August 22, 2016

Demystifying employment theory and policy

Comment on Adair Turner on ‘Demystifying Monetary Finance’

Blog-Reference

Walrasian, Keynesian, Marxian, and Austrian economists are groping in the dark with regard to the two most important features of the market economy: the price mechanism and the profit mechanism. The fault lies in the fact that economists argue from false premises, that is, Walrasianism in all shapes and forms (DSGE, RBC, AD/AS etc.) argues from unacceptable microfoundations, and Keynesianism in all shapes and forms argues from false macrofoundations (2011). To get out of failed economics requires nothing less than a paradigm shift.

In the following a sketch of the formally and empirically correct employment theory is given. A rather elementary version of the objective structural employment equation (2012) is shown on Wikimedia.

From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete AND testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Items (i) and (ii) cover Keynes’s arguments about aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provably false (see 2012). The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist falsely assumes. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

For the relationship between real wage, productivity, profit and real shares see (2015, Sec. 10).

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (expenditure ratio, investment expenditures etc.) or by INCREASING the average wage rate or by a combination of the two.

The Keynesian approach is macrofounded but incomplete because Keynes had no deeper understanding of the price and profit mechanism. Both, the Walrasian and Keynesian approaches have produced counterproductive policy advice. Unemployment is ultimately the result of theory failure.

The arguments for helicopter money are covered with items (i) and (ii). What has been overlooked so far is that deficit spending (with or without helicopter money) has massive distributional effects. Roughly speaking, the household sector’s and public sector’s deficits reappear one-to-one as monetary profit of the business sector (2015). Ultimately, helicopter money is a free lunch for the business sector.

The employment equation suggests a better way to full employment. The factor cost ratio rhoF translates roughly into the policy recipe (for a closed national economy): if the central bank wants an average inflation rate of, say, 2 percent and the average productivity growth is, say, 1.5 percent then the average wage rate must rise with 3.5 percent until full employment is established. The crucial point is that by using the price mechanism the known drawbacks of deficit spending/helicopter money are greatly reduced.

Egmont Kakarot-Handtke


References
E.K-H (2015). Keynesianism as ultimate profit machine. Blog post. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

August 21, 2016

Nothing to chose between Orthodoxy and traditional Heterodoxy

Comment on Noah Smith on ‘Heterodox macro ― a reply to some replies’

Blog-Reference and Blog-Reference on Aug 22 adapted to context

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

There are heterodox AND orthodox economists who cannot get their heads around this still valid summary. These are the retarded folks who do not understand that there is an essential difference between science and non-science. The former is the realm where the criterion true/false applies and NOTHING else (= theoretical economics), the latter is the vast realm of storytelling where anything goes (= political economics). So there are TWO kinds of Orthodoxy and TWO kinds Heterodoxy which have to be kept apart. For an overview of current economics see (2016b) plus description (2016a).

True/false in turn has TWO inseparable aspects: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Logical consistency is methodologically secured by the axiomatic-deductive method. This method presupposes firm ground to start with or, as Aristotle put it: “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.”

The fact of the matter is that BOTH orthodox microfoundations and heterodox macrofoundations are false. Because of this, traditional Heterodoxy is not an acceptable replacement of Orthodoxy. The current state of economics is: Walrasianism, Keynesianism, Marxianism, Austrianism is materially/formally inconsistent. Economics is a failed science. This calls for a paradigm shift.

Heterodox macro has been formalized. This is praiseworthy. The problem is that there are different versions of heterodox macro, e.g. Keynes, Kalecki, Minsky, Keen, which are INCONSISTENT. So traditional macrofounded Heterodoxy is formal garbage (2015) (2016c) just as microfounded Orthodoxy. Because there cannot be a pluralism of false theories BOTH approaches have to be replaced by the correct macrofoundations. Nothing less will do. Inconsistency is lethal in science. Game over for Orthodoxy and traditional Heterodoxy.

