoretical economics (= science).


#1 What Keynes really meant but could not really prove

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REPLY to Robert Locke, Ken Zimmerman, Dave Taylor, etc. on Aug 26

Cheap talk is the core problem of economics since Adam Smith: “But he 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)

This is how economics became the honeypot for morons, populists, incompetent scientists, and agenda pushers. In principle, there is nothing wrong with this, of course ― these folks, too, need a forum for the exchange of their ideas and an opportunity to politicize and to gossip and to hype their friends and mob their foes.

The problem arises with the claim that economics is a science that is as old as Adam Smith/Karl Marx. Because Walrasianism, Keynesianism, Marxianism, and Austrianism are PROVABLY false, this claim is either self-delusion or fraud.

For every intelligent person, it is crystal clear that economics is a failed science. The two main tasks at this critical juncture are (i) positive, i.e., to promote the necessary Paradigm Shift, and (ii) negative, i.e., to get rid of the proto-scientific garbage of the past 200 years. The latter task compares to the Fifth Labor of Heracles and is therefore called Project Augean Stable: “[Augeas] is best known for his stables, which housed the single greatest number of cattle in the country and had never been cleaned, until the time of the great hero Heracles.” #1 This is a fitting metaphor for current economics.

Project Augean Stable starts with a clear separation of political economics (= storytelling, agenda-pushing) and theoretical economics (= science). The mission of Heterodoxy is to flush the heap of proto-scientific dung out and to make economics a science. Clearly, this cannot be done by gossiping about Mr. Trump or any other freak phenomenon of Circus Maximus.

Politics is currently trumped to absolute zero. Economics is a trumped science since Adam Smith. Heterodoxy is here to change the latter but not to cheap talk about the former.

The current situation of economics is summarized in this exhibit.

The key point is that there are political economics and theoretical economics, and ALL political economics is proto-scientific dung. The distinction between Orthodoxy/Heterodoxy does NOT stand for right-wing/left-wing but for cargo-cult/science. This translates into the Augean Project: to flush the cheap talkers of ALL colors/schools. #2


#1 Wikipedia
#2 Nothing to choose between Orthodoxy and traditional Heterodoxy and Enough! Economists, retire now!

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REPLY to Robert Locke, Ken Zimmerman, Dave Taylor, gracchibros et al. on Aug 27

Trumpism has become a widespread nuisance. It consists of nonsense maximization = sense minimization under the constraint of 140 characters. Economists are traditionally good at this discipline, and they hold the record with zero sense for a standard peer-reviewed DSGE/I=S/IS-LM paper, but they regularly need more than 140 characters for the demonstration.

Economists in general and heterodox economists, in particular, dabble in:
― economic history (William Neil et al.)
― history of scientific thought (Asad Zaman et al.)
― psychology (Ken Zimmerman et al.)
― sociology/Frankfurt School (graccibros et al.)
― philosophy/religion/literature (Dave Taylor et al.)
― political science (gracchibros et al.)
― ethics (mariaalejandramadi et al.).

All this is very, very interesting, but OUT of economics. Isn’t it time for the Jacks-of-all-Trades to do a little economics? Theory of employment? Theory of profit? What about a consistent and comprehensive explanation of how the economic system works that beats general equilibrium theory hands down?

Please note: Heterodoxy and Trumpism do not mix. Never ever. Those who cannot answer the question about the difference between income and profit are out of economics. Recall that you are not admitted to physics if you cannot tell the difference between potential and kinetic energy. Science is hard, and this also holds for economics. But in politics, they are happy about every Trumpy. Think about it.


Related 'Turning the bananatization of economics around'