January 20, 2017

Macro poultry entrails reading

Comment on Nick Rowe on ‘AD/AS: a suggested interpretation’

Blog-Reference

Economists think they can answer any question by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool totem of the micro/totem of the macro. What economists do not understand until this day is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions. The totem of micro/macro is a NONENTITY like the Tooth Fairy or the Easter Bunny. This means in turn that the AD/AS analysis is a perfect instantiation of economists’ bad habit of confused interpretation of silly charts, an exercise which is in no way different from the poultry entrails reading of the old Roman haruspex.

Nick Rowe claims: “If you explain the AD/AS framework my way, you will see that it portrays a deep and realistic understanding of macroeconomics that is lost in more ‘sophisticated’ models. If you don’t start with the AD/AS framework you are doing it wrong.”

The plain fact of the matter is that Nick Rowe is in the state of manifest and incurable self-delusion. Keynesian macro in general, and AD/AS in particular, has always been methodologically unacceptable and its proper place is the waste basket.#1

What economists’ in their innate scientific incompetence fail to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE SYSTEMIC interrelationships as its formal hard core. This is an imperative methodological necessity.

The false Walrasian microfoundations and the false Keynesian macrofoundations have to be replaced by the true macrofoundations. This is achieved by taking Keynes’s idea of a ‘monetary theory of production’ as the starting point.

(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The graphical representation of this absolute formal minimum is given on Wikimedia.

This chart replaces the hare-brained totem of SS-function―DD-function―equilibrium. A detailed description of the elementary macro relationships has been given elsewhere.#2

The systemic macro axiom set A1/A3 is the one stone that kills, for a start, the Keynesian multiplier, ALL IS-LM models from Hicks onward, ALL AD/AS models, the stickiness argument, and the (Bastard-) Phillips curve including the natural rate hypothesis.#3

This, though, is forever beyond the horizon of the representative economist who flunked the intelligence test already by accepting the totems of micro and macro. If you don’t start macro with A1/A3 you are doing it wrong.

Egmont Kakarot-Handtke

#1 See ‘Keynesianism is broke: Get over it!
#2 See ‘Getting out of IS-LM = Getting out of despair
#3 For details see cross-references Paradigm Shift

Mass unemployment: The joint failure of orthodox and heterodox economics

Comment on Asad Zaman on ‘Theory of Employment’

Blog-Reference

Asad Zaman recapitulates: “In chapter 2 of General Theory, Keynes wishes to develop a theory of employment. He claims that classical economics does not have a theory of employment, because it assumes that all resources will be fully employed.”

What can be said after 80 years is that Keynesian employment theory is an abject failure.#1 So, after more than 200 years economists still have no valid employment theory. The ultimate reason is that economists in general and Keynesians is particular are incompetent scientists.#2

Walrasian, Keynesian, Marxian and Austrian economists are groping in the dark with regard to the two most important features of the market economy, that is, the profit mechanism and the price mechanism. The fault lies in the fact that economists argue from the micro level upwards to the economy as a whole. And here the fallacy of composition regularly slips in. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed microfoundations to entirely new macrofoundations.

In the following a sketch#3 of the correct employment theory is given. The most elementary version of the objective systemic employment equation is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek 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 employment equation contains in addition profit distribution, public deficit spending, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. Here, though, the focus is on the factor cost ratio rhoF as defined in (iii). This variable embodies the price mechanism which, however, does NOT work as standard economics claims. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. This is the opposite of what standard economics teaches.

The systemic employment equation contains nothing but measurable variables and is therefore readily testable. There is no need of further discussion. As always in science, a test decides the matter.

Right policy depends on true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991)

Economists do NOT have the true theory. In their scientific incompetence both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment. Economists are not only fake scientists but a hazard to their fellow citizens.

Egmont Kakarot-Handtke

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 See ‘Why Post Keynesianism Is Not Yet a Science
#3 For details see ‘Essentials of Constructive Heterodoxy: Employment

January 19, 2017

How the 99 percent can bring overall profit of the 1 percent legally down to zero in 2017

Comment on David Ruccio on ‘Mind the growing gap’

Blog-Reference

David Ruccio summarizes: “In recent years, corporate profits have been rising because they’ve been able to squeeze their own workers, by forcing more of them to work not for themselves but for corporate giants and, when they do, paying them a smaller and smaller share of the value that is created. ...”

This story has been told again and again since Adam Smith. It is commonsensically convincing but, on closer inspection, nothing but soap box economics. The scientific fact of the matter is that economists do NOT know what profit is. More specifically, the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and ALL got profit wrong.#1 As Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

By consequence, everything economists have said since Adam Smith about distribution is scientific rubbish.#2 It does not matter which political flag an economist waves, ALL economists are scientifically incompetent.

The mistake/error/blunder of economists is that they argue from the micro perspective of the firm or the worker. Thus, they inevitably crash against a logical wall. The run-of-the-mill-best-and-brightest economists correctly observe that profit rises, for example, with productivity or increasing monopoly power or lower wages. Now, these factors are indeed effective for a SINGLE firm or a sub-sector. But what is true in partial analysis is NOT true for the economy as a whole.#3 This false generalization is known since antiquity as fallacy of composition. Most of standard economics consists of this fallacy.