Egmont Kakarot-Handtke

References
E.K-H (2015). Heterodoxy, too, is scientific junk. Blog post. URL
E.K-H (2016a). From Orthodoxy to Heterodoxy to Sysdoxy. Blog post. URL
E.K-H (2016b). From proto-science to science. Wikimedia. URL
E.K-H (2016c). Where advanced Heterodoxy – represented by Steve Keen – took the wrong turn. Blog post. URL
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge, MA:
Cambridge University Press.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

***
COMMENT on Barkley Rosser on Aug 22

Georgescu-Roegen said: “What particular reality is described by a given theory can be ascertained only from that theory’s axiomatic foundation.” (1966, p. 361)

And: “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (1970, p. 9)

Georgescu-Roegen was well aware that the axiomatic foundations of economics are defective. Neither Orthodoxy nor Heterodoxy got this pivotal methodological point until this day.

Georgescu-Roegen was also well aware of his fellow economists’ utter scientific incompetence: “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists.” (1979, p. 317)

This is the very definition of economics as cargo cult science.* The situation since Georgescu-Roegen’s time has become even worse.

References
Georgescu-Roegen, N. (1966). Analytical Economics, chapter Economic Theory and Agrarian Economics, pages 359–397. Cambridge, MA: Harvard University Press.
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL

* Wikipedia

***
COMMENT on Frances Coppola on Aug 22

Your argument is entirely beside the point because ‘Science does NOT predict the future’.

***
REPLY to Barkley Rosser on Aug 23

You write: “First of all, lots of economists, even including some fairly mainstream ones, are aware that a lot of the axioms of economics are flawed.”

Famously, Keynes was very aware of this 85 years ago. “The classical theorists resemble Euclidean geometers in a non-Euclidean world ...” (1973, p. 16). And he knew that the fault was in what today is called microfoundations: “For if orthodox economics is at fault, the error is to be found not in the superstructure, ... but ... in the premises. (1973, p. xxi)

Consequently, Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

This was how Heterodoxy started in earnest. The original task of Heterodoxy is NOT to criticize Orthodoxy and to improve it here and there but to REPLACE indefensible scientific garbage and to become the legitimate Orthodoxy. As we know today, Heterodoxy messed up the necessary paradigm shift.

Keynes’s original blunder kicked off a chain reaction of errors/mistakes: (i) all I=S/IS-LM models are false since Keynes and Hicks, (ii) Keynes’s profit conundrum has not been solved by After-Keynesians, (iii) employment and monetary theory is still false.

On the other hand, Orthodoxy went on with their flawed ‘euclidean’ axioms. As Krugman 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.”

This is the current state of economics: the orthodox microfoundations are flawed since 140 years and the heterodox macrofoundations are flawed since 85 years. As a consequence, all models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and together this is roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks. Economic policy guidance has NO sound scientific foundation but is plucked from thin air.

From this follows, firstly, that the word ‘sciences’ has to be eliminated from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The general public has to be informed that the 200 year old claim and the actual state of economics do not match. It follows, secondly, that incompetent scientists have to be expelled from economics regardless of their affiliation to either Walrasianism, Keynesianism, Marxianism, Austrianism or any other failed approach. It follows, thirdly, that the pathetic cargo cult ping-pong between brain-dead Orthodoxy and silly Heterodoxy ends: “So we really ought to look into theories that don’t work, and science that isn’t science.” (Feynman)

And this is what one REALLY sees: The orthodox microfoundations are flawed. The heterodox macrofoundations are flawed. Economics is a failed science. Economists are incompetent scientists.


References
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

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., UK, Spain and many other economies have been badly devastated by real estate busts.

Interim results: (i) financial crises are the result of a 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

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

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

Economics is a science which 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.*

The failure of traditional Heterodoxy consists in 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.

* For details see here and here.

***
REPLY to Robert Locke on Aug 23

There is politics and there is economics. If the American people elects a president who is committed to Neoliberalism then this is their internal affair. If the German people elects politicians who implement co-determination then this is their internal affair. If the UK people votes 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 economist. A comment on Mr. Trump’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.

***
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.*

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 trough 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 correct profit equation 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 is 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 is fine. Needless to add that 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 nasty 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 growing/shrinking household sector (public sector) debt immediately translates into profit/loss of the business sector. Economists cannot see this because standard price and profit theory is false since Adam Smith.

The size of 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, MA: 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

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

August 20, 2016

Economics: A map for the perplexed

Comment on Matias Vernengo on ‘Noah Smith on heterodox models’

Blog-Reference and Blog-Reference on Aug 21 adapted to context

Noah Smith asserts: “So heterodox economics hasn’t really produced a replacement for mainstream macro.” This is true for traditional Heterodoxy but not for constructive Heterodoxy.

The whole truth is that Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLY false, i.e. materially and formally inconsistent. It is not just about Orthodoxy and Heterodoxy.

For a stylized map of current economics see Wikimedia. See also post ‘From Orthodoxy to Heterodoxy to Sysdoxy’ and cross references Paradigm shift.

Egmont Kakarot-Handtke

August 18, 2016

Science does NOT predict the future

Comment on Lars Syll on ‘On the irrelevance of Milton Friedman’

Blog-Reference and Blog-Reference on Aug 19

The representative economist has no idea of what science is all about. First of all, science does NOT ‘predict the future’ simply because, as a genuine scientist said: “The future is unpredictable.” (Feynman, 1992)

What is called prediction in science is categorically different from the commonsensical meaning of ‘predicting the future’. The sole criterion of science is true/false and not predicting the next crash or any other extraordinary event. This is the occupation of prophets, fear mongers, astrologers, psychics, poultry entrails readers, sensationalists, half-witted journalists, etcetera. In marked contrast, science is about invariants or eternal laws.

So, scientists do not predict when the next apple will fall from the tree. What they indeed predict is position and velocity at any point in time once the apple has started to fall. The commonsenser’s view of reality is entirely DIFFERENT from the scientist’s view. The commonsenser’s view is practical, trivial, and false but utterly convincing for other commonsensers. This is why false world views/theories that have no immediate grave negative practical consequences can survive for an indefinite time.

Each falling apple is an unique historical event. There are arbitrary many proximate causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. In almost all cases the singular event is uncertain and unpredictable. That is so OBVIOUS that no physicist ever lost many words about the historicity and uncertainty of falling apples. Not more can be reiterated about uncertainty than five words: “We simply do not know.” (Keynes)

A SCIENTIFIC prediction is a conditional proposition which presupposes: (i) the exact knowledge of initial conditions, (ii) the knowledge of one or more universal laws, (iii) the absence of disturbances. (Popper, 1994)

Where do we get the universal laws from? They follow from a mental construct called theory. A theory in turn must satisfy TWO criteria: material consistency and formal consistency (Klant, 1994). The former is established by observation/testing the latter by the axiomatic-deductive method, which in turn only works when the axioms/premises are true or as Aristotle said: “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.”*

Now it is pretty obvious that the behavioral premises/axioms of economics (agents individually optimize subject to constraints; agents have full relevant knowledge etcetera) are NOT certain, true, and primary. And this means that the whole analytical superstructure of orthodox economics is false, even if each intermediate logical step is correct.

Neither Friedman nor Samuelson nor the rest of the scientifically incompetent orthodox and heterodox crowd got this elementary methodological point. And this is why Walrasianism, Keynesianism, Marxianism, and Austrianism are provably false. The common underlying error of these approaches consists of the naive commonsensical belief that economics is a social science. This quite naturally leads to the acceptance of silly assumptions about human nature/behavior/action as premises/axioms.

Egmont Kakarot-Handtke

* For more details see exhibit on Wikimedia

Related 'Economics is NOT a social science' and 'How to get rid of an obsolete theory'

***
COMMENT on Thornton Hall on Aug 19

You quote Hume: “... but 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.” And conclude: “Syll, et al, choose to debate the size, scope, and shape of the coal pit.”

This, though, misses the crucial point: “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)

Economists know quite well that they are in the coal pit. The point is that they have no clue how to get out. So Orthodoxy and Heterodoxy entertain the public with the grand coal-pit-wrestling-in-the-dark sitcom.

What is needed is the “progressive alternative”, i.e. a new paradigm. Indeed, the failure of traditional Heterodoxy consists in endlessly debating the “size, scope, and shape of the coal pit” or, as Feyerabend put it: “... we may say that the ... omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge. (2004, p. 72)

The real task, then, is to define the new foundations of a materially and formally consistent economic paradigm. This, obviously, is beyond the means of the adherents of both Orthodoxy and traditional Heterodoxy.* These folks will end their wasted scientific lives in the coal pit.