For the economy as a WHOLE neither productivity nor monopoly power plays a role; overall profit for the closed investment economy is given by Qm=Yd+I-Sm. Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving. With the trade balance and government added the equation becomes a bit longer.

The systemic Profit Law says that for the economy as a WHOLE it is NOT wage income that is the antagonist of profit but monetary saving Sm (see the minus sign). Put the other way round: it is deficit spending/dissaving of the household sector (and the government sector) that is a major profit determinant. Distributed profit, investment and an export surplus are the others.

The height of OVERALL profit is NOT an indicator that American firms are particularly productive or that American business people are particularly smart or greedy or monopolistically. These factors only influence the distribution of profits WITHIN the business sector. Overall profits are in the main the mirror image of GROWING private and public debt.#4

The Profit Law tells the 99 percent how to bring down overall monetary profit to zero: save and pay back your debt. No further action is needed (if prices fall proportionally).#5

ALL commonsensical partial profit theories are false and neither orthodox nor heterodox economists have realized it until this very day. Economics is a failed science and the proof is in the profit and distribution theory.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 See ‘Inequality: Market failure or theory failure?
#3 See ‘How the intelligent non-economist can refute every economist hands down
#4 See ‘Rethinking deficit spending
#5 See also ‘Mathematical Proof of the Breakdown of Capitalism

January 18, 2017

Economics ― worse than fake

Comment on Simon Wren-Lewis on ‘Fake Economics and the media’

Blog-Reference and Blog-Reference

There is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists NEVER got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became one of the most embarrassing scientific failures of all times.#1

The fact of the matter is that economists do not know how the actual economy works. They do not even understand the foundational concepts of their subject matter, that is, profit and income.#2

The current state of economics is that of a failed science or what Feynman famously called a cargo cult science. The point is this: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991)

Economists do NOT have the true theory, that is, the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory and axiomatically false. In other words, since Adam Smith economic policy guidance has NO sound scientific foundation.

Because of this, the claim as expressed in the title ‘Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel’ is false. The Bank of Sweden is, of course, entitled to award prizes but is in NO position to upgrade a cargo cult science to a science. Actually, the Bank is misleading the general public about the dismal state of economics.#3

In their scientific incompetence both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment.#4 Economists are not only fake scientists but a hazard to their fellow citizens.

Egmont Kakarot-Handtke

#1 See ‘Failed economics: The losers’ long list of lame excuses
#2 For details and proof see cross-references
#3 See also ‘FakeNews, FakeScience: economics in the information age
#4 See ‘How economists murdered the economy and got away with it

January 16, 2017

Ideology? Incompetence? Fake? Or all this together?

Comment on Asad Zaman on ‘Ideological Macroeconomics & Increasing Inequality’

Blog-Reference

There is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became one of the most embarrassing scientific failures of all times.#1

The fact of the matter is that economists do not know how the actual economy works. They do not even understand the foundational concepts of their subject matter, that is, profit and income. This holds for Orthodoxy AND Heterodoxy.

Economists have NO mandate to dabble in politics because (i) this violates the principle of separation of politics and science, and (ii), economists have no true economic theory, in other words, since Adam Smith economic policy guidance has NO sound scientific foundation.

Asad Zaman cites the known absurdities of orthodox employment theory: “According to Lucas, the Great Depression was really the Great Vacation, where vast numbers of people suddenly decided to stop working in order to enjoy leisure.” However, Heterodoxy never managed to replace this obvious rubbish with a valid employment theory.

The short proof goes as follows. 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 defined by these three OBJECTIVE SYSTEMIC 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 with the second step. So, what we have with A1/A3 is the pure consumption economy as the most elementary economic configuration.

From these elementary, objective, transparent and intuitively convincing premises follows the BASIC version of the employment equation which is shown on Wikimedia.#2 This equation says inter alia: An increase of the overall factor cost ratio rhoF=W/PR leads to higher employment. The complete employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and foreign trade. All these details are not needed at the moment.

The factor cost ratio rhoF as defined above embodies the price mechanism which works very different from what is usually assumed. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R, and vice versa. This follows in an unbroken chain of transparent logical steps from A1/A3. The SYSTEMIC employment equation is entirely FREE of green cheese behavioral assumptions, consists alone of measurable variables, and is readily testable.

However, what economists assert since time immemorial is this: “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)

This is the worst piece of economic analysis and prescription. The advice to lower wages is based on a logically defective theory and leads to ever more unemployment according to the correct employment equation.#2

In their abysmal scientific incompetence both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment.#3 Consequently, they must immediately be stopped telling the general public that they have valid scientific ideas to save their fellow citizens from mass unemployment, depression, deflation, and stagnation. Both, orthodox AND heterodox economists are fake scientists.

Egmont Kakarot-Handtke

#1 See ‘Failed economics: The losers’ long list of lame excuses
#2 Wikimedia
#3 See also ‘Inequality: Market failure or theory failure?

Strange noise in the graveyard of economics

Comment on Noah Smith on ‘Cracks in the anti-behavioral dam?’

Blog-Reference

Economics is a failed science. More precisely, standard/orthodox economics from Jevons/ Walras/Menger to DSGE/RBC/New Keynesianism is scientific rubbish or what Feynman famously called cargo cult science.

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states.” (Weintraub, 1985)

Methodologically, these premises are forever unacceptable: (i) The ultimate reason can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works. Because of this, the microfoundations approach has already been dead in the cradle. (ii) The standard/ orthodox/Walrasian axiom set contains THREE NONENTITIES: (a) constrained optimization (HC2), (b) rational expectations (HC4), (c) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. So, standard/orthodox economics is axiomatically false ― it is as simple as that.

The microfoundations speak about human behavior. As a matter of principle, human behavior is the subject matter of psychology, sociology, anthropology etcetera and NOT of economics (Hudik, 2011). The error/mistake/idiocy of half-witted critics, though, has always been in the belief that it suffices to make behavioral assumptions ‘more realistic’. The classical case is the idea to replace the assumption of perfect rationality by bounded rationality.

What instead has to be done is to FULLY REPLACE the standard/orthodox microfoundations with methodologically correct macrofoundations, that is, to change the very definition of economics.

OLD behavioral definitions: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994) “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935)

NEW objective-systemic definition: “Economics is the science which studies how the monetary economy works.”

The move from the old behavioral definition to the new systemic=behavior-free definition of economics is called a paradigm shift. Nothing less will do to get economics out of its proto-scientific deadlock.

Noah Smith has spotted a new trend: “I’m seeing macro people taking behavioral ideas more seriously. ... in macro, most models use Rational Expectations, so let’s think of ‘behavioral’ as just meaning ‘non-RE’.”

To see hope or even progress in this pathetic putting-lipstick-on-a-dead-pig is as self-debunking as it can get. Standard economics is scientifically dead since 140+ years and it will NOT come to life by replacing RE with non-RE.

Egmont Kakarot-Handtke

January 15, 2017

Economics: Poor philosophy, poor psychology, poor science

Comment on Tom Hickey on ‘A philosophical look at economics’

Blog-Reference

The classicals called themselves Political Economists and they never left anybody in doubt what agenda they pushed. However, there was an ambiguity right from the beginning. The classicals also had high scientific ambitions. They were aware that with simple good/bad moralizing they were in the same boat with religion ― a no-go in the age of enlightenment: “The backward state of the Moral Sciences can only be remedied by applying to them the methods of Physical Science, duly extended and generalized.” (Mill, 2006, p. 833)

There was a political need to formulate a new moral philosophy and Adam Smith responded to it: “Adam Smith, when he wrote his Wealth of Nations ... understood by political economy  a branch of the science of the statesman or legislator, ...” (Halévy, 1960, p. 104)

To get economics off the ground as a science made it imperative to say something general about human behavior in the economic realm. John Stuart Mill was the first to state a behavioral axiom: “Just in the same manner [as geometry] does Political Economy presuppose an arbitrary definition of man, as a being who invariably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained in the existing state of knowledge.” (Mill, 1874, V.46)

Mill regarded this proposition, which includes what today is called rent-seeking as a limiting case, as an empirical law which resembles, but has to be carefully distinguished from, universal deterministic physical laws. Empirical laws are neither deterministic nor universal, they express merely a local and temporary tendency: “In political economy for instance, empirical laws of human nature are tacitly assumed by English thinkers, which are calculated only for Great Britain and the United States.” (Mill, 2006, p. 906)

This can be taken as a real-world description of human nature/behavior in a concrete historical setting. In other words it says that people in the UK/US subscribe to the philosophy of utilitarianism. Mill always remained within the confines of empirical science. However, the methodological question is, what has this rather dull philosophy to do with economics and, more important, with science?

After 200+ years we know that to build economics upon the behavioral assumption of utility maximization leads only to general equilibrium theory ― one of the greatest failures in the history of scientific thought.

The preoccupation with utilitarian folk philosophy, folk psychology, and folk sociology somehow took economists down the wrong path. After 200+ years they still do not know how the monetary economy works.

Does the world expect from economists to find out how people think and behave? No, this is the proper job of psychology, sociology, anthropology etcetera. Does the world expect from economists to figure out what profit is? Yes, of course, no philosopher, physicist, biologist, or sociologist will ever try to figure this out.

Have economists done their proper job? No (2014). The profit theory is false since Adam Smith gave his contemporaries the moral sentiments and the utilitarian folk philosophy they so urgently needed.

Economists have always been lousy philosophers but, what is worse, they have always been the most incompetent scientists. Today, everybody knows that economics is a failed science.*

Egmont Kakarot-Handtke


References
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

* See post ‘Failed economics: The losers’ long list of lame excuses