References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See ‘From Orthodoxy to Heterodoxy to Sysdoxy’and ‘How to get rid of an obsolete theory’ and cross references Paradigm shift

August 17, 2016

How to get rid of an obsolete theory

Comment on Raphaële Chappe on ‘General Equilibrium Theory: Sound and Fury, Signifying Nothing?’

Blog-Reference

Orthodoxy has failed on all counts and has no future. This is the point of departure of all new economic thinking. The ultimate reason of failure is the proven scientific incompetence of economists since Adam Smith.

The rules of conduct of the scientific community demand that the actual state of economics is at all times unambiguously communicated to the general public. This implies, as the VERY FIRST step, that the word sciences is deleted from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Because every theory is defined by its foundational premises, a.k.a. axioms, there is, as a matter of principle, no need to refute every single proposition of the elaborated theoretical superstructure, it suffices to ‘throw over’ (Keynes) the axioms. Yet, this is not enough. The negative/destructive first step must be followed by a positive/constructive second step. 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.” (1998, p. 703)

First step: economists have to throw over the orthodox set of axioms which is defined by these six hard core propositions:

HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, 1985, p. 109)

The methodological blunder that suffices to make this axiom set unacceptable is that HC3 and HC5 introduce nonentities and that HC6 is a petitio principii.

Note that we follow here Keynes’s methodological insight as laid down in the General Theory: “The 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.” (1973, p. 16)

In other words, the methodological revolution in economics consists in the switch from behavior-centered bottom-up, i.e. subjective microfoundations, to structure-centered top-down, i.e. objective macrofoundations.

Accordingly, Keynes went on to define the new set of foundational propositions: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

Unfortunately, at this critical juncture an error slipped in because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)

Because of this, Keynes’s two foundational macroeconomic equations (Y=C+I, S=Y-C) have to be replaced. The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by these three objective structural axioms:

A1. Yw=WL wage income Yw is equal to wage rate W times working hours L,
A2. O=RL output O is equal to productivity R times working hours L,
A3. C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The investment good sector comes in at a later stage. So, what we have with A1 to A3 is the pure consumption economy as the most elementary economic structure. This structure is the core of what Keynes called the monetary theory of production and it fully replaces the silly real exchange models.

After-Keynesians either got stuck at I=S/IS-LM-models which are provably false (2011) or fell back to maximization-and-equilibrium, i.e. HC1 to HC6, or both as in the case of the maximal confused Krugman (2014).

Human behavior, tastes, choice, or society have no durable underlying structure but the monetary economy has and this systemic structure is given in the most elementary case by A1 to A3. Economics is NOT a behavioral or social science but a system science. A system can be unambiguously defined. This is the indispensable condition to do science. The alternative to science is storytelling. This is what Walrasians, Keynesians, Marxians, and Austrians are actually doing.

Keynes started the paradigm shift from micro to macro. However, he got stuck with the definition of overall profit. Not to know what profit is turns out to be fatal for every economist and every approach. This methodological deadlock is overcome with the consistent axiomatic set A1 to A3 which provides the formally and materially consistent economic theory.* Thus Sysdoxy replaces both Orthodoxy and Heterodoxy.

Raphaële Chappe concludes: “When a way of thinking limits our thinking then it’s time, with due appreciation for those who built it, to ‘throw away the ladder’.” This, though, misses the crucial point: “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)

The real task, then, is to define the foundations of a materially and formally consistent economic paradigm. This is beyond the means of the adherents of both Orthodoxy and traditional Heterodoxy.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Weintraub, E. R. (1985a). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.
Weintraub, E. R. (1985b). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See cross references Paradigm shift

ICYMI/Orthodoxy/Heterodoxy/Sysdoxy

Comment on Noah Smith on ‘Economics Without Math Is Trendy, But It Doesn’t Add Up’

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

Noah Smith asserts: “So heterodox economics hasn’t really produced a replacement for mainstream macro.” This is true for traditional Heterodoxy but not for Constructive Heterodoxy.

See ‘From Orthodoxy to Heterodoxy to Sysdoxy’ and cross references Paradigm shift.

Egmont Kakarot-Handtke

Related 'ICYMI/Heterodoxy'